TAX CASES

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.

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 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 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.

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.

G.R. No. L-16315 May 30, 1964

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. HAWAIIAN-PHILIPPINE

COMPANY, respondent.

This is a petition filed by the Commissioner of Internal Revenue for the review of the decision of the Court
of Tax Appeals in C.T.A. Case No. 598 ordering him to refund to respondent Hawaiian-Philippine
Company the amount of P8,411.99 representing fixed and percentage taxes assessed against it and
which the latter had deposited with the City Treasurer of Silay, Occidental Negros.

The undisputed facts of this ease, as found by the Court of Tax Appeals, are as follows:
 The petitioner, a corporation duly organized in accordance with law, is operating a sugar central in the
City of Silay, Occidental Negros. It produces centrifugal sugar from sugarcane supplied by planters.
The processed sugar is divided between the planters and the petitioner in the proportion stipulated in
the milling contracts, and thereafter is deposited in the warehouses of the latter. (Pp. 4-5, t.s.n.) For
the sugar deposited by the planters, the petitioner issues the corresponding warehouse receipts of
"quedans". It does not collect storage charges on the sugar deposited in its warehouse during the first
90 days period counted from the time it is extracted from the sugarcane. Upon the lapse of the first
ninety days and up to the beginning of the next milling season, it collects a fee of P0.30 per picul a
month. Henceforth, if the sugar is not yet withdrawn, a penalty of P0.25 per picul or fraction thereof a
month is imposed. (Exhibits "B-1", "C-1", "D-1", "B-2", "C-2", p. 10, t.s.n.)

The storage of sugar is carried in the books of the company under Account No. 5000, denominated
"Manufacturing Cost Ledger Control"; the storage fees under Account No. 521620; the expense
accounts of the factory under Account No. 5200; and the so-called "Sugar Bodega Operations" under
Account No. 5216, under which is a Sub-Account No. 20, captioned, "Credits". (Pp. 16-17, t.s.n.,
Exhibit "F".) The collections from storage after the lapse of the first 90 days period are entered in the
company's books as debit to CASH, and credit to Expense Account No. 2516-20 (p. 18, t.s.n.).

The credit for storage charges decreased the deductible expense resulting in the corresponding
increase of the taxable income of the petitioner. This is reflected by the entries enclosed in
parenthesis in Exhibit "G", under the heading "Storage Charges". (P. 18, t.s.n.) The alleged reason for
this accounting operation is that, inasmuch as the "Sugar Bodega Operations" is considered as an
expense account, entries under it are "debits". Similarly, since "Storage Charges" constitute "credit",
the corresponding figures (see Exhibit "C") are enclosed in parenthesis as they decrease the
expenses of maintaining the sugar warehouses.

Upon investigation conducted by the Bureau, it was found that during the years 1949 to 1957, the
petitioner realized from collected storage fees a total gross receipts of P212,853.00, on the basis of
which the respondent determined the petitioner's liability for fixed and percentage taxes, 25%
surcharge, and administrative penalty in the aggregate amount of P8,411.99 (Exhibit "5", p. 11, BIR
rec.)

On October 20, 1958, the petitioner deposited the amount of P8,411.99 with the Office of the City
Treasurer of Silay. (Exhibits "I" and "I-1", pp. 59-60, CTA rec.) Later, it filed its petition for review
before this Court (Exhibit "K", p. 25, CTA rec.)

After due hearing the Court of Tax Appeals rendered the appealed decision.

The only issue to be resolved in the case at bar is whether or not, upon the facts stated above, petitioner
is a warehouseman liable for the payment of the fixed and percentage taxes prescribed in Sections 182
and 191 of the National Internal Revenue Code which read as follows:

SEC. 182. FIXED TAXES (a) ON BUSINESS (1) PERSONS SUBJECT TO PERCENTAGE TAX.
Unless otherwise provided every person engaging in a business on which the percentage tax is
imposed shall pay a fixed annual tax of twenty pesos. ... .

SEC. 191. PERCENTAGE TAX ON ROAD, BUILDING, IRRIGATION, ARTESIAN WELL,

WATERWORKS, AND OTHER CONSTRUCTION WORK CONTRACTORS, PROPRIETORS OR
OPERATORS OF DOCKYARD, AND OTHERS. ... warehousemen; plumbers, smiths; house or sign
painters; lithographers, publishers, except those engaged in the publication or printing and publication
of any newspaper, magazine, review or bulletin which appear at regular intervals with fixed prices for
subscription and sale, and which is not devoted principally to the publication of advertisements;
printers and bookbinders, business agents and other independent contractors, shall pay a tax
equivalent to THREE PERCENTUM of their gross receipts. ... .
Respondent disclaims liability under the provisions quoted above, alleging that it is not engaged the
business of storing its planters' sugar for profit; that the maintenance of its warehouses is merely
incidental to its business of manufacturing sugar and in compliance with its obligation to its planters. We
find this to be without merit.

It is clear from the facts of the case that, after manufacturing the sugar of its planters, respondent stores it
in its warehouses and issues the corresponding "quedans" to the planters who own the sugar; that while
the sugar is stored free during the first ninety days from the date the it "quedans" are issued, the
undisputed fact is that, upon the expiration of said period, respondent charger, and collects storage fees;
that for the period beginning 1949 to 1957, respondent's total gross receipts from this particular enterprise
amounted to P212,853.00.

A warehouseman has been defined as one who receives and stores goods of another for compensation
(44 Words and Phrases, p. 635). For one to be considered engaged in the warehousing business,
therefore, it is sufficient that he receives goods owned by another for storage, and collects fees in
connection with the same. In fact, Section 2 of the General Bonded Warehouse Act, as amended, defines
a warehouseman as "a person engaged in the business of receiving commodity for storage."

That respondent stores its planters' sugar free of charge for the first ninety days does not exempt it from
liability under the legal provisions under consideration. Were such fact sufficient for that purpose, the law
imposing the tax would be rendered ineffectual. 1wph1.t

Neither is the fact that respondent's warehousing business is carried in addition to, or in relation with, the
operation of its sugar central sufficient to exempt it from payment of the tax prescribed in the legal
provisions quoted heretofore Under Section 178 of the National Internal Revenue Code, the tax on
business is payable for every separate or distinct establishment or place where business subject to the
tax is conducted, and one line of business or occupation does not become exempt by being conducted
with some other business or occupation for which such tax has been paid.

Lastly, respondent's contention that the imposition of the tax under consideration would amount to double
taxation is likewise without merit. As is clear from the facts, respondent's warehousing business, although
carried on in relation to the operation of its sugar central, is a distinct and separate business taxable
under a different provision of the Tax Code. There can be no double taxation where the State merely
imposes a tax on every separate and distinct business in which a party is engaged. Moreover,
in Manufacturers Life insurance Co. vs. Meer, G.R. No. L-2910, June 29, 1951; City of Manila vs. Inter-
Island Gas service, G.R. L-8799, August 31, 1956, We have ruled that there is no prohibition against
double or multiple taxation in this jurisdiction.

WHEREFORE, the decision appealed from is reversed and set aside, with costs.

[G.R. No. 131359. May 5, 1999]

MANILA ELECTRIC COMPANY, petitioner vs. PROVINCE OF LAGUNA and BENITO R. BALAZO, in
his capacity as Provincial Treasurer of Laguna, respondents.

On various dates, certain municipalities of the Province of Laguna including, Bian, Sta Rosa, San
Pedro, Luisiana, Calauan and Cabuyao, by virtue of existing laws then in effect, issued resolutions
through their respective municipal councils granting franchise in favor of petitioner Manila Electric
Company (MERALCO) for the supply of electric light, heat and power within their concerned areas. On 19
January 1983, MERALCO was likewise granted a franchise by the National Electrification Administration
to operate an electric light and power service in the Municipality of Calamba, Laguna.
On 12 September 1991, Republic Act No. 7160, otherwise known as the Local Government Code of
1991, was enacted to take effect on 01 January 1992 enjoining local government units to create their own
sources of revenue and to levy taxes, fees and charges, subject to the limitations expressed therein,
consistent with the basic policy of local autonomy. Pursuant to the provisions of the Code, respondent
province enacted Laguna Provincial Ordinance No. 01-92, effective 01 January 1993, providing, in part,
as follows:

Sec. 2.09. Franchise Tax. There is hereby imposed a tax on businesses enjoying a franchise, at a rate of
fifty percent (50%) of one percent (1%) of the gross annual receipts, which shall include both cash sales
and sales on account realized during the preceding calendar year within this province, including the
territorial limits on any city located in the province[1]

On the basis of the above ordinance, respondent Provincial Treasurer sent a demand letter to
MERALCO for the corresponding tax payment. Petitioner MERALCO paid the tax, which then amounted
to P19,520,628.42, under protest. A formal claim for refund was thereafter sent by MERALCO to the
Provincial Treasurer of Laguna claiming that the franchise tax it had paid and continued to pay to the
National Government pursuant to P.D. 551 already included the franchise tax imposed by the Provincial
Tax Ordinance. MERALCO contended that the imposition of a franchise tax under Section 2.09 of Laguna
Provincial Ordinance No. 01-92, insofar as it concerned MERALCO, contravened the provisions of
Section 1 of P.D. 551 which read:

Any provision of law or local ordinance to the contrary notwithstanding, the franchise tax payable by all
grantees of franchises to generate, distribute and sell electric current for light, heat and power shall be
two per cent (2%) of their gross receipts received from the sale of electric current and from transactions
incident to the generation, distribution and sale of electric current.

Such franchise tax shall be payable to the Commissioner of Internal Revenue or his duly authorized
representative on or before the twentieth day of the month following the end of each calendar quarter or
month, as may be provided in the respective franchise or pertinent municipal regulation and shall, any
provision of the Local Tax Code or any other law to the contrary notwithstanding, be in lieu of all taxes and
assessments of whatever nature imposed by any national or local authority on earnings, receipts, income
and privilege of generation, distribution and sale of electric current.

On 28 August 1995, the claim for refund of petitioner was denied in a letter signed by Governor Jose
D. Lina. In denying the claim, respondents relied on a more recent law, i.e., Republic Act No. 7160 or the
Local Government Code of 1991, than the old decree invoked by petitioner.
On 14 February 1996, petitioner MERALCO filed with the Regional Trial Court of Sta Cruz, Laguna, a
complaint for refund, with a prayer for the issuance of a writ of preliminary injunction and/or temporary
restraining order, against the Province of Laguna and also Benito R. Balazo in his capacity as the
Provincial Treasurer of Laguna. Aside from the amount of P19,520,628.42 for which petitioner MERALCO
had priority made a formal request for refund, petitioner thereafter likewise made additional payments
under protest on various dates totaling P27,669,566.91.
The trial court, in its assailed decision of 30 September 1997, dismissed the complaint and
concluded:

WHEREFORE, IN THE LIGHT OF ALL THE FOREGOING CONSIDERATIONS, JUDGMENT is hereby

rendered in favor of the defendants and against the plaintiff, by:

1. Ordering the dismissal of the Complaint; and

2. Declaring Laguna Provincial Tax Ordinance No. 01-92 as valid, binding, reasonable and enforceable. [2]

In the instant petition, MERALCO assails the above ruling and brings up the following issues; viz:
1. Whether the imposition of a franchise tax under Section 2.09 of Laguna Provincial Ordinance No. 01-
92, insofar as petitioner is concerned, is violative of the non-impairment clause of the Constitution and
Section 1 of Presidential Decree No. 551.

2. Whether Republic Act. No. 7160, otherwise known as the Local Government Code of 1991, has
repealed, amended or modified Presidential Decree No. 551.

3. Whether the doctrine of exhaustion of administrative remedies is applicable in this case. [3]

The petition lacks merit.

Prefatorily, it might be well to recall that local governments do not have the inherent power to
tax[4] except to the extent that such power might be delegated to them either by the basic law or by
statute.Presently, under Article X of the 1987 Constitution, a general delegation of that power has been
given in favor of local government units. Thus:

Sec. 3. The Congress shall enact a local government code which shall provide for a more responsive and
accountable local government structure instituted through a system of decentralization with effective
mechanisms of recall, initiative, and referendum, allocate among the different local government units their
powers, responsibilities, and resources, and provide for the qualifications, election, appointment and
removal, term, salaries, powers and functions, and duties of local officials, and all other matters relating to
the organization and operation of the local units.

xxxxxxxxx

Sec. 5. Each local government shall have the power to create its own sources of revenues and to levy
taxes, fees, and charges subject to such guidelines and limitations as the Congress may provide,
consistent with the basic policy of local autonomy. Such taxes, fees and charges shall accrue exclusively
to the local governments.

The 1987 Constitution has a counterpart provision in the 1973 Constitution which did come out with a
similar delegation of revenue making powers to local governments. [5]
Under the regime of the 1935 Constitution no similar delegation of tax powers was provided, and
local government units instead derived their tax powers under a limited statutory authority. Whereas, then,
the delegation of tax powers granted at that time by statute to local governments was confined and
defined (outside of which the power was deemed withheld), the present constitutional rule (starting with
the 1973 Constitution), however, would broadly confer such tax powers subject only to specific exceptions
that the law might prescribe.
Under the now prevailing Constitution, where there is neither a grant nor a prohibition by statute,
the tax power must be deemed to exist although Congress may provide statutory limitations and
guidelines. The basic rationale for the current rule is to safeguard the viability and self-sufficiency of local
government units by directly granting them general and broad tax powers. Nevertheless, the fundamental
law did not intend the delegation to be absolute and unconditional; the constitutional objective obviously is
to ensure that, while the local government units are being strengthened and made more autonomous,
[6]
the legislature must still see to it that (a) the taxpayer will not be over-burdened or saddled with multiple
and unreasonable impositions; (b) each local government unit will have its fair share of available
resources; (c) the resources of the national government will not be unduly disturbed; and (d) local taxation
will be fair, uniform, and just.
The Local Government Code of 1991 has incorporated and adopted, by and large the provisions of
the now repealed Local Tax Code, which had been in effect since 01 July 1973, promulgated into law by
Presidential Decree No. 231[7] pursuant to the then provisions of Section 2, Article XI, of the 1973
Constitution. The 1991 Code explicitly authorizes provincial governments, notwithstanding any exemption
granted by any law or other special law, x x x (to) impose a tax on businesses enjoying a
franchise. Section 137 thereof provides:

Sec. 137. Franchise Tax Notwithstanding any exemption granted by any law or other special law, the
province may impose a tax on businesses enjoying a franchise, at a rate not exceeding fifty percent
(50%) of one percent (1%) of the gross annual receipts for the preceding calendar year based on the
incoming receipt, or realized, within its territorial jurisdiction. In the case of a newly started business, the
tax shall not exceed one-twentieth (1/20) of one percent (1%) of the capital investment. In the succeeding
calendar year, regardless of when the business started to operate, the tax shall be based on the gross
receipts for the preceding calendar year, or any fraction thereof, as provided herein. (Underscoring
supplied for emphasis)

Indicative of the legislative intent to carry out the Constitutional mandate of vesting broad tax powers
to local government units, the Local Government Code has effectively withdrawn under Section 193
thereof, tax exemptions or incentives theretofore enjoyed by certain entities. This law states:

Section 193 Withdrawal of Tax Exemption Privileges Unless otherwise provided in this Code, tax
exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical,
including government-owned or controlled corporations, except local water districts, cooperatives duly
registered under R.A. No. 6938, non-stock and non-profit hospitals and educational institutions, are
hereby withdrawn upon the effectivity of this Code. (Underscoring supplied for emphasis)

The Code, in addition, contains a general repealing clause in its Section 534; thus:

Section 534. Repealing Clause. x x x.

(f) All general and special laws, acts, city charters, decrees, executive orders, proclamations and
administrative regulations, or part or parts thereof which are inconsistent with any of the provisions of this
Code are hereby repealed or modified accordingly. (Underscoring supplied for emphasis)[8]

To exemplify, in Mactan Cebu International Airport Authority vs. Marcos,[9] the Court upheld the
withdrawal of the real estate tax exemption previously enjoyed by Mactan Cebu International Airport
Authority. The Court ratiocinated:

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

Petitioner in its complaint before the Regional Trial Court cited the ruling of this Court in Province of
Misamis Oriental vs. Cagayan Electric Power and Light Company, Inc.;[11] thus:

In an earlier case, the phrase shall be in lieu of all taxes and at any time levied, established by, or
collected by any authority found in the franchise of the Visayan Electric Company was held to exempt the
company from payment of the 5% tax on corporate franchise provided in Section 259 of the Internal
Revenue Code (Visayan Electric Co. vs. David, 49 O.G. [No. 4] 1385)
Similarly, we ruled that the provision: shall be in lieu of all taxes of every name and nature in the franchise
of the Manila Railroad (Subsection 12, Section 1, Act No. 1510) exempts the Manila Railroad from
payment of internal revenue tax for its importations of coal and oil under Act No. 2432 and the
Amendatory Acts of the Philippine Legislature (Manila Railroad vs. Rafferty, 40 Phil. 224).

The same phrase found in the franchise of the Philippine Railway Co. (Sec. 13, Act No. 1497) justified the
exemption of the Philippine Railway Company from payment of the tax on its corporate franchise under
Section 259 of the Internal Revenue Code, as amended by R.A. No. 39 (Philippine Railway Co vs.
Collector of Internal Revenue, 91 Phil. 35).

Those magic words, shall be in lieu of all taxes also excused the Cotabato Light and Ice Plant Company
from the payment of the tax imposed by Ordinance No. 7 of the City of Cotabato (Cotabato Light and
Power Co. vs. City of Cotabato, 32 SCRA 231).

So was the exemption upheld in favor of the Carcar Electric and Ice Plant Company when it was required
to pay the corporate franchise tax under Section 259 of the Internal Revenue Code as amended by R.A.
No. 39 (Carcar Electric & Ice Plant vs. Collector of Internal Revenue, 53 O.G. [No. 4] 1068). This Court
pointed out that such exemption is part of the inducement for the acceptance of the franchise and the
rendition of public service by the grantee.[12]

In the recent case of the City Government of San Pablo, etc., et al. vs. Hon. Bienvenido V. Reyes, et
al.,[13] the Court has held that the phrase in lieu of all taxes have to give way to the peremptory language
of the Local Government Code specifically providing for the withdrawal of such exemptions, privileges,
and that upon the effectivity of the Local Government Code all exemptions except only as provided
therein can no longer be invoked by MERALCO to disclaim liability for the local tax. In fine, the Court
has viewed its previous rulings as laying stress more on the legislative intent of the amendatory
law whether the tax exemption privilege is to be withdrawn or not rather than on whether the law
can withdraw, without violating the Constitution, the tax exemption or not.
While the Court has, not too infrequently, referred to tax exemptions contained in special franchises
as being in the nature of contracts and a part of the inducement for carrying on the franchise, these
exemptions, nevertheless, are far from being strictly contractual in nature. Contractual tax exemptions,
in the real sense of the term and where the non-impairment clause of the Constitution can rightly
be invoked, are those agreed to by the taxing authority in contracts, such as those contained in
government bonds or debentures, lawfully entered into by them under enabling laws in which the
government, acting in its private capacity, sheds its cloak of authority and waives its
governmental immunity. Truly, tax exemptions of this kind may not be revoked without impairing the
obligations of contracts.[14] These contractual tax exemptions, however, are not to be confused with tax
exemptions granted under franchises. A franchise partakes the nature of a grant which is beyond the
purview of the non-impairment clause of the Constitution. [15] Indeed, Article XII, Section 11, of the 1987
Constitution, like its precursor provisions in the 1935 and the 1973 Constitutions, is explicit that no
franchise for the operation of a public utility shall be granted except under the condition that such privilege
shall be subject to amendment, alteration or repeal by Congress as and when the common good so
requires.
WHEREFORE, the instant petition is hereby DISMISSED. No costs. SO ORDERED.
[G.R. No. 144104. June 29, 2004]

LUNG CENTER OF THE PHILIPPINES, petitioner, vs. QUEZON CITY and CONSTANTINO P. ROSAS,
in his capacity as City Assessor of Quezon City, respondents.

This is a petition for review on certiorari under Rule 45 of the Rules of Court, as amended, of the
Decision[1] dated July 17, 2000 of the Court of Appeals in CA-G.R. SP No. 57014 which affirmed the
decision of the Central Board of Assessment Appeals holding that the lot owned by the petitioner and its
hospital building constructed thereon are subject to assessment for purposes of real property tax.

The Antecedents

The petitioner Lung Center of the Philippines is a non-stock and non-profit entity established
on January 16, 1981 by virtue of Presidential Decree No. 1823. [2] It is the registered owner of a parcel of
land, particularly described as Lot No. RP-3-B-3A-1-B-1, SWO-04-000495, located at Quezon Avenue
corner Elliptical Road, Central District, Quezon City. The lot has an area of 121,463 square meters and is
covered by Transfer Certificate of Title (TCT) No. 261320 of the Registry of Deeds of Quezon
City. Erected in the middle of the aforesaid lot is a hospital known as the Lung Center of the Philippines. A
big space at the ground floor is being leased to private parties, for canteen and small store spaces, and to
medical or professional practitioners who use the same as their private clinics for their patients whom they
charge for their professional services. Almost one-half of the entire area on the left side of the building
along Quezon Avenue is vacant and idle, while a big portion on the right side, at the corner of Quezon
Avenue and Elliptical Road, is being leased for commercial purposes to a private enterprise known as the
Elliptical Orchids and Garden Center.
The petitioner accepts paying and non-paying patients. It also renders medical services to out-
patients, both paying and non-paying. Aside from its income from paying patients, the petitioner receives
annual subsidies from the government.
On June 7, 1993, both the land and the hospital building of the petitioner were assessed for real
property taxes in the amount of P4,554,860 by the City Assessor of Quezon City. [3]Accordingly, Tax
Declaration Nos. C-021-01226 (16-2518) and C-021-01231 (15-2518-A) were issued for the land and the
hospital building, respectively. [4] On August 25, 1993, the petitioner filed a Claim for Exemption [5] from real
property taxes with the City Assessor, predicated on its claim that it is a charitable institution. The
petitioners request was denied, and a petition was, thereafter, filed before the Local Board of Assessment
Appeals of Quezon City (QC-LBAA, for brevity) for the reversal of the resolution of the City Assessor. The
petitioner alleged that under Section 28, paragraph 3 of the 1987 Constitution, the property is exempt
from real property taxes. It averred that a minimum of 60% of its hospital beds are exclusively used for
charity patients and that the major thrust of its hospital operation is to serve charity patients. The
petitioner contends that it is a charitable institution and, as such, is exempt from real property taxes. The
QC-LBAA rendered judgment dismissing the petition and holding the petitioner liable for real property
taxes.[6]
The QC-LBAAs decision was, likewise, affirmed on appeal by the Central Board of Assessment
Appeals of Quezon City (CBAA, for brevity) [7] which ruled that the petitioner was not a charitable institution
and that its real properties were not actually, directly and exclusively used for charitable purposes; hence,
it was not entitled to real property tax exemption under the constitution and the law. The petitioner sought
relief from the Court of Appeals, which rendered judgment affirming the decision of the CBAA. [8]
Undaunted, the petitioner filed its petition in this Court contending that:
A. THE COURT A QUO ERRED IN DECLARING PETITIONER AS NOT ENTITLED TO
REALTY TAX EXEMPTIONS ON THE GROUND THAT ITS LAND, BUILDING AND
IMPROVEMENTS, SUBJECT OF ASSESSMENT, ARE NOT ACTUALLY, DIRECTLY AND
EXCLUSIVELY DEVOTED FOR CHARITABLE PURPOSES.
B. WHILE PETITIONER IS NOT DECLARED AS REAL PROPERTY TAX EXEMPT UNDER ITS
CHARTER, PD 1823, SAID EXEMPTION MAY NEVERTHELESS BE EXTENDED UPON
PROPER APPLICATION.
The petitioner avers that it is a charitable institution within the context of Section 28(3), Article VI of
the 1987 Constitution. It asserts that its character as a charitable institution is not altered by the fact that it
admits paying patients and renders medical services to them, leases portions of the land to private
parties, and rents out portions of the hospital to private medical practitioners from which it derives income
to be used for operational expenses. The petitioner points out that for the years 1995 to 1999, 100% of its
out-patients were charity patients and of the hospitals 282-bed capacity, 60% thereof, or 170 beds, is
allotted to charity patients. It asserts that the fact that it receives subsidies from the government attests to
its character as a charitable institution. It contends that the exclusivity required in the Constitution does
not necessarily mean solely. Hence, even if a portion of its real estate is leased out to private individuals
from whom it derives income, it does not lose its character as a charitable institution, and its exemption
from the payment of real estate taxes on its real property. The petitioner cited our ruling in Herrera v. QC-
BAA[9] to bolster its pose. The petitioner further contends that even if P.D. No. 1823 does not exempt it
from the payment of real estate taxes, it is not precluded from seeking tax exemption under the 1987
Constitution.
In their comment on the petition, the respondents aver that the petitioner is not a charitable
entity. The petitioners real property is not exempt from the payment of real estate taxes under P.D. No.
1823 and even under the 1987 Constitution because it failed to prove that it is a charitable institution and
that the said property is actually, directly and exclusively used for charitable purposes. The respondents
noted that in a newspaper report, it appears that graft charges were filed with the Sandiganbayan against
the director of the petitioner, its administrative officer, and Zenaida Rivera, the proprietress of the Elliptical
Orchids and Garden Center, for entering into a lease contract over 7,663.13 square meters of the
property in 1990 for only P20,000 a month, when the monthly rental should be P357,000 a month as
determined by the Commission on Audit; and that instead of complying with the directive of the COA for
the cancellation of the contract for being grossly prejudicial to the government, the petitioner renewed the
same on March 13, 1995 for a monthly rental of only P24,000. They assert that the petitioner uses the
subsidies granted by the government for charity patients and uses the rest of its income from the property
for the benefit of paying patients, among other purposes. They aver that the petitioner failed to adduce
substantial evidence that 100% of its out-patients and 170 beds in the hospital are reserved for indigent
patients. The respondents further assert, thus:

13. That the claims/allegations of the Petitioner LCP do not speak well of its record of service. That before
a patient is admitted for treatment in the Center, first impression is that it is pay-patient and required to
pay a certain amount as deposit. That even if a patient is living below the poverty line, he is charged with
high hospital bills. And, without these bills being first settled, the poor patient cannot be allowed to leave
the hospital or be discharged without first paying the hospital bills or issue a promissory note guaranteed
and indorsed by an influential agency or person known only to the Center; that even the remains of
deceased poor patients suffered the same fate. Moreover, before a patient is admitted for treatment as
free or charity patient, one must undergo a series of interviews and must submit all the requirements
needed by the Center, usually accompanied by endorsement by an influential agency or person known
only to the Center. These facts were heard and admitted by the Petitioner LCP during the hearings before
the Honorable QC-BAA and Honorable CBAA. These are the reasons of indigent patients, instead of
seeking treatment with the Center, they prefer to be treated at the Quezon Institute. Can such practice by
the Center be called charitable?[10]

The Issues

The issues for resolution are the following: (a) whether the petitioner is a charitable institution within
the context of Presidential Decree No. 1823 and the 1973 and 1987 Constitutions and Section 234(b) of
Republic Act No. 7160; and (b) whether the real properties of the petitioner are exempt from real property
taxes.

The Courts Ruling

 The petition is partially granted.
On the first issue, we hold that the petitioner is a charitable institution within the context of the 1973
and 1987 Constitutions. To determine whether an enterprise is a charitable institution/entity or not, the
elements which should be considered include the statute creating the enterprise, its corporate purposes,
its constitution and by-laws, the methods of administration, the nature of the actual work performed, the
character of the services rendered, the indefiniteness of the beneficiaries, and the use and occupation of
the properties.[11]
In the legal sense, a charity may be fully defined as a gift, to be applied consistently with existing
laws, for the benefit of an indefinite number of persons, either by bringing their minds and hearts under
the influence of education or religion, by assisting them to establish themselves in life or otherwise
lessening the burden of government.[12] It may be applied to almost anything that tend to promote the well-
doing and well-being of social man. It embraces the improvement and promotion of the happiness of man.
[13]
The word charitable is not restricted to relief of the poor or sick. [14] The test of a charity and a charitable
organization are in law the same. The test whether an enterprise is charitable or not is whether it exists to
carry out a purpose reorganized in law as charitable or whether it is maintained for gain, profit, or private
advantage.
Under P.D. No. 1823, the petitioner is a non-profit and non-stock corporation which, subject to the
provisions of the decree, is to be administered by the Office of the President of the Philippines with the
Ministry of Health and the Ministry of Human Settlements. It was organized for the welfare and benefit of
the Filipino people principally to help combat the high incidence of lung and pulmonary diseases in
the Philippines. The raison detre for the creation of the petitioner is stated in the decree, viz:

Whereas, for decades, respiratory diseases have been a priority concern, having been the leading cause
of illness and death in the Philippines, comprising more than 45% of the total annual deaths from all
causes, thus, exacting a tremendous toll on human resources, which ailments are likely to increase and
degenerate into serious lung diseases on account of unabated pollution, industrialization and unchecked
cigarette smoking in the country;

Whereas, the more common lung diseases are, to a great extent, preventable, and curable with early and
adequate medical care, immunization and through prompt and intensive prevention and health education
programs;

Whereas, there is an urgent need to consolidate and reinforce existing programs, strategies and efforts at
preventing, treating and rehabilitating people affected by lung diseases, and to undertake research and
training on the cure and prevention of lung diseases, through a Lung Center which will house and nurture
the above and related activities and provide tertiary-level care for more difficult and problematical cases;

Whereas, to achieve this purpose, the Government intends to provide material and financial support
towards the establishment and maintenance of a Lung Center for the welfare and benefit of the Filipino
people.[15]

The purposes for which the petitioner was created are spelled out in its Articles of Incorporation,
thus:

SECOND: That the purposes for which such corporation is formed are as follows:

1. To construct, establish, equip, maintain, administer and conduct an integrated medical institution which
shall specialize in the treatment, care, rehabilitation and/or relief of lung and allied diseases in line with
the concern of the government to assist and provide material and financial support in the establishment
and maintenance of a lung center primarily to benefit the people of the Philippines and in pursuance of
the policy of the State to secure the well-being of the people by providing them specialized health and
medical services and by minimizing the incidence of lung diseases in the country and elsewhere.
2. To promote the noble undertaking of scientific research related to the prevention of lung or pulmonary
ailments and the care of lung patients, including the holding of a series of relevant congresses,
conventions, seminars and conferences;

3. To stimulate and, whenever possible, underwrite scientific researches on the biological, demographic,
social, economic, eugenic and physiological aspects of lung or pulmonary diseases and their control; and
to collect and publish the findings of such research for public consumption;

4. To facilitate the dissemination of ideas and public acceptance of information on lung consciousness or
awareness, and the development of fact-finding, information and reporting facilities for and in aid of the
general purposes or objects aforesaid, especially in human lung requirements, general health and
physical fitness, and other relevant or related fields;

5. To encourage the training of physicians, nurses, health officers, social workers and medical and
technical personnel in the practical and scientific implementation of services to lung patients;

6. To assist universities and research institutions in their studies about lung diseases, to encourage
advanced training in matters of the lung and related fields and to support educational programs of value
to general health;

7. To encourage the formation of other organizations on the national, provincial and/or city and local
levels; and to coordinate their various efforts and activities for the purpose of achieving a more effective
programmatic approach on the common problems relative to the objectives enumerated herein;

8. To seek and obtain assistance in any form from both international and local foundations and
organizations; and to administer grants and funds that may be given to the organization;

9. To extend, whenever possible and expedient, medical services to the public and, in general, to promote
and protect the health of the masses of our people, which has long been recognized as an economic
asset and a social blessing;

10. To help prevent, relieve and alleviate the lung or pulmonary afflictions and maladies of the people in
any and all walks of life, including those who are poor and needy, all without regard to or discrimination,
because of race, creed, color or political belief of the persons helped; and to enable them to obtain
treatment when such disorders occur;

11. To participate, as circumstances may warrant, in any activity designed and carried on to promote the
general health of the community;

12. To acquire and/or borrow funds and to own all funds or equipment, educational materials and supplies
by purchase, donation, or otherwise and to dispose of and distribute the same in such manner, and, on
such basis as the Center shall, from time to time, deem proper and best, under the particular
circumstances, to serve its general and non-profit purposes and objectives;

13. To buy, purchase, acquire, own, lease, hold, sell, exchange, transfer and dispose of properties,
whether real or personal, for purposes herein mentioned; and

14. To do everything necessary, proper, advisable or convenient for the accomplishment of any of the
powers herein set forth and to do every other act and thing incidental thereto or connected therewith. [16]

Hence, the medical services of the petitioner are to be rendered to the public in general in any and
all walks of life including those who are poor and the needy without discrimination.After all, any person,
the rich as well as the poor, may fall sick or be injured or wounded and become a subject of charity. [17]
 As a general principle, a charitable institution does not lose its character as such and its exemption
from taxes simply because it derives income from paying patients, whether out-patient, or confined in the
hospital, or receives subsidies from the government, so long as the money received is devoted or used
altogether to the charitable object which it is intended to achieve; and no money inures to the private
benefit of the persons managing or operating the institution. [18] In Congregational Sunday School, etc. v.
Board of Review,[19] the State Supreme Court of Illinois held, thus:

[A]n institution does not lose its charitable character, and consequent exemption from taxation, by reason
of the fact that those recipients of its benefits who are able to pay are required to do so, where no profit is
made by the institution and the amounts so received are applied in furthering its charitable purposes, and
those benefits are refused to none on account of inability to pay therefor. The fundamental ground upon
which all exemptions in favor of charitable institutions are based is the benefit conferred upon the public
by them, and a consequent relief, to some extent, of the burden upon the state to care for and advance
the interests of its citizens.[20]

As aptly stated by the State Supreme Court of South Dakota in Lutheran Hospital Association of
South Dakota v. Baker:[21]

[T]he fact that paying patients are taken, the profits derived from attendance upon these patients being
exclusively devoted to the maintenance of the charity, seems rather to enhance the usefulness of the
institution to the poor; for it is a matter of common observation amongst those who have gone about at all
amongst the suffering classes, that the deserving poor can with difficulty be persuaded to enter an asylum
of any kind confined to the reception of objects of charity; and that their honest pride is much less
wounded by being placed in an institution in which paying patients are also received. The fact of receiving
money from some of the patients does not, we think, at all impair the character of the charity, so long as
the money thus received is devoted altogether to the charitable object which the institution is intended to
further.[22]

The money received by the petitioner becomes a part of the trust fund and must be devoted to public
trust purposes and cannot be diverted to private profit or benefit. [23]
Under P.D. No. 1823, the petitioner is entitled to receive donations. The petitioner does not lose its
character as a charitable institution simply because the gift or donation is in the form of subsidies granted
by the government. As held by the State Supreme Court of Utah in Yorgason v. County Board of
Equalization of Salt Lake County:[24]

Second, the government subsidy payments are provided to the project. Thus, those payments are like a
gift or donation of any other kind except they come from the government. In both Intermountain Health
Care and the present case, the crux is the presence or absence of material reciprocity. It is entirely
irrelevant to this analysis that the government, rather than a private benefactor, chose to make up the
deficit resulting from the exchange between St. Marks Tower and the tenants by making a contribution to
the landlord, just as it would have been irrelevant in Intermountain Health Care if the patients income
supplements had come from private individuals rather than the government.

Therefore, the fact that subsidization of part of the cost of furnishing such housing is by the government
rather than private charitable contributions does not dictate the denial of a charitable exemption if the
facts otherwise support such an exemption, as they do here. [25]

In this case, the petitioner adduced substantial evidence that it spent its income, including the
subsidies from the government for 1991 and 1992 for its patients and for the operation of the hospital. It
even incurred a net loss in 1991 and 1992 from its operations.
Even as we find that the petitioner is a charitable institution, we hold, anent the second issue, that
those portions of its real property that are leased to private entities are not exempt from real property
taxes as these are not actually, directly and exclusively used for charitable purposes.
 The settled rule in this jurisdiction is that laws granting exemption from tax are construed strictissimi
juris against the taxpayer and liberally in favor of the taxing power. Taxation is the rule and exemption is
the exception. The effect of an exemption is equivalent to an appropriation. Hence, a claim for exemption
from tax payments must be clearly shown and based on language in the law too plain to be mistaken.
[26]
As held in Salvation Army v. Hoehn:[27]

An intention on the part of the legislature to grant an exemption from the taxing power of the state will
never be implied from language which will admit of any other reasonable construction. Such an intention
must be expressed in clear and unmistakable terms, or must appear by necessary implication from the
language used, for it is a well settled principle that, when a special privilege or exemption is claimed
under a statute, charter or act of incorporation, it is to be construed strictly against the property owner and
in favor of the public. This principle applies with peculiar force to a claim of exemption from taxation . [28]

Section 2 of Presidential Decree No. 1823, relied upon by the petitioner, specifically provides that the
petitioner shall enjoy the tax exemptions and privileges:

SEC. 2. TAX EXEMPTIONS AND PRIVILEGES. Being a non-profit, non-stock corporation organized
primarily to help combat the high incidence of lung and pulmonary diseases in the Philippines, all
donations, contributions, endowments and equipment and supplies to be imported by authorized entities
or persons and by the Board of Trustees of the Lung Center of the Philippines, Inc., for the actual use and
benefit of the Lung Center, shall be exempt from income and gift taxes, the same further deductible in full
for the purpose of determining the maximum deductible amount under Section 30, paragraph (h), of the
National Internal Revenue Code, as amended.

The Lung Center of the Philippines shall be exempt from the payment of taxes, charges and fees imposed
by the Government or any political subdivision or instrumentality thereof with respect to equipment
purchases made by, or for the Lung Center.[29]

It is plain as day that under the decree, the petitioner does not enjoy any property tax exemption
privileges for its real properties as well as the building constructed thereon. If the intentions were
otherwise, the same should have been among the enumeration of tax exempt privileges under Section 2:

It is a settled rule of statutory construction that the express mention of one person, thing, or consequence
implies the exclusion of all others. The rule is expressed in the familiar maxim, expressio unius est
exclusio alterius.

The rule of expressio unius est exclusio alterius is formulated in a number of ways. One variation of the
rule is principle that what is expressed puts an end to that which is implied. Expressium facit cessare
tacitum. Thus, where a statute, by its terms, is expressly limited to certain matters, it may not, by
interpretation or construction, be extended to other matters.

...

The rule of expressio unius est exclusio alterius and its variations are canons of restrictive
interpretation. They are based on the rules of logic and the natural workings of the human mind. They are
predicated upon ones own voluntary act and not upon that of others. They proceed from the premise that
the legislature would not have made specified enumeration in a statute had the intention been not to
restrict its meaning and confine its terms to those expressly mentioned. [30]

The exemption must not be so enlarged by construction since the reasonable presumption is that the
State has granted in express terms all it intended to grant at all, and that unless the privilege is limited to
the very terms of the statute the favor would be intended beyond what was meant. [31]
Section 28(3), Article VI of the 1987 Philippine Constitution provides, thus:
(3) Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non-
profit cemeteries, and all lands, buildings, and improvements, actually, directly and exclusively used for
religious, charitable or educational purposes shall be exempt from taxation. [32]

The tax exemption under this constitutional provision covers property taxes only.[33] As Chief Justice
Hilario G. Davide, Jr., then a member of the 1986 Constitutional Commission, explained: . . . what is
exempted is not the institution itself . . .; those exempted from real estate taxes are lands, buildings and
improvements actually, directly and exclusively used for religious, charitable or educational purposes. [34]
Consequently, the constitutional provision is implemented by Section 234(b) of Republic Act No.
7160 (otherwise known as the Local Government Code of 1991) as follows:

SECTION 234. Exemptions from Real Property Tax. The following are exempted from payment of the real
property tax:

...

(b) Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, non-profit or
religious cemeteries and all lands, buildings, and improvements actually, directly, and exclusively used for
religious, charitable or educational purposes.[35]

We note that under the 1935 Constitution, ... all lands, buildings, and improvements used exclusively
for charitable purposes shall be exempt from taxation. [36] However, under the 1973 and the present
Constitutions, for lands, buildings, and improvements of the charitable institution to be considered
exempt, the same should not only be exclusively used for charitable purposes; it is required that such
property be used actually and directly for such purposes. [37]
In light of the foregoing substantial changes in the Constitution, the petitioner cannot rely on our
ruling in Herrera v. Quezon City Board of Assessment Appeals which was promulgated on September 30,
1961 before the 1973 and 1987 Constitutions took effect. [38] As this Court held in Province of Abra v.
Hernando:[39]

Under the 1935 Constitution: Cemeteries, churches, and parsonages or convents appurtenant thereto,
and all lands, buildings, and improvements used exclusively for religious, charitable, or educational
purposes shall be exempt from taxation. The present Constitution added charitable institutions, mosques,
and non-profit cemeteries and required that for the exemption of lands, buildings, and improvements, they
should not only be exclusively but also actually and directly used for religious or charitable purposes. The
Constitution is worded differently. The change should not be ignored. It must be duly taken into
consideration. Reliance on past decisions would have sufficed were the words actually as well as directly
not added. There must be proof therefore of the actual and direct use of the lands, buildings, and
improvements for religious or charitable purposes to be exempt from taxation.

Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to the
exemption, the petitioner is burdened to prove, by clear and unequivocal proof, that (a) it is a charitable
institution; and (b) its real properties are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable
purposes. Exclusive is defined as possessed and enjoyed to the exclusion of others; debarred from
participation or enjoyment; and exclusively is defined, in a manner to exclude; as enjoying a privilege
exclusively.[40] If real property is used for one or more commercial purposes, it is not exclusively used for
the exempted purposes but is subject to taxation. [41] The words dominant use or principal use cannot be
substituted for the words used exclusively without doing violence to the Constitutions and the law.
[42]
Solely is synonymous with exclusively.[43]
What is meant by actual, direct and exclusive use of the property for charitable purposes is the direct
and immediate and actual application of the property itself to the purposes for which the charitable
institution is organized. It is not the use of the income from the real property that is determinative of
whether the property is used for tax-exempt purposes. [44]
The petitioner failed to discharge its burden to prove that the entirety of its real property is actually,
directly and exclusively used for charitable purposes. While portions of the hospital are used for the
treatment of patients and the dispensation of medical services to them, whether paying or non-paying,
other portions thereof are being leased to private individuals for their clinics and a canteen. Further, a
portion of the land is being leased to a private individual for her business enterprise under the business
name Elliptical Orchids and Garden Center. Indeed, the petitioners evidence shows that it
collected P1,136,483.45 as rentals in 1991 and P1,679,999.28 for 1992 from the said lessees.
Accordingly, we hold that the portions of the land leased to private entities as well as those parts of
the hospital leased to private individuals are not exempt from such taxes. [45] On the other hand, the
portions of the land occupied by the hospital and portions of the hospital used for its patients, whether
paying or non-paying, are exempt from real property taxes.
IN LIGHT OF ALL THE FOREGOING, the petition is PARTIALLY GRANTED. The respondent
Quezon City Assessor is hereby DIRECTED to determine, after due hearing, the precise portions of the
land and the area thereof which are leased to private persons, and to compute the real property taxes due
thereon as provided for by law.
SO ORDERED.

G.R. No. L-39086 June 15, 1988

ABRA VALLEY COLLEGE, INC., represented by PEDRO V. BORGONIA, petitioner, vs.

HON. JUAN P. AQUINO, Judge, Court of First Instance, Abra; ARMIN M. CARIAGA, Provincial
Treasurer, Abra; GASPAR V. BOSQUE, Municipal Treasurer, Bangued, Abra; HEIRS OF PATERNO
MILLARE, respondents.

This is a petition for review on certiorari of the decision * of the defunct Court of First Instance of Abra,
Branch I, dated June 14, 1974, rendered in Civil Case No. 656, entitled "Abra Valley Junior College, Inc.,
represented by Pedro V. Borgonia, plaintiff vs. Armin M. Cariaga as Provincial Treasurer of Abra, Gaspar
V. Bosque as Municipal Treasurer of Bangued, Abra and Paterno Millare, defendants," the decretal
portion of which reads:

IN VIEW OF ALL THE FOREGOING, the Court hereby declares:

That the distraint seizure and sale by the Municipal Treasurer of Bangued, Abra, the Provincial
Treasurer of said province against the lot and building of the Abra Valley Junior College, Inc.,
represented by Director Pedro Borgonia located at Bangued, Abra, is valid;

That since the school is not exempt from paying taxes, it should therefore pay all back taxes in the
amount of P5,140.31 and back taxes and penalties from the promulgation of this decision;

That the amount deposited by the plaintaff him the sum of P60,000.00 before the trial, be confiscated
to apply for the payment of the back taxes and for the redemption of the property in question, if the
amount is less than P6,000.00, the remainder must be returned to the Director of Pedro Borgonia,
who represents the plaintiff herein;

That the deposit of the Municipal Treasurer in the amount of P6,000.00 also before the trial must be
returned to said Municipal Treasurer of Bangued, Abra;

And finally the case is hereby ordered dismissed with costs against the plaintiff. SO ORDERED.
(Rollo, pp. 22-23)
Petitioner, an educational corporation and institution of higher learning duly incorporated with the
Securities and Exchange Commission in 1948, filed a complaint (Annex "1" of Answer by the respondents
Heirs of Paterno Millare; Rollo, pp. 95-97) on July 10, 1972 in the court a quo to annul and declare void
the "Notice of Seizure' and the "Notice of Sale" of its lot and building located at Bangued, Abra, for non-
payment of real estate taxes and penalties amounting to P5,140.31. Said "Notice of Seizure" of the
college lot and building covered by Original Certificate of Title No. Q-83 duly registered in the name of
petitioner, plaintiff below, on July 6, 1972, by respondents Municipal Treasurer and Provincial Treasurer,
defendants below, was issued for the satisfaction of the said taxes thereon. The "Notice of Sale" was
caused to be served upon the petitioner by the respondent treasurers on July 8, 1972 for the sale at
public auction of said college lot and building, which sale was held on the same date. Dr. Paterno Millare,
then Municipal Mayor of Bangued, Abra, offered the highest bid of P6,000.00 which was duly accepted.
The certificate of sale was correspondingly issued to him.

On August 10, 1972, the respondent Paterno Millare (now deceased) filed through counstel a motion to
dismiss the complaint.

On August 23, 1972, the respondent Provincial Treasurer and Municipal Treasurer, through then
Provincial Fiscal Loreto C. Roldan, filed their answer (Annex "2" of Answer by the respondents Heirs of
Patemo Millare; Rollo, pp. 98-100) to the complaint. This was followed by an amended answer (Annex
"3," ibid, Rollo, pp. 101-103) on August 31, 1972.

On September 1, 1972 the respondent Paterno Millare filed his answer (Annex "5," ibid; Rollo, pp. 106-
108).

On October 12, 1972, with the aforesaid sale of the school premises at public auction, the respondent
Judge, Hon. Juan P. Aquino of the Court of First Instance of Abra, Branch I, ordered (Annex "6," ibid;
Rollo, pp. 109-110) the respondents provincial and municipal treasurers to deliver to the Clerk of Court
the proceeds of the auction sale. Hence, on December 14, 1972, petitioner, through Director Borgonia,
deposited with the trial court the sum of P6,000.00 evidenced by PNB Check No. 904369.

On April 12, 1973, the parties entered into a stipulation of facts adopted and embodied by the trial court in
its questioned decision. Said Stipulations reads:

STIPULATION OF FACTS

COME NOW the parties, assisted by counsels, and to this Honorable Court respectfully enter into the
following agreed stipulation of facts:

1. That the personal circumstances of the parties as stated in paragraph 1 of the complaint is
admitted; but the particular person of Mr. Armin M. Cariaga is to be substituted, however, by anyone
who is actually holding the position of Provincial Treasurer of the Province of Abra;

2. That the plaintiff Abra Valley Junior College, Inc. is the owner of the lot and buildings thereon
located in Bangued, Abra under Original Certificate of Title No. 0-83;

3. That the defendant Gaspar V. Bosque, as Municipal treasurer of Bangued, Abra caused to be
served upon the Abra Valley Junior College, Inc. a Notice of Seizure on the property of said school
under Original Certificate of Title No. 0-83 for the satisfaction of real property taxes thereon,
amounting to P5,140.31; the Notice of Seizure being the one attached to the complaint as Exhibit A;

4. That on June 8, 1972 the above properties of the Abra Valley Junior College, Inc. was sold at public
auction for the satisfaction of the unpaid real property taxes thereon and the same was sold to
 defendant Paterno Millare who offered the highest bid of P6,000.00 and a Certificate of Sale in his
favor was issued by the defendant Municipal Treasurer.

5. That all other matters not particularly and specially covered by this stipulation of facts will be the
subject of evidence by the parties.

WHEREFORE, it is respectfully prayed of the Honorable Court to consider and admit this stipulation
of facts on the point agreed upon by the parties.

Bangued, Abra, April 12, 1973.

Sgd. Agripino Brillantes

Typ AGRIPINO BRILLANTES
Attorney for Plaintiff

Sgd. Loreto Roldan

Typ LORETO ROLDAN
Provincial Fiscal
Counsel for Defendants
Provincial Treasurer of
Abra and the Municipal
Treasurer of Bangued, Abra

Sgd. Demetrio V. Pre Typ. DEMETRIO V. PRE

Attorney for Defendant Paterno Millare (Rollo, pp. 17-18)

Aside from the Stipulation of Facts, the trial court among others, found the following: (a) that the school is
recognized by the government and is offering Primary, High School and College Courses, and has a
school population of more than one thousand students all in all; (b) that it is located right in the heart of
the town of Bangued, a few meters from the plaza and about 120 meters from the Court of First Instance
building; (c) that the elementary pupils are housed in a two-storey building across the street; (d) that the
high school and college students are housed in the main building; (e) that the Director with his family is in
the second floor of the main building; and (f) that the annual gross income of the school reaches more
than one hundred thousand pesos.

From all the foregoing, the only issue left for the Court to determine and as agreed by the parties, is
whether or not the lot and building in question are used exclusively for educational purposes. (Rollo, p.
20)

The succeeding Provincial Fiscal, Hon. Jose A. Solomon and his Assistant, Hon. Eustaquio Z. Montero,
filed a Memorandum for the Government on March 25, 1974, and a Supplemental Memorandum on May
7, 1974, wherein they opined "that based on the evidence, the laws applicable, court decisions and
jurisprudence, the school building and school lot used for educational purposes of the Abra Valley
College, Inc., are exempted from the payment of taxes." (Annexes "B," "B-1" of Petition; Rollo, pp. 24-49;
44 and 49).

Nonetheless, the trial court disagreed because of the use of the second floor by the Director of petitioner
school for residential purposes. He thus ruled for the government and rendered the assailed decision.

After having been granted by the trial court ten (10) days from August 6, 1974 within which to perfect its
appeal (Per Order dated August 6, 1974; Annex "G" of Petition; Rollo, p. 57) petitioner instead availed of
the instant petition for review on certiorari with prayer for preliminary injunction before this Court, which
petition was filed on August 17, 1974 (Rollo, p.2).
In the resolution dated August 16, 1974, this Court resolved to give DUE COURSE to the petition (Rollo,
p. 58). Respondents were required to answer said petition (Rollo, p. 74).

Petitioner raised the following assignments of error:

I. THE COURT A QUO ERRED IN SUSTAINING AS VALID THE SEIZURE AND SALE OF THE
COLLEGE LOT AND BUILDING USED FOR EDUCATIONAL PURPOSES OF THE PETITIONER.

II. THE COURT A QUO ERRED IN DECLARING THAT THE COLLEGE LOT AND BUILDING OF THE
PETITIONER ARE NOT USED EXCLUSIVELY FOR EDUCATIONAL PURPOSES MERELY BECAUSE
THE COLLEGE PRESIDENT RESIDES IN ONE ROOM OF THE COLLEGE BUILDING.

III. THE COURT A QUO ERRED IN DECLARING THAT THE COLLEGE LOT AND BUILDING OF THE
PETITIONER ARE NOT EXEMPT FROM PROPERTY TAXES AND IN ORDERING PETITIONER TO PAY
P5,140.31 AS REALTY TAXES.

IV. THE COURT A QUO ERRED IN ORDERING THE CONFISCATION OF THE P6,000.00 DEPOSIT
MADE IN THE COURT BY PETITIONER AS PAYMENT OF THE P5,140.31 REALTY TAXES. (See Brief
for the Petitioner, pp. 1-2)

The main issue in this case is the proper interpretation of the phrase "used exclusively for educational
purposes."

Petitioner contends that the primary use of the lot and building for educational purposes, and not the
incidental use thereof, determines and exemption from property taxes under Section 22 (3), Article VI of
the 1935 Constitution. Hence, the seizure and sale of subject college lot and building, which are contrary
thereto as well as to the provision of Commonwealth Act No. 470, otherwise known as the Assessment
Law, are without legal basis and therefore void.

On the other hand, private respondents maintain that the college lot and building in question which were
subjected to seizure and sale to answer for the unpaid tax are used: (1) for the educational purposes of
the college; (2) as the permanent residence of the President and Director thereof, Mr. Pedro V. Borgonia,
and his family including the in-laws and grandchildren; and (3) for commercial purposes because the
ground floor of the college building is being used and rented by a commercial establishment, the Northern
Marketing Corporation (See photograph attached as Annex "8" (Comment; Rollo, p. 90]).

Due to its time frame, the constitutional provision which finds application in the case at bar is Section 22,
paragraph 3, Article VI, of the then 1935 Philippine Constitution, which expressly grants exemption from
realty taxes for "Cemeteries, churches and parsonages or convents appurtenant thereto, and all lands,
buildings, and improvements used exclusively for religious, charitable or educational purposes ...

Relative thereto, Section 54, paragraph c, Commonwealth Act No. 470 as amended by Republic Act No.
409, otherwise known as the Assessment Law, provides:

The following are exempted from real property tax under the Assessment Law:

xxx xxx xxx

(c) churches and parsonages or convents appurtenant thereto, and all lands, buildings, and
improvements used exclusively for religious, charitable, scientific or educational purposes.

xxx xxx xxx

In this regard petitioner argues that the primary use of the school lot and building is the basic and
controlling guide, norm and standard to determine tax exemption, and not the mere incidental use thereof.

As early as 1916 in YMCA of Manila vs. Collector of lnternal Revenue, 33 Phil. 217 [1916], this Court
ruled that while it may be true that the YMCA keeps a lodging and a boarding house and maintains a
restaurant for its members, still these do not constitute business in the ordinary acceptance of the word,
but an institution used exclusively for religious, charitable and educational purposes, and as such, it is
entitled to be exempted from taxation.

In the case of Bishop of Nueva Segovia v. Provincial Board of Ilocos Norte, 51 Phil. 352 [1972], this Court
included in the exemption a vegetable garden in an adjacent lot and another lot formerly used as a
cemetery. It was clarified that the term "used exclusively" considers incidental use also. Thus, the
exemption from payment of land tax in favor of the convent includes, not only the land actually occupied
by the building but also the adjacent garden devoted to the incidental use of the parish priest. The lot
which is not used for commercial purposes but serves solely as a sort of lodging place, also qualifies for
exemption because this constitutes incidental use in religious functions.

The phrase "exclusively used for educational purposes" was further clarified by this Court in the cases
of Herrera vs. Quezon City Board of assessment Appeals, 3 SCRA 186 [1961] and Commissioner of
Internal Revenue vs. Bishop of the Missionary District, 14 SCRA 991 [1965], thus

Moreover, the exemption in favor of property used exclusively for charitable or educational purposes
is 'not limited to property actually indispensable' therefor (Cooley on Taxation, Vol. 2, p. 1430), but
extends to facilities which are incidental to and reasonably necessary for the accomplishment of said
purposes, such as in the case of hospitals, "a school for training nurses, a nurses' home, property use
to provide housing facilities for interns, resident doctors, superintendents, and other members of the
hospital staff, and recreational facilities for student nurses, interns, and residents' (84 CJS 6621),
such as "Athletic fields" including "a firm used for the inmates of the institution. (Cooley on Taxation,
Vol. 2, p. 1430).

The test of exemption from taxation is the use of the property for purposes mentioned in the Constitution
(Apostolic Prefect v. City Treasurer of Baguio, 71 Phil, 547 [1941]).

It must be stressed however, that while this Court allows a more liberal and non-restrictive interpretation
of the phrase "exclusively used for educational purposes" as provided for in Article VI, Section 22,
paragraph 3 of the 1935 Philippine Constitution, reasonable emphasis has always been made that
exemption extends to facilities which are incidental to and reasonably necessary for the accomplishment
of the main purposes. Otherwise stated, the use of the school building or lot for commercial purposes is
neither contemplated by law, nor by jurisprudence. Thus, while the use of the second floor of the main
building in the case at bar for residential purposes of the Director and his family, may find justification
under the concept of incidental use, which is complimentary to the main or primary purposeeducational,
the lease of the first floor thereof to the Northern Marketing Corporation cannot by any stretch of the
imagination be considered incidental to the purpose of education.

It will be noted however that the aforementioned lease appears to have been raised for the first time in
this Court. That the matter was not taken up in the to court is really apparent in the decision of respondent
Judge. No mention thereof was made in the stipulation of facts, not even in the description of the school
building by the trial judge, both embodied in the decision nor as one of the issues to resolve in order to
determine whether or not said properly may be exempted from payment of real estate taxes (Rollo, pp.
17-23). On the other hand, it is noteworthy that such fact was not disputed even after it was raised in this
Court.

Indeed, it is axiomatic that facts not raised in the lower court cannot be taken up for the first time on
appeal. Nonetheless, as an exception to the rule, this Court has held that although a factual issue is not
squarely raised below, still in the interest of substantial justice, this Court is not prevented from
considering a pivotal factual matter. "The Supreme Court is clothed with ample authority to review
palpable errors not assigned as such if it finds that their consideration is necessary in arriving at a just
decision." (Perez vs. Court of Appeals, 127 SCRA 645 [1984]).

Under the 1935 Constitution, the trial court correctly arrived at the conclusion that the school building as
well as the lot where it is built, should be taxed, not because the second floor of the same is being used
by the Director and his family for residential purposes, but because the first floor thereof is being used for
commercial purposes. However, since only a portion is used for purposes of commerce, it is only fair that
half of the assessed tax be returned to the school involved.

PREMISES CONSIDERED, the decision of the Court of First Instance of Abra, Branch I, is hereby
AFFIRMED subject to the modification that half of the assessed tax be returned to the petitioner. SO
ORDERED.

G.R. No. L-15270 September 30, 1961

JOSE V. HERRERA and ESTER OCHANGCO HERRERA, petitioners, vs. THE QUEZON CITY BOARD
OF ASSESSMENT APPEALS, respondent.

Appeal, by petitioners Jose V. Herrera and Ester Ochangco Herrera, from a decision of the Court of Tax
Appeals affirming that of the Board of Assessment Appeals of Quezon City, which held that certain
properties of said petitioners are subject to assessment for purposes of real estate tax.

The facts and the issue are set forth in the aforementioned decision of the Court of Tax Appeals, from
which we quote:

On July 24, 1952, the Director of the Bureau of Hospitals authorized the petitioners to establish and
operate the "St. Catherine's Hospital", located at 58 D. Tuazon, Sta. Mesa Heights, Quezon City
(Exhibit "F-1", p. 7, BIR rec.). On or about January 3, 1953, the petitioners sent a letter to the Quezon
City Assessor requesting exemption from payment of real estate tax on the lot, building and other
improvements comprising the hospital stating that the same was established for charitable and
humanitarian purposes and not for commercial gain (Exhibit "F-2", pp. 8-9, BIR rec.). After an
inspection of the premises in question and after a careful study of the case, the exemption from real
property taxes was granted effective the years 1953, 1954 and 1955.

Subsequently, however, in a letter dated August 10, 1955 (Exhibit "E", p. 65, CTA rec.) the Quezon
City Assessor notified the petitioners that the aforesaid properties were re-classified from exempt to
"taxable" and thus assessed for real property taxes effective 1956, enclosing therewith copies of Tax
Declarations Nos. 19321 to 19322 covering the said properties. The petitioners appealed the
assessment to the Quezon City Board of Assessment Appeals, which, in a decision dated March 31,
1956 and received by the former on May 17, 1956, affirmed the decision of the City Assessor. A
motion for reconsideration thereof was denied on March 8, 1957. From this decision, the petitioners
instituted the instant appeal.1awphl.nt

The building involved in this case is principally used as a hospital. It is mainly a surgical and
orthopedic hospital with emphasis on obstetrical cases, the latter constituting 90% of the total number
of cases registered therein. The hospital has thirty-two (32) beds, of which twenty (20) are for charity-
patients and twelve (12) for pay-patients. From the evidence presented by petitioners, it is made to
appear that there are two kinds of charity patients (a) those who come for consultation only ("out-
charity patients"); and (b) those who remain in the hospital for treatment ("lying-in-patients"). The out-
charity patients are given free consultation and prescription, although sometimes they are furnished
with free medicines which are not costly like aspirin, sulfatiazole, etc. The charity lying-in-patients are
given free medical service and medicine although the food served to the pay-patients is very much
better than that given to the former. Although no condition is imposed by the hospital on the
admission of charity lying-in-patients, they however, usually give donations to the hospital. On the
other hand, the pay-patients are required to pay for hospital services ranging from the minimum
charge of P5.00 to the maximum of P40.00 for each day of stay in the hospital. The income realized
from pay-patients is spent for the improvement of the charity wards. The hospital personnel is
composed of three nurses, two graduate midwives, a resident physician receiving a salary of P170.00
a month and the petitioner, Dr. Ester Ochangco Herrera, as directress. As such directress, the latter
does not receive any salary.

Petitioners also operate within the premises of the hospital the "St. Catherine's School of Midwifery"
which was granted government recognition by the Secretary of Education on February 1, 1955
(Exhibit "F-3", p. 10, BIR rec.) This school has an enrollment of about two hundred students. The
students are charged a matriculation fee of P300.00 for 1- years, plus P50.00 a month for board
and lodging, which includes transportation to the St. Mary's Hospital. The students practice in the St.
Catherine's Hospital, as well as in the St. Mary's Hospital, which is also owned by the petitioners. A
separate set of accounting books is maintained by the school for midwifery distinct from that kept by
the hospital. The petitioners alleged that the accounts of the school are not included in Exhibits "A",
"A-1", "A-2", "B", "B-1", "B-2", "C", "C-1" and "C-2" which relate to the hospital only. However, the
petitioners have refused to submit a separate statement of accounts of the school. A brief tabulation
indicating the amount of income of the hospital for the years 1954, 1955 and 1956, and its operational
expenses, is as follows:

1954
Income Expenses Deficit
P 5,280.04 P1,303.80
Charity
P10,803.26
Ward P14,779.50
Pay Ward
P16,083.30
(Exhibits "A", "A-1" and "A-2")

1955
Income Expenses Deficit
P 6,859.32
Charity
14,038.92
Ward P17,433.30 P3,464.94
Pay Ward
P20,898.24
(Exhibits "B", "B-1" and "B-2")

1956
Income Expenses Deficit
P 5,559.89 P 341.53
Charity
16,249.04
Ward P21,467.40
Pay Ward
P21,809.93
(Exhibits "C", "C-1" and "C-2")
Aside from the St. Catherine and St. Mary hospitals, the petitioners declared that they also own lands and
coconut plantations in Quezon Province, and other real estate in the City of Manila consisting of
apartments for rent. The petitioner, Jose V. Herrera, is an architect, actively engaged in the practice of his
profession, with office at Tuason Building, Escolta, Manila. He was formerly Chairman, Board of
Examiners for Architects and Chairman, Board of Architects connected with the United Nations. He was
also connected with the Allied Technologists which constructed the Veterans Hospital in Quezon City.

The only issue raised, is whether or not the lot, building and other improvements occupied by the St.
Catherine Hospital are exempt from the real property tax. The resolution of this question boils down to the
corollary issue as to whether or not the said properties are used exclusively for charitable or educational
purposes. (Petitioners' brief, pp. 24-29).

The Court of Tax Appeals decided the issue in the negative, upon the ground that the St. Catherine's
Hospital "has a pay ward for ... pay-patients, who are charged for the use of the private rooms, operating
room, laboratory room, delivery room, etc., like other hospitals operated for profit" and that "petitioners
and their family occupy a portion of the building for their residence." With respect to petitioners' claim for
exemption based upon the operation of the school of midwifery, the Court conceded that "the proposition
might be proper if the property used for the school of midwifery were separate and distinct from the
hospital." It added, however, that, "in the instant case, the portions of the building used for classrooms of
the school of midwifery have not been shown to be exclusively for school purposes"; that said portions
"rather ... have a dual use, i.e., for classroom and for hospital use, the latter not being a purpose that
renders the property tax exempt;" that part of the building and lot in question "is used as a hospital, part
as residence of the petitioners, part as garage, part as dormitory and part as school"; and that "the portion
dedicated to educational and charitable purposes can not be identified from those destined to other uses;
and the building is itself an indivisible unit of property."

It should be noted, however, that, according to the very statement of facts made in the decision appealed
from, of the thirty-two (32) beds in the hospital, twenty (20) are for charity-patients; that "the income
realized from pay-patients is spent for improvement of the charity wards;" and that "petitioners, Dr. Ester
Ochangco Herrera, as directress" of said hospital, "does not receive any salary," although its resident
physician gets a monthly salary of P170.00. It is well settled, in this connection, that the admission of pay-
patients does not detract from the charitable character of a hospital, if all its funds are devoted
"exclusively to the maintenance of the institution" as a "public charity" (84 C.J.S., 617; see, also, 51 Am.
Jur. 607; Cooley on Taxation, Vol. 2, p. 1562; 144 A.L.R., 1489-1492). "In other words, where rendering
charity is its primary object, and the funds derived from payments made by patients able to pay are
devoted to the benevolent purposes of the institution, the mere fact that a profit has been made will not
deprive the hospital of its benevolent character" (Prairie Du Chien Sanitarium Co. vs. City of Prairie Du
Chien, 242 Wis. 262, 7 NW [2d] 832, 144 A.L.R. 1480).

Thus, we have held that the U.S.T. Hospital was not established for profit-making purposes, although it
had 140 paying beds maintained only to partly finance the expenses of the free wards, containing 203
beds for charity patients (U.S.T. Hospital Employees Association vs. Sto. Tomas University Hospital, L-
6988, May 24, 1954), that St. Paul's Hospital of Iloilo, a corporation organized for "charitable educational
and religious purposes" can not be considered as engaged in business merely because its pharmacy
department charges paying patients the cost of their medicine, plus 10% thereof, to partly offset the cost
of medicines supplied free of charge to charity patients (Collector of Internal Revenue vs. St. Paul's
Hospital of Iloilo, L-12127, May 25, 1959), and that the amendment of the original articles of incorporation
of the University of Visayas to convert it from a non-stock to a stock corporation and the increase of its
assets from P9,000 to P50,000, distributed among the members of the original non-stock corporation in
terms of shares of stock, as well as the subsequent move of its board of trustees to double the stock
dividends of the corporation, in view of a gain of P200,000.00 in property, besides good-will, which was
not carried out, does not justify the inference that the corporation has become one for business and profit,
none of its profits having inured to the benefit of any stockholder or individual (Collector of Internal
Revenue vs. University of Visayas, L-13554, February 28, 1961).
Moreover, the exemption in favor of property used exclusively for charitable or educational purposes is
"not limited to property actually indispensable" therefor (Cooley on Taxation, Vol. 2, p. 1430), but extends
to facilities which are "incidental to and reasonably necessary for" the accomplishment of said purposes,
such as, in the case of hospitals, "a school for training nurses, a nurses' home, property use to provide
housing facilities for interns, resident doctors, superintendents, and other members of the hospital staff,
and recreational facilities for student nurses, interns and residents" (84 C.J.S., 621), such as "athletic
fields," including "a farm used for the inmates of the institution" (Cooley on Taxation, Vol. 2, p. 1430).

Within the purview of the Constitutional exemption from taxation, the St. Catherine's Hospital is, therefore,
a charitable institution, and the fact that it admits pay-patients does not bar it from claiming that it is
devoted exclusively to benevolent purposes, it being admitted that the income derived from pay-patients
is devoted to the improvement of the charity wards, which represent almost two-thirds (2/3) of the bed
capacity of the hospital, aside from "out-charity patients" who come only for consultation.

Again, the existence of "St. Catherine's School of Midwifery", with an enrollment of about 200 students,
who practice partly in St. Catherine's Hospital and partly in St. Mary's Hospital, which, likewise, belongs to
petitioners herein, does not, and cannot, affect the exemption to which St. Catherine's Hospital is entitled
under our fundamental law. On the contrary, it furnishes another ground for exemption. Seemingly, the
Court of Tax Appeals was impressed by the fact that the size of said enrollment and the matriculation fee
charged from the students of midwifery, aside from the amount they paid for board and lodging, including
transportation to St. Mary's Hospital, warrants the belief that petitioners derive a substantial profit from the
operation of the school aforementioned. Such factor is, however, immaterial to the issue in the case at
bar, for "all lands, building and improvements used exclusively for religious, charitable or educational
purposes shall be exempt from taxation," pursuant to the Constitution, regardless of whether or not
material profits are derived from the operation of the institutions in question. In other words, Congress
may, if it deems fit to do so, impose taxes upon such "profits", but said "lands, buildings and
improvements" are beyond its taxing power.

Similarly, the garage in the building above referred to which was obviously essential to the operation of
the school of midwifery, for the students therein enrolled practiced, not only in St. Catherine's Hospital,
but, also, in St. Mary's Hospital, and were entitled to transportation thereto for Mrs. Herrera received
no compensation as directress of St. Catherine's Hospital were incidental to the operation of the latter
and of said school, and, accordingly, did not affect the charitable character of said hospital and the
educational nature of said school.

WHEREFORE, the decision of the Court of Tax Appeals, as well as that of the Assessment Board of
Appeals of Quezon City, are hereby reversed and set aside, and another one entered declaring that the
lot, building and improvements constituting the St. Catherine's Hospital are exempt from taxation under
the provisions of the Constitution, without special pronouncement as to costs. It is so ordered.

G.R. No. L-19707 August 17, 1967

PHILIPPINE ACETYLENE CO., INC., petitioner, vs. COMMISSIONER OF INTERNAL REVENUE and
COURT OF TAX APPEALS, respondents.

The petitioner is a corporation engaged in the manufacture and sale of oxygen and acetylene gases.
During the period from June 2, 1953 to June 30, 1958, it made various sales of its products to the
National Power Corporation, an agency of the Philippine Government, and to the Voice of America an
agency of the United States Government. The sales to the NPC amounted to P145,866.70, while those to
the VOA amounted to P1,683, on account of which the respondent Commission of Internal Revenue
assessed against, and demanded from, the petitioner the payment of P12,910.60 as deficiency sales tax
and surcharge, pursuant to the following-provisions of the National Internal Revenue Code:
 Sec. 186. Percentage tax on sales of other articles.There shall be levied, assessed and collected
once only on every original sale, barter, exchange, and similar transaction either for nominal or
valuable considerations, intended to transfer ownership of, or title to, the articles not enumerated in
sections one hundred and eighty-four and one hundred and eighty-five a tax equivalent to seven per
centum of the gross selling price or gross value in money of the articles so sold, bartered exchanged,
or transferred, such tax to be paid by the manufacturer or producer: . . . .

Sec. 183. Payment of percentage taxes.(a) In general.It shall be the duty of every person
conducting business on which a percentage tax is imposed under this Title, to make a true and
complete return of the amount of his, her, or its gross monthly sales, receipts or earnings, or gross
value of output actually removed from the factory or mill warehouse and within twenty days after the
end of each month, pay the tax due thereon: Provided, That any person retiring from a business
subject to the percentage tax shall notify the nearest internal revenue officer thereof, file his return or
declaration and pay the tax due thereon within twenty days after closing his business.

If the percentage tax on any business is not paid within the time specified above, the amount of the
tax shall be increased by twenty-five per centum, the increment to be a part of the tax.

The petitioner denied liability for the payment of the tax on the ground that both the NPC and the VOA are
exempt from taxation. It asked for a reconsideration of the assessment and, failing to secure one,
appealed to the Court of Tax Appeals.

The court ruled that the tax on the sale of articles or goods in section 186 of the Code is a tax on the
manufacturer and not on the buyer with the result that the "petitioner Philippine Acetylene Company, the
manufacturer or producer of oxygen and acetylene gases sold to the National Power Corporation, cannot
claim exemption from the payment of sales tax simply because its buyer the National Power
Corporation is exempt from the payment of all taxes." With respect to the sales made to the VOA, the
court held that goods purchased by the American Government or its agencies from manufacturers or
producers are exempt from the payment of the sales tax under the agreement between the Government
of the Philippines and that of the United States, provided the purchases are supported by certificates of
exemption, and since purchases amounting to only P558, out of a total of P1,683, were not covered by
certificates of exemption, only the sales in the sum of P558 were subject to the payment of tax.
Accordingly, the assessment was revised and the petitioner's liability was reduced from P12,910.60, as
assessed by the respondent commission, to P12,812.16. 1

The petitioner appealed to this Court. Its position is that it is not liable for the payment of tax on the sales
it made to the NPC and the VOA because both entities are exempt from taxation.

The NPC enjoys tax exemption by virtue of an act2 of Congress which provides as follows:

Sec. 2. To facilitate the payment of its indebtedness, the National Power Corporation shall be
exempt from all taxes, except real property tax, and from all duties, fees, imposts, charges, and
restrictions of the Republic of the Philippines, its provinces, cities and municipalities.

It is contended that the immunity thus given to the NPC would be impaired by the imposition of a tax on
sales made to it because while the tax is paid by the manufacturer or producer, the tax is ultimately
shifted by the latter to the former. The petitioner invokes in support of its position a 1954 opinion of the
Secretary of Justice which ruled that the NPC is exempt from the payment of all taxes "whether direct or
indirect."

We begin with an analysis of the nature of the percentage (sales) tax imposed by section 186 of the
Code. Is it a tax on the producer or on the purchaser? Statutes of the type under consideration, which
impose a tax on sales, have been described as "act[s] with schizophrenic symptoms," 3 as they apparently
have two faces one that of a vendor tax, the other, a vendee tax. Fortunately for us the provisions of
the Code throw some light on the problem. The Code states that the sales tax "shall be paid by the
manufacturer or producer,"4 who must "make a true and complete return of the amount of his, her or its
gross monthly sales, receipts or earnings or gross value of output actually removed from the factory or
mill warehouse and within twenty days after the end of each month, pay the tax due thereon." 5

But it is argued that a sales tax is ultimately passed on to the purchaser, and that, so far as the purchaser
is an entity like the NPC which is exempt from the payment of "all taxes, except real property tax," the tax
cannot be collected from sales.

Many years ago, Mr. Justice Oliver Wendell Holmes expressed dissatisfaction with the use of the phrase
"pass the tax on." Writing the opinion of the U.S. Supreme Court in Lash's Products v. United States,6 he
said: "The phrase 'passed the tax on' is inaccurate, as obviously the tax is laid and remains on the
manufacturer and on him alone. The purchaser does not really pay the tax. He pays or may pay the seller
more for the goods because of the seller's obligation, but that is all. . . . The price is the sum total paid for
the goods. The amount added because of the tax is paid to get the goods and for nothing else. Therefore
it is part of the price . . .".

It may indeed be that the incidence of the tax ultimately settles on the purchaser, but it is not for that
reason alone that one may validly argue that it is a tax on the purchaser. The exemption granted to the
NPC may be likened to the immunity of the Federal Government from state taxation and vice versa in the
federal system of government of the United States. In the early case of Panhandle Oil Co. v.
Mississippi7 the doctrine of intergovernment mental tax immunity was held as prohibiting the imposition of
a tax on sales of gasoline made to the Federal Government. Said the Supreme court of the United States:

A charge at the prescribed. rate is made on account of every gallon acquired by the United
States. It is immaterial that the seller and not the purchaser is required to report and make
payment to the state. Sale and purchase constitute a transaction by which the tax is measured
and on which the burden rests. . . . The necessary operation of these enactments when so
construed is directly to retard, impede and burden the exertion by the United States, of its
constitutional powers to operate the fleet and hospital. . . . To use the number of gallons sold the
United States as a measure of the privilege tax is in substance and legal effect to tax the sale. . . .
And that is to tax the United States to exact tribute on its transactions and apply the same to
the support of the state.1wph1.t

Justice Holmes did not agree. In a powerful dissent joined by Justices Brandeis and Stone, he said:

If the plaintiff in error had paid the tax and added it to the price the government would have
nothing to say. It could take the gasoline or leave it but it could not require the seller to abate his
charge even if it had been arbitrarily increased in the hope of getting more from the government
than could be got from the public at large. . . . It does not appear that the government would have
refused to pay a price that included the tax if demanded, but if the government had refused it
would not have exonerated the seller. . . .

. . . I am not aware that the President, the Members of the Congress, the Judiciary or to come
nearer to the case at hand, the Coast Guard or the officials of the Veterans' Hospital [to which the
sales were made], because they are instrumentalities of government and cannot function naked
and unfed, hitherto have been held entitled to have their bills for food and clothing cut down so far
as their butchers and tailors have been taxed on their sales; and I had not supposed that the
butchers and tailors could omit from their tax returns all receipts from the large class of customers
to which I have referred. The question of interference with Government, I repeat, is one of
reasonableness and degree and it seems to me that the interference in this case is too remote.
But time was not long in coming to confirm the soundness of Holmes' position. Soon it became obvious
that to test the constitutionality of a statute by determining the party on which the legal incidence of the
tax fell was an unsatisfactory way of doing things. The fall of the bastion was signalled by Chief Justice
Hughes' statement in James v. Dravo Constructing Co.8 that "These cases [referring to Panhandle and
Indian Motorcycle Co. v. United States, 283 U.S. 570 (1931)] have been distinguished and must be
deemed to be limited to their particular facts."

In 1941, Alabama v. King & Boozer 9 held that the constitutional immunity of the United States from state
taxation was not infringed by the imposition of a state sales tax with which the seller was chargeable but
which he was required to collect from the buyer, in respect of materials purchased by a contractor with the
United States on a cost-plus basis for use in carrying out its contract, despite the fact that the economic
burden of the tax was borne by the United States.

The asserted right of the one to be free of taxation by the other does not spell immunity from
paying the added costs, attributable to the taxation of those who furnish supplies to the
Government and who have been granted no tax immunity. So far as a different view has
prevailed, see Panhandle Oil Co. v. Mississippi and Graves v. Texas Co., supra, we think it no
longer tenable.

Further inroads into the doctrine of Panhandle were made in 1943 when the U.S. Supreme Court held
that immunity from state regulation in the performance of governmental functions by Federal officers and
agencies did not extend to those who merely contracted to furnish supplies or render services to the
government even though as a result of an increase in the price of such supplies or services attributable to
the state regulation, its ultimate effect may be to impose an additional economic burden on the
Government.10

But if a complete turnabout from the rule announced in Panhandle was yet to be made, it was so made in
1952 in Esso Standard Oil v. Evans11 which held that a contractor is not exempt from the payment of a
state privilege tax on the business of storing gasoline simply because the Federal Government with which
it has a contract for the storage of gasoline is immune from state taxation.

This tax was imposed because Esso stored gasoline. It is not . . . based on the worth of the
government property. Instead, the amount collected is graduated in accordance with the exercise
of Esso's privilege to engage in such operations; so it is not "on" the federal property. . . . Federal
ownership of the fuel will not immunize such a private contractor from the tax on storage. It may
generally, as it did here, burden the United States financially. But since James vs. Dravo
Contracting Co., 302 U.S. 134, 151, 82 L. ed. 155, 167, 58 S. Ct. 208, 114 ALR 318, this has
been no fatal flaw. . . . 12

We have determined the current status of the doctrine of intergovernmental tax immunity in the United
States, by showing the drift of the decisions following announcement of the original rule, to point up the
that fact that even in those cases where exemption from tax was sought on the ground of state immunity,
the attempt has not met with success.

As Thomas Reed Powell noted in 1945 in reviewing the development of the doctrine:

Since the Dravo case settled that it does not matter that the economic burden of the gross
receipts tax may be shifted to the Government, it could hardly matter that the shift comes about
by explicit agreement covering taxes rather than by being absorbed in a higher contract price by
bidders for a contract. The situation differed from that in the Panhandle and similar cases in that
they involved but two parties whereas here the transaction was tripartite. These cases are
condemned in so far as they rested on the economic ground of the ultimate incidence of the
burden being on the Government, but this condemnation still leaves open the question whether
 either the state or the United States when acting in governmental matters may be made legally
liable to the other for a tax imposed on it as vendee.

The carefully chosen language of the Chief Justice keeps these cases from foreclosing the
issue. . . . Yet at the time it would have been a rash man who would find in this a dictum that a
sales tax clearly on the Government as purchaser is invalid or a dictum that Congress may
immunize its contractors.13

If a claim of exemption from sales tax based on state immunity cannot command assent, much less can a
claim resting on statutory grant.

It may indeed be that the economic burden of the tax finally falls on the purchaser; when it does the tax
becomes a part of the price which the purchaser must pay. It does not matter that an additional amount is
billed as tax to the purchaser. The method of listing the price and the tax separately and defining taxable
gross receipts as the amount received less the amount of the tax added, merely avoids payment by the
seller of a tax on the amount of the tax. The effect is still the same, namely, that the purchaser does not
pay the tax. He pays or may pay the seller more for the goods because of the seller's obligation, but that
is all and the amount added because of the tax is paid to get the goods and for nothing else. 14

But the tax burden may not even be shifted to the purchaser at all. A decision to absorb the burden of the
tax is largely a matter of economics. 15 Then it can no longer be contended that a sales tax is a tax on the
purchaser.

We therefore hold that the tax imposed by section 186 of the National Internal Revenue Code is a tax on
the manufacturer or producer and not a tax on the purchaser except probably in a very remote and
inconsequential sense. Accordingly its levy on the sales made to tax-exempt entities like the NPC is
permissible.

II

This conclusion should dispose of the same issue with respect to sales made to the VOA, except that a
claim is here made that the exemption of such sales from taxation rests on stronger grounds. Even the
Court of Tax Appeals appears to share this view as is evident from the following portion of its decision:

With regard to petitioner's sales to the Voice of America, it appears that the petitioner and the
respondent are in agreement that the Voice of America is an agency of the United States
Government and as such, all goods purchased locally by it directly from manufacturers or
producers are exempt from the payment of the sales tax under the provisions of the agreement
between the Government of the Philippines and the Government of the United States, (See
Commonwealth Act No. 733) provided such purchases are supported by serially numbered
Certificates of Tax Exemption issued by the vendee-agency, as required by General Circular No.
V-41, dated October 16, 1947. . . .

The circular referred to reads:

Goods purchased locally by U.S. civilian agencies directly from manufacturers, producers or
importers shall be exempt from the sales tax.

It was issued purportedly to implement the Agreement between the Republic of the Philippines and the
United States of America Concerning Military Bases, 16 but we find nothing in the language of the
Agreement to warrant the general exemption granted by that circular.

The pertinent provisions of the Agreement read:

 ARTICLE V. Exemption from Customs and Other Duties

No import, excise, consumption or other tax, duty or impost shall be charged on material,
equipment, supplies or goods, including food stores and clothing, for exclusive use in the
construction, maintenance, operation or defense of the bases, consigned to, or destined for, the
United States authorities and certified by them to be for such purposes.

ARTICLE XVIII.Sales and Services Within the Bases

1. It is mutually agreed that the United States Shall have the right to establish on bases, free of all
licenses; fees; sales, excise or other taxes, or imposts; Government agencies, including
concessions, such as sales commissaries and post exchanges, messes and social clubs, for the
exclusive use of the United States military forces and authorized civilian personnel and their
families. The merchandise or services sold or dispensed by such agencies shall be free of all
taxes, duties and inspection by the Philippine authorities. . . .

Thus only sales made "for exclusive use in the construction, maintenance, operation or defense of the
bases," in a word, only sales to the quartermaster, are exempt under article V from taxation. Sales of
goods to any other party even if it be an agency of the United States, such as the VOA, or even to the
quartermaster but for a different purpose, are not free from the payment of the tax.

On the other hand, article XVIII exempts from the payment of the tax sales made within the base by (not
sales to) commissaries and the like in recognition of the principle that a sales tax is a tax on the seller and
not on the purchaser.

It is a familiar learning in the American law of taxation that tax exemption must be strictly construed and
that the exemption will not be held to be conferred unless the terms under which it is granted clearly and
distinctly show that such was the intention of the parties. 17 Hence, in so far as the circular of the Bureau of
Internal Revenue would give the tax exemptions in the Agreement an expansive construction it is void.

We hold, therefore, that sales to the VOA are subject to the payment of percentage taxes under section
186 of the Code. The petitioner is thus liable for P12,910.60, computed as follows:

Sales to NPC P145,866.70

Sales to VOA P 1,683.00

Total sales subject to tax P147,549.70

7% sales tax due thereon P 10,328.48

Add: 25% surcharge P 2,582.12

Total amount due and collectible P 12,910.60

Accordingly, the decision a quo is modified by ordering the petitioner to pay to the respondent
Commission the amount of P12,910.60 as sales tax and surcharge, with costs against the petitioner.

G.R. No. L-14878 December 26, 1963

SURIGAO CONSOLIDATED MINING CO., INC., petitioner, vs. COLLECTOR OF INTERNAL REVENUE
and COURT OF APPEALS, respondents.

This is a petition to review the decision of the Court of Tax Appeals in Manila Civil Case No. 4770
dismissing for lack of merit the action of the Surigao Consolidated Mining Company for the refund of the
total amount of P17,051.14 allegedly representing overpayment of ad valorem tax for the fourth quarter of
1941.

The record shows that before the outbreak of World War II, the Surigao Consolidated Mining Company
(called SURIGAO CONSOLIDATED, for short), a domestic corporation which then had its principal office
in the City of Iloilo, was operating its mining concessions in Mainit, Surigao. Pursuant to section 246 of the
Internal Revenue Code, which prescribes the time and manner of payment of royalties or ad
valorem taxes, it filed a bond and had been regularly filing its returns for minerals removed from its mines
during each calendar quarter and paying ad valoremtax thereon within 20 days after the close of every
quarter. In each case, computation of the ad valorem tax was based on the market value of the minerals
set forth in the returns, subject to adjustment upon the receipt of the smelter showing the actual market
value of the minerals to the United States.

Due to the interruption, of the communications outbreak of the war, the principal office of Surigao
Consolidated lost contact with its mines and never received the production reports for the fourth quarter of
1941. In order to avoid incurring any tax penalty, said company, on January 19, 1942, deposited a check
amount of P27,000.00 payable to and "indorsed in favor of the City Treasurer (of Iloilo) in payment of
the ad valorem taxes (approximate adjustment to be made when circumstances allow it) for the fourth
quarter of 1941."

After the termination of the war, Commonwealth Act No. 722 was enacted, which provided for the filing of
returns for minerals removed during the last quarter of 1941 up to December 31, 1945 and the payment
of ad valorem tax on said minerals to February 28, 1946.

Availing of the provisions of the aforementioned Act, the Surigao Consolidated, on December 28,
1945, ad valoremtax returns for the fourth quarter declaring as its tax liability the amount of P43,486.54.
Applying the amount of P27,000.00 previously deposited with the City Treasurer of Iloilo, the returns
indicated an unpaid balance of P16,486.54 as the " tax subject to revision."

However, on February 26, 1946, the Surigao Consolidated filed an amended ad valorem tax returns under
which amendment it declared a reduced ad valorem tax in the amount of P37,189.00. And crediting itself
with the amount of P27,000.00 previously deposited with the City Treasurer of Iloilo, it paid the remaining
balance of P10,189.00.

On September 24, 1946, the Surigao Consolidated again filed a statement of adjustment allegedly
containing figures and data of the complete smelter returns for minerals shipped to the United States. In
the accompanying letter, a request was made, this time not only for the reduction of tax, but for the refund
of the amount of P18,107.87. On October 19, 1946, another statement of adjustment was filed reducing
the claim for refund to P17,158.01. Finally, on March 15, 1947, a third statement of adjustment was
submitted further reducing the claim for refund to the amount of P 17,051.14.

As the Collector of Internal Revenue denied the request for the refund of the said P17,051.14 on the
ground that the money already paid as ad valorem tax was legally due to the Government, the Surigao
Consolidated instituted with the Court of First Instance of Manila civil action for its recovery. However,
upon the enactment of Republic Act No. 1125 creating the Court of Tax Appeals, the case was remanded
to the latter court for proper disposition.

After hearing, the Court of Tax Appeals, on July 16, 1958, finding that the amount sought to be refunded
been lawfully collected, rendered its decision denying the claim for refund. The Surigao Consolidated in
due time filed a motion for new trial on the ground that the decision was "not justified by the overwhelming
weight of evidence" and that it was contrary to law. The tax court, however, denied the motion. Hence, this
petition for review.lawphil.net

The question to be resolved is whether or not Surigao Consolidated, petitioner herein, is entitled to the
refund of ad valorem tax in the total amount of P17,051.14, itemized as follows:

1. Ad valorem tax on minerals removed from the P1,191.46

mines but allegedly lost in transit on account of
war
2. Ad valorem tax on minerals extracted from the 15,609.73
mines but allegedly looted during the Japanese
occupation
3. Alleged overpayment of ad valorem tax on 249.95
minerals shipped to the United States

P17,051.14

The first, item in petitioner's claim for refund in the amount of P1,191.46 represents the amount of ad
valorem tax paid on minerals removed from the mines but alleged to have been lost in transit on account
of the war. The refund is sought under section 1 (d) of Republic Act No. 81, which provides as follows:

SECTION 1. Any provision of existing law to the contrary notwithstanding:

xxx xxx xxx

(d) All unpaid royalties, ad valorem or specific taxes on all minerals mined from mining claims or
concessions existing and in force on January first, nineteen hundred and forty-two, and which
minerals were lost by reason of the war or circumstances arising therefrom, are hereby
condoned: Provided, That if said minerals had been or shall be recovered by the miner or
producer, such royalties, ad valorem or specific taxes on the same shall be immediately due and
demandable.

Petitioner argues that since the law condones the taxes due from taxpayers who failed to pay their taxes,
it would be unfair to deny this benefit to those taxpayers who had been prompt in paying theirs. The
argument merits careful consideration. At first it would seem to be sound and logical. But the aforequoted
section clearly refers to the condonation of unpaid taxes only. The condonation of a tax liability is
equivalent and is in the nature of a tax exemption. Being so, it should be sustained only when expressed
in explicit terms, and it can not be extended beyond the plain meaning of those terms. It is the universal
rule that he who claims an exemption from his share of the common burden of taxation must justify his
claim by showing that the Legislature intended to exempt him by words too plain to be mistaken.
(Statutory Construction by Francisco, citing Government of P. I. v. Monte de Piedad, 25 Phil. 42.)

The application of a statute creating an exemption for taxation to taxes already assessed
depends upon whether it is retrospective in its operation. Such a statute has no retrospective
operation, unless by the terms thereof it clearly appears to be the intention of the legislature that
the exemption shall relate back to taxes which have already become fixed, as a statute which
releases a person or corporation from a burden common to the whole community should be
strictly (Louisville Water Co. v. Hamilton, 81 Ky. 517, ... cited 6 American and English Ann. Cases,
p. 438).
Petitioner having failed to point to Us any portion of the law that explicitly provides for a refund of those
taxpayers who had paid their taxes on the items and under circumstances mentioned in the abovequoted
provision, We are constrained to hold that the benefits of said provision does not extend to it.

Even assuming arguendo that the provisions of Republic Act No. 81 authorizes the refund of taxes
already paid by petitioner, the latter would not still be entitled to the refund sought for under the first item.
It is to be noted that petitioner's evidence of the alleged loss in transit as observed by the Court of Tax
Appeals, merely of testimony of witnesses who did not have personal knowledge of the circumstances
which gave rise to the loss. Such evidence cannot, of course be considered sufficient to establish that the
minerals were in fact lost. Judge Luciano of the Court of Tax Appeals during the trial, would be to create a
dangerous precendent.

Under the second item, petitioner seeks to recover the amount of P15,609.73 representing the ad
valorem tax paid on minerals extracted from its mines but alleged to have been looted during the enemy
occupation. In connection with the alleged looting of the minerals, the Tax Court has this to say:

We are again confronted with the case where plaintiff has, to our mind, failed to present adequate
evidence to prove such loss. The evidence, if at all, is merely limited to the general and
uncorroborated statements of plaintiff's officers that the same were lost in the mines. These
testimonies cannot be taken on their full face value, especially because they had no direct
supervision over the handling of such minerals at the time of the alleged loss. Much less had
these officers have personal knowledge of the loss. Under the circumstances, we can not make
the finding that the minerals were in fact lost.

Going over the record, We find no reason to disturb the above findings of the Court of Tax Appeals, there
being no showing that they are not substantiated by the evidence. With this observation, it would be
useless ceremony to delve into the issue of whether ad valorem tax should be or should not be paid on
minerals extracted from the mines but not removed therefrom.

One more item in petitioner's claim is the alleged overpayment of ad valorem tax in the amount of
P249.95 on the minerals shipped to the United States. It is that an ad valorem tax in the amount of
P20,387.81 was originally paid on the minerals shipped to the United States with a gross value of
P410,299.49; that the smelter returns from the United States show that the actual market value of the
minerals shipped to the States was P416,895.28; and that after deducting all allowable deductions
amounting in all to P1,828,34, the true and correct amount of ad valoremtax on said minerals was
P20,137.86. Petitioner, therefore, claims difference between the amount of P20,387.81 and P20,137.86 is
an overpayment.

It is not disputed that, as indicated above, the amount of ad valorem tax on the minerals shipped to the
United States is subject to adjustment upon the receipt of the smelter returns showing their actual market
value Petitioner contends that the statements of adjustment alleged to contain the figures and data set
forth in the smelter returns are adequate evidence of the actual market value of the minerals shipped to
the United States.

The best evidence of the actual market value minerals shipped to the United States are the smelter
returns themselves. These returns are admittedly petitioner's possession, but for unknown reasons,
petitioner failed to produce them during the trial. As there is no credible and satisfactory explanation for
the non-production of said returns, there arises the presumption that if produced they would be adverse to
petitioner. Under the circumstances, the Court of Tax Appeals cannot be said to have committed error,
much less abused its discretion, in refusing to give any probative value statements of adjustment.

It is a settled doctrine that in a suit for the recovery of the payment of taxes or any portion thereof as
having been illegally or erroneously collected, the burden is upon the taxpayer to establish the facts which
show the illegality of the tax or that the determination thereof is erroneous. In this case, petitioner failed to
show that the amount of taxes sought to be refunded have been erroneously collected.

Conformably to the above, We are of the opinion that the Court of Tax Appeals did not commit any error in
denying petitioner's claim.

WHEREFORE, the decision appealed from is hereby affirmed. Costs against petitioner.

DIGITAL TELECOMMUNICATIONS G.R. No. 156040

PHILIPPINES, INC.,
Petitioner, Present:

PUNO, C.J.,
QUISUMBING,
YNARES-SANTIAGO,
CARPIO,
AUSTRIA-MARTINEZ,
- versus - CORONA,
CARPIO MORALES,
AZCUNA,
TINGA,
CHICO-NAZARIO,
VELASCO, JR.,
NACHURA,
CITY GOVERNMENT OF REYES,
BATANGAS represented by LEONARDO-DE CASTRO, and
HON. ANGELITO DONDON BRION, JJ.
A. DIMACUHA, Batangas City Mayor,
MR. BENJAMIN S. PARGAS,
Batangas City Treasurer, and
ATTY. TEODULFO A. DEQUITO, Promulgated:
Batangas City Legal Officer,
Respondents. December 11, 2008
x-----------------------------------------------------x

The Case
This is a petition for review on certiorari [1] assailing the Regional Trial Courts Order [2] dated 2 May 2002 in
Civil Case No. 5343 as well as the 19 November 2002 Order denying the Motion for Reconsideration. In
the assailed orders, Branch 8 of the Regional Trial Court (RTC) of Batangas City (RTC-Branch 8)
reversed the 28 March 2001 Order [3] issued by Branch 3 of RTC-Batangas City (RTC-Branch 3). RTC-
Branch 8 declared that under its legislative franchise, Digital Telecommunications Philippines, Inc.
(petitioner) is not exempt from paying real property tax assessed by the Batangas City Government
(respondent).

The Facts

On 17 February 1994, Republic Act No. 7678 (RA 7678) [4] granted petitioner a 25-year franchise to install,
operate and maintain telecommunications systems throughout the Philippines. Section 5 of RA 7678
reads:
 Sec. 5. Tax Provisions. - The grantee shall be liable to pay the same taxes on its real
estate, buildings, and personal property exclusive of this franchise as other
persons or corporations are now or hereafter may be required by law to pay. In
addition thereto, the grantee shall pay to the Bureau of Internal Revenue each year,
within thirty (30) days after the audit and approval of the accounts, a franchise tax as may
be prescribed by law of all gross receipts of the telephone or other telecommunications
businesses transacted under this franchise by the grantee; Provided, That the grantee
shall continue to be liable for income taxes payable under Title II of the National Internal
Revenue Code pursuant to Section 2 of Executive Order No. 72 unless the latter
enactment is amended or repealed, in which case the amendment or repeal shall be
applicable thereto.

The grantee shall file the return with and pay the tax due thereon to the Commissioner of
Internal Revenue or his duly authorized representative in accordance with the National
Internal Revenue Code and the return shall be subject to audit by the Bureau of Internal
Revenue. (Boldfacing and underscoring supplied)

Sometime in 1997, respondent issued a building permit for the installation of petitioners
telecommunications facilities in Batangas City. After the installation of the facilities, petitioner applied with
the Mayors office of Batangas City for a permit to operate. Because of a discrepancy in the actual
investment costs used in computing the prescribed fees for the clearances and permits, petitioner was not
able to secure a Mayors Permit for the year 1998. Petitioner was also advised to settle its unpaid realty
taxes. However, petitioner claimed exemption from the payment of realty tax, citing the first sentence of
Section 5 of RA 7678, the Letter-Opinion of the Bureau of Local Government Finance (BLGF) dated 8
April 1997,[5] and the letter of the Office of the President dated 12 March 1996.[6]

In 1999, respondent refused to issue a Mayors Permit to petitioner without payment of its realty taxes.

On 22 June 1999, petitioner paid P68,890.39 under protest as fees for the permit to operate, but
respondent refused to accept the payment unless petitioner also paid the realty taxes. [7]

On 2 July 1999, respondent threatened to close down petitioners operations. Hence, on 3 July 1999,
petitioner instituted a complaint for prohibition and mandamus with prayer for a temporary restraining
order or writ of preliminary injunction. This case was raffled to RTC-Branch 3. On the same date,
respondent served a Cease and Desist Order on petitioner. [8]

On 20 January 2000, during the pendency of the complaint, petitioner paid its realty taxes of P2,043,265
under protest.[9] Petitioner resumed its business, rendering the other issues raised in petitioners complaint
moot. Consequently, the only issue left for resolution is whether petitioner is exempt from the realty tax
under Section 5 of RA 7678.

The Ruling of RTC-Branch 3

On 28 March 2001, RTC-Branch 3 issued the following Order:

WHEREFORE, premises considered, the Court hereby declares that the real estate,
buildings and personal property of plaintiff Digital Telecommunications Philippines, Inc.
which are used in the operation of its franchise are exempt from payment of real property
taxes, but those not so used should be held liable thereto. [10]

RTC-Branch 3 reasoned that the phrase exclusive of this franchise in the first sentence of Section 5 of RA
7678 limits the real properties that are subject to realty tax only to those which are not used in petitioners
telecommunications business. In short, petitioners real properties used in its telecommunications
business are not subject to realty tax.[11]
On 1 May 2001, respondent moved for reconsideration. Before acting on the motion, the Presiding Judge
of RTC-Branch 3 voluntarily inhibited himself because the newly-elected mayor of Batangas City was
his kumpadre.[12] The case was re-raffled to RTC-Branch 8.

The Ruling of RTC-Branch 8

On 2 May 2002, RTC-Branch 8 issued an Order which reads:

WHEREFORE, the defendants Motion for Reconsideration is hereby granted. The Order
of this Court dated March 21, 2001 is hereby set aside and, in lieu thereof, judgment is
hereby rendered in favor of the defendants and against the plaintiff:

DISMISSING the Amended Complaint;

DECLARING that the plaintiff Digital Telecommunications Philippines, Inc., under
its legislative franchise RA No. 7678, is not exempted from the payment of real
property tax being collected by the defendant City of Batangas and, accordingly,
ORDERING said plaintiff to pay the City of Batangas real estate taxes in the
amount of Ph4,620,683.33 which was due as of January, 2000, as well as those due
thereafter, plus corresponding interest and penalties. [13]

On 29 May 2002, petitioner moved for reconsideration. On 19 November 2002, RTC-Branch 8 denied
petitioners motion for reconsideration.

Hence, this petition.

The Issue

The sole issue for resolution is whether, under the first sentence of Section 5 of RA 7678, petitioners real
properties used in its telecommunications business are exempt from the realty tax.

Petitioners Contentions

Petitioner contends that its exemption from realty tax is based on the first sentence of Section 5 of RA
7678. Petitioner claims that the evident purpose of the phrase exclusive of this franchise is to limit the
real properties that are subject to realty tax only to properties that are not used in petitioners
telecommunications business.[14] Petitioner asserts that the phrase exclusive of this franchise must not be
construed as a useless surplusage. Petitioner points out that its exemption from realty tax was affirmed in
two separate opinions, one rendered by the Office of the President on 12 March 1996 and the other by
the BLGF on 8 April 1997 and reaffirmed on 4 January 1999.[15] The BLGF declared that the real
properties of Digitel, which are used in the operation of its franchise are x x x found to be exempt from the
payment of real property taxes beginning 1 January 1993. However, all other properties of that company
not used in connection with the operation of its franchise shall remain taxable. [16]

Petitioner further argues that under the Local Government Code, the realty tax is imposed on all lands,
buildings, machineries and other improvements attached to real property. A franchise is an incorporeal
being, a special privilege granted by the legislature. Hence, to read the first sentence of Section 5 of RA
7678 to mean that the franchisee shall pay taxes on its real properties used in its telecommunications
business would render the phrase exclusive of this franchise meaningless.

Petitioner admits that the franchise granted under RA 7678 is a personal property, but the franchise is not
the personal property referred to in the first sentence of Section 5. Petitioner asserts that the phrase real
estate, buildings, and personal property in the first sentence of Section 5 refers solely to real properties
and does not include personal properties. Petitioner explains thus:
 For PTEs (public telecommunication entities), these personal properties include the
switches which were installed in the exchange buildings as well as the outside and inside
plant equipment.Initially, these telecommunications materials and equipment were
personal property in character. But, having been installed and made operational by being
attached to the exchange building, they are now converted into immovables or real
property. That being the case, the phrase real estate, buildings and personal
property actually refer[s] to properties that are liable for real estate tax. And,
Congress having made the qualification with the phrase exclusive of this franchise, only
such real properties that are not used in furtherance of the franchise are subject to real
property tax.[17] (Emphasis supplied)

Respondents Contentions
Respondent contends that the phrase exclusive of this franchise does not mean that petitioner is exempt
from the realty tax on its real properties used in its telecommunications business. The first sentence of
Section 5 of RA 7678 makes petitioner liable to pay the same taxes for its real estate, buildings, and
personal property exclusive of this franchise as other persons or corporations are or hereafter may be
required by law to pay. This shows the clear intent of Congress to tax petitioners real and personal
properties.[18]Respondent asserts that the phrase exclusive of this franchise is a qualification of the broad
declaration on the franchisees liability for taxes which is the main thrust of the first sentence of Section
5. Respondent points out that petitioner is paying taxes and fees on all its motor vehicles, which are
personal properties, without distinction. [19] Respondent also points out that petitioner admits that the first
sentence of Section 5 of RA 7678 is ambiguous with respect to the phrase exclusive of this franchise,
[20]
thus petitioner resorted to the rules on statutory construction. [21]

Respondent adds that the legislative franchises granted to other telecommunications companies contain
the same phrase exclusive of this franchise. This shows the intent of Congress to make franchisees liable
for the realty tax rather than exempt them even if the real properties are used in their telecommunications
business.[22]

The Office of the Solicitor General (OSG), appearing for respondent, contends that the first sentence of
Section 5 provides for petitioners general liability to pay taxes and does not provide for petitioners
exemption from realty tax. The OSG invokes the doctrine of last antecedent which is an aid in statutory
construction. The OSG argues that under this doctrine, the qualifying word or phrase only restricts the
word or phrase to which the qualifying word or phrase is immediately associated and not the word or
phrase which is distantly or remotely located. In the first sentence of Section 5, the phrase exclusive of
this franchise restricts only the words personal property which immediately precede the phrase exclusive
of this franchise. This means that the franchise, an intangible personal property, should be excluded from
the personal properties that are subject to taxes under the first sentence of Section 5. The OSG adds that
the use of the comma to separate real estate, buildings from personal property exerts a dominant
influence in the application of the doctrine of last antecedent. Further, the OSG reiterates that laws
granting exemption from tax are to be construed strictissimi juris against the taxpayer and liberally in favor
of the taxing power.

The Ruling of the Court

The petition has no merit.

Section 5 of RA 7678 imposes taxes

and does not exempt from realty tax

The issue in this case involves the interpretation of the phrase exclusive of this franchise in the first
sentence of Section 5 of RA 7678.
Section 5 of RA 7678 states:

Sec. 5. Tax Provisions. - The grantee shall be liable to pay the same taxes on its real
estate, buildings, and personal property exclusive of this franchise as other
 persons or corporations are now or hereafter may be required by law to pay. In
addition thereto, the grantee shall pay to the Bureau of Internal Revenue each year,
within thirty (30) days after the audit and approval of the accounts, a franchise tax as may
be prescribed by law of all gross receipts of the telephone or other telecommunications
businesses transacted under this franchise by the grantee; Provided, That the grantee
shall continue to be liable for income taxes payable under Title II of the National Internal
Revenue Code pursuant to Section 2 of Executive Order No. 72 unless the latter
enactment is amended or repealed, in which case the amendment or repeal shall be
applicable thereto.

The grantee shall file the return with and pay the tax due thereon to the Commissioner of
Internal Revenue or his duly authorized representative in accordance with the National
Internal Revenue Code and the return shall be subject to audit by the Bureau of Internal
Revenue. (Boldfacing and underscoring supplied)

The first sentence of Section 5 of RA 7678 is the same provision found in almost all legislative franchises
in the telecommunications industry dating back to 1905. [23] It is also the same provision that appears in the
legislative franchises of other telecommunications companies like Philippine Long Distance Telephone
Company,[24] Smart Information Technologies, Inc.,[25] and Globe Telecom.[26] Since 1905, no
telecommunications company has claimed exemption from realty tax based on the phrase exclusive of
this franchise, until petitioner filed the present case on 3 July 1999.[27]

The first sentence of Section 5 clearly states that the legislative franchisee shall be liable to pay the
following taxes: (1) the same taxes on its real estate, buildings, and personal property exclusive of this
franchise as other persons or corporations are now or hereafter may be required by law to pay; (2)
franchise tax as may be prescribed by law of all gross receipts of the telephone or other
telecommunications businesses transacted under this franchise; [28] and (3) income taxes payable under
Title II of the National Internal Revenue Code.

The crux of the controversy lies in the interpretation of the phrase exclusive of this franchise in the first
sentence of Section 5. Petitioner interprets the phrase to mean that its real properties that are used in its
telecommunications business shall not be subject to realty tax. Respondent interprets the same phrase to
mean that the term personal property shall not include petitioners franchise, which is an intangible
personal property.

We rule that the phrase exclusive of this franchise simply means that petitioners franchise shall not be
subject to the taxes imposed in the first sentence of Section 5. The first sentence lists the properties that
are subject to taxes, and the list excludes the franchise. Thus, the first sentence provides:

The grantee shall be liable to pay the same taxes on its real estate, buildings, and
personal property exclusive of this franchise as other persons or corporations are now
or hereafter may be required by law to pay. (Emphasis supplied)

A plain reading shows that the phrase exclusive of this franchise is meant to exclude the legislative
franchise from the properties subject to taxes under the first sentence. In effect, petitioners franchise,
which is a personal property, is not subject to the taxes imposed on properties under the first sentence of
Section 5.

However, petitioners gross receipts from its franchise are subject to the franchise tax under the
second sentence of Section 5. Thus, the second sentence provides:

In addition thereto, the grantee shall pay to the Bureau of Internal Revenue each year,
within thirty (30) days after the audit and approval of the accounts, a franchise tax as
may be prescribed by law of all gross receipts of the telephone or other
 telecommunications businesses transacted under this franchise by the grantee;
x x x (Emphasis supplied)

In short, petitioners franchise is excluded from the properties taxable under the first sentence of Section 5
but the gross receipts from its franchise are expressly taxable under the second sentence of the same
Section.

The first sentence of Section 5 imposes on the franchisee the same taxes that non-franchisees are
subject to with respect to real and personal properties. The clear intent is to put the franchisees and non-
franchisees in parity in the taxation of their real and personal properties. Since non-franchisees have
obviously no franchises, the franchise must be excluded from the list of properties subject to tax to
maintain the parity between the franchisees and non-franchisees. However, the franchisee is taxable
separately from its franchise. Thus, the second sentence of Section 5 imposes the franchise tax on gross
receipts, which under Republic Act No. 7716 has been replaced by the 10% Valued Added Tax effective 1
January 1996.[29]

Section 5 can be divided into three parts. First is the first sentence which imposes taxes on real and
personal properties, excluding one property, that is, the franchise. This puts in parity the franchisees and
non-franchisees in the taxation of real and personal properties. Second is the second sentence which
imposes the franchise tax, which is applicable solely to the franchisee. And third is the proviso in the
second sentence that imposes the income tax on the franchisee, the same income tax payable by non-
franchisees.

Petitioner claims that the first sentence refers only to real properties, and that the phrase exclusive of this
franchise exempts petitioner from realty tax on its real properties used in its telecommunications
business. This claim has no basis in the language of the law as written in the first sentence of Section
5. First, the first sentence expressly refers to taxes on real estate and on personal property. Clearly, the
first sentence does not refer only to taxes on real properties, but also to taxes on personal properties. The
trial court correctly observed that petitioner pays taxes on its motor vehicles, [30] which are personal
properties, that are used in its telecommunications business. [31] There is also the documentary stamp tax
on transactions involving real and personal properties, which petitioner and other taxpayers are liable for.
[32]

A franchise granted by Congress to operate a private radio station for the franchisees communications in
deep-sea fishing shows that the first sentence of Section 5 of RA 7678 does not refer to real properties
alone. Section 6 of Republic Act No. 3218 (RA 3218), entitled An Act Granting Batas Riego De Dios A
Franchise To Construct, Maintain And Operate Private Radio Stations For Radio Communications In Its
Deep-Sea Fishing Industry, provides:

SECTION 6. The grantee shall be liable (1) to pay the same taxes on its real
estate, building, fishing boats and personal property, exclusive of this franchise as
other persons or corporations are now, or hereafter may be required by law to pay, and
shall further be liable (2) to pay all other taxes that may be imposed by the National
Internal Revenue Code by reason of this franchise.(Emphasis supplied)

The inclusion of fishing boats, personal properties that can never be attached to a land or building so as
to make them real properties, demonstrates that Section 6 of RA 3218, like the first sentence of Section 5
of RA 7678, not only applies to real properties but also to personal properties.

Second, there is no language in the first sentence of Section 5 expressly or even impliedly exempting
petitioner from the realty tax. The phrases exemption from real estate tax, free from real estate tax or not
subject to real estate tax do not appear in the first sentence. No matter how one reads the first sentence,
there is no grant of exemption, express or implied, from realty tax. In fact, the first sentence expressly
imposes taxes on both real and personal properties, excluding only the intangible personal property that
is the franchise.

A tax exemption cannot arise from vague inference. The first sentence of Section 5 does not grant any
express or even implied exemption from realty tax. On the contrary, the first sentence categorically states
that the franchisee is subject to the same taxes currently imposed, and those taxes that may be
subsequently imposed, on other persons or corporations, taxpayers that admittedly are all subject to
realty tax. The first sentence does not limit the imposition of the same taxes to realty tax only but even to
those taxes that may in the future be imposed on other taxpayers, which future taxes shall also be
imposed on petitioner. Thus, the first sentence of Section 5 imposes on petitioner not only realty tax but
also other taxes.

The phrase personal property exclusive of this franchise merely means that personal property does not
include the franchise even if the franchise is an intangible personal property. Stated differently, the first
sentence of Section 5 provides that petitioner shall pay tax on its real properties as well as on its personal
properties but the franchise, which is an intangible personal property, shall not be deemed personal
property.
The historical usage of the phrase exclusive of this franchise in franchise laws enacted by Congress
indubitably shows that the phrase is not a grant of tax exemption, but an exclusion of one type of personal
property subject to taxes, and the excluded personal property is the franchise. Thus, the franchises of
telecommunications companies in Republic Act Nos. 4137, [33] 5692,[34] 5739,[35] 5785,[36] 5790,[37] 5791,
[38]
5795,[39] 5810,[40] 5847,[41] 5848,[42] 5856,[43] 5857,[44] 5913,[45] 5914,[46] 5929,[47]5937,[48] 5958,[49] 5959,[50] 5
974,[51] 5993,[52] 5994,[53] 6002,[54] 6006,[55] 6007,[56] 6013,[57] 6024,[58] 6097,[59] 6510,[60] 6536,[61] and
6530[62] contain the following common tax provision:

The grantee shall be liable to pay the same taxes, unless exempted therefrom, on its
business, real estate, buildings, and personal property, exclusive of this franchise, as
other persons or corporations are now or hereafter may be required by law to
pay. (Emphasis supplied)

The phrase unless exempted therefrom in the common provision clearly clarifies that the phrase
exclusive of this franchise does not grant any tax exemption. To claim tax exemption, there must be an
express exemption from tax in another provision of law. On the other hand, the deletion of the phrase
unless exempted therefrom from the common provision does not give rise to any tax exemption.

Bayantel and Digitel Cases

In City Government of Quezon City v. Bayan Telecommunications, Inc.,[63] this Courts Second Division
held that all realties which are actually, directly and exclusively used in the operation of its franchise
are exempted from any property tax. The Second Division added that Bayantels franchise being national
in character, the exemption granted applies to all its real and personal properties found anywhere within
the Philippines. The Second Division reasoned in this wise:

The legislative intent expressed in the phrase exclusive of this franchise cannot be
construed other than distinguishing between two (2) sets of properties, be they real or
personal, owned by the franchisee, namely, (a) those actually, directly and exclusively
used in its radio or telecommunications business, and (b) those properties which are not
so used. It is worthy to note that the properties subject of the present controversy are only
those which are admittedly falling under the first category.
To the mind of the Court, Section 14 of Rep. Act No. 3259 effectively works to grant or
delegate to local governments of Congress inherent power to tax the franchisees
properties belonging to the second group of properties indicated above, that is, all
properties which, exclusive of this franchise, are not actually and directly used in the
pursuit of its franchise. As may be recalled, the taxing power of local governments under
both the 1935 and the 1973 Constitutions solely depended upon an enabling law. Absent
such enabling law, local government units were without authority to impose and collect
taxes on real properties within their respective territorial jurisdictions. While Section 14 of
 Rep. Act No. 3259 may be validly viewed as an implied delegation of power to tax, the
delegation under that provision, as couched, is limited to impositions over properties of
the franchisee which are not actually, directly and exclusively used in the pursuit of its
franchise. Necessarily, other properties of Bayantel directly used in the pursuit of its
business are beyond the pale of the delegated taxing power of local governments. In a
very real sense, therefore, real properties of Bayantel, save those exclusive of its
franchise, are subject to realty taxes. Ultimately, therefore, the inevitable result was
that all realties which are actually, directly and exclusively used in the operation of
its franchise are exempted from any property tax. (Emphasis supplied)

In Digital Telecommunications Philippines, Inc. (Digitel) v. Province of Pangasinan,[64] this Courts Third
Division ruled that Digitels real properties located within the territorial jurisdiction of Pangasinan that are
actually, directly and exclusively used in its franchise are exempt from realty tax under the first sentence
of Section 5 of RA 7678. The Third Division explained thus:

The more pertinent issue to consider is whether or not, by passing Republic Act No. 7678,
Congress intended to exempt petitioner DIGITELs real properties actually, directly and
exclusively used by the grantee in its franchise.

The fact that Republic Act No. 7678 was a later piece of legislation can be taken to mean
that Congress, knowing fully well that the Local Government Code had already withdrawn
exemptions from real property taxes, chose to restore such immunity even to a limited
degree. Accordingly:

The Court views this subsequent piece of legislation as an express and

real intention on the part of Congress to once again remove from
the LGCs delegated taxing power, all of the franchisees x x x properties
that are actually, directly and exclusively used in the pursuit of its
franchise.

In view of the unequivocal intent of Congress to exempt from real property tax those real
properties actually, directly and exclusively used by petitioner DIGITEL in the pursuit of its
franchise, respondent Province of Pangasinan can only levy real property tax on the
remaining real properties of the grantee located within its territorial jurisdiction not part of
the above-stated classification. Said exemption, however, merely applies from the time of
the effectivity of petitioner DIGITELs legislative franchise and not a moment sooner.

Nowhere in the language of the first sentence of Section 5 of RA 7678 does it expressly or even impliedly
provide that petitioners real properties that are actually, directly and exclusively used in its
telecommunications business are exempt from payment of realty tax. On the contrary, the first sentence
of Section 5 specifically states that the petitioner, as the franchisee, shall pay the same taxes on its real
estate, buildings, and personal property exclusive of this franchise as other persons or corporations are
now or hereafter may be required by law to pay.

The heading of Section 5 is Tax Provisions, not Tax Exemptions. To reiterate, the phrase exemption from
real estate tax or other words conveying exemption from realty tax do not appear in the first sentence of
Section 5. The phrase exclusive of this franchise in the first sentence of Section 5 merely qualifies the
phrase personal property to exclude petitioners legislative franchise, which is an intangible personal
property. Petitioners franchise is subject to tax in the second sentence of Section 5 which imposes the
franchise tax. Thus, there is no grant of tax exemption in the first sentence of Section 5.

The interpretation of the phrase exclusive of this franchise in the Bayantel and Digitel cases goes against
the basic principle in construing tax exemptions. In PLDT v. City of Davao,[65] the Court held that tax
exemptions should be granted only by clear and unequivocal provision of law on the basis of language
too plain to be mistaken. They cannot be extended by mere implication or inference.
Tax exemptions must be clear and unequivocal. A taxpayer claiming a tax exemption must point to a
specific provision of law conferring on the taxpayer, in clear and plain terms, exemption from a common
burden. Any doubt whether a tax exemption exists is resolved against the taxpayer. [66]
RCPI case

In Radio Communications of the Philippines, Inc. (RCPI) v. Provincial Assessor of South Cotabato,[67] the
Courts First Division held that RCPIs radio relay station tower, radio station building, and machinery shed
are real properties and are subject to real property tax. The Court added that:

RCPI cannot also invoke the equality of treatment clause under Section 23 of Republic
Act No. 7925. The franchises of Smart, Islacom, TeleTech, Bell, Major Telecoms,
Island Country, and IslaTel,[68] all expressly declare that the franchisee shall pay the
real estate tax, using words similar to Section 14 of RA 2036, as amended. The
provisions of these subsequent telecommunication franchises imposing the real estate
tax on franchisees only confirm that RCPI is subject to the real estate tax. Otherwise,
RCPI will stick out like a sore thumb, being the only telecommunications company exempt
from the real estate tax, in mockery of the spirit of equality of treatment that RCPI is
invoking, not to mention the violation of the constitutional rule on uniformity of taxation.

It is an elementary rule in taxation that exemptions are strictly construed against the
taxpayer and liberally in favor of the taxing authority. It is the taxpayers duty to justify the
exemption by words too plain to be mistaken and too categorical to be misinterpreted.
(Emphasis supplied)

In RCPI, the Court emphasized that telecommunications companies which were granted
legislative franchise are liable to realty tax. The intent to grant realty tax exemption cannot be discerned
from Republic Act No. 4054[69] and neither from the legislative franchises of other telecommunications
companies. Tax exemptions granted to one or more, but not to all, telecommunications companies
similarly situated will violate the constitutional rule on uniformity of taxation. [70]

The intent of Congress is to make

legislative franchisees liable to tax

In PLDT v. City of Davao,[71] it was observed that after the imposition of VAT on telecommunications
companies, Congress refused to grant any tax exemption to telecommunications companies that sought
new franchises from Congress, except the exemption from specific tax. [72] More importantly, the uniform
tax provision in these new franchises expressly states that the franchisee shall pay not only all taxes,
except specific tax, under the National Internal Revenue Code, but also all taxes under other applicable
laws,[73] one of which is the Local Government Code which imposes the realty tax. [74]

In fact, Section 12 of Republic Act No. 9180 (RA 9180), [75] the legislative franchise of Digitel Mobile, a
100%-owned subsidiary of petitioner, states that the franchisee, its successors or assigns shall be subject
to the payment of all taxes, duties, fees or charges and other impositions under the National Internal
Revenue Code of 1997, as amended, and other applicable laws.[76] Section 12 of RA 9180 provides:

SECTION 12. Tax Provisions. The grantee, its successors or assigns, shall be
subject to the payment of all taxes, duties, fees or charges and other impositions
under the National Internal Revenue Code of 1997, as amended, and other
applicable laws: Provided, That nothing herein shall be construed as repealing any
specific tax exemptions, incentives, or privileges granted under any relevant law:
Provided, further, That all rights, privileges, benefits and exemptions accorded to existing
and future telecommunications franchises shall likewise be extended to the grantee.

The grantee shall file the return with the city or province where its facility is located and
pay the income tax due thereon to the Commissioner of Internal Revenue or his duly
authorized representatives in accordance with the National Internal Revenue Code and
 the return shall be subject to audit by the Bureau of Internal Revenue. (Emphasis
supplied)

Thus, Digitel Mobile is subject to tax on its real estate and personal properties, whether or not used in its
telecommunications business.

In Compagnie Financiere Sucres et Denrees v. Commissioner of Internal Revenue,[77] the Court ruled that
the governing principle is that tax exemptions are to be construed in strictissimi juris against the taxpayer
and liberally in favor of the taxing authority he who claims an exemption must be able to justify his claim
by the clearest grant of statute. A person claiming an exemption has the burden of justifying the
exemption by words too plain to be mistaken and too categorical to be misinterpreted. Tax exemptions are
never presumed and the burden lies with the taxpayer to clearly establish his right to exemption.[78]

BLGF Opinions
On 25 October 2004, the BLGF issued Memorandum Circular No. 15-2004. [79] This circular reversed
the BLGFs Letter-Opinion dated 8 April 1997 recognizing realty tax exemption under the phrase exclusive
of this franchise. This later circular states that the real properties owned by Globe and Smart
Telecommunications and all other telecommunications companies similarly situated are subject to the
realty tax. The BLGF has reversed its opinion on the realty tax exemption of telecommunications
companies. Hence, petitioners claim of tax exemption based on BLGFs opinion does not hold
water. Besides, the BLGF has no authority to rule on claims for exemption from the realty tax. [80]
WHEREFORE, we DENY the petition. We AFFIRM the 2 May 2002 and 19 November 2002 Orders of the
Regional Trial Court, Branch 8, Batangas City, in Civil Case No. 5343. SO ORDERED.

G.R. No. 115349 April 18, 1997

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE COURT OF APPEALS, THE COURT
OF TAX APPEALS and ATENEO DE MANILA UNIVERSITY, respondents.

In conducting researches and studies of social organizations and cultural values thru its Institute of
Philippine Culture, is the Ateneo de Manila University performing the work of an independent contractor
and thus taxable within the purview of then Section 205 of the National Internal Revenue Code levying a
three percent contractor's tax? This question is answer by the Court in the negative as it resolves this
petition assailing the Decision 1 of the Respondent Court of Appeals 2 in CA-G.R. SP No. 31790
promulgated on April 27, 1994 affirming that of the Court of Tax Appeals. 3

The Antecedent Facts

The antecedents as found by the Court of Appeals are reproduced hereinbelow, the same being largely
undisputed by the parties.

Private respondent is a non-stock, non-profit educational institution with auxiliary units and
branches all over the Philippines. One such auxiliary unit is the Institute of Philippine Culture
(IPC), which has no legal personality separate and distinct from that of private respondent. The
IPC is a Philippine unit engaged in social science studies of Philippine society and culture.
Occasionally, it accepts sponsorships for its research activities from international organizations,
private foundations and government agencies.

On July 8, 1983, private respondent received from petitioner Commissioner of Internal Revenue a
demand letter dated June 3, 1983, assessing private respondent the sum of P174,043.97 for
alleged deficiency contractor's tax, and an assessment dated June 27, 1983 in the sum of
 P1,141,837 for alleged deficiency income tax, both for the fiscal year ended March 31, 1978.
Denying said tax liabilities, private respondent sent petitioner a letter-protest and subsequently
filed with the latter a memorandum contesting the validity of the assessments.

On March 17, 1988, petitioner rendered a letter-decision canceling the assessment for deficiency
income tax but modifying the assessment for deficiency contractor's tax by increasing the amount
due to P193,475.55. Unsatisfied, private respondent requested for a reconsideration or
reinvestigation of the modified assessment. At the same time, it filed in the respondent court a
petition for review of the said letter-decision of the petitioner. While the petition was pending
before the respondent court, petitioner issued a final decision dated August 3, 1988 reducing the
assessment for deficiency contractor's tax from P193,475.55 to P46,516.41, exclusive of
surcharge and interest.

On July 12, 1993, the respondent court rendered the questioned decision which dispositively
reads:

WHEREFORE, in view of the foregoing, respondent's decision is SET ASIDE. The deficiency
contractor's tax assessment in the amount of P46,516.41 exclusive of surcharge and interest for
the fiscal year ended March 31, 1978 is hereby CANCELED. No pronouncement as to cost.

SO ORDERED.

Not in accord with said decision, petitioner has come to this Court via the present petition for
review raising the following issues:

1) WHETHER OR NOT PRIVATE RESPONDENT FALLS UNDER THE PURVIEW OF

INDEPENDENT CONTRACTOR PURSUANT TO SECTION 205 OF THE TAX CODE; and

2) WHETHER OR NOT PRIVATE RESPONDENT IS SUBJECT TO 3% CONTRACTOR'S TAX

UNDER SECTION 205 OF THE TAX CODE.

The pertinent portions of Section 205 of the National Internal Revenue Code, as amended, provide:

Sec. 205. Contractor, proprietors or operators of dockyards, and others. A contractor's

tax of threeper centum of the gross receipts is hereby imposed on the following:

xxx xxx xxx

(16) Business agents and other independent contractors except persons,

associations and corporations under contract for embroidery and apparel
for export, as well as their agents and contractors and except gross
receipts of or from a pioneer industry registered with the Board of
Investments under Republic Act No. 5186:

xxx xxx xxx

The term "independent contractors" include persons (juridical or natural)

not enumerated above (but not including individuals subject to the
occupation tax under Section 12 of the Local Tax Code) whose activity
consists essentially of the sale of all kinds of services for a fee regardless
of whether or not the performance of the service calls for the exercise or
use of the physical or mental faculties of such contractors or their
employees.
 xxx xxx xxx

Petitioner contends that the respondent court erred in holding that private respondent is
not an "independent contractor" within the purview of Section 205 of the Tax Code. To
petitioner, the term "independent contractor", as defined by the Code, encompasses all
kinds of services rendered for a fee and that the only exceptions are the following:

a. Persons, association and corporations under contract for embroidery and apparel for
export and gross receipts of or from pioneer industry registered with the Board of
Investment under R.A. No. 5186;

b. Individuals occupation tax under Section 12 of the Local Tax Code (under the old
Section 182 [b] of the Tax Code); and

c. Regional or area headquarters established in the Philippines by multinational

corporations, including their alien executives, and which headquarters do not earn or
derive income from the Philippines and which act as supervisory, communication and
coordinating centers for their affiliates, subsidiaries or branches in the Asia Pacific Region
(Section 205 of the Tax Code).

Petitioner thus submits that since private respondent falls under the definition of an
"independent contractor" and is not among the aforementioned exceptions, private
respondent is therefore subject to the 3% contractor's tax imposed under the same
Code. 4

The Court of Appeals disagreed with the Petitioner Commissioner of Internal Revenue and affirmed the
assailed decision of the Court of Tax Appeals. Unfazed, petitioner now asks us to reverse the CA through
this petition for review.

The Issues

Petitioner submits before us the following issues:

1) Whether or not private respondent falls under the purview of independent contractor
pursuant to Section 205 of the Tax Code.

2) Whether or not private respondent is subject to 3% contractor's tax under Section 205
of the Tax Code. 5

In fine, these may be reduced to a single issue: Is Ateneo de Manila University, through its auxiliary unit or
branch the Institute of Philippine Culture performing the work of an independent contractor and,
thus, subject to the three percent contractor's tax levied by then Section 205 of the National Internal
Revenue Code?

The Court's Ruling

The petition is unmeritorious.

Interpretation of Tax Laws

The parts of then Section 205 of the National Internal Revenue Code germane to the case before us read:
 Sec. 205. Contractors, proprietors or operators of dockyards, and others. A
contractor's tax of threeper centum of the gross receipts is hereby imposed on the
following:

xxx xxx xxx

(16) Business agents and other independent contractors, except persons, associations
and corporations under contract for embroidery and apparel for export, as well as their
agents and contractors, and except gross receipts of or from a pioneer industry
registered with the Board of Investments under the provisions of Republic Act No. 5186;

xxx xxx xxx

The term "independent contractors" include persons (juridical or natural) not enumerated
above (but not including individuals subject to the occupation tax under Section 12 of the
Local Tax Code) whose activity consists essentially of the sale of all kinds of services for
a fee regardless of whether or not the performance of the service calls for the exercise or
use of the physical or mental faculties of such contractors or their employees.

The term "independent contractor" shall not include regional or area headquarters
established in the Philippines by multinational corporations, including their alien
executives, and which headquarters do not earn or derive income from the Philippines
and which act as supervisory, communications and coordinating centers for their
affiliates, subsidiaries or branches in the Asia-Pacific Region.

The term "gross receipts" means all amounts received by the prime or principal
contractor as the total contract price, undiminished by amount paid to the subcontractor,
shall be excluded from the taxable gross receipts of the subcontractor.

Petitioner Commissioner of Internal Revenue contends that Private Respondent Ateneo de Manila
University "falls within the definition" of an independent contractor and "is not one of those mentioned as
excepted"; hence, it is properly a subject of the three percent contractor's tax levied by the foregoing
provision of law. 6 Petitioner states that the "term 'independent contractor' is not specifically defined so as
to delimit the scope thereof, so much so that any person who . . . renders physical and mental service for
a fee, is now indubitably considered an independent contractor liable to 3% contractor's tax." 7 According
to petitioner, Ateneo has the burden of proof to show its exemption from the coverage of the law.

We disagree. Petitioner Commissioner of Internal Revenue erred in applying the principles of tax
exemption without first applying the well-settled doctrine of strict interpretation in the imposition of taxes. It
is obviously both illogical and impractical to determine who are exempted without first determining who
are covered by the aforesaid provision. The Commissioner should have determined first if private
respondent was covered by Section 205, applying the rule of strict interpretation of laws imposing taxes
and other burdens on the populace, before asking Ateneo to prove its exemption therefrom. The Court
takes this occasion to reiterate the hornbook doctrine in the interpretation of tax laws that "(a) statute will
not be construed as imposing a tax unless it does so clearly, expressly, and unambiguously . . . (A) tax
cannot be imposed without clear and express words for that purpose. Accordingly, the general rule of
requiring adherence to the letter in construing statutes applies with peculiar strictness to tax lawsand the
provisions of a taxing act are not to be extended by implication." 8 Parenthetically, in answering the
question of who is subject to tax statutes, it is basic that "in case of doubt, such statutes are to be
construed most strongly against the government and in favor of the subjects or citizens because burdens
are not to be imposed nor presumed to be imposed beyond what statutes expressly and clearly import." 9

To fall under its coverage, Section 205 of the National Internal Revenue Code requires that the
independent contractor be engaged in the business of selling its services. Hence, to impose the three
percent contractor's tax on Ateneo's Institute of Philippine Culture, it should be sufficiently proven that the
private respondent is indeed selling its services for a fee in pursuit of an independent business. And it is
only after private respondent has been found clearly to be subject to the provisions of Sec. 205 that the
question of exemption therefrom would arise. Only after such coverage is shown does the rule of
construction that tax exemptions are to be strictly construed against the taxpayer come into play,
contrary to petitioner's position. This is the main line of reasoning of the Court of Tax Appeals in its
decision, 10 which was affirmed by the CA.

The Ateneo de Manila University Did Not Contract

for the Sale of the Service of its Institute of Philippine Culture

After reviewing the records of this case, we find no evidence that Ateneo's Institute of Philippine Culture
ever sold its services for a fee to anyone or was ever engaged in a business apart from and
independently of the academic purposes of the university.

Stressing that "it is not the Ateneo de Manila University per se which is being taxed," Petitioner
Commissioner of Internal Revenue contends that "the tax is due on its activity of conducting researches
for a fee. The tax is due on the gross receipts made in favor of IPC pursuant to the contracts the latter
entered to conduct researches for the benefit primarily of its clients. The tax is imposed on the exercise of
a taxable activity. . . . [T]he sale of services of private respondent is made under a contract and the
various contracts entered into between private respondent and its clients are almost of the same terms,
showing, among others, the compensation and terms of payment." 11(Emphasis supplied.)

In theory, the Commissioner of Internal Revenue may be correct. However, the records do not show that
Ateneo's IPC in fact contracted to sell its research services for a fee. Clearly then, as found by the Court
of Appeals and the Court of Tax Appeals, petitioner's theory is inapplicable to the established factual
milieu obtaining in the instant case.

In the first place, the petitioner has presented no evidence to prove its bare contention that, indeed,
contracts for sale of services were ever entered into by the private respondent. As appropriately pointed
out by the latter:

An examination of the Commissioner's Written Formal Offer of Evidence in the Court of

Tax Appeals shows that only the following documentary evidence was presented:

Exhibit 1 BIR letter of authority no. 331844

2 Examiner's Field Audit Report

3 Adjustments to Sales/Receipts

4 Letter-decision of BIR Commissioner Bienvenido A.

Tan Jr.

None of the foregoing evidence even comes close to purport to be contracts between
private respondent and third parties. 12

Moreover, the Court of Tax Appeals accurately and correctly declared that the " funds received by the
Ateneo de Manila University are technically not a fee. They may however fall as gifts or donations which
are tax-exempt" as shown by private respondent's compliance with the requirement of Section 123 of the
National Internal Revenue Code providing for the exemption of such gifts to an educational institution. 13

Respondent Court of Appeals elucidated on the ruling of the Court of Tax Appeals:
 To our mind, private respondent hardly fits into the definition of an "independent
contractor".

For one, the established facts show that IPC, as a unit of the private respondent, is not
engaged in business. Undisputedly, private respondent is mandated by law to undertake
research activities to maintain its university status. In fact, the research activities being
carried out by the IPC is focused not on business or profit but on social sciences studies
of Philippine society and culture. Since it can only finance a limited number of IPC's
research projects, private respondent occasionally accepts sponsorship for unfunded IPC
research projects from international organizations, private foundations and governmental
agencies. However, such sponsorships are subject to private respondent's terms and
conditions, among which are, that the research is confined to topics consistent with the
private respondent's academic agenda; that no proprietary or commercial purpose
research is done; and that private respondent retains not only the absolute right to
publish but also the ownership of the results of the research conducted by the IPC . Quite
clearly, the aforementioned terms and conditions belie the allegation that private
respondent is a contractor or is engaged in business.

For another, it bears stressing that private respondent is a non-stock, non-profit

educational corporation. The fact that it accepted sponsorship for IPC's unfunded projects
is merely incidental. For, the main function of the IPC is to undertake research projects
under the academic agenda of the private respondent. Moreover the records do not show
that in accepting sponsorship of research work, IPC realized profits from such work. On
the contrary, the evidence shows that for about 30 years, IPC had continuously operated
at a loss, which means that sponsored funds are less than actual expenses for its
research projects. That IPC has been operating at a loss loudly bespeaks of the fact that
education and not profit is the motive for undertaking the research projects.

Then, too, granting arguendo that IPC made profits from the sponsored research
projects, the fact still remains that there is no proof that part of such earnings or profits
was ever distributed as dividends to any stockholder, as in fact none was so distributed
because they accrued to the benefit of the private respondent which is a non-profit
educational institution. 14

Therefore, it is clear that the funds received by Ateneo's Institute of Philippine Culture are not given in the
concept of a fee or price in exchange for the performance of a service or delivery of an object. Rather, the
amounts are in the nature of an endowment or donation given by IPC's benefactors solely for the purpose
of sponsoring or funding the research with no strings attached. As found by the two courts below, such
sponsorships are subject to IPC's terms and conditions. No proprietary or commercial research is done,
and IPC retains the ownership of the results of the research, including the absolute right to publish the
same. The copyrights over the results of the research are owned by Ateneo and, consequently, no portion
thereof may be reproduced without its permission. 15 The amounts given to IPC, therefore, may not be
deemed, it bears stressing as fees or gross receipts that can be subjected to the three percent
contractor's tax.

It is also well to stress that the questioned transactions of Ateneo's Institute of Philippine Culture cannot
be deemed either as a contract of sale or a contract of a piece of work. "By the contract of sale, one of the
contracting parties obligates himself to transfer the ownership of and to deliver a determinate thing, and
the other to pay therefor a price certain in money or its equivalent." 16 By its very nature, a contract of sale
requires a transfer of ownership. Thus, Article 1458 of the Civil Code "expressly makes the obligation to
transfer ownership as an essential element of the contract of sale, following modern codes, such as the
German and the Swiss. Even in the absence of this express requirement, however, most writers, including
Sanchez Roman, Gayoso, Valverde, Ruggiero, Colin and Capitant, have considered such transfer of
ownership as the primary purpose of sale. Perez and Alguer follow the same view, stating that the delivery
of the thing does not mean a mere physical transfer, but is a means of transmitting ownership. Transfer of
title or an agreement to transfer it for a price paid or promised to be paid is the essence of sale." 17 In the
case of a contract for a piece of work, "the contractor binds himself to execute a piece of work for the
employer, in consideration of a certain price or compensation. . . . If the contractor agrees to produce the
work from materials furnished by him, he shall deliver the thing produced to the employer and transfer
dominion over the thing, . . ." 18 Ineludably, whether the contract be one of sale or one for a piece of work,
a transfer of ownership is involved and a party necessarily walks away with an object. 19 In the case at
bench, it is clear from the evidence on record that there was no sale either of objects or services because,
as adverted to earlier, there was no transfer of ownership over the research data obtained or the results of
research projects undertaken by the Institute of Philippine Culture.

Furthermore, it is clear that the research activity of the Institute of Philippine Culture is done in pursuance
of maintaining Ateneo's university status and not in the course of an independent business of selling such
research with profit in mind. This is clear from a reading of the regulations governing universities:

31. In addition to the legal requisites an institution must meet, among others, the
following requirements before an application for university status shall be considered:

xxx xxx xxx

(e) The institution must undertake research and operate with a competent qualified staff
at least three graduate departments in accordance with the rules and standards for
graduate education. One of the departments shall be science and technology. The
competence of the staff shall be judged by their effective teaching, scholarly publications
and research activities published in its school journal as well as their leadership activities
in the profession.

(f) The institution must show evidence of adequate and stable financial resources and
support, a reasonable portion of which should be devoted to institutional development
and research. (emphasis supplied)

xxx xxx xxx

32. University status may be withdrawn, after due notice and hearing, for failure to
maintain satisfactorily the standards and requirements therefor. 20

Petitioner's contention that it is the Institute of Philippine Culture that is being taxed and not the Ateneo is
patently erroneous because the former is not an independent juridical entity that is separate and distinct
form the latter.

Factual Findings and Conclusions of the Court of Tax Appeals Affirmed by the Court of Appeals
Generally Conclusive

In addition, we reiterate that the "Court of Tax Appeals is a highly specialized body specifically created for
the purpose of reviewing tax cases. Through its expertise, it is undeniably competent to determine the
issue of whether" 21 Ateneo de Manila University may be deemed a subject of the three percent
contractor's tax "through the evidence presented before it." Consequently, "as a matter of principle, this
Court will not set aside the conclusion reached by . . . the Court of Tax Appeals which is, by the very
nature of its function, 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 authority . . ." 22 This point becomes more evident in the case before us where the findings and
conclusions of both the Court of Tax Appeals and the Court of Appeals appear untainted by any abuse of
authority, much less grave abuse of discretion. Thus, we find the decision of the latter affirming that of the
former free from any palpable error.
 Public Service, Not Profit, is the Motive

The records show that the Institute of Philippine Culture conducted its research activities at a huge deficit
of P1,624,014.00 as shown in its statements of fund and disbursements for the period 1972 to 1985. 23 In
fact, it was Ateneo de Manila University itself that had funded the research projects of the institute, and it
was only when Ateneo could no longer produce the needed funds that the institute sought funding from
outside. The testimony of Ateneo's Director for Accounting Services, Ms. Leonor Wijangco, provides
significant insight on the academic and nonprofit nature of the institute's research activities done in
furtherance of the university's purposes, as follows:

Q Now it was testified to earlier by Miss Thelma Padero (Office Manager of the Institute
of Philippine Culture) that as far as grants from sponsored research it is possible that the
grant sometimes is less than the actual cost. Will you please tell us in this case when the
actual cost is a lot less than the grant who shoulders the additional cost?

A The University.

Q Now, why is this done by the University?

A Because of our faculty development program as a university, because a university has

to have its own research institute. 24

So, why is it that Ateneo continues to operate and conduct researches through its Institute of Philippine
Culture when it undisputedly loses not an insignificant amount in the process? The plain and simple
answer is that private respondent is not a contractor selling its services for a fee but an academic
institution conducting these researches pursuant to its commitments to education and, ultimately, to public
service. For the institute to have tenaciously continued operating for so long despite its accumulation of
significant losses, we can only agree with both the Court of Tax Appeals and the Court of Appeals that
"education and not profit is [IPC's] motive for undertaking the research
projects." 25

WHEREFORE, premises considered, the petition is DENIED and the assailed Decision of the Court of
Appeals is hereby AFFIRMED in full. SO ORDERED.

G.R. No. 115852 October 30, 1995

PHILIPPINE AIRLINES, INC., petitioner, vs. THE SECRETARY OF FINANCE and COMMISSIONER OF
INTERNAL REVENUE, respondents.

These are motions seeking reconsideration of our decision dismissing the petitions filed in these cases for
the declaration of unconstitutionality of R.A. No. 7716, otherwise known as the Expanded Value-Added
Tax Law. The motions, of which there are 10 in all, have been filed by the several petitioners in these
cases, with the exception of the Philippine Educational Publishers Association, Inc. and the Association of
Philippine Booksellers, petitioners in G.R. No. 115931.

The Solicitor General, representing the respondents, filed a consolidated comment, to which the
Philippine Airlines, Inc., petitioner in G.R. No. 115852, and the Philippine Press Institute, Inc., petitioner in
G.R. No. 115544, and Juan T. David, petitioner in G.R. No. 115525, each filed a reply. In turn the Solicitor
General filed on June 1, 1995 a rejoinder to the PPI's reply.

On June 27, 1995 the matter was submitted for resolution.

I. Power of the Senate to propose amendments to revenue bills. Some of the petitioners (Tolentino,
Kilosbayan, Inc., Philippine Airlines (PAL), Roco, and Chamber of Real Estate and Builders Association
(CREBA)) reiterate previous claims made by them that R.A. No. 7716 did not "originate exclusively" in the
House of Representatives as required by Art. VI, 24 of the Constitution. Although they admit that H. No.
11197 was filed in the House of Representatives where it passed three readings and that afterward it was
sent to the Senate where after first reading it was referred to the Senate Ways and Means Committee,
they complain that the Senate did not pass it on second and third readings. Instead what the Senate did
was to pass its own version (S. No. 1630) which it approved on May 24, 1994. Petitioner Tolentino adds
that what the Senate committee should have done was to amend H. No. 11197 by striking out the text of
the bill and substituting it with the text of S. No. 1630. That way, it is said, "the bill remains a House bill
and the Senate version just becomes the text (only the text) of the House bill."

The contention has no merit.

The enactment of S. No. 1630 is not the only instance in which the Senate proposed an amendment to a
House revenue bill by enacting its own version of a revenue bill. On at least two occasions during
the Eighth Congress, the Senate passed its own version of revenue bills, which, in consolidation with
House bills earlier passed, became the enrolled bills. These were:

R.A. No. 7369 (AN ACT TO AMEND THE OMNIBUS INVESTMENTS CODE OF 1987 BY EXTENDING
FROM FIVE (5) YEARS TO TEN YEARS THE PERIOD FOR TAX AND DUTY EXEMPTION AND TAX
CREDIT ON CAPITAL EQUIPMENT) which was approved by the President on April 10, 1992. This Act is
actually a consolidation of H. No. 34254, which was approved by the House on January 29, 1992, and S.
No. 1920, which was approved by the Senate on February 3, 1992.

R.A. No. 7549 (AN ACT GRANTING TAX EXEMPTIONS TO WHOEVER SHALL GIVE REWARD TO ANY
FILIPINO ATHLETE WINNING A MEDAL IN OLYMPIC GAMES) which was approved by the President on
May 22, 1992. This Act is a consolidation of H. No. 22232, which was approved by the House of
Representatives on August 2, 1989, and S. No. 807, which was approved by the Senate on October 21,
1991.

On the other hand, the Ninth Congress passed revenue laws which were also the result of the
consolidation of House and Senate bills. These are the following, with indications of the dates on which
the laws were approved by the President and dates the separate bills of the two chambers of Congress
were respectively passed:

1. R.A. NO. 7642

AN ACT INCREASING THE PENALTIES FOR TAX EVASION, AMENDING FOR THIS PURPOSE
THE PERTINENT SECTIONS OF THE NATIONAL INTERNAL REVENUE CODE (December 28,
1992).

House Bill No. 2165, October 5, 1992

Senate Bill No. 32, December 7, 1992

2. R.A. NO. 7643

AN ACT TO EMPOWER THE COMMISSIONER OF INTERNAL REVENUE TO REQUIRE THE

PAYMENT OF THE VALUE-ADDED TAX EVERY MONTH AND TO ALLOW LOCAL GOVERNMENT
UNITS TO SHARE IN VAT REVENUE, AMENDING FOR THIS PURPOSE CERTAIN SECTIONS OF
THE NATIONAL INTERNAL REVENUE CODE (December 28, 1992)
House Bill No. 1503, September 3, 1992

Senate Bill No. 968, December 7, 1992

3. R.A. NO. 7646

AN ACT AUTHORIZING THE COMMISSIONER OF INTERNAL REVENUE TO PRESCRIBE THE

PLACE FOR PAYMENT OF INTERNAL REVENUE TAXES BY LARGE TAXPAYERS, AMENDING
FOR THIS PURPOSE CERTAIN PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE,
AS AMENDED (February 24, 1993)

House Bill No. 1470, October 20, 1992

Senate Bill No. 35, November 19, 1992

4. R.A. NO. 7649

AN ACT REQUIRING THE GOVERNMENT OR ANY OF ITS POLITICAL SUBDIVISIONS,

INSTRUMENTALITIES OR AGENCIES INCLUDING GOVERNMENT-OWNED OR CONTROLLED
CORPORATIONS (GOCCS) TO DEDUCT AND WITHHOLD THE VALUE-ADDED TAX DUE AT THE
RATE OF THREE PERCENT (3%) ON GROSS PAYMENT FOR THE PURCHASE OF GOODS AND
SIX PERCENT (6%) ON GROSS RECEIPTS FOR SERVICES RENDERED BY CONTRACTORS
(April 6, 1993)

House Bill No. 5260, January 26, 1993

Senate Bill No. 1141, March 30, 1993

5. R.A. NO. 7656

AN ACT REQUIRING GOVERNMENT-OWNED OR CONTROLLED CORPORATIONS TO DECLARE

DIVIDENDS UNDER CERTAIN CONDITIONS TO THE NATIONAL GOVERNMENT, AND FOR
OTHER PURPOSES (November 9, 1993)

House Bill No. 11024, November 3, 1993

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 National Assembly. When it was decided in
1939 to change to a bicameral legislature, it became necessary to provide for the procedure for
lawmaking by the Senate and the House of Representatives. The work of proposing amendments to the
Constitution was done by the National Assembly, acting as a constituent assembly, some of whose
members, jealous of preserving the Assembly's lawmaking powers, sought to curtail the powers of the
proposed Senate. Accordingly they proposed the following provision:

All bills appropriating public funds, revenue or tariff bills, bills of local application, and private bills shall
originate exclusively in the Assembly, but the Senate may propose or concur with amendments. In
case of disapproval by the Senate of any such bills, the Assembly may repass the same by a two-
thirds vote of all its members, and thereupon, the bill so repassed shall be deemed enacted and may
be submitted to the President for corresponding action. In the event that the Senate should fail to
finally act on any such bills, the Assembly may, after thirty days from the opening of the next regular
session of the same legislative term, reapprove the same with a vote of two-thirds of all the members
of the Assembly. And upon such reapproval, the bill shall be deemed enacted and may be submitted
to the President for corresponding action.

The special committee on the revision of laws of the Second National Assembly vetoed the proposal. It
deleted everything after the first sentence. As rewritten, the proposal was approved by the National
Assembly and embodied in Resolution No. 38, as amended by Resolution No. 73. (J. ARUEGO, KNOW
YOUR CONSTITUTION 65-66 (1950)). The proposed amendment was submitted to the people and
ratified by them in the elections held on June 18, 1940.

This is the history of Art. VI, 18 (2) of the 1935 Constitution, from which Art. VI, 24 of the present
Constitution was derived. It explains why the word "exclusively" was added to the American text from
which the framers of the Philippine Constitution borrowed and why the phrase "as on other Bills" was not
copied. Considering the defeat of the proposal, the power of the Senate to propose amendments must be
understood to be full, plenary and complete "as on other Bills." Thus, because revenue bills are required
to originate exclusively in the House of Representatives, the Senate cannot enact revenue measures of
its own without such bills. After a revenue bill is passed and sent over to it by the House, however, the
Senate certainly can pass its own version on the same subject matter. This follows from the coequality of
the two chambers of Congress.

That this is also the understanding of book authors of the scope of the Senate's power to concur is clear
from the following commentaries:

The power of the Senate to propose or concur with amendments is apparently without restriction. It
would seem that by virtue of this power, the Senate can practically re-write a bill required to come
from the House and leave only a trace of the original bill. For example, a general revenue bill passed
by the lower house of the United States Congress contained provisions for the imposition of an
inheritance tax . This was changed by the Senate into a corporation tax. The amending authority of
 the Senate was declared by the United States Supreme Court to be sufficiently broad to enable it to
make the alteration. [Flint v. Stone Tracy Company, 220 U.S. 107, 55 L. ed. 389].

(L. TAADA AND F. CARREON, POLITICAL LAW OF THE PHILIPPINES 247 (1961))

The above-mentioned bills are supposed to be initiated by the House of Representatives because it is
more numerous in membership and therefore also more representative of the people. Moreover, its
members are presumed to be more familiar with the needs of the country in regard to the enactment
of the legislation involved.

The Senate is, however, allowed much leeway in the exercise of its power to propose or concur with
amendments to the bills initiated by the House of Representatives. Thus, in one case, a bill
introduced in the U.S. House of Representatives was changed by the Senate to make a proposed
inheritance tax a corporation tax. It is also accepted practice for the Senate to introduce what is
known as an amendment by substitution, which may entirely replace the bill initiated in the House of
Representatives.

(I. CRUZ, PHILIPPINE POLITICAL LAW 144-145 (1993)).

In sum, while Art. VI, 24 provides that all appropriation, revenue or tariff bills, bills authorizing increase of
the public debt, bills of local application, and private bills must "originate exclusively in the House of
Representatives," it also adds, "but the Senate may propose or concur with amendments." In the exercise
of this power, the Senate may propose an entirely new bill as a substitute measure. As petitioner Tolentino
states in a high school text, a committee to which a bill is referred may do any of the following:

(1) to endorse the bill without changes; (2) to make changes in the bill omitting or adding sections or
altering its language; (3) to make and endorse an entirely new bill as a substitute, in which case it will
be known as a committee bill; or (4) to make no report at all.

(A. TOLENTINO, THE GOVERNMENT OF THE PHILIPPINES 258 (1950))

To except from this procedure the amendment of bills which are required to originate in the House by
prescribing that the number of the House bill and its other parts up to the enacting clause must be
preserved although the text of the Senate amendment may be incorporated in place of the original body
of the bill is to insist on a mere technicality. At any rate there is no rule prescribing this form. S. No. 1630,
as a substitute measure, is therefore as much an amendment of H. No. 11197 as any which the Senate
could have made.

II. S. No. 1630 a mere amendment of H. No. 11197. Petitioners' basic error is that they assume that S.
No. 1630 is an independent and distinct bill. Hence their repeated references to its certification that it was
passed by the Senate "in substitution of S.B. No. 1129, taking into consideration P.S. Res. No. 734
and H.B. No. 11197," implying that there is something substantially different between the reference to S.
No. 1129 and the reference to H. No. 11197. From this premise, they conclude that R.A. No. 7716
originated both in the House and in the Senate and that it is the product of two "half-baked bills because
neither H. No. 11197 nor S. No. 1630 was passed by both houses of Congress."

In point of fact, in several instances the provisions of S. No. 1630, clearly appear to be mere amendments
of the corresponding provisions of H. No. 11197. The very tabular comparison of the provisions of H. No.
11197 and S. No. 1630 attached as Supplement A to the basic petition of petitioner Tolentino, while
showing differences between the two bills, at the same time indicates that the provisions of the Senate bill
were precisely intended to be amendments to the House bill.
Without H. No. 11197, the Senate could not have enacted S. No. 1630. Because the Senate bill was a
mere amendment of the House bill, H. No. 11197 in its original form did not have to pass the Senate on
second and three readings. It was enough that after it was passed on first reading it was referred to the
Senate Committee on Ways and Means. Neither was it required that S. No. 1630 be passed by the House
of Representatives before the two bills could be referred to the Conference Committee.

There is legislative precedent for what was done in the case of H. No. 11197 and S. No. 1630. When the
House bill and Senate bill, which became R.A. No. 1405 (Act prohibiting the disclosure of bank deposits),
were referred to a conference committee, the question was raised whether the two bills could be the
subject of such conference, considering that the bill from one house had not been passed by the other
and vice versa. As Congressman Duran put the question:

MR. DURAN. Therefore, I raise this question of order as to procedure: If a House bill is passed by the
House but not passed by the Senate, and a Senate bill of a similar nature is passed in the Senate but
never passed in the House, can the two bills be the subject of a conference, and can a law be
enacted from these two bills? I understand that the Senate bill in this particular instance does not
refer to investments in government securities, whereas the bill in the House, which was introduced by
the Speaker, covers two subject matters: not only investigation of deposits in banks but also
investigation of investments in government securities. Now, since the two bills differ in their subject
matter, I believe that no law can be enacted.

Ruling on the point of order raised, the chair (Speaker Jose B. Laurel, Jr.) said:

THE SPEAKER. The report of the conference committee is in order. It is precisely in cases like this
where a conference should be had. If the House bill had been approved by the Senate, there would
have been no need of a conference; but precisely because the Senate passed another bill on the
same subject matter, the conference committee had to be created, and we are now considering the
report of that committee.

(2 CONG. REC. NO. 13, July 27, 1955, pp. 3841-42 (emphasis added))

III. The President's certification. The fallacy in thinking that H. No. 11197 and S. No. 1630 are distinct and
unrelated measures also accounts for the petitioners' (Kilosbayan's and PAL's) contention that because
the President separately certified to the need for the immediate enactment of these measures, his
certification was ineffectual and void. The certification had to be made of the version of the same revenue
bill which at the moment was 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 yeas and nays entered in the Journal.

The exception is based on the prudential consideration that if in all cases three readings on separate days
are required and a bill has to be printed in final form before it can be passed, the need for a law may be
rendered academic by the occurrence of the very emergency or public calamity which it is meant to
address.

Petitioners further contend that a "growing budget deficit" is not an emergency, especially in a country like
the Philippines where budget deficit is a chronic condition. Even if this were the case, an enormous
budget deficit does not make the need for R.A. No. 7716 any less urgent or the situation calling for its
enactment any less an emergency.

Apparently, the members of the Senate (including some of the petitioners in these cases) believed that
there was an urgent need for consideration of S. No. 1630, because they responded to the call of the
President by voting on the bill on second and third readings on the same day. While the judicial
department is not bound by the Senate's acceptance of the President's certification, the respect due
coequal departments of the government in matters committed to them by the Constitution and the
absence of a clear showing of grave abuse of discretion caution a stay of the judicial hand.

At any rate, we are satisfied that S. No. 1630 received thorough consideration in the Senate where it was
discussed for six days. Only its distribution in advance in its final printed form was actually dispensed with
by holding the voting on second and third readings on the same day (March 24, 1994). Otherwise,
sufficient time between the submission of the bill on February 8, 1994 on second reading and its approval
on March 24, 1994 elapsed before it was finally voted on by the Senate on third reading.

The purpose for which three readings on separate days is required is said to be two-fold: (1) to inform the
members of Congress of what they must vote on and (2) to give them notice that a measure is
progressing through the enacting process, thus enabling them and others interested in the measure to
prepare their positions with reference to it. (1 J. G. SUTHERLAND, STATUTES AND STATUTORY
CONSTRUCTION 10.04, p. 282 (1972)). These purposes were substantially achieved in the case of
R.A. No. 7716.
IV. Power of Conference Committee. It is contended (principally by Kilosbayan, Inc. and the Movement of
Attorneys for Brotherhood, Integrity and Nationalism, Inc. (MABINI)) that in violation of the constitutional
policy of full public disclosure and the people's right to know (Art. II, 28 and Art. III, 7) the Conference
Committee met for two days in executive session with only the conferees present.

As pointed out in our main decision, even in the United States it was customary to hold such sessions
with only the conferees and their staffs in attendance and it was only in 1975 when a new rule was
adopted requiring open sessions. Unlike its American counterpart, the Philippine Congress has not
adopted a rule prescribing open hearings for conference committees.

It is nevertheless claimed that in the United States, before the adoption of the rule in 1975, at least staff
members were present. These were staff members of the Senators and Congressmen, however, who
may be presumed to be their confidential men, not stenographers as in this case who on the last two days
of the conference were excluded. There is no showing that the conferees themselves did not take notes
of their proceedings so as to give petitioner Kilosbayan basis for claiming that even in secret diplomatic
negotiations involving state interests, conferees keep notes of their meetings. Above all, the public's right
to know was fully served because the Conference Committee in this case submitted a report showing the
changes made on the differing versions of the House and the Senate.

Petitioners cite the rules of both houses which provide that conference committee reports must contain "a
detailed, sufficiently explicit statement of the changes in or other amendments." These changes are
shown in the bill attached to the Conference Committee Report. The members of both houses could thus
ascertain what changes had been made in the original bills without the need of a statement detailing the
changes.

The same question now presented was raised when the bill which became R.A. No. 1400 (Land Reform
Act of 1955) was reported by the Conference Committee. Congressman Bengzon raised a point of order.
He said:

MR. BENGZON. My point of order is that it is out of order to consider the report of the conference
committee regarding House Bill No. 2557 by reason of the provision of Section 11, Article XII, of the
Rules of this House which provides specifically that the conference report must be accompanied by a
detailed statement of the effects of the amendment on the bill of the House. This conference
committee report is not accompanied by that detailed statement, Mr. Speaker. Therefore it is out of
order to consider it.

Petitioner Tolentino, then the Majority Floor Leader, answered:

MR. TOLENTINO. Mr. Speaker, I should just like to say a few words in connection with the point of
order raised by the gentleman from Pangasinan.

There is no question about the provision of the Rule cited by the gentleman from Pangasinan, but this
provision applies to those cases where only portions of the bill have been amended. In this case
before us an entire bill is presented; therefore, it can be easily seen from the reading of the bill what
the provisions are. Besides, this procedure has been an established practice.

After some interruption, he continued:

MR. TOLENTINO. As I was saying, Mr. Speaker, we have to look into the reason for the provisions of
the Rules, and the reason for the requirement in the provision cited by the gentleman from
Pangasinan is when there are only certain words or phrases inserted in or deleted from the provisions
of the bill included in the conference report, and we cannot understand what those words and
phrases mean and their relation to the bill. In that case, it is necessary to make a detailed statement
on how those words and phrases will affect the bill as a whole; but when the entire bill itself is copied
 verbatim in the conference report, that is not necessary. So when the reason for the Rule does not
exist, the Rule does not exist.

(2 CONG. REC. NO. 2, p. 4056. (emphasis added))

Congressman Tolentino was sustained by the chair. The record shows that when the ruling was appealed,
it was upheld by viva voce and when a division of the House was called, it was sustained by a vote of 48
to 5. (Id., p. 4058)

Nor is there any doubt about the power of a conference committee to insert new provisions as long as
these are germane to the subject of the conference. As this Court held in Philippine Judges Association
v. Prado, 227 SCRA 703 (1993), in an opinion written by then Justice Cruz, the jurisdiction of the
conference committee is not limited to resolving differences between the Senate and the House. It may
propose an entirely new provision. What is important is that its report is subsequently approved by the
respective houses of Congress. This Court ruled that it would not entertain allegations that, because new
provisions had been added by the conference committee, there was thereby a violation of the
constitutional injunction that "upon the last reading of a bill, no amendment thereto shall be allowed."

Applying these principles, we shall decline to look into the petitioners' charges that an amendment
was made upon the last reading of the bill that eventually became R.A. No. 7354 and
that copies thereof in its final form were not distributed among the members of each House. Both the
enrolled bill and the legislative journals certify that the measure was duly enacted i.e., in accordance
with Article VI, Sec. 26 (2) of the Constitution. We are bound by such official assurances from a
coordinate department of the government, to which we owe, at the very least, a becoming courtesy.

(Id. at 710. (emphasis added))

It is interesting to note the following description of conference committees in the Philippines in a 1979
study:

Conference committees may be of two types: free or instructed. These committees may be given
instructions by their parent bodies or they may be left without instructions. Normally the conference
committees are without instructions, and this is why they are often critically referred to as "the little
legislatures." Once bills have been sent to them, the conferees have almost unlimited authority to
change the clauses of the bills and in fact sometimes introduce new measures that were not in the
original legislation. No minutes are kept, and members' activities on conference committees are
difficult to determine. One congressman known for his idealism put it this way: "I killed a bill on export
incentives for my interest group [copra] in the conference committee but I could not have done so
anywhere else." The conference committee submits a report to both houses, and usually it is
accepted. If the report is not accepted, then the committee is discharged and new members are
appointed.

(R. Jackson, Committees in the Philippine Congress, in COMMITTEES AND LEGISLATURES: A

COMPARATIVE ANALYSIS 163 (J. D. LEES AND M. SHAW, eds.)).

In citing this study, we pass no judgment on the methods of conference committees. We cite it only to say
that conference committees here are no different from their counterparts in the United States whose vast
powers we noted in Philippine Judges Association v. Prado, supra. At all events, under Art. VI, 16(3)
each house has the power "to determine the rules of its proceedings," including those of its committees.
Any meaningful change in the method and procedures of Congress or its committees must therefore be
sought in that body itself.

V. The titles of S. No. 1630 and H. No. 11197. PAL maintains that R.A. No. 7716 violates Art. VI, 26 (1) of
the Constitution which provides that "Every bill passed by Congress shall embrace only one subject which
shall be expressed in the title thereof." PAL contends that the amendment of its franchise by the
withdrawal of its exemption from the VAT is not expressed in the title of the law.

Pursuant to 13 of P.D. No. 1590, PAL pays a franchise tax of 2% on its gross revenue "in lieu of all other
taxes, duties, royalties, registration, license and other fees and charges of any kind, nature, or
description, imposed, levied, established, assessed or collected by any municipal, city, provincial or
national authority or government agency, now or in the future."

PAL was exempted from the payment of the VAT along with other entities by 103 of the National Internal
Revenue Code, which provides as follows:

103. Exempt transactions. The following shall be exempt from the value-added tax:

xxx xxx xxx

(q) Transactions which are exempt under special laws or international agreements to
which the Philippines is a signatory.

R.A. No. 7716 seeks to withdraw certain exemptions, including that granted to PAL, by amending 103,
as follows:

103. Exempt transactions. The following shall be exempt from the value-added tax:

xxx xxx xxx

(q) Transactions which are exempt under special laws, except those granted under
Presidential Decree Nos. 66, 529, 972, 1491, 1590. . . .

The amendment of 103 is expressed in the title of R.A. No. 7716 which reads:

AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT) SYSTEM, WIDENING ITS

TAX BASE AND ENHANCING ITS ADMINISTRATION, AND FOR THESE PURPOSES
AMENDING AND REPEALING THE RELEVANT PROVISIONS OF THE NATIONAL
INTERNAL REVENUE CODE, AS AMENDED, AND FOR OTHER PURPOSES.

By stating that R.A. No. 7716 seeks to "[RESTRUCTURE] THE VALUE-ADDED TAX (VAT) SYSTEM [BY]
WIDENING ITS TAX BASE AND ENHANCING ITS ADMINISTRATION, AND FOR THESE PURPOSES
AMENDING AND REPEALING THE RELEVANT PROVISIONS OF THE NATIONAL INTERNAL
REVENUE CODE, AS AMENDED AND FOR OTHER PURPOSES," Congress thereby clearly expresses
its intention to amend any provision of the NIRC which stands in the way of accomplishing the purpose of
the law.

PAL asserts that the amendment of its franchise must be reflected in the title of the law by specific
reference to P.D. No. 1590. It is unnecessary to do this in order to comply with the constitutional
requirement, since it is already stated in the title that the law seeks to amend the pertinent provisions of
the NIRC, among which is 103(q), in order to widen the base of the VAT. Actually, it is the bill which
becomes a law that is required to express in its title the subject of legislation. The titles of H. No. 11197
and S. No. 1630 in fact specifically referred to 103 of the NIRC as among the provisions sought to be
amended. We are satisfied that sufficient notice had been given of the pendency of these bills in
Congress before they were enacted into what is now R.A.
No. 7716.
In Philippine Judges Association v. Prado, supra, a similar argument as that now made by PAL was
rejected. R.A. No. 7354 is entitled AN ACT CREATING THE PHILIPPINE POSTAL CORPORATION,
DEFINING ITS POWERS, FUNCTIONS AND RESPONSIBILITIES, PROVIDING FOR REGULATION OF
THE INDUSTRY AND FOR OTHER PURPOSES CONNECTED THEREWITH. It contained a provision
repealing all franking privileges. It was contended that the withdrawal of franking privileges was not
expressed in the title of the law. In holding that there was sufficient description of the subject of the law in
its title, including the repeal of franking privileges, this Court held:

To require every end and means necessary for the accomplishment of the general
objectives of the statute to be expressed in its title would not only be unreasonable but
would actually render legislation impossible. [Cooley, Constitutional Limitations, 8th Ed.,
p. 297] As has been correctly explained:

The details of a legislative act need not be specifically stated in its title,
but matter germane to the subject as expressed in the title, and adopted
to the accomplishment of the object in view, may properly be included in
the act. Thus, it is proper to create in the same act the machinery by
which the act is to be enforced, to prescribe the penalties for its
infraction, and to remove obstacles in the way of its execution. If such
matters are properly connected with the subject as expressed in the title,
it is unnecessary that they should also have special mention in the title.
(Southern Pac. Co. v. Bartine, 170 Fed. 725)

(227 SCRA at 707-708)

VI. Claims of press freedom and religious liberty. We have held that, as a general proposition, the press is
not exempt from the taxing power of the State and that what the constitutional guarantee of free press
prohibits are laws which single out the press or target a group belonging to the press for special treatment
or which in any way discriminate against the press on the basis of the content of the publication, and R.A.
No. 7716 is none of these.

Now it is contended by the PPI that by removing the exemption of the press from the VAT while
maintaining those granted to others, the law discriminates against the press. At any rate, it is averred,
"even nondiscriminatory taxation of constitutionally guaranteed freedom is unconstitutional."

With respect to the first contention, it would suffice to say that since the law granted the press a privilege,
the law could take back the privilege anytime without offense to the Constitution. The reason is simple: by
granting exemptions, the State does not forever waive the exercise of its sovereign prerogative.

Indeed, in withdrawing the exemption, the law merely subjects the press to the same tax burden to which
other businesses have long ago been subject. It is thus different from the tax involved in the cases
invoked by the PPI. The license tax in Grosjean v. American Press Co., 297 U.S. 233, 80 L. Ed. 660
(1936) was found to be discriminatory because it was laid on the gross advertising receipts only of
newspapers whose weekly circulation was over 20,000, with the result that the tax applied only to 13 out
of 124 publishers in Louisiana. These large papers were critical of Senator Huey Long who controlled the
state legislature which enacted the license tax. The censorial motivation for the law was thus evident.

On the other hand, in Minneapolis Star & Tribune Co. v. Minnesota Comm'r of Revenue, 460 U.S. 575, 75
L. Ed. 2d 295 (1983), the tax was found to be discriminatory because although it could have been made
liable for the sales tax or, in lieu thereof, for the use tax on the privilege of using, storing or consuming
tangible goods, the press was not. Instead, the press was exempted from both taxes. It was, however,
later made to pay a special use tax on the cost of paper and ink which made these items "the only items
subject to the use tax that were component of goods to be sold at retail." The U.S. Supreme Court held
that the differential treatment of the press "suggests that the goal of regulation is not related to
suppression of expression, and such goal is presumptively unconstitutional." It would therefore appear
that even a law that favors the press is constitutionally suspect. (See the dissent of Rehnquist, J. in that
case)

Nor is it true that only two exemptions previously granted by E.O. No. 273 are withdrawn "absolutely and
unqualifiedly" by R.A. No. 7716. Other exemptions from the VAT, such as those previously granted to
PAL, petroleum concessionaires, enterprises registered with the Export Processing Zone Authority, and
many more are likewise totally withdrawn, in addition to exemptions which are partially withdrawn, in an
effort to broaden the base of the tax.

The PPI says that the discriminatory treatment of the press is highlighted by the fact that transactions,
which are profit oriented, continue to enjoy exemption under R.A. No. 7716. An enumeration of some of
these transactions will suffice to show that by and large this is not so and that the exemptions are granted
for a purpose. As the Solicitor General says, such exemptions are granted, in some cases, to encourage
agricultural production and, in other cases, for the personal benefit of the end-user rather than for profit.
The exempt transactions are:

(a) Goods for consumption or use which are in their original state (agricultural, marine
and forest products, cotton seeds in their original state, fertilizers, seeds, seedlings,
fingerlings, fish, prawn livestock and poultry feeds) and goods or services to enhance
agriculture (milling of palay, corn, sugar cane and raw sugar, livestock, poultry feeds,
fertilizer, ingredients used for the manufacture of feeds).

(b) Goods used for personal consumption or use (household and personal effects of
citizens returning to the Philippines) or for professional use, like professional instruments
and implements, by persons coming to the Philippines to settle here.

(c) Goods subject to excise tax such as petroleum products or to be used for
manufacture of petroleum products subject to excise tax and services subject to
percentage tax.

(d) Educational services, medical, dental, hospital and veterinary services, and services
rendered under employer-employee relationship.

(e) Works of art and similar creations sold by the artist himself.

(f) Transactions exempted under special laws, or international agreements.

(g) Export-sales by persons not VAT-registered.

(h) Goods or services with gross annual sale or receipt not exceeding P500,000.00.

(Respondents' Consolidated Comment on the Motions for Reconsideration, pp. 58-60)

The PPI asserts that it does not really matter that the law does not discriminate against the press because
"even nondiscriminatory taxation on constitutionally guaranteed freedom is unconstitutional." PPI cites in
support of this assertion the following statement in Murdock v. Pennsylvania, 319 U.S. 105, 87 L. Ed.
1292 (1943):

The fact that the ordinance is "nondiscriminatory" is immaterial. The protection afforded
by the First Amendment is not so restricted. A license tax certainly does not acquire
constitutional validity because it classifies the privileges protected by the First
Amendment along with the wares and merchandise of hucksters and peddlers and treats
 them all alike. Such equality in treatment does not save the ordinance. Freedom of press,
freedom of speech, freedom of religion are in preferred position.

The Court was speaking in that case of a license tax, which, unlike an ordinary tax, is mainly for
regulation. Its imposition on the press is unconstitutional because it lays a prior restraint on the exercise
of its right. Hence, although its application to others, such those selling goods, is valid, its application to
the press or to religious groups, such as the Jehovah's Witnesses, in connection with the latter's sale of
religious books and pamphlets, is unconstitutional. As the U.S. Supreme Court put it, "it is one thing to
impose a tax on income or property of a preacher. It is quite another thing to exact a tax on him for
delivering a sermon."

A similar ruling was made by this Court in American Bible Society v. City of Manila, 101 Phil. 386 (1957)
which invalidated a city ordinance requiring a business license fee on those engaged in the sale of
general merchandise. It was held that the tax could not be imposed on the sale of bibles by the American
Bible Society without restraining the free exercise of its right to propagate.

The VAT is, however, different. It is not a license tax. It is not a tax on the exercise of a privilege, much
less a constitutional right. It is imposed on the sale, barter, lease or exchange of goods or properties or
the sale or exchange of services and the lease of properties purely for revenue purposes. To subject the
press to its payment is not to burden the exercise of its right any more than to make the press pay income
tax or subject it to general regulation is not to violate its freedom under the Constitution.

Additionally, the Philippine Bible Society, Inc. claims that although it sells bibles, the proceeds derived
from the sales are used to subsidize the cost of printing copies which are given free to those who cannot
afford to pay so that to tax the sales would be to increase the price, while reducing the volume of sale.
Granting that to be the case, the resulting burden on the exercise of religious freedom is so incidental as
to make it difficult to differentiate it from any other economic imposition that might make the right to
disseminate religious doctrines costly. Otherwise, to follow the petitioner's argument, to increase the tax
on the sale of vestments would be to lay an impermissible burden on the right of the preacher to make a
sermon.

On the other hand the registration fee of P1,000.00 imposed by 107 of the NIRC, as amended by 7 of
R.A. No. 7716, although fixed in amount, is really just to pay for the expenses of registration and
enforcement of provisions such as those relating to accounting in 108 of the NIRC. That the PBS
distributes free bibles and therefore is not liable to pay the VAT does not excuse it from the payment of
this fee because it also sells some copies. At any rate whether the PBS is liable for the VAT must be
decided in concrete cases, in the event it is assessed this tax by the Commissioner of Internal Revenue.

VII. Alleged violations of the due process, equal protection and contract clauses and the rule on taxation .
CREBA asserts that R.A. No. 7716 (1) impairs the obligations of contracts, (2) classifies transactions as
covered or exempt without reasonable basis and (3) violates the rule that taxes should be uniform and
equitable and that Congress shall "evolve a progressive system of taxation."

With respect to the first contention, it is claimed that the application of the tax to existing contracts of the
sale of real property by installment or on deferred payment basis would result in substantial increases in
the monthly amortizations to be paid because of the 10% VAT. The additional amount, it is pointed out, is
something that the buyer did not anticipate at the time he entered into the contract.

The short answer to this is the one given by this Court in an early case: "Authorities from numerous
sources are cited by the plaintiffs, but none of them show that a lawful tax on a new subject, or an
increased tax on an old one, interferes with a contract or impairs its obligation, within the meaning of the
Constitution. Even though such taxation may affect particular contracts, as it may increase the debt of one
person and lessen the security of another, or may impose additional burdens upon one class and release
the burdens of another, still the tax must be paid unless prohibited by the Constitution, nor can it be said
that it impairs the obligation of any existing contract in its true legal sense." (La Insular v. Machuca Go-
Tauco and Nubla Co-Siong, 39 Phil. 567, 574 (1919)). Indeed not only existing laws but also " the
reservation of the essential attributes of sovereignty, is . . . read into contracts as a postulate of the legal
order." (Philippine-American Life Ins. Co. v. Auditor General, 22 SCRA 135, 147 (1968)) Contracts must
be understood as having been made in reference to the possible exercise of the rightful authority of the
government and no obligation of contract can extend to the defeat of that authority. (Norman v. Baltimore
and Ohio R.R., 79 L. Ed. 885 (1935)).

It is next pointed out that while 4 of R.A. No. 7716 exempts such transactions as the sale of agricultural
products, food items, petroleum, and medical and veterinary services, it grants no exemption on the sale
of real property which is equally essential. The sale of real property for socialized and low-cost housing is
exempted from the tax, but CREBA claims that real estate transactions of "the less poor," i.e., the middle
class, who are equally homeless, should likewise be exempted.

The sale of food items, petroleum, medical and veterinary services, etc., which are essential goods and
services was already exempt under 103, pars. (b) (d) (1) of the NIRC before the enactment of R.A. No.
7716. Petitioner is in error in claiming that R.A. No. 7716 granted exemption to these transactions, while
subjecting those of petitioner to the payment of the VAT. Moreover, there is a difference between the
"homeless poor" and the "homeless less poor" in the example given by petitioner, because the second
group or middle class can afford to rent houses in the meantime that they cannot yet buy their own
homes. The two social classes are thus differently situated in life. "It is inherent in the power to tax that
the State be free to select the subjects of taxation, and it has been repeatedly held that 'inequalities which
result from a singling out of one particular class for taxation, or exemption infringe no constitutional
limitation.'" (Lutz v. Araneta, 98 Phil. 148, 153 (1955). Accord, City of Baguio v. De Leon, 134 Phil. 912
(1968); Sison, Jr. v. Ancheta, 130 SCRA 654, 663 (1984); Kapatiran ng mga Naglilingkod sa Pamahalaan
ng Pilipinas, Inc. v. Tan, 163 SCRA 371 (1988)).

Finally, it is contended, for the reasons already noted, that R.A. No. 7716 also violates Art. VI, 28(1)
which provides that "The rule of taxation shall be uniform and equitable. The Congress shall evolve a
progressive system of taxation."

Equality and uniformity of taxation means that all taxable articles or kinds of property of the same class be
taxed at the same rate. The taxing power has the authority to make reasonable and natural classifications
for purposes of taxation. To satisfy this requirement it is enough that the statute or ordinance applies
equally to all persons, forms and corporations placed in similar situation. (City of Baguio v. De
Leon, supra; Sison, Jr. v. Ancheta, supra)

Indeed, the VAT was already provided in E.O. No. 273 long before R.A. No. 7716 was enacted. R.A. No.
7716 merely expands the base of the tax. The validity of the original VAT Law was questioned
in Kapatiran ng Naglilingkod sa Pamahalaan ng Pilipinas, Inc. v. Tan, 163 SCRA 383 (1988) on grounds
similar to those made in these cases, namely, that the law was "oppressive, discriminatory, unjust and
regressive in violation of Art. VI, 28(1) of the Constitution." (At 382) Rejecting the challenge to the law,
this Court held:

As the Court sees it, EO 273 satisfies all the requirements of a valid tax. It is uniform. . . .

The sales tax adopted in EO 273 is applied similarly on all goods and services sold to the
public, which are not exempt, at the constant rate of 0% or 10%.

The disputed sales tax is also equitable. It is imposed only on sales of goods or services
by persons engaged in business with an aggregate gross annual sales exceeding
P200,000.00. Small corner sari-sari stores are consequently exempt from its application.
Likewise exempt from the tax are sales of farm and marine products, so that the costs of
 basic food and other necessities, spared as they are from the incidence of the VAT, are
expected to be relatively lower and within the reach of the general public.

(At 382-383)

The CREBA claims that the VAT is regressive. A similar claim is made by the Cooperative Union of the
Philippines, Inc. (CUP), while petitioner Juan T. David argues that the law contravenes the mandate of
Congress to provide for a progressive system of taxation because the law imposes a flat rate of 10% and
thus places the tax burden on all taxpayers without regard to their ability to pay.

The Constitution does not really prohibit the imposition of indirect taxes which, like the VAT, are
regressive. What it simply provides is that Congress shall "evolve a progressive system of taxation." The
constitutional provision has been interpreted to mean simply that "direct taxes are . . . to be preferred
[and] as much as possible, indirect taxes should be minimized." (E. FERNANDO, THE CONSTITUTION
OF THE PHILIPPINES 221 (Second ed. (1977)). Indeed, the mandate to Congress is not to prescribe, but
to evolve, a progressive tax system. Otherwise, sales taxes, which perhaps are the oldest form of indirect
taxes, would have been prohibited with the proclamation of Art. VIII, 17(1) of the 1973 Constitution from
which the present Art. VI, 28(1) was taken. Sales taxes are also regressive.

Resort to indirect taxes should be minimized but not avoided entirely because it is difficult, if not
impossible, to avoid them by imposing such taxes according to the taxpayers' ability to pay. In the case of
the VAT, the law minimizes the regressive effects of this imposition by providing for zero rating of certain
transactions (R.A. No. 7716, 3, amending 102 (b) of the NIRC), while granting exemptions to other
transactions. (R.A. No. 7716, 4, amending 103 of the NIRC).

Thus, the following transactions involving basic and essential goods and services are exempted from the
VAT:

(a) Goods for consumption or use which are in their original state (agricultural, marine
and forest products, cotton seeds in their original state, fertilizers, seeds, seedlings,
fingerlings, fish, prawn livestock and poultry feeds) and goods or services to enhance
agriculture (milling of palay, corn sugar cane and raw sugar, livestock, poultry feeds,
fertilizer, ingredients used for the manufacture of feeds).

(b) Goods used for personal consumption or use (household and personal effects of
citizens returning to the Philippines) and or professional use, like professional
instruments and implements, by persons coming to the Philippines to settle here.

(c) Goods subject to excise tax such as petroleum products or to be used for
manufacture of petroleum products subject to excise tax and services subject to
percentage tax.

(d) Educational services, medical, dental, hospital and veterinary services, and services
rendered under employer-employee relationship.

(e) Works of art and similar creations sold by the artist himself.

(f) Transactions exempted under special laws, or international agreements.

(g) Export-sales by persons not VAT-registered.

(h) Goods or services with gross annual sale or receipt not exceeding P500,000.00.
 (Respondents' Consolidated Comment on the Motions for Reconsideration, pp. 58-60)

On the other hand, the transactions which are subject to the VAT are those which involve goods and
services which are used or availed of mainly by higher income groups. These include real properties held
primarily for sale to customers or for lease in the ordinary course of trade or business, the right or
privilege to use patent, copyright, and other similar property or right, the right or privilege to use industrial,
commercial or scientific equipment, motion picture films, tapes and discs, radio, television, satellite
transmission and cable television time, hotels, restaurants and similar places, securities, lending
investments, taxicabs, utility cars for rent, tourist buses, and other common carriers, services of franchise
grantees of telephone and telegraph.

The problem with CREBA's petition is that it presents broad claims of constitutional violations by
tendering issues not at retail but at wholesale and in the abstract. There is no fully developed record
which can impart to adjudication the impact of actuality. There is no factual foundation to show in
the concrete the application of the law to actual contracts and exemplify its effect on property rights. For
the fact is that petitioner's members have not even been assessed the VAT. Petitioner's case is not made
concrete by a series of hypothetical questions asked which are no different from those dealt with in
advisory opinions.

The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. A mere

allegation, as here, does not suffice. There must be a factual foundation of such
unconstitutional taint. Considering that petitioner here would condemn such a provision
as void on its face, he has not made out a case. This is merely to adhere to the
authoritative doctrine that where the due process and equal protection clauses are
invoked, considering that they are not fixed rules but rather broad standards, there is a
need for proof of such persuasive character as would lead to such a conclusion. Absent
such a showing, the presumption of validity must prevail.

(Sison, Jr. v. Ancheta, 130 SCRA at 661)

Adjudication of these broad claims must await the development of a concrete case. It may be that
postponement of adjudication would result in a multiplicity of suits. This need not be the case, however.
Enforcement of the law may give rise to such a case. A test case, provided it is an actual case and not an
abstract or hypothetical one, may thus be presented.

Nor is hardship to taxpayers alone an adequate justification for adjudicating abstract issues. Otherwise,
adjudication would be no different from the giving of advisory opinion that does not really settle legal
issues.

We are told that it is our duty under Art. VIII, 1, 2 to decide whenever a claim is made that "there has
been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any branch or
instrumentality of the government." This duty can only arise if an actual case or controversy is before us.
Under Art . VIII, 5 our jurisdiction is defined in terms of "cases" and all that Art. VIII, 1, 2 can plausibly
mean is that in the exercise of that jurisdiction we have the judicial power to determine questions of grave
abuse of discretion by any branch or instrumentality of the government.

Put in another way, what is granted in Art. VIII, 1, 2 is "judicial power," which is "the power of a court to
hear and decide cases pending between parties who have the right to sue and be sued in the courts of
law and equity" (Lamb v. Phipps, 22 Phil. 456, 559 (1912)), as distinguished from legislative and
executive power. This power cannot be directly appropriated until it is apportioned among several courts
either by the Constitution, as in the case of Art. VIII, 5, or by statute, as in the case of the Judiciary Act of
1948 (R.A. No. 296) and the Judiciary Reorganization Act of 1980 (B.P. Blg. 129). The power thus
apportioned constitutes the court's "jurisdiction," defined as "the power conferred by law upon a court or
judge to take cognizance of a case, to the exclusion of all others." (United States v. Arceo, 6 Phil. 29
(1906)) Without an actual case coming within its jurisdiction, this Court cannot inquire into any allegation
of grave abuse of discretion by the other departments of the government.

VIII. Alleged violation of policy towards cooperatives. On the other hand, the Cooperative Union of the
Philippines (CUP), after briefly surveying the course of legislation, argues that it was to adopt a definite
policy of granting tax exemption to cooperatives that the present Constitution embodies provisions on
cooperatives. To subject cooperatives to the VAT would therefore be to infringe a constitutional policy.
Petitioner claims that in 1973, P.D. No. 175 was promulgated exempting cooperatives from the payment
of income taxes and sales taxes but in 1984, because of the crisis which menaced the national economy,
this exemption was withdrawn by P.D. No. 1955; that in 1986, P.D. No. 2008 again granted cooperatives
exemption from income and sales taxes until December 31, 1991, but, in the same year, E.O. No. 93
revoked the exemption; and that finally in 1987 the framers of the Constitution "repudiated the previous
actions of the government adverse to the interests of the cooperatives, that is, the repeated revocation of
the tax exemption to cooperatives and instead upheld the policy of strengthening the cooperatives by way
of the grant of tax exemptions," by providing the following in Art. XII:

1. The goals of the national economy are a more equitable distribution of opportunities,
income, and wealth; a sustained increase in the amount of goods and services produced
by the nation for the benefit of the people; and an expanding productivity as the key to
raising the quality of life for all, especially the underprivileged.

The State shall promote industrialization and full employment based on sound agricultural
development and agrarian reform, through industries that make full and efficient use of
human and natural resources, and which are competitive in both domestic and foreign
markets. However, the State shall protect Filipino enterprises against unfair foreign
competition and trade practices.

In the pursuit of these goals, all sectors of the economy and all regions of the country
shall be given optimum opportunity to develop. Private enterprises, including
corporations, cooperatives, and similar collective organizations, shall be encouraged to
broaden the base of their ownership.

15. The Congress shall create an agency to promote the viability and growth of
cooperatives as instruments for social justice and economic development.

Petitioner's contention has no merit. In the first place, it is not true that P.D. No. 1955 singled out
cooperatives by withdrawing their exemption from income and sales taxes under P.D. No. 175, 5. What
P.D. No. 1955, 1 did was to withdraw the exemptions and preferential treatments theretofore granted to
private business enterprises in general, in view of the economic crisis which then beset the nation. It is
true that after P.D. No. 2008, 2 had restored the tax exemptions of cooperatives in 1986, the exemption
was again repealed by E.O. No. 93, 1, but then again cooperatives were not the only ones whose
exemptions were withdrawn. The withdrawal of tax incentives applied to all, including government and
private entities. In the second place, the Constitution does not really require that cooperatives be granted
tax exemptions in order to promote their growth and viability. Hence, there is no basis for petitioner's
assertion that the government's policy toward cooperatives had been one of vacillation, as far as the grant
of tax privileges was concerned, and that it was to put an end to this indecision that the constitutional
provisions cited were adopted. Perhaps as a matter of policy cooperatives should be granted tax
exemptions, but that is left to the discretion of Congress. If Congress does not grant exemption and there
is no discrimination to cooperatives, no violation of any constitutional policy can be charged.

Indeed, petitioner's theory amounts to saying that under the Constitution cooperatives are exempt from
taxation. Such theory is contrary to the Constitution under which only the following are exempt from
taxation: charitable institutions, churches and parsonages, by reason of Art. VI, 28 (3), and non-stock,
non-profit educational institutions by reason of Art. XIV, 4 (3).
CUP's further ground for seeking the invalidation of R.A. No. 7716 is that it denies cooperatives the equal
protection of the law because electric cooperatives are exempted from the VAT. The classification
between electric and other cooperatives (farmers cooperatives, producers cooperatives, marketing
cooperatives, etc.) apparently rests on a congressional determination that there is greater need to provide
cheaper electric power to as many people as possible, especially those living in the rural areas, than
there is to provide them with other necessities in life. We cannot say that such classification is
unreasonable.

We have carefully read the various arguments raised against the constitutional validity of R.A. No. 7716.
We have in fact taken the extraordinary step of enjoining its enforcement pending resolution of these
cases. We have now come to the conclusion that the law suffers from none of the infirmities attributed to it
by petitioners and that its enactment by the other branches of the government does not constitute a grave
abuse of discretion. Any question as to its necessity, desirability or expediency must be addressed to
Congress as the body which is electorally responsible, remembering that, as Justice Holmes has said,
"legislators are the ultimate guardians of the liberties and welfare of the people in quite as great a degree
as are the courts." (Missouri, Kansas & Texas Ry. Co. v. May, 194 U.S. 267, 270, 48 L. Ed. 971, 973
(1904)). It is not right, as petitioner in G.R. No. 115543 does in arguing that we should enforce the public
accountability of legislators, that those who took part in passing the law in question by voting for it in
Congress should later thrust to the courts the burden of reviewing measures in the flush of enactment.
This Court does not sit as a third branch of the legislature, much less exercise a veto power over
legislation.

WHEREFORE, the motions for reconsideration are denied with finality and the temporary restraining
order previously issued is hereby lifted. SO ORDERED.

G.R. No. L-21183 September 27, 1968

VICTORIAS MILLING CO., INC., plaintiff-appellant, vs. THE MUNICIPALITY OF VICTORIAS,

PROVINCE OF NEGROS OCCIDENTAL, defendant-appellant.

This case calls into question the validity of Ordinance No. 1, series of 1956, of the Municipality of
Victorias, Negros Occidental.

The disputed ordinance was approved by the municipal Council of Victorias on September 22, 1956 by
way of an amendment to two municipal ordinances separately imposing license taxes on operators of
sugar centrals 1 and sugar refineries. 2 The changes were: with respect to sugar centrals, by increasing the
rates of license taxes; and as to sugar refineries, by increasing the rates of license taxes as well as the
range of graduated schedule of annual output capacity.

Ordinance No. 1 3 is labeled "An Ordinance Amending Ordinance No. 25, Series of 1953 and Ordinance
No. 18, Series of 1947 on Sugar Central by Increasing the Rates on Sugar Refinery Mill by Increasing the
Range of Graduated Schedule on Capacity Annual Output Respectively". It was, as the ordinance itself
states, enacted pursuant to the taxing power conferred by Commonwealth Act 472. By Section 1 of the
Ordinance: "Any person, corporation or other forms of companies, operating sugar central or engage[d] in
the manufacture of centrifugal sugar shall be required to pay the following annual municipal license tax,
payable quarterly, to wit: . . ." Section 1 referred to prescribes a wide range of schedule. It starts with a
sugar central with mill having an annual output capacity of not less than 50,000 piculs of centrifugal sugar,
in which case an annual municipal license tax of P1,000.00 is provided. Depending upon the annual
output capacity the schedule of taxes continues with P2,000.00 progressively upward in twelve other
grades until an output capacity of 1,500,001 piculs or more shall have been reached. For this, the annual
tax is P40,000.00. The tax on sugar refineries is likewise calibrated with similar rates. It also starts with
P1,000.00 for a refinery with mill having an annual output capacity of not less than 25,000 bags of 100
lbs. of refined sugar. Then, it continues with the second bracket of from 25,001 bags to 75,000 bags of
100 lbs. Here, the municipal license tax is P1,500.00. Then follow the other rates in the graduated scale
with the ceiling placed at a capacity of 1,750,001 bags or more. The annual municipal license tax for the
last mentioned output capacity is P40,000.00.

Of importance are the provisions of Section 1(m) relating to sugar centrals and Section 2(m) covering
sugar refineries with specific reference to the maximum annual license tax, viz:

Section No. 1 Any person, corporation or other forms of Companies, operating Sugar Central
or engage[d] in the manufacture of centrifugal sugar shall be required to pay the following annual
municipal license tax, payable quarterly, to wit:

xxx xxx xxx

(m) Sugar Central with mill having a capacity of producing an annual output of from 1,500,001
piculs or more shall be required to pay an annual municipal license tax of P40,000.00.

Section No. 2 Any person, corporation or other forms of Companies shall be required to pay an
annual municipal license tax for the operation of Sugar Refinery Mill at the following rates:

xxx xxx xxx

(m) Sugar Refinery with mill having a capacity of producing an annual output of from 1,750,001
bags of 100 lbs. or more shall be required to pay an annual municipal license tax of
P40,000.00.

For, the production of plaintiff Victorias Milling Co., Inc. in both its sugar central and its sugar refinery
located in the Municipality of Victorias comes within these items in the schedule.

Plaintiff filed suit below 4 to ask for judgment declaring Ordinance No. 1, series of 1956, null and void;
ordering the refund of all license taxes paid and to be paid under protest; directing the officials of Victorias
and the Province of Negros Occidental to observe, during the pendency of the action, the provisions of
section 357 of the Revised Manual of Instructions to Treasurers of Provinces, Cities and Municipalities,
1954 edition, 5 regarding the treatment of license taxes paid under protest by virtue of a disputed
ordinance; and other reliefs. 6

The reasons put forth by plaintiff are that: (a) the ordinance exceeds the amounts fixed in Provincial
Circular 12-A issued by the Finance Department on February 27, 1940; (b) it is discriminatory since it
singles out plaintiff which is the only operator of a sugar central and a sugar refinery within the jurisdiction
of defendant municipality; (c) it constitutes double taxation; and (d) the national government has
preempted the field of taxation with respect to sugar centrals or refineries.

Upon the complaint as supplemented and amended, and the answer thereto, and following hearing on the
merits, the trial court rendered its judgment. After declaring that "[t]here is no doubt that" the ordinance in
question refers to license taxes or fees," and that "[i]t is settled that a license tax should be limited to the
cost of licensing, regulating and surveillance," 7 the trial court ruled that said license taxes in dispute are
unreasonable, 8 and held that: "If the defendant has the power to tax the plaintiff for purposes of revenue,
it may do so by proper municipal legislation, but not in the guise of a license tax." 9 The court added: "The
Court is not, however, prepared to order the refund of all the license taxes paid by the plaintiff under
protest and amounting, up to the second quarter of 1960, to P280,000.00, considering that the plaintiff
appears to have agreed to the payment of the license taxes at the rates fixed prior to Ordinance No. 1,
series of 1956; that the defendant had evidently not complied with the provisions of Section 357 of the
Revised Manual of Instructions to Treasurers of Provinces, Cities and Municipalities, 1954 Edition, as the
plaintiff herein seeks an order enjoining the defendant and its appropriate officials to carry out said
provisions; that the financial position of the defendant would surely be disrupted if ordered to refund, while
 10
the plaintiff may perhaps easily forego or forget what it had already parted with". It disposes of the suit
in the following manner:

WHEREFORE, judgment is rendered (a) declaring that Ordinance No. 1, series of 1956, of the
municipality of Victorias, Negros Occidental, is invalid; (b) ordering all officials of the defendant to
observe the provisions of Section 357 of the Revised Manual of Instructions to Treasurers of
Provinces, Cities and Municipalities, 1954 Edition, with particular reference to any license taxes
paid by the plaintiff under said Ordinance No. 1, series of 1956, after notice of this decision; and
(c) ordering the defendant to refund to the plaintiff any and all such license taxes paid under
protest after notice of this decision. 11

Both plaintiff and defendant appealed direct to this Court. Plaintiff questions that portion of the decision
denying the refund of the license taxes paid under protest in the amount of P280,000 covering the period
from the first quarter of 1957 to the second quarter of 1960; and balked at the court's order limiting refund
to "any and all such license taxes paid under protest after notice of this decision." Defendant, upon the
other hand, challenges the correctness of the court's decision invalidating Ordinance No. 1, series of
1956.

The questions raised in the appeals will be discussed in their proper sequence.

1. We first grapple with the threshold question: Was Ordinance No. 1, series of 1956, passed by
defendant's municipal council as a regulatory enactment or as a revenue measure?

The trial court says, and plaintiff seconds, that the amounts set forth in the ordinance in question did
exceed the cost of licensing, regulating and surveillance, and that defendant cannot impose a tax for
revenue in the guise of a police or a regulatory measure. Our finding, however, is the other
way.1awphl.nt

The ordinance itself recites that its source of taxing power emanates from Commonwealth Act 472,
Section 1 of which reads:

Section 1. A municipal council or municipal district council shall have authority to impose
municipal license taxes upon persons engaged in any occupation or business, or exercising
privileges in the municipality or municipal district, by requiring them to secure licenses at rates
fixed by the municipal council, or municipal district council, and to collect fees and charges for
services rendered by the municipality or municipal district and shall otherwise have power to levy
for public local purposes, and for school purposes, including teachers' salaries, just and uniform
taxes other than percentage taxes and taxes on specified articles.

Under the statute just quoted and pertinent jurisprudence, a municipality is authorized to impose three
kinds of licenses: (1) license for regulation of useful occupations or enterprises; (2) license for restriction
or regulation of non-useful occupations or enterprises; and (3) license for revenue. 12 The first two easily
fall within the broad police power granted under the general welfare clause. 13 The third class, however, is
for revenue purposes. It is not a license fee, properly speaking, and yet it is generally so termed. It rests
on the taxing power. That taxing power must be expressly conferred by statute upon the municipality. 14 It
is so granted under Commonwealth Act 472.

To be recalled at this point is that Ordinance No. 1, series of 1956, is but an amendment of Ordinance No.
18, series of 1947, in reference to refineries, and Ordinance No. 25, series of 1953, covering sugar
centrals. Ordinance No. 18 imposes "municipal taxes on persons, firms or corporations operating refinery
mills in this municipality." 15Ordinance No. 25 speaks of municipal taxes "relative to the output of the sugar
centrals." 16
What are these taxes for? Resolution No. 60 of the municipal council of Victorias, 17 adopted also on
September 22, 1956 in conjunction with Ordinance No. 1, series of 1956, furnishes a ready answer. It
reads in part:

WHEREAS, the Municipal Treasurer informed the Municipal Council of the revenue of the
Municipality and the heavy obligations which confront it because of the implementation of
Minimum Wage Law on the salaries and wages it pays to its municipal employees and laborers
thus greatly draining the Municipal Treasury;

WHEREAS, this local administration is committed to the plan of ameliorating the deplorable
situation existing in the barrios, sitios and rural areas by giving them essential and necessary
facilities calculated to improve conditions thereat thru improvements of roads and feeder roads;

WHEREAS, one of the causes of the municipality's financial difficulty is low rates of municipal
taxes imposed by some of the ordinances enacted by the local legislative body;

WHEREAS, [in] . . . the ordinances known as Ordinance No. 25, Series of 1953, dealing on
the operation of Sugar Central, and Ordinance No. 18, Series of 1947, which exclusively deals
with the operation of Sugar Refinery Mill, the rates so given are rates suggested and determined
by the Provincial Circular No. 12-A, dated February 27, 1940 issued by the Department of
Finance as regards to Sugar Centrals;

WHEREAS, the Municipal Council has come to the conclusion that the rates provided for in such
ordinances are no longer adequate if made in keeping with the present high cost of living;

WHEREAS, the Municipal Council has also taken cognizance of the fact that the price of sugar
per picul today is more than twice its pre-war average price; . . . . 18

Given the purposes just mentioned, we find no warrant in logic to give our assent to the view that the
ordinance in question is solely for regulatory purpose. Plain is the meaning conveyed. The ordinance is
for raising money. To say otherwise is to misread the purpose of the ordinance.1awphl.nt

We should not hang so heavy a meaning on the use of the term "municipal license tax". This does not
necessarily connote the idea that the tax is imposed as the lower court would want it to mean a
revenue measure in the guise of a license tax. For really, this runs counter to the declared purpose to
make money.

Besides, the term "license tax" has not acquired a fixed meaning. It is often "used indiscriminately to
designate impositions exacted for the exercise of various privileges." 19 It does not refer solely to a license
for regulation. In many instances, it refers to "revenue-raising exactions on privileges or activities." 20 On
the other hand, license feesare commonly called taxes. But, legally speaking, the latter are "for the
purpose of raising revenues," in contrast to the former which are imposed "in the exercise of police power
for purposes of regulation." 21

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. 22 Thus, "[w]hen no police
inspection, supervision, or regulation is provided, nor any standard set for the applicant 23 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." 24
Precisely because of these considerations the present imposition must be treated as a levy for revenue
purposes. A quick glance at the big amount of maximum annual tax set forth in the ordinance, P40,000.00
for sugar centrals, and P40,000.00 for sugar refineries, will readily convince one that the tax is really a
revenue tax. And then, we read in the ordinance nothing which would as much as indicate that the tax
imposed is merely for police inspection, supervision or regulation.

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

The present case is not to be analogized with Panaligan vs. City of Tacloban cited in the decision
below. 27 For there, the inspection fee sought to be collected upon every head of specified animals to
be transported out of the City of Tacloban (P2.00 per hog, P10.00 per cow and 20.00 per carabao) was
in reality an export tax specifically withheld from municipal taxing power under Section 2287 of the
Revised Administrative Code.

So also do we say that the cases of Pacific Commercial Co. vs. Romualdez, 28 Lacson vs. City of
Bacolod, 29 and Santos vs. Municipal Government of Caloocan, 30 used by plaintiff as references, are
entirely inopposite. In Pacific Commercial, the tax involved on frozen meat was nullified because tax
measures on cold stores were not then within the legislative grant to the City of Manila. In Lacson, the
City of Bacolod taxed every admission ticket sold in the moviehouses. And justification for this imposition
was moored to the general welfare clause of the city charter. This Court held the ordinance ultra vires for
the reason that the authority to tax cannot be derived from the general welfare clause. In Santos, the
taxes in controversy were internal organs fees, meat inspection fees and corral fees, separate from the
slaughter or slaughterhouse fees. In annulling the taxes there questioned, this Court declared: "[W]hen
the Council ordained the payment of internal organs fees, meat inspection fees and corral fees, aside
from the slaughter or slaughterhouse fees, it overstepped the limits of its statutory grant [Sec. 1, C.A.
655]. Only one fee was allowed by that law to be charged and that was slaughter or slaughterhouse fees."

In the cases cited then, the tax ordinances did not find plain and clear statutory prop. Such infirmity is not
present here.

We, accordingly, rule that Ordinance No. 1, series of 1956, of the Municipality of Victorias, was
promulgated not in the exercise of the municipality's regulatory power but as a revenue measure a tax
on occupation or business. The authority to impose such tax is backed by the express grant of power in
Section 1 of Commonwealth Act 472.

2. Not that the disputed ordinance lacks the imprimatur of the Secretary of Finance required in paragraph
2, Section 4, of Commonwealth Act 472. This legal provision necessitates such approval "[w]henever the
rate of fixed municipal license taxes on businesses not excepted in this Act or otherwise covered by the
preceding paragraph and subject to the fixed annual tax imposed in section one hundred eighty-two of the
National Internal Revenue Law, is in excess of fifty pesos per annum; . . . ."

The ordinance here challenged was recommended by the Provincial Board of Negros Occidental in its
resolution (No. 1864) of October 26, 1956. 31 And, the Undersecretary of Finance in his letter to the
municipal council of Victorias on December 18, 1956 approved said ordinance. But considering that it is
amendatory in nature, that approval was coupled with the mandate that the ordinance "should take effect
at the beginning of the ensuing calendar year [1957] pursuant to Section 2309 of the Revised
Administrative Code." 32
3. Plaintiff argues that the municipality is bereft of authority to enact the ordinance in question because
the national government "had preempted it from entering the field of taxation of sugar centrals and sugar
refineries." 33 Plaintiff seeks refuge in Section 189 of the National Internal Revenue Code which subjects
proprietors or operators of sugar centrals or sugar refineries to percentage tax.

The implausibility of this position is at once apparent. We are not dealing here with percentage tax.
Rather, we are concerned with a tax specifically for operators of sugar centrals and sugar refineries. The
rates imposed are based on the maximum annual output capacity. Which is not a percentage. Because it
is not a share. Nor is it a tax based on the amount of the proceeds realized out of the sale of sugar,
centrifugal or refined. 34

What can be said at most is that the national government has preempted the field of percentage taxation.
Section 1 of Commonwealth Act 472, while granting municipalities power to levy taxes, expressly
removes from them the power to exact "percentage taxes".

It is correct to say that preemption in the matter of taxation simply refers to an instance where the national
government elects to tax a particular area, impliedly withholding from the local government the delegated
power to tax the same field. This doctrine primarily rests upon the intention of Congress. 35 Conversely,
should Congress allow municipal corporations to cover fields of taxation it already occupies, then the
doctrine of preemption will not apply.

In the case at bar, Section 4(1) of Commonwealth Act 472 clearly and specifically allows municipal
councils to tax persons engaged in "the same businesses or occupation" on which "fixed internal revenue
privilege taxes" are "regularly imposed by the National Government." With certain exceptions specified in
Section 3 of the same statute. Our case does not fall within the exceptions. It would therefore be futile to
argue that Congress exclusively reserved to the national government the right to impose the disputed
taxes.

We rule that there is no preemption.

4. Petitioner advances the theory that the ordinance is excessive.

An ordinance carries with it the presumption of validity. The question of reasonableness though is open to
judicial inquiry. Much should be left thus to the discretion of municipal authorities. Courts will go slow in
writing off an ordinance as unreasonable unless the amount is so excessive as to be prohibitive, arbitrary,
unreasonable, oppressive, or confiscatory. 36 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. 37

Plaintiff has however not sufficiently proven that, taking these factors together, the license taxes are
unreasonable. The presumption of validity subsists. For, plaintiff has limited itself to insisting that the
amounts levied exceed the cost of regulation and that the municipality has adequate funds for the alleged
purposes as evidenced by the municipality's cash surplus for the fiscal year ending 1956.

The cost of regulation cannot be taken as a gauge, if the municipality really intended to enact a revenue
ordinance. For, "if the charge exceeds the expense of issuance of a license and costs of regulation, it is a
tax." 38 And if it is, and it is validly imposed, as in this case, "the rule that license fees for regulation must
bear a reasonable relation to the expense of the regulation has no application." 39

And then, a cash surplus alone cannot stop a municipality from enacting a revenue ordinance increasing
license taxes in anticipation of municipal needs. Discretion to determine the amount of revenue required
for the needs of the municipality is lodged with the municipal authorities. Again, judicial intervention steps
in only when there is a flagrant, oppressive and excessive abuse of power by said municipal authorities. 40
Not that defendant municipality was without reason. On February 27, 1940, the Secretary of Finance,
later President, Manuel A. Roxas, issued Provincial Circular 12-A. In that circular, the then Finance
Secretary stated that his "Department has reached the conclusion that a tax on the basis of one centavo
for every picul of annual output capacity of sugar centrals ... would be just and reasonable." At that time,
the price of sugar was around P6.00 per picul. Sixteen years later 1956 when Ordinance No. 1 was
approved, the market quotation for export sugar ranged from P12.00 to P15.00 per picul. 41 And yet, since
then the rate per output capacity of a sugar central in Ordinance No. 1 was merely from one centavo to
two centavos. There is a statement in the municipality's brief 42that thereafter the price of sugar had never
gone below P16.00 per picul; instead it had gone up.

The reasonableness of the ordinance may not be disputed. It is not confiscatory.

There was misapprehension in the decision below in its statement that the increase of rates for refineries
was 2,000%. We should not overlook the fact that the original maximum rate covering refineries in
Ordinance No. 18, series of 1947, was P2,000.00; but that was only for a refinery with an output capacity
of 90,000 or more sacks. Under Section 2(c) of Ordinance No. 1, series of 1956, where the refineries
have an output capacity of from 75,001 bags to 100,000 bags, the tax remains at P2,000.00. From here
on, the ordinance provides for ten more scales for the graduation of the tax depending upon the output
capacity (P3,000.00, P4,000.00, P5,000.00, P10,000.00, P15,000.00, P20,000.00, P25,000.00,
P30,000.00, P35,000.00 and P40,000.00). But it is only where a refinery has an output capacity of
1,750,001 or more bags that the present ordinance imposes a tax of P40,000.00. The happenstance that
plaintiff's refinery is in the last bracket calling upon it to pay P40,000.00 per annum does not make the
ordinance in question unreasonable.

Neither may we tag the ordinance with excessiveness if we consider the capital invested by plaintiff in
both its sugar central and sugar refinery and its annual income from both. Plaintiff's capital investment in
the sugar central and sugar refinery is more or less P26,000,000.00. 43 And here are its annual net
income: for the year 1956 P3,852,910; for the year 1957 P3,854,520; for the year 1958
P7,230,493; for the year 1959 P5,951,187; and for the year 1960 P7,809,250. 44 If these figures
mean anything at all, they show that the ordinance in question is neither confiscatory nor unjust and
unreasonable.

5. Upon the averment that in the Municipality of Victorias plaintiff is the only operator of a sugar central
and sugar refinery, plaintiff now presses its argument that Ordinance No. 1, series of 1956, is
discriminatory. The ordinance does not single out Victorias as the only object of the ordinance. Said
ordinance is made to apply to any sugar central or sugar refinery which may happen to operate in the
municipality. So it is, that the fact that plaintiff is actually the sole operator of a sugar central and a sugar
refinery does not make the ordinance discriminatory. Argument along the same lines was rejected in Shell
Co. of P.I., Ltd. vs. Vao, 45 this Court holding that the circumstance "that there is no other person in the
locality who exercises" the occupation designated as installation manager "does not make the ordinance
discriminatory and hostile, inasmuch as it is and will be applicable to any person or firm who exercises
such calling or occupation." And in Ormoc Sugar Company, Inc. vs. Municipal Board of Ormoc
City, 46 declaratory relief was sought to test the validity of a municipal ordinance which provides a city tax
of twenty centavos per picul of centrifugal sugar and one per centum on the gross sale of its derivatives
and by-products "produced by the Ormoc Sugar Company, Incorporated, or by any other sugar mill in
Ormoc City." Mr. Justice Enrique Fernando, delivering the opinion of this Court, declared that the
ordinance did not suffer "from a constitutional or statutory infirmity." And yet, in Ormoc, it is to be observed
that Section 1 of the ordinance spelled out Ormoc Sugar Company, Incorporated specifically by name.
Not even the name of plaintiff herein was ever mentioned in the ordinance now disputed.

No discrimination exists.

6. As infirm is plaintiff's stand that its business is not confined to the Municipality of Victorias. It suffices
that plantiff engages in a business or occupation subject to an exaction by the municipality within the
territorial boundaries of that municipality. Plaintiff's sugar central and sugar refinery are located within the
Municipality of Victorias. In this central and refinery, plaintiff manufactures centrifugal sugar and refined
sugar, respectively.

But plaintiff insists that plaintiff's sugar milling and refining operations are not wholly performed within the
territorial limits of Victorias. According to plaintiff, transportation of canes from plantation to the mill site,
operation and maintenance of telephone system, inspection of crop progress and other related activities,
are conducted not only in defendant's municipality but also in the municipalities of Cadiz, Manapla, Sagay
and Saravia as well. 47 We fail to see the relevance of these facts. Because, if we follow plaintiff's
ratiocination, neither Victorias nor any of the municipalities just adverted to would be able to impose the
tax. One thing certain, of course, is that the tax is imposed upon the business of operating a sugar central
and a sugar refinery. And the situs of that business is precisely the Municipality of Victorias.

7. Plaintiff finally impleads double taxation. Its reason is that in computing the amount of taxes to be paid
by the sugar refinery the cost of the raw sugar coming from the sugar central is not deducted; ergo,
plaintiff is taxed twice on the raw sugar.

Double taxation has been otherwise described as "direct duplicate taxation." 48 For double taxation to
exist, "the same property must be taxed twice, when it should be taxed but once." 49 Double taxation has
also been "defined as taxing the same person twice by the same jurisdiction for the same thing." 50 As
stated in Manila Motor Company, Inc. vs. Ciudad de Manila, 51 there is double taxation "cuando la misma
propiedad se sujeta a dos impuestos por la misma entidad o Gobierno, para el mismo fin y durante el
mismo periodo de tiempo."

With the foregoing precepts in mind, we find no difficulty in saying that plaintiff's argument on double
taxation does not inspire assent. First. The two taxes cover two different objects. Section 1 of the
ordinance taxes a person operating sugar centrals or engaged in the manufacture of centrifugal sugar.
While under Section 2, those taxed are the operators of sugar refinery mills. One occupation or business
is different from the other. Second. The disputed taxes are imposed on occupation or business. Both
taxes are not on sugar. The amount thereof depends on the annual output capacity of the mills
concerned, regardless of the actual sugar milled. Plaintiff's argument perhaps could make out a point if
the object of taxation here were the sugar it produces, not the business of producing it.

There is no double taxation.

For the reasons given

The judgment under review is hereby reversed; and

Judgment is hereby rendered: (a) declaring valid and subsisting Ordinance No. 1, series of 1956, of the
Municipality of Victorias, Province of Negros Occidental; and (b) dismissing plaintiff's complaint as
supplemented and amended. Costs against plaintiff. So ordered.

G.R. No. L-24813 April 28, 1969

DR. HERMENEGILDO SERAFICA, plaintiff-appellant, vs. THE TREASURER OF ORMOC CITY, THE
MUNICIPAL BOARD OF ORMOC CITY, HON. ESTEBAN C. CONEJOS, as Mayor of Ormoc City and
ORMOC CITY, defendants-appellees.

Direct appeal from a decision of the Court of First Instance of Leyte dismissing plaintiff's complaint,
without pronouncement as to costs.

Plaintiff, Dr. Hermenegildo Serafica, seeks a declaration of nullity of Ordinance No. 13, Series of 1964, of
Ormoc City, imposing a "tax of five pesos (P5.00) for every one thousand (1,000) board feet of lumber
sold at Ormoc City by any person, partnership, firm, association, corporation, or entities", pursuant to
which the Treasurer of said City levied on and collected from said plaintiff, as owner of the Serafica
Sawmill, the aggregate sum of P1,837.84, as tax on 367,568 board feet of lumber sold, in said City,
during the third quarter of 1964. After appropriate proceedings, the lower court rendered judgment
upholding the validity of said ordinance and denying the relief prayed for by Dr. Serafica. Hence, this
appeal by the latter.

The contested ordinance reads:

ORDINANCE NO. 13

AN ORDINANCE IMPOSING A TAX OF FIVE PESOS (P5.00) FOR EVERY ONE THOUSAND
BOARD FEET OF LUMBER SOLD AT ORMOC CITY AND FOR OTHER PURPOSES.

BE IT ORDAINED, by authority of the Municipal Board of Ormoc City, Philippines, pursuant to the
provisions of Republic Act 179, as amended by RA 429, otherwise known as the Charter of
Ormoc City, That:

SECTION 1. City tax. There shall be paid to the City Treasurer a city tax of five pesos (P5.00)
for every one thousand (1,000) board feet of lumber sold at Ormoc City by any person,
partnership, firm, association, corporation or entity.

SECTION 2. Time and manner of payment and penalty for delinquency. The city tax herein
prescribed shall be payable without penalty within twenty (20) days after the close of every
quarter for which the tax is due. Failure to pay the tax within the prescribed time shall render the
taxpayer subject to a surcharge of fifty percentum (50%) for the first offense and one hundred
percentum (100%) for subsequent failures to pay within the prescribed period.

SECTION 3. Payment to be rendered by taxpayer. The taxpayer is hereby obliged to include

the tax due in every invoice issued for the sale of lumber which tax shall be submitted for
payment to the City Treasurer within twenty (20) days after the close of every quarter.

SECTION 4. Inspection of taxpayer's books and records. For the purpose of enforcing the
provisions of this Ordinance, the City Treasurer or any of his deputies specifically authorized in
writing for the purpose, shall have authority to examine the books and records of any person,
partnership, firm, association, corporation or entity subject to the tax herein imposed, PROVIDED,
HOWEVER, That such examination shall be made only during regular business hours, unless the
person, partnership, firm, association, corporation or entity concerned shall consent otherwise.

SEC. 5. Penalty for violation. Any violation of the provisions of the Ordinance shall be
punishable by a fine of not more than five hundred (P500.00) pesos and an imprisonment of not
more than three (3) months.

SEC. 6. Construction of this Ordinance. If any part or section of this Ordinance shall be
declared unconstitutional or ultra vires, such part or section shall not invalidate any other
provision hereof.

SEC. 7. Effectivity. This Ordinance shall take effect immediately upon approval. ENACTED,
June 17, 1964.lawphi1.nt

RESOLVED, FURTHER, to authorize the City Treasurer to copies of this Ordinance for issuance
to all concerned;
 RESOLVED, FINALLY, to furnish a copy of this resolution-ordinance each to the City Treasurer,
the City Auditor, the City Fiscal, the City Judge, and all concerned;

CARRIED. Six affirmative votes registered by Councilors Tugonon, Alfaro, Kierulf, Abas,
Besabella, and Du; one abstention registered by Councilor Aviles.

xxx xxx xxx

Plaintiff assails this ordinance as null and void upon the grounds that: (1) the Charter of Ormoc City
(Republic Acts Nos. 179 and 429) authorizes the same to "regulate", but not to "tax" lumber yards; (2) the
ordinance in question imposes, in effect, double taxation, because the business of lumberyard is already
regulated under said Charter and the sale of lumber is "a mere incident to the business of lumber yard";
(3) the tax imposed is "unfair, unjust, arbitrary, unreasonable, oppressive and contrary to the principles of
taxation"; and (4) "the public was not heard and given a chance to air its views" thereon.

With respect to the first ground, We have held in Ormoc Sugar Co. v. Municipal Board of Ormoc City, 1 that
the taxing power of the City of Ormoc, under section 2 of the Local Autonomy Act 2 is "broad" and
"sufficiently plenary to cover everything, excepting those mentioned therein". 3 It should be noted that in
said case of Ormoc Sugar Co., We upheld the validity of a sales tax.

As regards the second ground, suffice it to say that regulation and taxation are two different things, the
first being an exercise of police power, whereas the latter is not, apart from the fact that double taxation is
not prohibited in the Philippines. 4

The third objection is premised upon the fact that the tax in question is imposed regardless of the class of
lumber sold, although there are several categories thereof, commanding different prices. Plaintiff has not
proven, however, or even alleged the prices corresponding to each category, so that, like the lower court,
We have no means to ascertain the accuracy of the conclusion drawn by him, and must, accordingly, rely
upon the presumption that the City Council had merely complied with its duty and that the ordinance is
valid, unless and until the contrary has been duly established. 5

The last objection is based upon Provincial Circular No. 24 of the Department of Finance, dated March
31, 1960, suggesting that, "in the enactment of tax ordinances .. under the Local Autonomy Act ... where
practicable, public hearings be held wherein the views of the public ... may be heard." This is, however, a
mere suggestion, compliance with which is not obligatory, so that failure to act in accordance therewith
can not and does not affect the validity of the tax ordinance.

Indeed, since local governments are subject, not to the control, but merely to the general supervision of
the President, it is to say the least, doubtful that the latter could have made compliance with said circular
obligatory. 6

We have not overlooked the fact that, pursuant to Sec. 2 of Republic Act No. 2264 as amended "no city,
municipality or municipal district may levy or impose ...

xxx xxx xxx

(e) Taxes on forest products or forest concessions."

Although lumber is a forest product, this imitation has no application to the case at bar, the tax in question
being imposed, not upon lumber, but upon its sale. Said tax is not levied upon the lumber in plaintiff's
sawmill and does not become due until after the lumber has been sold. Hence, the case at bar is
distinguishable from Golden Ribbon Lumber Co., Inc. v. City of Butuan 7 in that the ordinance involved
therein provided that "every person, association or corporation operating a lumber mill and/or lumber yard
within the territory of the City of Butuan shall pay to the City a tax of two-fifths (P.004) centavo for every
board foot of lumber sawn, manufactured and/or produced." In short, the tax in that case was imposed
upon the "lumber" a forest product, not subject to local taxation whether sold or not.
Similarly, Santos Lumber Co. v. City of Cebu 8 and Jose S. Johnston & Sons v. Ramon Regondola 9 cited
by the plaintiff, refer to situations arising before the enactment of Republic Act No. 2264, 10 and, hence,
are inapplicable to the present case.

Neither have We overlooked the proviso in Sec. 2 of said Act prohibiting the imposition of "any percentage
tax on sales or other taxes in any form based thereon," for this injunction is directed exclusively to
"municipalities and municipal districts," and does not apply to cities.

WHEREFORE, the decision appealed from should be, as it is hereby affirmed, with costs against plaintiff
herein. It is so ordered.

G.R. No. L- 41383 August 15, 1988

PHILIPPINE AIRLINES, INC., plaintiff-appellant,

vs.
ROMEO F. EDU in his capacity as Land Transportation Commissioner, and UBALDO CARBONELL,
in his capacity as National Treasurer, defendants-appellants.

Ricardo V. Puno, Jr. and Conrado A. Boro for plaintiff-appellant.

GUTIERREZ, JR., J.:

What is the nature of motor vehicle registration fees? Are they taxes or regulatory fees?

This question has been brought before this Court in the past. The parties are, in effect, asking for a re-
examination of the latest decision on this issue.

This appeal was certified to us as one involving a pure question of law by the Court of Appeals in a case
where the then Court of First Instance of Rizal dismissed the portion-about complaint for refund of
registration fees paid under protest.

The disputed registration fees were imposed by the appellee, Commissioner Romeo F. Elevate pursuant
to Section 8, Republic Act No. 4136, otherwise known as the Land Transportation and Traffic Code.

The Philippine Airlines (PAL) is a corporation organized and existing under the laws of the Philippines and
engaged in the air transportation business under a legislative franchise, Act No. 42739, as amended by
Republic Act Nos. 25). and 269.1 Under its franchise, PAL is exempt from the payment of taxes. The
pertinent provision of the franchise provides as follows:

Section 13. In consideration of the franchise and rights hereby granted, the grantee shall
pay to the National Government during the life of this franchise a tax of two per cent of
the gross revenue or gross earning derived by the grantee from its operations under this
franchise. Such tax shall be due and payable quarterly and shall be in lieu of all taxes of
any kind, nature or description, levied, established or collected by any municipal,
provincial or national automobiles, Provided, that if, after the audit of the accounts of the
grantee by the Commissioner of Internal Revenue, a deficiency tax is shown to be due,
the deficiency tax shall be payable within the ten days from the receipt of the
 assessment. The grantee shall pay the tax on its real property in conformity with existing
law.

On the strength of an opinion of the Secretary of Justice (Op. No. 307, series of 1956) PAL has, since
1956, not been paying motor vehicle registration fees.

Sometime in 1971, however, appellee Commissioner Romeo F. Elevate issued a regulation requiring all
tax exempt entities, among them PAL to pay motor vehicle registration fees.

Despite PAL's protestations, the appellee refused to register the appellant's motor vehicles unless the
amounts imposed under Republic Act 4136 were paid. The appellant thus paid, under protest, the amount
of P19,529.75 as registration fees of its motor vehicles.

After paying under protest, PAL through counsel, wrote a letter dated May 19,1971, to Commissioner Edu
demanding a refund of the amounts paid, invoking the ruling in Calalang v. Lorenzo (97 Phil. 212 [1951])
where it was held that motor vehicle registration fees are in reality taxes from the payment of which PAL is
exempt by virtue of its legislative franchise.

Appellee Edu denied the request for refund basing his action on the decision in Republic v. Philippine
Rabbit Bus Lines, Inc., (32 SCRA 211, March 30, 1970) to the effect that motor vehicle registration fees
are regulatory exceptional. and not revenue measures and, therefore, do not come within the exemption
granted to PAL? under its franchise. Hence, PAL filed the complaint against Land Transportation
Commissioner Romeo F. Edu and National Treasurer Ubaldo Carbonell with the Court of First Instance of
Rizal, Branch 18 where it was docketed as Civil Case No. Q-15862.

Appellee Romeo F. Elevate in his capacity as LTC Commissioner, and LOI Carbonell in his capacity as
National Treasurer, filed a motion to dismiss alleging that the complaint states no cause of action. In
support of the motion to dismiss, defendants repatriation the ruling in Republic v. Philippine Rabbit Bus
Lines, Inc., (supra) that registration fees of motor vehicles are not taxes, but regulatory fees imposed as
an incident of the exercise of the police power of the state. They contended that while Act 4271 exempts
PAL from the payment of any tax except two per cent on its gross revenue or earnings, it does not exempt
the plaintiff from paying regulatory fees, such as motor vehicle registration fees. The resolution of the
motion to dismiss was deferred by the Court until after trial on the merits.

On April 24, 1973, the trial court rendered a decision dismissing the appellant's complaint "moved by the
later ruling laid down by the Supreme Court in the case or Republic v. Philippine Rabbit Bus Lines,
Inc., (supra)." From this judgment, PAL appealed to the Court of Appeals which certified the case to us.

Calalang v. Lorenzo (supra) and Republic v. Philippine Rabbit Bus Lines, Inc. (supra) cited by PAL and
Commissioner Romeo F. Edu respectively, discuss the main points of contention in the case at bar.

Resolving the issue in the Philippine Rabbit case, this Court held:

"The registration fee which defendant-appellee had to pay was imposed by Section 8 of
the Revised Motor Vehicle Law (Republic Act No. 587 [1950]). Its heading speaks of
"registration fees." The term is repeated four times in the body thereof. Equally so,
mention is made of the "fee for registration." (Ibid., Subsection G) A subsection starts with
a categorical statement "No fees shall be charged." (lbid.,Subsection H) The conclusion
is difficult to resist therefore that the Motor Vehicle Act requires the payment not of a tax
but of a registration fee under the police power. Hence the incipient, of the section relied
upon by defendant-appellee under the Back Pay Law, It is not held liable for a tax but for
a registration fee. It therefore cannot make use of a backpay certificate to meet such an
obligation.
 Any vestige of any doubt as to the correctness of the above conclusion should be
dissipated by Republic Act No. 5448. ([1968]. Section 3 thereof as to the imposition of
additional tax on privately-owned passenger automobiles, motorcycles and scooters was
amended by Republic Act No. 5470 which is (sic) approved on May 30, 1969.) A special
science fund was thereby created and its title expressly sets forth that a tax on privately-
owned passenger automobiles, motorcycles and scooters was imposed. The rates
thereof were provided for in its Section 3 which clearly specifies the" Philippine
tax."(Cooley to be paid as distinguished from the registration fee under the Motor Vehicle
Act. There cannot be any clearer expression therefore of the legislative will, even on the
assumption that the earlier legislation could by subdivision the point be susceptible of the
interpretation that a tax rather than a fee was levied. What is thus most apparent is that
where the legislative body relies on its authority to tax it expressly so states, and where it
is enacting a regulatory measure, it is equally exploded (at p. 22,1969

In direct refutation is the ruling in Calalang v. Lorenzo (supra), where the Court, on the other hand, held:

The charges prescribed by the Revised Motor Vehicle Law for the registration of motor
vehicles are in section 8 of that law called "fees". But the appellation is no impediment to
their being considered taxes if taxes they really are. For not the name but the object of
the charge determines whether it is a tax or a fee. Geveia speaking, taxes are for
revenue, whereas fees are exceptional. for purposes of regulation and inspection and are
for that reason limited in amount to what is necessary to cover the cost of the services
rendered in that connection. Hence, a charge fixed by statute for the service to be
person,-When by an officer, where the charge has no relation to the value of the services
performed and where the amount collected eventually finds its way into the treasury of
the branch of the government whose officer or officers collected the chauffeur, is not a fee
but a tax."(Cooley on Taxation, Vol. 1, 4th ed., p. 110.)

From the data submitted in the court below, it appears that the expenditures of the Motor
Vehicle Office are but a small portionabout 5 per centumof the total collections from
motor vehicle registration fees. And as proof that the money collected is not intended for
the expenditures of that office, the law itself provides that all such money shall accrue to
the funds for the construction and maintenance of public roads, streets and bridges. It is
thus obvious that the fees are not collected for regulatory purposes, that is to say, as an
incident to the enforcement of regulations governing the operation of motor vehicles on
public highways, for their express object is to provide revenue with which the
Government is to discharge one of its principal functionsthe construction and
maintenance of public highways for everybody's use. They are veritable taxes, not merely
fees.

As a matter of fact, the Revised Motor Vehicle Law itself now regards those fees as
taxes, for it provides that "no other taxes or fees than those prescribed in this Act shall be
imposed," thus implying that the charges therein imposedthough called feesare of
the category of taxes. The provision is contained in section 70, of subsection (b), of the
law, as amended by section 17 of Republic Act 587, which reads:

Sec. 70(b) No other taxes or fees than those prescribed in this Act shall
be imposed for the registration or operation or on the ownership of any
motor vehicle, or for the exercise of the profession of chauffeur, by any
municipal corporation, the provisions of any city charter to the contrary
notwithstanding: Provided, however, That any provincial board, city or
municipal council or board, or other competent authority may exact and
collect such reasonable and equitable toll fees for the use of such
bridges and ferries, within their respective jurisdiction, as may be
authorized and approved by the Secretary of Public Works and
 Communications, and also for the use of such public roads, as may be
authorized by the President of the Philippines upon the recommendation
of the Secretary of Public Works and Communications, but in none of
these cases, shall any toll fee." be charged or collected until and unless
the approved schedule of tolls shall have been posted levied, in a
conspicuous place at such toll station. (at pp. 213-214)

Motor vehicle registration fees were matters originally governed by the Revised Motor Vehicle Law (Act
3992 [19511) as amended by Commonwealth Act 123 and Republic Acts Nos. 587 and 1621.

Today, the matter is governed by Rep. Act 4136 [1968]), otherwise known as the Land Transportation
Code, (as amended by Rep. Acts Nos. 5715 and 64-67, P.D. Nos. 382, 843, 896, 110.) and BP Blg. 43, 74
and 398).

Section 73 of Commonwealth Act 123 (which amended Sec. 73 of Act 3992 and remained unsegregated,
by Rep. Act Nos. 587 and 1603) states:

Section 73. Disposal of moneys collected.Twenty per centum of the money collected
under the provisions of this Act shall accrue to the road and bridge funds of the different
provinces and chartered cities in proportion to the centum shall during the next previous
year and the remaining eighty per centum shall be deposited in the Philippine Treasury to
create a special fund for the construction and maintenance of national and provincial
roads and bridges. as well as the streets and bridges in the chartered cities to be alloted
by the Secretary of Public Works and Communications for projects recommended by the
Director of Public Works in the different provinces and chartered cities. ....

Presently, Sec. 61 of the Land Transportation and Traffic Code provides:

Sec. 61. Disposal of Mortgage. CollectedMonies collected under the provisions of this
Act shall be deposited in a special trust account in the National Treasury to constitute the
Highway Special Fund, which shall be apportioned and expended in accordance with the
provisions of the" Philippine Highway Act of 1935. "Provided, however, That the amount
necessary to maintain and equip the Land Transportation Commission but not to exceed
twenty per cent of the total collection during one year, shall be set aside for the purpose.
(As amended by RA 64-67, approved August 6, 1971).

It appears clear from the above provisions 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. On the other hand, the Philippine Rabbit case mentions a presumption arising from
the use of the term "fees," which appears to have been favored by the legislature to distinguish fees from
other taxes such as those mentioned in Section 13 of Rep. Act 4136 which reads:

Sec. 13. Payment of taxes upon registration.No original registration of motor vehicles
subject to payment of taxes, customs s duties or other charges shall be accepted unless
proof of payment of the taxes due thereon has been presented to the Commission.

referring to taxes other than those imposed on the registration, operation or ownership of a motor vehicle
(Sec. 59, b, Rep. Act 4136, as amended).

Fees may be properly regarded as taxes even though they also serve as an instrument of regulation, As
stated by a former presiding judge of the Court of Tax Appeals and writer on various aspects of taxpayers
 It is possible for an exaction to be both tax arose. regulation. License fees are changes.
looked to as a source of revenue as well as a means of regulation (Sonzinky v. U.S., 300
U.S. 506) This is true, for example, of automobile license fees. Isabela such case, the
fees may properly be regarded as taxes even though they also serve as an instrument of
regulation. 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. (1955 CCH Fed. tax
Course, Par. 3101, citing Cooley on Taxation (2nd Ed.) 592, 593; Calalang v. Lorenzo. 97
Phil. 213-214) Lutz v. Araneta 98 Phil. 198.) These exactions are sometimes called
regulatory taxes. (See Secs. 4701, 4711, 4741, 4801, 4811, 4851, and 4881, U.S.
Internal Revenue Code of 1954, which classify taxes on tobacco and alcohol as
regulatory taxes.) (Umali, Reviewer in Taxation, 1980, pp. 12-13, citing Cooley on
Taxation, 2nd Edition, 591-593).

Indeed, 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 (Umali, Id.) Such is the case of motor vehicle registration fees. The
conclusions become inescapable in view of Section 70(b) of Rep. Act 587 quoted in the Calalang case.
The same provision appears as Section 591-593). 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." Though nowhere in Rep. Act 4136 does the
law specifically state that the imposition is a tax, Section 591-593). speaks of "taxes." or fees ... for the
registration or operation or on the ownership of any motor vehicle, or for the exercise of the profession of
chauffeur ..." making the intent to impose a tax more apparent. Thus, even Rep. Act 5448 cited by the
respondents, speak of an "additional" tax," where the law could have referred to an original tax and not
one in addition to the tax already imposed on the registration, operation, or ownership of a motor vehicle
under Rep. Act 41383. 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. 591-593). of the Code as taxes like
the motor vehicle registration fee and chauffers' license fee. Such fees are to go into the expenditures of
the Land Transportation Commission as provided for in the last proviso of see. 61, aforequoted.

It is quite apparent that vehicle registration fees were originally simple exceptional. intended only for
rigidly purposes in the exercise of the State's police powers. Over the years, however, as vehicular traffic
exploded in number and motor vehicles became absolute necessities without which modem life as we
know it would stand still, Congress found the registration of vehicles a very convenient way of raising
much needed revenues. Without changing the earlier deputy. of registration payments as "fees," their
nature has become that of "taxes."

In view of the foregoing, we rule that motor vehicle registration fees as at present exacted pursuant to the
Land Transportation and Traffic Code are actually taxes intended for additional revenues. of government
even if one fifth or less of the amount collected is set aside for the operating expenses of the agency
administering the program.

May the respondent administrative agency be required to refund the amounts stated in the complaint of
PAL?

The answer is NO.

The claim for refund is made for payments given in 1971. It is not clear from the records as to what
payments were made in succeeding years. We have ruled that Section 24 of Rep. Act No. 5448 dated
June 27, 1968, repealed all earlier tax exemptions Of corporate taxpayers found in legislative franchises
similar to that invoked by PAL in this case.

In Radio Communications of the Philippines, Inc. v. Court of Tax Appeals, et al. (G.R. No. 615)." July 11,
1985), this Court ruled:

Under its original franchise, Republic Act No. 21); enacted in 1957, petitioner Radio
Communications of the Philippines, Inc., was subject to both the franchise tax and
income tax. In 1964, however, petitioner's franchise was amended by Republic Act No.
41-42). to the effect that its franchise tax of one and one-half percentum (1-1/2%) of all
gross receipts was provided as "in lieu of any and all taxes of any kind, nature, or
description levied, established, or collected by any authority whatsoever, municipal,
provincial, or national from which taxes the grantee is hereby expressly exempted." The
issue raised to this Court now is the validity of the respondent court's decision which
ruled that the exemption under Republic Act No. 41-42). was repealed by Section 24 of
Republic Act No. 5448 dated June 27, 1968 which reads:

"(d) The provisions of existing special or general laws to the contrary

notwithstanding, all corporate taxpayers not specifically exempt under
Sections 24 (c) (1) of this Code shall pay the rates provided in this
section. All corporations, agencies, or instrumentalities owned or
controlled by the government, including the Government Service
Insurance System and the Social Security System but excluding
educational institutions, shall pay such rate of tax upon their taxable net
income as are imposed by this section upon associations or corporations
engaged in a similar business or industry. "

An examination of Section 24 of the Tax Code as amended shows clearly that the law
intended all corporate taxpayers to pay income tax as provided by the statute. There can
be no doubt as to the power of Congress to repeal the earlier exemption it granted. Article
XIV, Section 8 of the 1935 Constitution and Article XIV, Section 5 of the Constitution as
amended in 1973 expressly provide that no franchise shall be granted to any individual,
firm, or corporation except under the condition that it shall be subject to amendment,
alteration, or repeal by the legislature when the public interest so requires. There is no
question as to the public interest involved. The country needs increased revenues. The
repealing clause is clear and unambiguous. There is a listing of entities entitled to tax
exemption. The petitioner is not covered by the provision. Considering the foregoing, the
Court Resolved to DENY the petition for lack of merit. The decision of the respondent
court is affirmed.

Any registration fees collected between June 27, 1968 and April 9, 1979, were correctly imposed because
the tax exemption in the franchise of PAL was repealed during the period. However, an amended
franchise was given to PAL in 1979. Section 13 of Presidential Decree No. 1590, now provides:

In consideration of the franchise and rights hereby granted, the grantee shall pay to the
Philippine Government during the lifetime of this franchise whichever of subsections (a)
and (b) hereunder will result in a lower taxes.)

(a) The basic corporate income tax based on the grantee's annual net
taxable income computed in accordance with the provisions of the
Internal Revenue Code; or

(b) A franchise tax of two per cent (2%) of the gross revenues. derived by
the grantees from all specific. without distinction as to transport or
 nontransport corporations; provided that with respect to international
airtransport service, only the gross passengers, mail, and freight
revenues. from its outgoing flights shall be subject to this law.

The tax paid by the grantee under either of the above alternatives shall be 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, including but not limited to the following:

xxx xxx xxx

(5) All taxes, fees and other charges on the registration, license, acquisition, and transfer
of airtransport equipment, motor vehicles, and all other personal or real property of the
gravitates (Pres. Decree 1590, 75 OG No. 15, 3259, April 9, 1979).

PAL's current franchise is clear and specific. It has removed the ambiguity found in the earlier law. PAL is
now exempt from the payment of any tax, fee, or other charge on the registration and licensing of motor
vehicles. Such payments are already included in the basic tax or franchise tax provided in Subsections (a)
and (b) of Section 13, P.D. 1590, and may no longer be exacted.

WHEREFORE, the petition is hereby partially GRANTED. The prayed for refund of registration fees paid
in 1971 is DENIED. The Land Transportation Franchising and Regulatory Board (LTFRB) is enjoined
functions-the collecting any tax, fee, or other charge on the registration and licensing of the petitioner's
motor vehicles from April 9, 1979 as provided in Presidential Decree No. 1590.

SO ORDERED.

G.R. No. L-19737 August 26, 1968

HENG TONG TEXTILES CO., INC. (before), PHILIP MANUFACTURING CORPORATION

(now), petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE and THE COURT OF TAX APPEALS, respondents.

Caparas and Ilagan and Anatolia F. Reyes for petitioner.

Office of the Solicitor General for respondents.

MAKALINTAL, J.:

In 1952 the then Collector of Internal Revenue assessed against the petitioner deficiency sales taxes and
surcharges for the year 1949 and the first four months of 1950 in the aggregate sum of P89,123.58. The
assessment was appealed to the Board of Tax Appeals, whence the case was transferred to the Court of
Tax Appeals upon its organization in 1954, and there was affirmed in its decision dated February 28,
1952. The matter was thereafter elevated to this Court for review.

The deficiency taxes in question were assessed on importations of textiles from abroad. The goods were
withdrawn from Customs by Pan-Asiatic Commercial Co., Inc., which paid, in the name of the petitioner,
the corresponding advance sales tax under section 183(b) of the Internal Revenue Code. The
assessment for the deficiency, however, was made against the petitioner, Heng Tong Textiles Co., Inc.
(now Philip Manufacturing Corporation) on the ground that it was the real importer of the goods and did
not pay the taxes due on the basis of the gross selling prices thereof. There is no dispute as to the
amount as computed by the internal revenue examiners and confirmed by the Collector. The only issues
posed in the instant petition for review are: (1) whether or not the petitioner was the importer of the goods;
and (2) whether or not it was guilty of fraud so as to warrant the imposition of a penalty of 50% on the
deficiency.

The Court of Tax Appeals based its decision of affirmance, finding the petitioner the importer of the goods,
on a number of evidentiary circumstances. First, Heng Tong Textiles Co., Inc. and Pan-Asiatic
Commercial were sister corporations. This is not controverted by the petitioner. Second, the commercial
documents covering the importations (shipping documents, insurance papers, and records of payment of
the advance sales tax in the Bureau of Customs) were all in the name of the petitioner. Third, in
connection with advance sales tax aforesaid, Pan-Asiatic Asiatic Commercial wrote the petitioner the
following letter:

In compliance with your request regarding the 5% Sales Tax that we paid for you for the year
1949 and the first quarter of 1950 against the goods that you ordered from various United States
suppliers, through us, we attach hereto a list giving a breakdown of this 5% Sales Tax, together
with the corresponding Official Receipt Numbers and other details relative to the orders covered
by these payments.

Fourth, there is both documentary and testimonial evidence the latter being declarations of the
petitioner's own witnesses that Pan-Asiatic Commercial acted merely as indentor. Indeed the original
petition for review below contains the allegation that "during the taxable year 1949, Heng Tong Textiles
Co., Inc. placed through Pan-Asiatic Commercial Co., Inc., orders for importations of textiles from the
United States in the sum of P2,190,948.66."

Petitioner excepts to the conclusion of the Court of Tax Appeals and avers that the importation papers
were placed in the name of the petitioner only for purposes of accommodation, that is, to introduce the
petitioner to textile suppliers abroad; and that the petitioner was not in a financial position to make the
importations in question, valued at over a million pesos, since its paid-up capital was only P30,000.00.
These circumstances show nothing but a private arrangement between the petitioner and Pan-Asiatic
Commercial, which in no way affected the role of the petitioner as the importer as far as the Government
and its right to collect the taxes were concerned. Pan-Asiatic Commercial might have furnished the
necessary financing for the importations in question, but that did not militate against the petitioner's being
the importer; nor did the idea of building up its reputation among textile suppliers abroad render it
necessary for the withdrawal of the goods from customs and the payment of the advance sales tax to be
made in the petitioner's name, these being purely local operations, or for Pan-Asiatic Commercial to
affirm, in the private communication sent by it to the petitioner, that the latter was the one that ordered the
goods from the United States.

If anything, we perceive in the entire set-up an arrangement through which the sales taxes due could be
minimized, by having Pan-Asiatic Commercial, as indorsee of the goods, withdraw the same from
Customs upon payment of the advance sales tax and then execute a sale thereof to Heng Tong Textiles
at cost, or at a negligible profit. As it turned out, according to the Court of Tax Appeals, "the goods were
made to appear as having (thus) been sold ... so that no sales tax was paid by petitioner upon the sales
of such goods ... (and) neither, was any sales tax paid on the supposed sales of said goods by the Pan-
Asiatic Commercial to the petitioner as the sales were made apparently at cost." This is so because
"during the period in question," the Court of Tax Appeals added, "the sales tax on sales of imported
articles was based on the gross selling price thereof, the advance sales tax paid upon removal of the
goods from the customhouse being credited against the tax on the actual gross selling price paid by the
importer. (See Rep. Act No. 253; General Circular No. V-106, February 19, 1951.)"

In our opinion, however, the arrangement resorted to does not by itself alone justify the penalty imposed.
Section 183 (a), paragraph 3, of the Internal Revenue Code, as amended by Republic Act No. 253,
speaks of willful neglect to file the return or willful making of a false or fraudulent return. An attempt to
minimize one's tax does not necessarily constitute fraud. It is a settled principle that a taxpayer may
diminish his liability by any means which the law permits. "The intention to minimize taxes, when used in
the context of fraud, must be proved to exist by clear and convincing evidence amounting to more than
mere preponderance, and cannot, be justified by mere speculation. This is because fraud is never lightly
to be presumed." (Yutivo Sons Hardware Co. vs. CTA, G.R. No. L-13203, and cases cited). No such
evidence is shown by the record in the case of the herein petitioner. Its actuation is not incompatible with
good faith on its part, that is, with a genuine belief that by indorsing the goods to Pan-Asiatic Commercial
so that the latter could, as it did, take delivery thereof, Pan-Asiatic Commercial would in law be
considered the importer. It may even be true, as the petitioner insists, that it was Pan-Asiatic Commercial
that financed the importations but placed them in the name of the petitioner as a matter of
accommodation, in which case the element of fraud would be ruled out, although from the legal viewpoint
and as far as the right of the Government to collect the taxes was concerned the petitioner was the real
importer and hence must shoulder the tax burden.

The decision of the Court of Tax Appeals is modified, by eliminating therefrom the penalty of 50% on the
amount of deficiency sales taxes imposed, and is affirmed in all other respects. No pronouncement as to
costs.

G.R. No. L-21609 September 29, 1966

REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,

vs.
KER & COMPANY, LTD., defendant-appellant.

Office of the Solicitor General for plaintiff-appellant.

Leido, Andrada, Perez and Associates for defendant-appellant.

BENGZON, J.P., J.:

Ker & Co., Ltd., a domestic corporation, filed its income tax returns for the years 1947, 1948, 1949 and
1950 on the following dates:

Year Date Filed

1947 April 12, 1948
1948 April 30, 1949
1949 May 15, 1950
1950 May 9, 1951

It amended its income tax returns for 1948 and 1949 on May 11, 1949 and June 30, 1950, respectively.

In 1953 the Bureau of Internal Revenue examined and audited Ker & Co., Ltd.'s returns and books of
accounts and subsequently issued the following assessments for deficiency income tax:

Year Amount Date Assessed

1947 P42,342.30 July 25, 1953
1948 18,651.87 Feb. 16, 1953
1949 139.67 Feb. 16, 1953
1950 12,813.00 Feb. 16, 1953
due and payable on dates indicated in the accompanying notices of assessment. The assessments for
1948 and 1950 carried the surcharge of 50% authorized under Section 72 of the Tax Code for the filing of
fraudulent returns.

Upon request of Ker & Co., Ltd., through Atty. Jose Leido, its counsel, the Bureau of Internal Revenue
reduced the assessments for the year 1947 from P42,342.30 to P27,026.28 and for the year 1950 from
P12,813.00 to P8,542.00, imposed the 50% surcharge for the year 1947 and eliminated the same
surcharge from the assessment for the year 1950. The assessments for years 1948 and 1949 remained
the same.

On March 1, 1956 Ker & Co., Ltd. filed with the Court of Tax Appeals a petition for review with preliminary
injunction. No preliminary injunction was issued, for said court dismissed the appeal for having been
instituted beyond the 30-day period provided for in Section 11 of Republic Act 1125. We affirmed the order
of dismissal of L-12396. 1

On March 15, 1962, the Bureau of Internal Revenue demanded payment of the aforesaid assessments
together with a surcharge of 5% for late payment and interest at the rate of 1% monthly. Ker & Co., Ltd.
refused to pay, instead in its letters dated March 28, 1962 and April 10, 1962 it set up the defense of
prescription of the Commissioner's right to collect the tax. Subsequently, the Republic of the Philippines
filed on March 27, 1962 a complaint with the Court of First Instance of Manila seeking collection of the
aforesaid deficiency income tax for the years 1947, 1948, 1949 and 1950. The complaint did not allege
fraud in the filing of any of the income tax returns for the years involved, nor did it pray for the payment of
the corresponding 50% surcharge, but it prayed for the payment of 5% surcharge for late payment and
interest of 1% per month without however specifying from what date interest started to accrue.

Summons was served not on the defendant taxpayer but upon Messrs. Leido and Associates, its counsel
in the proceedings before the Bureau of Internal Revenue and the Court of Tax Appeals.

On April 14, 1962 Ker & Co., Ltd. through its counsel, Leido, Andrada, Perez & Associates, moved for the
dismissal of the complaint on the ground that the court did not acquire jurisdiction over the person of the
defendant and that plaintiff's cause of action has prescribed. This motion was denied and defendant filed
a motion for reconsideration. Resolution on said motion, however, was deferred until trial of the case on
the merits.

On May 18, 1962, Ker & Co., Ltd. filed its answer to the complaint interposing therein the defense set up
in its motion to dismiss of April 14, 1962.

On September 18, 1962 the Republic of the Philippines amended its complaint, in answer to which Ker &
Co., Ltd. adopted the same answer which it had filed on May 18, 1962.

On January 30, 1963 the Court of First Instance rendered judgment, the dispositive portion of which
states:

WHEREFORE, this Court dismisses the claim for the collection of deficiency income taxes for
1947, but orders defendant taxpayer to pay the deficiency income taxes for 1948, 1949 and 1950,
in the amounts of P18,651.87, P139.67 and P8,542.00, respectively, plus 5% surcharge thereon
on each amount and interest of 1% a month computed from March 27, 1962 and until full
payment thereof is made, plus the costs of suit.

On February 20, 1963 the Republic of the Philippines filed a motion for reconsideration contending that
the right of the Commissioner of Internal Revenue to collect the deficiency assessment for 1947 has not
prescribed by a lapse of merely five years and three months, because the taxpayer's income tax return
was fraudulent in which case prescription sets in ten years from October 31, 1951, the date of discovery
of the fraud, pursuant to Section 332 (a) of the Tax Codes and that the payment of delinquency interest of
1% per month should commence from the date it fell due as indicated in the assessment notices instead
of on the date the complaint was filed.

On March 6, 1963 Ker & Co., Ltd. also filed a motion for reconsideration reiterating its assertion that the
Court of First Instance did not acquire jurisdiction over its person, and maintaining that since the
complaint was filed nine years, one month and eleven days after the deficiency assessments for 1948,
1949 and 1950 were made and since the filing of its petition for review in the Court of Tax Appeals did not
stop the running of the period of limitations, the right of the Commissioner of Internal Revenue to collect
the tax in question has prescribed.

The two motions for reconsideration having been denied, both parties appealed directly to this Court.

The issues in this case are:

1. Did the Court of First Instance acquire jurisdiction over the person of defendant Ker & Co.,
Ltd.? .

2. Did the right of the Commissioner of Internal Revenue to assess deficiency income tax for the
year 1947 prescribe? .

3. Did the filing of a petition for review by the taxpayer in the Court of Tax Appeals suspend the
running of the statute of limitations to collect the deficiency income for the years 1948, 1949 and
1950?

4. When did the delinquency interest on the deficiency income tax for the years 1948, 1949 and
1950 accrue?

First Issue

Ker & Co., Ltd. maintains that the court a quo did not acquire jurisdiction over its person inasmuch as
summons was not served upon it but upon Messrs. Leido and Associates who do not come under any of
the class of persons upon whom summons should be served as enumerated in Section 13, Rule 7 of the
Rules of Court, 2 which reads:

SEC. 13. Service upon private domestic corporation or partnership.If the defendant is a
corporation formed under the laws of the Philippines or a partnership duly registered, service may
be made on the president, manager, secretary, cashier, agent, or any of its directors.

Messrs. Leido and Associates acted as counsel for Ker Co., Ltd. when this tax case was in its
administrative stage. The same counsel represented Ker & Co., Ltd., when it appealed said case to the
Court of Tax Appeals and later to this Court. Subsequently, when the Deputy Commissioner of Internal
Revenue, by letter dated March 15, 1962, demanded the payment of the deficiency income tax in
question, it was Messrs. Leido, Andrada, Perez & Associates who replied in behalf of Ker & Co., Ltd. in
two letters, dated March 28, 1962 and April 10, 1962, both after the complaint in this case was filed. At
least therefore on April 2, 1962 when Messrs. Leido and Associates received the summons, they were still
acting for and in behalf of Ker & Co., Ltd. in connection with its tax liability involved in this case. Perforce,
they were the taxpayer's agent when summons was served. Under Section 13 of Rule 7, aforequoted,
service upon the agent of a corporation is sufficient.

We observe that the motion to dismiss filed on April 14, 1962, aside from disputing the lower court's
jurisdiction over defendant's person, prayed for dismissal of the complaint on the ground that plaintiff's
cause of action has prescribed. By interposing such second ground in its motion to dismiss, Ker & Co.,
Ltd. availed of an affirmative defense on the basis of which it prayed the court to resolve controversy in its
favor. For the court to validly decide the said plea of defendant Ker & Co., Ltd., it necessarily had to
acquire jurisdiction upon the latter's person, who, being the proponent of the affirmative defense, should
be deemed to have abandoned its special appearance and voluntarily submitted itself to the jurisdiction of
the court.3

Voluntary appearance cures defects of summons, if any. 4 Such defect, if any, was further cured when
defendant filed its answer to the complaint. 5 A defendant can not be permitted to speculate upon the
judgment of the court by objecting to the court's jurisdiction over its person if the judgment is adverse to it,
and acceding to jurisdiction over its person if and when the judgment sustains its defenses.

Second Issue

Ker & Co., Ltd. contends that under Section 331 of the Tax Code the right of the Commissioner of Internal
Revenue to assess against it a deficiency income tax for the year 1947 has prescribed because the
assessment was issued on July 25, 1953 after a lapse of five years, three months and thirteen days from
the date (April 12, 1948) it filed its income tax return. On the other hand, the Republic of the Philippines
insists that the taxpayer's income tax return was fraudulent, therefore the Commissioner of Internal
Revenue may assess the tax within ten years from discovery of the fraud on October 31, 1951 pursuant
to Section 322(a) of the Tax Code.

The stand of the Republic of the Philippines hinges on whether or not taxpayer's income tax return for
1947 was fraudulent.

The court a quo, confining itself to determining whether or not the assessment of the tax for 1947 was
issued within the five-year period provided for in Section 331 of the Tax Code, ruled that the right of the
Commissioner of Internal Revenue to assess the tax has prescribed. Said the lower court:

The Court resolves the second issue in the negative, because Section 331 of the Revenue Code
explicitly provides, in mandatory terms, that "Internal Revenue taxes shall be assessed within 5
years after the return was filed, and no proceedings in court without assessment, for the
collection of such taxes, shall be begun after expiration of such period. The attempt by the
Commissioner of Internal Revenue to make an assessment on July 25, 1953, on the basis of a
return filed on April 12, 1948, is an exercise of authority against the aforequoted explicit and
mandatory limitations of statutory law. Settled in our system is the rule that acts committed
against the provisions of mandatory or prohibitory laws shall be void (Art. 5, New Civil Code). . . .

Said court resolved the issue without touching upon fraudulence of the return. The reason is that the
complaint alleged no fraud, nor did the plaintiff present evidence to prove fraud.

In reply to the lower court's conclusion, the Republic of the Philippines maintains in its brief that Ker &
Co., Ltd. filed a false return and since the fraud penalty of 50% surcharge was imposed in the deficiency
income tax assessment, which has become final and executory, the finding of the Commissioner of
Internal Revenue as to the existence of the fraud has also become final and need not be proved. This
contention suffers from a flaw in that it fails to consider the well-settled principle that fraud is a question of
fact6 which must be alleged and proved. 7 Fraud is a serious charge and, to be sustained, it must be
supported by clear and convincing proof. 8 Accordingly, fraud should have been alleged and proved in the
lower court. On these premises We therefore sustain the ruling of the lower court upon the point of
prescription.

It would be worth mentioning that since the assessment for deficiency income tax for 1947 has become
final and executory, Ker & Co., Ltd. may not anymore raise defenses which go into the merits of the
assessment, i.e., prescription of the Commissioner's right to assess the tax. Such was our ruling in
previous cases.9 In this case however, Ker & Co., Ltd. raised the defense of prescription in the
proceedings below and the Republic of the Philippines, instead of questioning the right of the defendant to
raise such defense, litigated on it and submitted the issue for resolution of the court. By its actuation, the
Republic of the Philippines should be considered to have waived its right to object to the setting up of
such defense.

Third Issue

Ker & Co., Ltd. impresses upon Us that since the Republic of the Philippines filed the complaint for the
collection of the deficiency income tax for the years 1948, 1949 and 1950 only on March 27, 1962, or nine
years, one month and eleven days from February 16, 1953, the date the tax was assessed, the right to
collect the same has prescribed pursuant to Section 332 (c) of the Tax Code. The Republic of the
Philippines however contends that the running of the prescriptive period was interrupted by the filing of
the taxpayer's petition for review in the Court of Tax Appeals on March 1, 1956.

If the period during which the case was pending in the Court of Tax Appeals and in the Supreme Court
were not counted in reckoning the prescriptive period, less than five years would have elapsed, hence,
the right to collect the tax has not prescribed.

The taxpayer counters that the filing of the petition for review in the Court of Tax Appeals could not have
stopped the running of the prescriptive period to collect because said court did not have jurisdiction over
the case, the appeal having been interposed beyond the 30-day period set forth in Section 11 of Republic
Act 1125. Precisely, it adds, the Tax Court dismissed the appeal for lack of jurisdiction and said dismissal
was affirmed by the Supreme Court in L-12396 aforementioned.

Under Section 333 of the Tax Code, quoted hereunder:

SEC. 333. Suspension of running of statute.The running of the statute of limitations provided in
Section 331 or three hundred thirty-two on the making of assessments and the beginning, of
distraint or levy or a proceeding in court for collection, in respect of any deficiency, shall be
suspended for the period during which the Collector of Internal Revenue is prohibited from
making the assessment or beginning distraint or levy or a proceeding in court, and for sixty days
thereafter.

the running of the prescriptive period to collect the tax shall be suspended for the period during which the
Commissioner of Internal Revenue is prohibited from beginning a distraint and levy or instituting a
proceeding in court, and for sixty days thereafter.

Did the pendency of the taxpayer's appeal in the Court of Tax Appeals and in the Supreme Court have the
effect of legally preventing the Commissioner of Internal Revenue from instituting an action in the Court of
First Instance for the collection of the tax? Our view is that it did.

From March 1, 1956 when Ker & Co., Ltd. filed a petition for review in the Court of Tax Appeals contesting
the legality of the assessments in question, until the termination of its appeal in the Supreme Court, the
Commissioner of Internal Revenue was prevented, as recognized in this Court's ruling in Ledesma, et al.
v. Court of Tax Appeals, 10 from filing an ordinary action in the Court of First Instance to collect the tax.
Besides, to do so would be to violate the judicial policy of avoiding multiplicity of suits and the rule on lis
pendens. 11

It would be interesting to note that when the Commissioner of Internal Revenue issued the final deficiency
assessments on January 5, 1954, he had already lost, by prescription, the right to collect the tax (except
that for 1950) by the summary method of warrant of distraint and levy. Ker & Co., Ltd. immediately
thereafter requested suspension of the collection of the tax without penalty incident to late payment
pending the filing of a memorandum in support of its views. As requested, no tax was collected. On May
22, 1954 the projected memorandum was filed, but as of that date the Commissioner's right to collect by
warrant of distraint and levy the deficiency tax for 1950 had already prescribed. So much so, that on
March 1, 1956 when Ker & Co., Ltd. filed a petition for review in the Court of Tax Appeals, the
Commissioner of Internal Revenue had but one remedy left to collect the tax, that is, by judicial
action. 12 However, as stated, an independent ordinary action in the Court of First Instance was not
available to the Commissioner pursuant to Our ruling in Ledesma, et al. v. Court of Tax Appeals, supra, in
view of the pendency of the taxpayer's petition for review in the Court of Tax Appeals. Precisely he
urgently filed a motion to dismiss the taxpayer's petition for review with a view to terminating therein the
proceedings in the shortest possible time in order that he could file a collection case in the Court of First
Instance before his right to do so is cut off by the passage of time. As moved, the Tax Court dismissed the
case and Ker & Co., Ltd. appealed to the Supreme Court. By the time the Supreme Court affirmed the
order of dismissal of the Court of Tax Appeals in L-12396 on January 31, 1962 more than five years had
elapsed since the final assessments were made on January 5, 1954. Thereafter, the Commissioner of
Internal Revenue demanded extra-judicially the payment of the deficiency tax in question and in reply the
taxpayer, by its letter dated March 28, 1962, advised the Commissioner of Internal Revenue that the right
to collect the tax has prescribed pursuant to Section 332 (c) of the Tax Code.1awphl.nt

Thus, did the taxpayer produce the effect of temporarily staying the hands of the Commissioner of Internal
Revenue simply through a choice of remedy. And, if We were to sustain the taxpayer's stand, We would
be encouraging taxpayers to delay the payment of taxes in the hope of ultimately avoiding the same.

Under the circumstances, the Commissioner of Internal Revenue was in effect prohibited from collecting
the tax in question. This being so, the provisions of Section 333 of the Tax Code will apply.

Fourth Issue

The Republic of the Philippines maintains that the delinquency interest on the deficiency income tax for
1948, 1949 and 1950 accrued and should commence from the date of the assessments as shown in the
assessment notices, pursuant to Section 51(e) of the Tax Code, instead of from the date the complaint
was filed as determined in the decision appealed from.

Section 51 (e) of the Tax Code states:

SEC. 51(e). Surcharge and interest in case of delinquency.To any sum or sums due and unpaid
after the dates prescribed in subsections (b), (c) and (d) for the payment of the same, there shall
be added the sum of five per centum on the amount of tax unpaid and interest at the rate of one
per centum a month upon said tax from the time the same became due, except from the estates
of insane, deceased, or insolvent persons. (emphasis supplied)

Exhibit "F" the letter of assessment shows that the deficiency income tax for 1948 and 1949
became due on March 15, 1953 and that for 1950 accrued on February 15, 1954 in accordance with
Section 51(d) of the Tax Code. Since the tax in question remained unpaid, delinquency interest accrued
and became due starting from said due dates. The decision appealed from should therefore be modified
accordingly.

WHEREFORE, the decision appealed from is affirmed with the modification that the delinquency interest
at the rate of 1% per month shall be computed from March 15, 1953 for the deficiency income tax for
1948 and 1949 and from February 15, 1954 for the deficiency income tax for 1950. With costs against Ker
& Co., Ltd. So ordered.

[G.R. Nos. L-9738 & L-9771. May 31, 1957.]

BLAS GUTIERREZ, and MARIA MORALES, Petitioners, v. HONORABLE COURT OF TAX APPEALS,
and THE COLLECTOR OF INTERNAL REVENUE, Respondents.

COLLECTOR OF INTERNAL REVENUE, Petitioner, v. BLAS GUTIERREZ, MARIA MORALES, and

COURT OF TAX APPEALS, Respondents.

Rafael Morales, for Petitioners.

Assistant Solicitor General Ramon L. Avancea and Solicitor Jose P. Alejandro for Respondents.

SYLLABUS

1. EXPROPRIATION; INCOME FROM SOURCES WITHIN THE PHILIPPINES, WHERE TAXABLE.

The compensation or income derived from the expropriation of property located in the Philippines is an
income from sources within the Philippines and subject to the taxing jurisdiction of the place.

2. ID.; ID.; TRANSFER OF PROPERTY EQUIVALENT TO SALE; PROCEEDS SUBJECT TO INCOME

TAX AS CAPITAL GAIN. The acquisition by the Government of private properties through the exercise
of the power of eminent domain, said properties being justly compensated, is embraced within the
meaning of the term "sale" or "disposition of property," and the proceeds derived therefrom is subject to
income tax as capital gain pursuant to the provisions of Section 37-(a)-(5) in relation to Section 29-(a) of
the Tax Code.

3. ID.; ID.; ID.; ID.; INCOME NOT INCLUDED IN THE TAX EXEMPTIONS SPECIFIED IN THE MILITARY
BASES AGREEMENT. The taxpayers maintain that since, at the request of the U. S. Government, the
proceeding to expropriate the land in question necessary for the expansion of the Clark Field Air Base
was instituted by the Philippine Government as part of its obligation under the Military Bases Agreement,
the compensation accruing therefrom must necessarily fall under the exemption provided for by Section
29-(b)-6 of the Tax Code. This stand is untenable because while the condemnation or expropriation of
properties wad provided for in the Agreement, the exemption from tax of the compensation to be paid for
the expropriation of privately owned lands located in the Philippines was not given any attention, and the
internal revenue exemptions specifically taken care of by said agreement applies only to members of the
U. S. Armed Forces serving in the Philippines and U. S. nationals working in these Islands in connection
with the construction, maintenance, operation and defense of said bases.

4. ID.; TRANSFER OF OWNERSHIP; WHEN TITLE PASSES TO EXPROPRIATOR. In condemnation

proceedings, title to the land does not pass to the plaintiff until the indemnity is paid (Calvo v. Zandueta,
49 Phil. 605), and notwithstanding possession acquired by the expropriator, title does not actually pass to
him until payment of the amount adjudged by the Court and the registration of the judgment with the
Register of Deeds (See Visayan Refining Company v. Camus Et. Al., 40 Phil. 550; Metropolitan Water
District v. De los Angeles, 55 Phil. 783).

5. ID.; GAIN OR LOSS FROM SALE, HOW DETERMINED. The property in question was adjudicated
to the owner by court order on March 23, 1929, and in accordance with Section 35 (b) of the Tax Code,
only the fair market price or value of the property as of the date of the acquisition thereof should be
considered in determining the gain or loss sustained by the property owner when the property was
disposed, without taking into account the purchasing power of the currency used in the transaction. The
value of the property at the time of its acquisition by the owner was P28,291.78 and the same was
compensated with P94,305.75 when it was expropriated. The resulting difference is not merely nominal
but a capital gain and should be correspondingly taxed.

6. TAXATION; ASSESSMENT MADE WITHIN THE PRESCRIPTIVE PERIOD, HOW ENFORCED.

When the assessment for deficiency income tax was made by the Collector of Internal Revenue within the
3-year prescriptive period provided for by Section 51-d of the Tax Code, the same could be collected
either by the administrative methods of distraint and levy or by judicial action.

7. COURT OF TAX APPEALS; REVIEW OF DECISIONS OF; ONLY QUESTIONS OF LAW MAY BE
CONSIDERED. The question of fraud is a question of fact which is for the Court of Tax Appeals to
determine. It is already settled in this jurisdiction that in passing upon petitions to review decisions of the
Court of Tax Appeals, only questions of law may be considered.

DECISION

FELIX, J.:

Maria Morales was the registered owner of an agricultural land designated as Lot No. 724-C of the
cadastral survey of Mabalacat, Pampanga. The Republic of the Philippines, at the request of the U.S.
Government and pursuant to the terms of the Military Bases Agreement of March 14, 1947, instituted
condemnation proceedings in the Court of First Instance of Pampanga, docketed as Civil Case No. 148,
for the purpose of expropriating the lands owned by Maria Morales and others needed for the expansion
of the Clark Field Air Base, which project is necessary for the mutual protection and defense of the
Philippines and the United States. Blas Gutirrez was also made a party defendant in said Civil Case No.
148 for being the husband of the landowner Maria Morales. At the commencement of the action, the
Republic of the Philippines, therein plaintiff, deposited with the Clerk of the Court of First Instance of
Pampanga the sum of P156,960, which was provisionally fixed as the value of the lands sought to be
expropriated, in order that it could take immediate possession of the same.

On January 27, 1949, upon order of the Court, the sum of P34,580 (PNB Check 721520-Exh. R) was paid
by the Provincial Treasurer of Pampanga to Maria Morales out of the original deposit of P156,960 made
by therein plaintiff. After due hearing, the Court of First Instance of Pampanga rendered decision dated
November 29, 1949, wherein it fixed as just compensation P2,500 per hectare for some of the lots and
P3,000 per hectare for the others, which values were based on the reports of the Commission on
Appraisal whose members were chosen by both parties and by the Court, which took into consideration
the different conditions affecting the value of the condemned properties in making their findings.

In virtue of said decision, defendant Maria Morales was to receive the amount of P94,305.75 as
compensation for Lot No. 724-C which was one of the expropriated lands. But the Court disapproved
defendants claims for consequential damages considering them amply compensated by the price
awarded to their said properties. In order to avoid further litigation expenses and delay inherent to an
appeal, the parties entered into a compromise agreement on January 7, 1950, modifying in part the
decision rendered by the Court in the sense of fixing the compensation for all the lands, without
distinction, at P2,500 per hectare, which compromise agreement was approved by the Court on January
9, 1950. This reduction of the price to P2,500 per hectare did not affect Lot No. 724-C of defendant Maria
Morales. Sometime in 1950, the spouses Blas Gutirrez and Maria Morales received the sum of
P59,785.75 representing the balance remaining in their favor after deducting the amount of P34,580
already withdrawn from the compensation due to them.

In a notice of assessment dated January 28, 1953, the Collector of Internal Revenue demanded of the
petitioners the payment of P8,481 as alleged deficiency income tax for the year 1950, inclusive of
surcharges and penalties. On March 5, 1953, counsel for petitioners sent a letter to the Collector of
Internal Revenue requesting the latter to withdraw and reconsider said assessment, contending among
others, that the compensation paid to the spouses by the Government for their property was not "income
derived from sale, dealing or disposition of property" referred to by section 29 of the Tax Code and
therefore not taxable; that even granting that condemnation of private properties is embraced within the
meaning of the word "sale" or "dealing", the compensation received by the taxpayers must be considered
as income for 1948 and not for 1950 since the amount deposited and paid in 1948 represented more than
25 per cent of the total compensation awarded by the court; that the assessment was made after the
lapse of the 3-year prescriptive period provided for in section 51-(d) of the Tax Code; that the
compensation in question should be exempted from taxation by reason of the provision of section 29 (b)-6
of the Tax Code; that the spouses Blas Gutirrez and Maria Morales did not realize any profit in said
transaction as there were improvements on the land already made and that the purchasing value of the
peso at the time of the expropriation proceeding had depreciated if compared to the value of the pre-war
peso; and that penalties should not be imposed on said spouses because granting that the assessment
was correct, the omission of the compensation awarded therein was due to an honest mistake.

This request was denied by the Collector of Internal Revenue, in a letter dated April 26, 1954, refuting
point by point the arguments advanced by the taxpayers. The record further shows that a warrant of
distraint and levy was issued by the Collector of Internal Revenue on the properties of Mr. & Mrs. Blas
Gutirrez found in Mabalacat, Pampanga, and a notice of tax lien was duly registered with the Register of
Deeds of San Fernando, Pampanga, on the same date. Counsel for the spouses then requested that the
matter be referred to the Conference Staff of the Bureau of Internal Revenue for proper hearing, to which
the Collector answered in a letter dated December 24, 1954, stating that the request would be granted
upon compliance by the taxpayers with the requirements of Department of Finance Order No. 213, i.e.,
the filing of a verified petition to that effect and that one-half of the total assessment should be guaranteed
by a bond, provided that the taxpayers would agree in writing to the suspension of the running of the
period of prescription.

The taxpayers then served notice that the case would be brought on appeal to the Court of Tax Appeals,
which they did by filing a petition with said Court to review the assessment made by the Collector of
Internal Revenue, docketed as C.T.A. Case No. 65. In that instance, it was prayed that the Court render
judgment declaring that the taking of petitioners land by the Government was not a sale or dealing in
property; that the amount paid to petitioners as just compensation for their property should not be
diminished by way of taxation; that said compensation was by law exempt from taxation and that the
period to collect the income taxes by summary methods had prescribed; that respondent Collector of
Internal Revenue be enjoined from carrying out further steps to collect from petitioners by summary
methods the said taxes which they alleged to be erroneously assessed and for such other remedies
which would serve the ends of law and justice.

The Solicitor General, in representation of the respondent Collector of Internal Revenue, filed an answer
on February 11, 1955, admitting some of the allegations of petitioners and denying some of them, and as
special defenses, he advanced the contention that the Court had no jurisdiction to entertain the petition;
that the profit realized by petitioners from the sale of the land in question was subject to income tax; that
the full compensation received by petitioners should be included in the income received in 1950, same
having been paid in 1950 by the Government; that under the Bases Agreement only residents of the
United States are exempt from the payment of income tax in the Philippines in respects to profits derived
under a contract with the U.S. Government in connection with the construction, maintenance and
operation of the bases; that in the determination of the gain or loss from the sale of property acquired on
or after March 1, 1913, the cost of acquisition and the selling price shall be taken into account without
qualification as to the purchasing power of the currency; that the imposition of the 50 per cent surcharge
was in accordance with the Tax Code; that the Collector of Internal Revenue was empowered to collect
petitioners deficiency income tax; and prayed that the petition for review be dismissed; petitioners be
ordered to pay the amount of P8,481 plus the delinquency penalty of 5 per cent for late payment and
monthly interest at the rate of 1 per cent from April 1, 1953, up to the date of actual payment and for such
other relief that may be deemed just and equitable in the premises.

After due hearing and after the parties had filed their respective memoranda, the Court of Tax Appeals
rendered decision on August 31, 1955, holding that it had jurisdiction to hear and determine the case; that
the gain derived by the petitioners from the expropriation of their property constituted taxable income and
as such was capital gain; and that said gain was taxable in 1950 when it was realized. It was also found
by said Court that the evidence did not warrant the imposition of the 50 per cent surcharge because the
petitioners acted in good faith and without intent to defraud the Government when they failed to include in
their gross income the proceeds they received from the expropriated property, and, therefore, modified
the assessment made by respondent, requiring petitioners to pay only the sum of P5,654. From this
decision, both parties appealed to this Court and in this instance, petitioners Blas Gutirrez and Maria
Morales, as appellants in G. R. No. L-9738, made the following assignments of error:chanrob1es virtual
1aw library
1. That the Court of Tax Appeals erred in holding that, for income tax purposes, income from expropriation
should be deemed as income from sale, any profit derived therefrom is subject to income tax as capital
gain pursuant to the provisions of Section 37-(a)-(5) in relation to Section 29-(a) of the Tax Code;

2. That the Court of Tax Appeals erred in not holding that, under the particular circumstances in which the
property of the appellants was taken by the Philippine Government, the amount paid to them as just
compensation is exempt from income tax pursuant to Section 29- (b)-(6) of the Tax Code;

3. That the Court of Tax Appeals erred in not holding that the respondent Collector is definitely barred by
the Statute of Limitations from collecting the deficiency income tax in question, whether administratively
thru summary methods, or judicially thru the ordinary court procedures;

4. That the Court of Tax Appeals erred is not holding that the capital gain found by the respondent
Collector as have been derived by the petitioners-appellants from the expropriation of their property is
merely nominal not subject to income tax, and in not holding that the pronouncement of the court in the
expropriation case in this respect is binding upon the respondent Collector of Internal Revenue; and

5. That the Court of Tax Appeals erred in not pronouncing upon the pleadings of the parties that the
petitioners-appellants did not derive any capital gain from the expropriation of their property.

The appeal of the respondent Collector of Internal Revenue was docketed in this Court as G. R. No. L-
9771, and in this case the Solicitor General ascribed to the lower court the commission of the following
error:chanrob1es virtual 1aw library

That the Court of Tax Appeals erred in holding that respondents are not subject to the payment of the 50
per cent surcharge in spite of the fact that the latters income tax return for the year 1950 is false and/or
fraudulent.

The facts just narrated are not disputed and the controversy only arose from the assertion by the
Collector of Internal Revenue that petitioners-appellants failed to include from their gross income, in filing
their income tax return for 1950, the amount of P94,305.75 which they had received as compensation for
their land taken by the Government by expropriation proceedings. It is the contention of respondent
Collector of Internal Revenue that such transfer of property, for taxation purposes, is "sale" and that the
income derived therefrom is taxable. The pertinent provisions of the National Internal Revenue Code
applicable to the instant cases are the following:chanrob1es virtual 1aw library

SEC. 29. GROSS INCOME. (a) General definition. "Gross income" includes gains, profits, and
income derived from salaries, wages, or compensation for personal service of whatever kind and in
whatever form paid, or from professions, vocations, trades, businesses, commerce, sales or dealings in
property, whether real or personal, growing out of ownership or use of or interest in such property; also
from interests, rents, dividends, securities, or the transactions of any business carried on for gain or profit,
or gains, profits, and income derived from any source whatsoever.

SEC. 37. INCOME FROM SOURCES WITHIN THE PHILIPPINES.

(a) Gross income from sources within the Philippines. The following items of gross income shall be
treated as gross income from sources within the Philippines:chanrob1es virtual 1aw library

x x x

(5) SALE OF REAL PROPERTY. Gains profits, and income from the sale of real property located in the
Philippines;

x x x
There is no question that the property expropriated being located in the Philippines, compensation or
income derived therefrom ordinarily has to be considered as income from sources within the Philippines
and subject to the taxing jurisdiction of the Philippines. However, it is to be remembered that said property
was acquired by the Government through condemnation proceedings and appellants stand is, therefore,
that same cannot be considered as sale as said acquisition was by force, there being practically no
meeting of the minds between the parties. Consequently, the taxpayers contend, this kind of transfer of
ownership must perforce be distinguished from sale, for the purpose of Section 29-(a) of the Tax Code.
But the authorities in the United States on the matter sustain the view expressed by the Collector of
Internal Revenue, for it is held that:jgc:chanrobles.com.ph

"The transfer of property through condemnation proceedings is a sale or exchange within the meaning of
section 117 (a) of the 1936 Revenue Act and profit from the transaction constitutes capital gain" (1942.
Com. Int. Revenue v. Kieselbach (CCA 3) 127 F. (24) 359). "The taking of property by condemnation and
the payment of just compensation therefore is a sale or exchange within the meaning of section 117 (a)
of the Revenue Act of 1936, and profits from that transaction is capital gain" (David S. Brown v. Comm.,
1942, 42 BTA 139).

The proposition that income from expropriation proceedings is income from sales or exchange and
therefore taxable has been likewise upheld in the case of Lapham v. U.S. (1949, 40 AFTR 1370) and in
Kneipp v. U.S. (1949, 85 F Suppl. 902). It appears then that the acquisition by the Government of private
properties through the exercise of the power of eminent domain, said properties being JUSTLY
compensated, is embraced within the meaning of the term "sale" or "disposition of property", and the
proceeds from said transaction clearly fall within the definition of gross income laid down by Section 29 of
the Tax Code of the Philippines.

Petitioners-appellants also averred that granting that the compensation thus received is "income", same is
exempted under Section 29-(b)-6 of the Tax Code, which reads as follows:chanrob1es virtual 1aw library

SEC. 29. GROSS INCOME.

x x x

(b) EXCLUSIONS FROM GROSS INCOME. The following items shall not be included in gross income
and shall be exempt from taxation under this Title:chanrob1es virtual 1aw library

x x x

(6) Income exempt under treaty. Income of any kind, to the extent required by any treaty obligation
binding upon the Government of the Philippines.

The taxpayers maintain that since, at the request of the U.S. Government, the proceeding to expropriate
the land in question necessary for the expansion of the Clark Field Air Base was instituted by the
Philippine Government as part of its obligation under the Military Bases Agreement, the compensation
accruing therefrom must necessarily fall under the exemption provided for by Section 29-(b)-6 of the Tax
Code. We find this stand untenable, for the same Military Bases Agreement cited by appellants contains
the following:jgc:chanrobles.com.ph

"ARTICLE XXII

"CONDEMNATION OR EXPROPRIATION

"1. Whenever it is necessary to acquire by condemnation or expropriation proceedings real property

belonging to private persons, association, or corporations located in bases named in Annex A and Annex
B in order to carry out the purposes of this agreement, the Philippines will institute and prosecute such
condemnation proceedings in accordance with the laws of the Philippines. The United States agrees to
reimburse the Philippines for all the reasonable expanses, damages, and costs thereby incurred,
including the value of the property as determined by the Court. In addition, subject to mutual agreements
of the two governments, the United States shall reimburse the Philippines for the reasonable costs of
transportation and removal of any occupants displaced or ejected by reason of the condemnation or
expropriation"

"ARTICLE XII

"INTERNAL REVENUE EXEMPTION

"(1) No member of the United States Armed Forces except Filipino citizens, serving in the Philippines in
connection with the bases and residing in the Philippines by reason only of such service, or his
dependents, shall be liable to pay income tax in the Philippines except in respect of income derived from
Philippine sources.

"(2) No national of the United States serving in the Philippines in connection with the construction,
maintenance, operation or defense of the bases and residing in the Philippines by reason only of such
employment, or his spouse and minor children and dependent parents of either spouse, shall be liable to
pay income tax in the Philippines except in respect of income derived from Philippine sources or sources
other than the United States.

"(3) No person referred to in paragraphs 1 and 2 of this said Article shall be liable to pay the government
or local authorities of the Philippines any poll or residence tax, or any imports or experts duties, or any
other tax on personal property imported for his own use provided, that private owned vehicles shall be
subject to payment of the following only: when certified as being used for military purposes by appropriate
United States Authorities, the normal license plate fee; otherwise, the normal license and registration
fees.

"(4) No national of the United States, or corporation organized under the laws of the United States, shall
be liable to pay income tax in the Philippines in respect of any profits derived under a contract made in
the United States with the government of the United States in connection with the construction,
maintenance, operation and defense of the bases, or any tax in the nature of a license in respect of any
service of works for the United States in connection with the construction, maintenance, operation and
defense of the bases.

x x x

The facts brought about by the aforementioned terms of the said treaty need no further elucidation. It is
unmistakable that although the condemnation or expropriation of properties was provided for, the
exemption from tax of the compensation to be paid for the expropriation of privately owned lands located
in the Philippines was not given any attention, and the internal revenue exemptions specifically taken care
of by said Agreement applies only to members of the U.S. Armed Forces serving in the Philippines and
U.S. nationals working in these Islands in connection with the construction, maintenance, operation and
defense of said bases.

Anent appellant taxpayers allegation that the respondent Collector of Internal Revenue was barred from
collecting the deficiency income tax assessment, it having been made beyond the 3-year period
prescribed by section 51-(d) of the Tax Code, We have this much to say. Although it is true that by order of
the Court of First Instance of Pampanga, the amount of P34,580 out of the original deposit made by the
Government was withdrawn in favor of appellants on January 27, 1949, the same cannot be considered
as income for said year but for 1950 when the balance of P59,785.75 was actually received. Before that
date (1950), appellant taxpayers were still the owners of their whole property that was subject of
condemnation proceedings and said amount of P34,580 was not paid to, but merely deposited in court
and withdrawn by them. Therefore, the payment of the value of Maria Morales Lot 724-C was actually
made by the Republic of the Philippines in 1950 and it has to be credited as income for 1950 for it was
then when title over said property passed to the Republic of the Philippines. Appellant tax payers cannot
say that the title over the property expropriated already passed to the Government when the latter was
placed in possession thereof, for in condemnation proceedings, title to the land does not pass to the
plaintiff until the indemnity is paid (Calvo v. Zandueta, 49 Phil. 605), and notwithstanding possession
acquired by the expropriator, title does not actually pass to him until payment of the amount adjudged by
the Court and the registration of the judgment with the Register of Deeds (See Visayan Refining
Company v. Camus Et. Al., 40 Phil. 550; Metropolitan Water District v. De los Angeles, 55 Phil. 783). Now,
if said amount should have been reported as income for 1950 in the return that must have been filed on or
before March 1, 1951, the assessment made by the Collector on January 28, 1953, is still within the 3-
year prescriptive period provided for by Section 51-d and could, therefore, be collected either by the
administrative methods of distraint and levy or by judicial action (See Collector of Internal Revenue v. A.P.
Reyes Et. Al., 100 Phil., 822; Collector of Internal Revenue v. Zulueta Et. Al., 100 Phil., 872; and
Sambrano v. Court of Tax Appeals Et. Al., supra, p. 1).

As to appellant taxpayers proposition that the profit derived by them from the expropriation of their
property is merely nominal and not subject to income tax, We find Section 35 of the Tax Code illuminating.
Said section reads as follows:jgc:chanrobles.com.ph

"SEC. 35. DETERMINATION OF GAIN OR LOSS FROM THE SALE OR OTHER DISPOSITION OF
PROPERTY. The gain derived or loss sustained from the sale or other disposition of property, real or
personal, or mixed, shall be determined in accordance with the following schedule:chanrob1es virtual 1aw
library

(a)x x x"

(b) In the case of property acquired on or after March first, nineteen hundred and thirteen, the cost thereof
if such property was acquired by purchase or the fair market price or value as of the date of the
acquisition if the same was acquired by gratuitous title.

x x x

The records show that the property in question was adjudicated to Maria Morales by order of the Court of
First Instance of Pampanga on March 23, 1929, and in accordance with the aforequoted section of the
National Internal Revenue Code, only the fair market price or value of the property as of the date of the
acquisition thereof should be considered in determining the gain or loss sustained by the property owner
when the property was disposed, without taking into account the purchasing power of the currency used
in the transaction. The records placed the value of the said property at the time of its acquisition by
appellant Maria Morales was P28,291.73 and it is a fact that same was compensated with P94,305.75
when it was expropriated. The resulting difference is surely a capital gain and should be correspondingly
taxed.

As to the only question raised by appellant Collector of Internal Revenue in case L-9771, assailing the
lower Courts order exonerating petitioners from the 50 per cent surcharge imposed on the latter, on the
ground that the taxpayers income tax return for 1950 is false and/or fraudulent, it should be noted that the
Court of Tax Appeals found that the evidence did not warrant the imposition of said surcharge because
the petitioners therein acted in good faith and without intent to defraud the Government.

"The question of fraud is a question of fact which frequently requires a nicely balanced judgment to
answer. All the facts and circumstances surrounding the conduct of the taxpayers business and all the
facts incident to the preparation of the alleged fraudulent return should be considered." (Mertens, Federal
Income Taxation, Chapter 55).
The question of fraud being a question of fact and the lower court having made the finding that "the
evidence of this case does not warrant the imposition of the 50 per cent surcharge", We are constrained
to refrain from giving any consideration to the question raised by the Solicitor General, for it is already
settled in this jurisdiction that in passing upon petitions to review decisions of the Court of Tax Appeals,
We have to confine ourselves to questions of law.

Wherefore, the decision appealed from by both parties is hereby affirmed, without pronouncement as to
costs. It is so ordered.

G.R. No. 88291 June 8, 1993

ERNESTO M. MACEDA, petitioner,

vs.
HON. CATALINO MACARAIG, JR., in his capacity as Executive Secretary, Office of the President,
HON. VICENTE JAYME, ETC., ET AL., respondents.

Angara, Abello, Concepcion & Cruz for respondent Pilipinas Shell Petroleum Corporation.

Siguion Reyna, Montecillo & Ongsiako for Caltex.

NOCON, J.:

Just like lightning which does strike the same place twice in some instances, this matter of indirect tax
exemption of the private respondent National Power Corporation (NPC) is brought to this Court a second
time. Unfazed by the Decision We promulgated on May 31, 1991 1 petitioner Ernesto Maceda asks this
Court to reconsider said Decision. Lest We be criticized for denying due process to the petitioner. We
have decided to take a second look at the issues. In the process, a hearing was held on July 9, 1992
where all parties presented their respective arguments. Etched in this Court's mind are the paradoxical
claims by both petitioner and private respondents that their respective positions are for the benefit of the
Filipino people.

A Chronological review of the relevant NPC laws, specially with respect to its tax exemption provisions, at
the risk of being repetitious is, therefore, in order.

On November 3, 1936, Commonwealth Act No. 120 was enacted creating the National Power
Corporation, a public corporation, mainly to develop hydraulic power from all water sources in the
Philippines. 2 The sum of P250,000.00 was appropriated out of the funds in the Philippine Treasury for the
purpose of organizing the NPC and conducting its preliminary work. 3 The main source of funds for the
NPC was the flotation of bonds in the capital markets 4 and these bonds

. . . issued under the authority of this Act shall be exempt from the payment of all taxes by
the Commonwealth of the Philippines, or by any authority, branch, division or political
subdivision thereof and subject to the provisions of the Act of Congress, approved March
24, 1934, otherwise known as the Tydings McDuffle Law, which facts shall be stated upon
the face of said bonds. . . . . 5

On June 24, 1938, C.A. No. 344 was enacted increasing to P550,000.00 the funds needed for the initial
operations of the NPC and reiterating the provision of the flotation of bonds as soon as the first
construction of any hydraulic power project was to be decided by the NPC Board. 6 The provision on tax
exemption in relation to the issuance of the NPC bonds was neither amended nor deleted.

On September 30, 1939, C.A. No. 495 was enacted removing the provision on the payment of the bond's
principal and interest in "gold coins" but adding that payment could be made in United States
dollars. 7 The provision on tax exemption in relation to the issuance of the NPC bonds was neither
amended nor deleted.

On June 4, 1949, Republic Act No. 357 was enacted authorizing the President of the Philippines to
guarantee, absolutely and unconditionally, as primary obligor, the payment of any and all NPC loans. 8 He
was also authorized to contract on behalf of the NPC with the International Bank for Reconstruction and
Development (IBRD) for NPC loans for the accomplishment of NPC's corporate objectives 9 and for the
reconstruction and development of the economy of the country. 10 It was expressly stated that:

Any such loan or loans shall be exempt from taxes, duties, fees, imposts, charges,
contributions and restrictions of the Republic of the Philippines, its provinces, cities and
municipalities. 11

On the same date, R.A. No. 358 was enacted expressly authorizing the NPC, for the first time, to incur
other types of indebtedness, aside from indebtedness incurred by flotation of bonds. 12 As to the pertinent
tax exemption provision, the law stated as follows:

To facilitate payment of its indebtedness, the National Power Corporation shall be exempt
from all taxes, duties, fees, imposts, charges, and restrictions of the Republic of the
Philippines, its provinces, cities and municipalities. 13

On July 10, 1952, R.A. No. 813 was enacted amending R.A. No. 357 in that, aside from the IBRD, the
President of the Philippines was authorized to negotiate, contract and guarantee loans with the Export-
Import Bank of of Washigton, D.C., U.S.A., or any other international financial institution. 14 The tax
provision for repayment of these loans, as stated in R.A. No. 357, was not amended.

On June 2, 1954, R.A. No. 987 was enacted specifically to withdraw NPC's tax exemption for real estate
taxes. As enacted, the law states as follows:

To facilitate payment of its indebtedness, the National Power Corporation shall be exempt
from all taxes, except real property tax, and from all duties, fees, imposts, charges, and
restrictions of the Republic of the Philippines, its provinces, cities, and municipalities. 15

On September 8, 1955, R.A. No. 1397 was enacted directing that the NPC projects to be funded by the
increased indebtedness 16 should bear the National Economic Council's stamp of approval. The tax
exemption provision related to the payment of this total indebtedness was not amended nor deleted.

On June 13, 1958, R.A. No. 2055 was enacted increasing the total amount of foreign loans NPC was
authorized to incur to US$100,000,000.00 from the US$50,000,000.00 ceiling in R.A. No. 357. 17 The tax
provision related to the repayment of these loans was not amended nor deleted.

On June 13, 1958, R.A. No. 2058 was enacting fixing the corporate life of NPC to December 31,
2000. 18 All laws or provisions of laws and executive orders contrary to said R.A. No. 2058 were expressly
repealed. 19

On June 18, 1960, R.A. No 2641 was enacted converting the NPC from a public corporation into a stock
corporation with an authorized capital stock of P100,000,000.00 divided into 1,000.000 shares having a
 20
par value of P100.00 each, with said capital stock wholly subscribed to by the Government. No tax
exemption was incorporated in said Act.

On June 17, 1961, R.A. No. 3043 was enacted increasing the above-mentioned authorized capital stock
to P250,000,000.00 with the increase to be wholly subscribed by the Government. 21 No tax provision was
incorporated in said Act.

On June 17, 1967, R.A. No 4897 was enacted. NPC's capital stock was increased again to
P300,000,000.00, the increase to be wholly subscribed by the Government. No tax provision was
incorporated in said Act. 22

On September 10, 1971, R.A. No. 6395 was enacted revising the charter of the NPC, C.A. No. 120, as
amended. Declared as primary objectives of the nation were:

Declaration of Policy. Congress hereby declares that (1) the comprehensive

development, utilization and conservation of Philippine water resources for all beneficial
uses, including power generation, and (2) the total electrification of the Philippines
through the development of power from all sources to meet the needs of industrial
development and dispersal and the needs of rural electrification are primary objectives of
the nation which shall be pursued coordinately and supported by all instrumentalities and
agencies of the government, including the financial institutions. 23

Section 4 of C.A. No. 120, was renumbered as Section 8, and divided into sections 8 (a) (Authority to
incur Domestic Indebtedness) and Section 8 (b) (Authority to Incur Foreign Loans).

As to the issuance of bonds by the NPC, Paragraph No. 3 of Section 8(a), states as follows:

The bonds issued under the authority of this subsection shall be exempt from the
payment of all taxes by the Republic of the Philippines, or by any authority, branch,
division or political subdivision thereof which facts shall be stated upon the face of said
bonds. . . . 24

As to the foreign loans the NPC was authorized to contract, Paragraph No. 5, Section 8(b), states as
follows:

The loans, credits and indebtedness contracted under this subsection and the payment of
the principal, interest and other charges thereon, as well as the importation of machinery,
equipment, materials and supplies by the Corporation, paid from the proceeds of any
loan, credit or indebtedeness incurred under this Act, shall also be exempt from all taxes,
fees, imposts, other charges and restrictions, including import restrictions, by the
Republic of the Philippines, or any of its agencies and political subdivisions. 25

A new section was added to the charter, now known as Section 13, R.A. No. 6395, which declares the
non-profit character and tax exemptions of NPC as follows:

The Corporation shall be non-profit and shall devote all its returns from its capital
investment, as well as excess revenues from its operation, for expansion. To enable the
Corporation to pay its indebtedness and obligations and in furtherance and effective
implementation of the policy enunciated in Section one of this Act, the Corporation is
hereby declared exempt:

(a) From the payment of all taxes, duties, fees, imposts, charges costs and service fees
in any court or administrative proceedings in which it may be a party, restrictions and
 duties to the Republic of the Philippines, its provinces, cities, and municipalities and other
government agencies and instrumentalities;

(b) From all income taxes, franchise taxes and realty taxes to be paid to the National
Government, its provinces, cities, municipalities and other government agencies and
instrumentalities;

(c) From all import duties, compensating taxes and advanced sales tax, and wharfage
fees on import of foreign goods required for its operations and projects; and

(d) From all taxes, duties, fees, imposts and all other charges its provinces, cities,
municipalities and other government agencies and instrumentalities, on all petroleum
products used by the Corporation in the generation, transmission, utilization, and sale of
electric power. 26

On November 7, 1972, Presidential Decree No. 40 was issued declaring that the
electrification of the entire country was one of the primary concerns of the country. And in
connection with this, it was specifically stated that:

The setting up of transmission line grids and the construction of associated generation
facilities in Luzon, Mindanao and major islands of the country, including the Visayas, shall
be the responsibility of the National Power Corporation (NPC) as the authorized
implementing agency of the State. 27

xxx xxx xxx

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

On January 22, 1974, P.D. No. 380 was issued giving extra powers to the NPC to enable it to fulfill its role
under aforesaid P.D. No. 40. Its authorized capital stock was raised to P2,000,000,000.00, 29 its total
domestic indebtedness was pegged at a maximum of P3,000,000,000.00 at any one time, 30 and the NPC
was authorized to borrow a total of US$1,000,000,000.00 31 in foreign loans.

The relevant tax exemption provision for these foreign loans states as follows:

The loans, credits and indebtedness contracted under this subsection and the payment of
the principal, interest and other charges thereon, as well as the importation of machinery,
equipment, materials, supplies and services, by the Corporation, paid from the proceeds
of any loan, credit or indebtedness incurred under this Act, shall also be exempt from all
direct and indirect taxes, fees, imposts, other charges and restrictions, including import
restrictions previously and presently imposed, and to be imposed by the Republic of the
Philippines, or any of its agencies and political subdivisions. 32(Emphasis supplied)

Section 13(a) and 13(d) of R.A. No 6395 were amended to read as follows:

(a) From the payment of all taxes, duties, fees, imposts, charges and restrictions to the
Republic of the Philippines, its provinces, cities, municipalities and other government
agencies and instrumentalities including the taxes, duties, fees, imposts and other
charges provided for under the Tariff and Customs Code of the Philippines, Republic Act
Numbered Nineteen Hundred Thirty-Seven, as amended, and as further amended by
Presidential Decree No. 34 dated October 27, 1972, and Presidential Decree No. 69,
 dated November 24, 1972, and costs and service fees in any court or administrative
proceedings in which it may be a party;

xxx xxx xxx

(d) From all taxes, duties, fees, imposts, and all other charges imposed directly or
indirectly by the Republic of the Philippines, its 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. 33 (Emphasis supplied)

On February 26, 1970, P.D. No. 395 was issued removing certain restrictions in the NPC's sale of
electricity to its different customers. 34 No tax exemption provision was amended, deleted or added.

On July 31, 1975, P.D. No. 758 was issued directing that P200,000,000.00 would be appropriated
annually to cover the unpaid subscription of the Government in the NPC authorized capital stock, which
amount would be taken from taxes accruing to the General Funds of the Government, proceeds from
loans, issuance of bonds, treasury bills or notes to be issued by the Secretary of Finance for this
particular purpose. 35

On May 27, 1976 P.D. No. 938 was issued

(I)n view of the accelerated expansion programs for generation and transmission facilities
which includes nuclear power generation, the present capitalization of National Power
Corporation (NPC) and the ceilings for domestic and foreign borrowings are deemed
insufficient; 36

xxx xxx xxx

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

xxx xxx xxx

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

Thus NPC's capital stock was raised to P8,000,000,000.00, 39 the total domestic indebtedness ceiling was
increased to P12,000,000,000.00, 40 the total foreign loan ceiling was raised to
US$4,000,000,000.00 41 and Section 13 of R.A. No. 6395, was amended to read as follows:

The Corporation shall be non-profit and shall devote all its returns from its capital
investment as well as excess revenues from its operation, for expansion. To enable the
Corporation to pay to its indebtedness and obligations and in furtherance and effective
implementation of the policy enunciated in Section one of this Act, the Corporation,
including its subsidiaries, is hereby declared exempt from the payment of all forms of
taxes, duties, fees, imposts as well as costs and service fees including filing fees, appeal
bonds, supersedeas bonds, in any court or administrative proceedings. 42

II
On the other hand, the pertinent tax laws involved in this controversy are P.D. Nos. 882, 1177, 1931 and
Executive Order No. 93 (S'86).

On January 30, 1976, P.D. No. 882 was issued withdrawing the tax exemption of NPC with regard to
imports as follows:

WHEREAS, importations by certain government agencies, including government-owned

or controlled corporation, are exempt from the payment of customs duties and
compensating tax; and

WHEREAS, in order to reduce foreign exchange spending and to protect domestic

industries, it is necessary to restrict and regulate such tax-free importations.

NOW THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue

of the powers vested in me by the Constitution, and do hereby decree and order the
following:

Sec. 1. All importations of any government agency, including government-owned or

controlled corporations which are exempt from the payment of customs duties and
internal revenue taxes, shall be subject to the prior approval of an Inter-Agency
Committee which shall insure compliance with the following conditions:

(a) That no such article of local manufacture are available in sufficient quantity and
comparable quality at reasonable prices;

(b) That the articles to be imported are directly and actually needed and will be used
exclusively by the grantee of the exemption for its operations and projects or in the
conduct of its functions; and

(c) The shipping documents covering the importation are in the name of the grantee to
whom the goods shall be delivered directly by customs authorities.

xxx xxx xxx

Sec. 3. The Committee shall have the power to regulate and control the tax-free
importation of government agencies in accordance with the conditions set forth in Section
1 hereof and the regulations to be promulgated to implement the provisions of this
Decree. Provided, however, That any government agency or government-owned or
controlled corporation, or any local manufacturer or business firm adversely affected by
any decision or ruling of the Inter-Agency Committee may file an appeal with the Office of
the President within ten days from the date of notice thereof. . . . .

xxx xxx xxx

Sec. 6. . . . . Section 13 of Republic Act No. 6395; . . .. and all similar provisions of all
general and special laws and decrees are hereby amended accordingly.

xxx xxx xxx

On July 30, 1977, P.D. 1177 was issued as it was

. . . declared the policy of the State to formulate and implement a National Budget that is
an instrument of national development, reflective of national objectives, strategies and
 plans. The budget shall be supportive of and consistent with the socio-economic
development plan and shall be oriented towards the achievement of explicit objectives
and expected results, to ensure that funds are utilized and operations are conducted
effectively, economically and efficiently. The national budget shall be formulated within a
context of a regionalized government structure and of the totality of revenues and other
receipts, expenditures and borrowings of all levels of government-owned or controlled
corporations. The budget shall likewise be prepared within the context of the national
long-term plan and of a long-term budget program. 43

In line with such policy, the law decreed that

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

The law also declared that

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

On July 11, 1984, most likely due to the economic morass the Government found itself in after the Aquino
assassination, P.D. No. 1931 was issued to reiterate that:

WHEREAS, Presidential Decree No. 1177 has already expressly repealed the grant of
tax privileges to any government-owned or controlled corporation and all other units of
government; 46

and since there was a

. . . need for government-owned or controlled corporations and all other units of

government enjoying tax privileges to share in the requirements of development, fiscal or
otherwise, by paying the duties, taxes and other charges due from them. 47

it was decreed that:

Sec. 1. The provisions of special on general law to the contrary notwithstanding, all
exemptions from the payment of duties, taxes, fees, imposts and other charges
heretofore granted in favor of government-owned or controlled corporations including
their subsidiaries, are hereby withdrawn.

Sec. 2. The President of the Philippines and/or the Minister of Finance, upon the
recommendation of the Fiscal Incentives Review Board created under Presidential
Decree No. 776, is hereby empowered to restore, partially or totally, the exemptions
withdrawn by Section 1 above, any applicable tax and duty, taking into account, among
others, any or all of the following:

1) The effect on the relative price levels;

2) The relative contribution of the corporation to the revenue generation effort;

 3) The nature of the activity in which the corporation is engaged in; or

4) In general the greater national interest to be served.

xxx xxx xxx

Sec. 5. The provisions of Presidential Decree No. 1177 as well as all other laws, decrees,
executive orders, administrative orders, rules, regulations or parts thereof which are
inconsistent with this Decree are hereby repealed, amended or modified accordingly.

On December 17, 1986, E.O. No. 93 (S'86) was issued with a view to correct presidential restoration or
grant of tax exemption to other government and private entities without benefit of review by the Fiscal
Incentives Review Board, to wit:

WHEREAS, Presidential Decree Nos. 1931 and 1955 issued on June 11, 1984 and
October 14, 1984, respectively, withdrew the tax and duty exemption privileges, including
the preferential tax treatment, of government and private entities with certain exceptions,
in order that the requirements of national economic development, in terms of fiscals and
other resources, may be met more adequately;

xxx xxx xxx

WHEREAS, in addition to those tax and duty exemption privileges were restored by the
Fiscal Incentives Review Board (FIRB), a number of affected entities, government and
private, had their tax and duty exemption privileges restored or granted by Presidential
action without benefit or review by the Fiscal Incentives Review Board (FIRB);

xxx xxx xxx

Since it was decided that:

[A]ssistance to government and private entities may be better provided where necessary
by explicit subsidy and budgetary support rather than tax and duty exemption privileges if
only to improve the fiscal monitoring aspects of government operations.

It was thus ordered that:

Sec. 1. The Provisions of any general or special law to the contrary notwithstanding, all
tax and duty incentives granted to government and private entities are hereby withdrawn,
except:

a) those covered by the non-impairment clause of the Constitution;

b) those conferred by effective internation agreement to which the Government of the

Republic of the Philippines is a signatory;

c) those enjoyed by enterprises registered with:

(i) the Board of Investment pursuant to Presidential Decree No. 1789, as

amended;
 (ii) the Export Processing Zone Authority, pursuant to Presidential Decree
No. 66 as amended;

(iii) the Philippine Veterans Investment Development Corporation

Industrial Authority pursuant to Presidential Decree No. 538, was
amended.

d) those enjoyed by the copper mining industry pursuant to the provisions of Letter of
Instructions No. 1416;

e) those conferred under the four basic codes namely:

(i) the Tariff and Customs Code, as amended;

(ii) the National Internal Revenue Code, as amended;

(iii) the Local Tax Code, as amended;

(iv) the Real Property Tax Code, as amended;

f) those approved by the President upon the recommendation of the

Fiscal Incentives Review Board.

Sec. 2. The Fiscal Incentives Review Board created under Presidential Decree No. 776,
as amended, is hereby authorized to:

a) restore tax and/or duty exemptions withdrawn hereunder in whole or in part;

b) revise the scope and coverage of tax and/or duty exemption that may be restored;

c) impose conditions for the restoration of tax and/or duty exemption;

d) prescribe the date of period of effectivity of the restoration of tax and/or duty
exemption;

e) formulate and submit to the President for approval, a complete system for the grant of
subsidies to deserving beneficiaries, in lieu of or in combination with the restoration of tax
and duty exemptions or preferential treatment in taxation, indicating the source of funding
therefor, eligible beneficiaries and the terms and conditions for the grant thereof taking
into consideration the international commitment of the Philippines and the necessary
precautions such that the grant of subsidies does not become the basis for countervailing
action.

Sec. 3. In the discharge of its authority hereunder, the Fiscal Incentives Review Board
shall take into account any or all of the following considerations:

a) the effect on relative price levels;

b) relative contribution of the beneficiary to the revenue generation effort;

c) nature of the activity the beneficiary is engaged; and

 d) in general, the greater national interest to be served.

xxx xxx xxx

Sec. 5. All laws, orders, issuances, rules and regulations or parts thereof inconsistent
with this Executive Order are hereby repealed or modified accordingly.

E.O. No. 93 (S'86) was decreed to be effective 48 upon the promulgation of the rules and regulations, to
be issued by the Ministry of Finance. 49 Said rules and regulations were promulgated and published in the
Official Gazette
on February 23, 1987. These became effective on the 15th day after promulgation 50 in the Official
Gasetter, 51 which 15th day was March 10, 1987.

III

Now to some definitions. We refer to the very simplistic approach that all would-be lawyers, learn in their
TAXATION I course, which fro convenient reference, is as follows:

Classifications or kinds of Taxes:

According to Persons who pay or who bear the burden:

a. Direct Tax the where the person supposed to pay the tax really pays
it. WITHOUT transferring the burden to someone else.

Examples: Individual income tax, corporate income tax, transfer taxes (estate tax, donor's
tax), residence tax, immigration tax

b. Indirect Tax that where the tax is imposed upon goods BEFORE reaching the
consumer who ultimately pays for it, not as a tax, but as a part of the purchase price.

Examples: the internal revenue indirect taxes (specific tax, percentage taxes, (VAT) and
the tariff and customs indirect taxes (import duties, special import tax and other dues) 52

IV

To simply matter, the issues raised by petitioner in his motion for reconsideration can be reduced to the
following:

(1) What kind of tax exemption privileges did NPC have?

(2) For what periods in time were these privileges being enjoyed?

(3) If there are taxes to be paid, who shall pay for these taxes?

Petitioner contends that P.D. No. 938 repealed the indirect tax exemption of NPC as the phrase "all forms
of taxes etc.," in its section 10, amending Section 13, R.A. No. 6395, as amended by P.D. No. 380, does
not expressly include "indirect taxes."

His point is not well-taken.

A chronological review of the NPC laws will show that it has been the lawmaker's intention that the NPC
was to be completely tax exempt from all forms of taxes direct and indirect.

NPC's tax exemptions at first applied to the bonds it was authorized to float to finance its operations upon
its creation by virtue of C.A. No. 120.

When the NPC was authorized to contract with the IBRD for foreign financing, any loans obtained were to
be completely tax exempt.

After the NPC was authorized to borrow from other sources of funds aside issuance of bonds it was
again specifically exempted from all types of taxes "to facilitate payment of its indebtedness." Even when
the ceilings for domestic and foreign borrowings were periodically increased, the tax exemption privileges
of the NPC were maintained.

NPC's tax exemption from real estate taxes was, however, specifically withdrawn by Rep. Act No. 987, as
above stated. The exemption was, however, restored by R.A. No. 6395.

Section 13, R.A. No. 6395, was very comprehensive in its enumeration of the tax exemptions allowed
NPC. Its section 13(d) is the starting point of this bone of contention among the parties. For easy
reference, it is reproduced as follows:

[T]he Corporation is hereby declared exempt:

xxx xxx xxx

(d) From all taxes, duties, fees, imposts and all other charges imposed by the Republic of
the Philippines, its provinces, cities, municipalities and other government agencies and
instrumentalities, on all petroleum products used by the Corporation in the generation,
transmission, utilization, and sale of electric power.

P.D. No. 380 added phrase "directly or indirectly" to said Section 13(d), which now reads as follows:

xxx xxx xxx

(d) From all taxes, duties, fees, imposts, and all other charges imposed directly or
indirectly by the Republic of the Philippines, its 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.
(Emphasis supplied)

Then came P.D. No. 938 which amended Sec. 13(a), (b), (c) and (d) into one very simple paragraph as
follows:

The Corporation shall be non-profit and shall devote all its returns from its capital
investment as well as excess revenues from its operation, for expansion. To enable the
Corporation to pay its indebtedness and obligations and in furtherance and effective
implementation of the policy enunciated in Section one of this Act, the Corporation,
including its subsidiaries, is hereby declared exempt from the payment of ALL FORMS
OF taxes, duties, fees, imposts as well as costs and service fees including filing fees,
appeal bonds, supersedeas bonds, in any court or administrative proceedings.
(Emphasis supplied)

Petitioner reminds Us that:

 [I]t must be borne in mind that Presidential Decree Nos. 380
and 938 were issued by one man, acting as such the Executive and Legislative. 53

xxx xxx xxx

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

Actually, P.D. No. 938 attests to the ingenuousness of then President Marcos no matter what his fault
were. It should be noted that section 13, R.A. No. 6395, provided for tax exemptions for the following
items:

13(a) : court or administrative proceedings;

13(b) : income, franchise, realty taxes;

13(c) : import of foreign goods required for its operations and projects;

13(d) : petroleum products used in generation of electric power.

P.D. No. 938 lumped up 13(b), 13(c), and 13(d) into the phrase "ALL FORMS OF TAXES, ETC.,",
included 13(a) under the "as well as" clause and added PNOC subsidiaries as qualified for tax
exemptions.

This is the only conclusion one can arrive at if he has read all the NPC laws in the order of enactment or
issuance as narrated above in part I hereof. President Marcos must have considered all the NPC statutes
from C.A. No. 120 up to its latest amendments, P.D. No. 380, P.D. No. 395 and P.D. No. 759, AND came
up 55 with a very simple Section 13, R.A. No. 6395, as amended by P.D. No. 938.

One common theme in all these laws is that the NPC must be enable to pay its indebtedness 56 which, as
of P.D. No. 938, was P12 Billion in total domestic indebtedness, at any one time, and U$4 Billion in total
foreign loans at any one time. The NPC must be and has to be exempt from all forms of taxes if this goal
is to be achieved.

By virtue of P.D. No. 938 NPC's capital stock was raised to P8 Billion. It must be remembered that to pay
the government share in its capital stock P.D. No. 758 was issued mandating that P200 Million would be
appropriated annually to cover the said unpaid subscription of the Government in NPC's authorized
capital stock. And significantly one of the sources of this annual appropriation of P200 million is TAX
MONEY accruing to the General Fund of the Government. It does not stand to reason then that former
President Marcos would order P200 Million to be taken partially or totally from tax money to be used to
pay the Government subscription in the NPC, on one hand, and then order the NPC to pay all its indirect
taxes, on the other.

The above conclusion that then President Marcos lumped up Sections 13 (b), 13 (c) and (d) into the
phrase "All FORMS OF" is supported by the fact that he did not do the same for the tax exemption
provision for the foreign loans to be incurred.

The tax exemption on foreign loans found in Section 8(b), R.A. No. 6395, reads as follows:

The loans, credits and indebtedness contracted under this subsection and the payment of
the principal, interest and other charges thereon, as well as the importation of machinery,
equipment, materials and supplies by the Corporation, paid from the proceeds of any
 loan, credit or indebtedness incurred under this Act, shall also be exempt from all taxes,
fees, imposts, other charges and restrictions, including import restrictions, by the
Republic of the Philippines, or any of its agencies and political subdivisions. 57

The same was amended by P.D. No. 380 as follows:

The loans, credits and indebtedness contracted this subsection and the payment of the
principal, interest and other charges thereon, as well as the importation of machinery,
equipment, materials, supplies and services, by the Corporation, paid from the proceeds
of any loan, credit or indebtedness incurred under this Act, shall also be exempt from
all direct and indirect taxes, fees, imposts, other charges and restrictions, including import
restrictions previously and presently imposed, and to be imposed by the Republic of the
Philippines, or any of its agencies and political subdivisions. 58(Emphasis supplied)

P.D. No. 938 did not amend the same 59 and so the tax exemption provision in Section 8 (b), R.A. No.
6395, as amended by P.D. No. 380, still stands. Since the subject matter of this particular Section 8 (b)
had to do only with loans and machinery imported, paid for from the proceeds of these foreign
loans, THERE WAS NO OTHER SUBJECT MATTER TO LUMP IT UP WITH, and so, the tax exemption
stood as is with the express mention of "direct
and indirect" tax exemptions. And this "direct and indirect" tax exemption privilege extended to "taxes,
fees, imposts, other charges . . . to be imposed" in the future surely, an indication that the lawmakers
wanted the NPC to be exempt from ALL FORMS of taxes direct and indirect.

It is crystal clear, therefore, that NPC had been granted tax exemption privileges for both direct and
indirect taxes under P.D. No. 938.

VI

Five (5) years on into the now discredited New Society, the Government decided to rationalize
government receipts and expenditures by formulating and implementing a National Budget. 60 The NPC,
being a government owned and controlled corporation had to be shed off its tax exemption status
privileges under P.D. No. 1177. It was, however, allowed to ask for a subsidy from the General Fund in the
exact amount of taxes/duties due.

Actually, much earlier, P.D. No. 882 had already repealed NPC's tax-free importation privileges. It allowed,
however, NPC to appeal said repeal with the Office of the President and to avail of tax-free importation
privileges under its Section 1, subject to the prior approval of an Inter-Agency Committed created by
virtue of said P.D. No. 882. It is presumed that the NPC, being the special creation of the State, was
allowed to continue its tax-free importations.

This Court notes that petitioner brought to the attention of this Court, the matter of the abolition of NPC's
tax exemption privileges by P.D. No. 1177 61 only in his Common Reply/Comment to private Respondents'
"Opposition" and "Comment" to Motion for Reconsideration, four (4) months AFTER the motion for
Reconsideration had been filed. During oral arguments heard on July 9, 1992, he proceeded to discuss
this tax exemption withdrawal as explained by then Secretary of Justice Vicente Abad Santos in opinion
No. 133 (S '77). 62 A careful perusal of petitioner's senate Blue Ribbon Committee Report No. 474, the
basis of the petition at bar, fails to yield any mention of said P.D. No. 1177's effect on NPC's tax
exemption privileges. 63 Applying by analogy Pulido vs. Pablo, 64 the court declares that the matter of P.D.
No. 1177 abolishing NPC's tax exemption privileges was not seasonably invoked 65 by the petitioner.

Be that as it may, the Court still has to discuss the effect of P.D. No. 1177 on the NPC tax exemption
privileges as this statute has been reiterated twice in P.D. No. 1931. The express repeal of tax privileges
of any government-owned or controlled corporation (GOCC). NPC included, was reiterated in the fourth
whereas clause of P.D. No. 1931's preamble. The subsidy provided for in Section 23, P.D. No. 1177, being
inconsistent with Section 2, P.D. No. 1931, was deemed repealed as the Fiscal Incentives Revenue Board
was tasked with recommending the partial or total restoration of tax exemptions withdrawn by Section 1,
P.D. No. 1931.

The records before Us do not indicate whether or not NPC asked for the subsidy contemplated in Section
23, P.D. No. 1177. Considering, however, that under Section 16 of P.D. No. 1177, NPC had to submit to
the Office of the President its request for the P200 million mandated by P.D. No. 758 to be appropriated
annually by the Government to cover its unpaid subscription to the NPC authorized capital stock and that
under Section 22, of the same P.D. No. NPC had to likewise submit to the Office of the President its
internal operating budget for review due to capital inputs of the government (P.D. No. 758) and to the
national government's guarantee of the domestic and foreign indebtedness of the NPC, it is clear that
NPC was covered by P.D. No. 1177.

There is reason to believe that NPC availed of subsidy granted to exempt GOCC's that suddenly found
themselves having to pay taxes. It will be noted that Section 23, P.D. No. 1177, mandated that the
Secretary of Finance and the Commissioner of the Budget had to establish the necessary procedure to
accomplish the tax payment/tax subsidy scheme of the Government. In effect, NPC, did not put any cash
to pay any tax as it got from the General Fund the amounts necessary to pay different revenue collectors
for the taxes it had to pay.

In his memorandum filed July 16, 1992, petitioner submits:

[T]hat with the enactment of P.D. No. 1177 on July 30, 1977, the NPC lost all its duty and
tax exemptions, whether direct or indirect. And so there was nothing to be withdrawn or to
be restored under P.D. No. 1931, issued on June 11, 1984. This is evident from sections
1 and 2 of said P.D. No. 1931, which reads:

"Section 1. The provisions of special or general law to the contrary

notwithstanding, all exemptions from the payment of duties, taxes, fees,
imports and other charges heretofore granted in favor of government-
owned or controlled corporations including their subsidiaries are hereby
withdrawn."

Sec. 2. The President of the Philippines and/or the Minister of Finance,

upon the recommendation of the Fiscal Incentives Review Board created
under P.D. No. 776, is hereby empowered to restore partially or totally,
the exemptions withdrawn by section 1 above. . . .

Hence, P.D. No. 1931 did not have any effect or did it change NPC's status. Since it had
already lost all its tax exemptions privilege with the issuance of P.D. No. 1177 seven (7)
years earlier or on July 30, 1977, there were no tax exemptions to be withdrawn by
section 1 which could later be restored by the Minister of Finance upon the
recommendation of the FIRB under Section 2 of P.D. No. 1931. Consequently, FIRB
resolutions No. 10-85, and 1-86, were all illegally and validly issued since FIRB acted
beyond their statutory authority by creating and not merely restoring the tax exempt
status of NPC. The same is true for FIRB Res. No. 17-87 which restored NPC's tax
exemption under E.O. No. 93 which likewise abolished all duties and tax exemptions but
allowed the President upon recommendation of the FIRB to restore those abolished.

The Court disagrees.

Applying by analogy the weight of authority that:

 When a revised and consolidated act re-enacts in the same or substantially the same
terms the provisions of the act or acts so revised and consolidated, the revision and
consolidation shall be taken to be a continuation of the former act or acts, although the
former act or acts may be expressly repealed by the revised and consolidated act; and all
rights
and liabilities under the former act or acts are preserved and may be enforced. 66

the Court rules that when P.D. No. 1931 basically reenacted in its Section 1 the first half of Section 23,
P.D. No. 1177, on withdrawal of tax exemption privileges of all GOCC's said Section 1, P.D. No. 1931 was
deemed to be a continuation of the first half of Section 23, P.D. No. 1177, although the second half of
Section 23, P.D. No. 177, on the subsidy scheme for former tax exempt GOCCs had been expressly
repealed by Section 2 with its institution of the FIRB recommendation of partial/total restoration of tax
exemption privileges.

The NPC tax privileges withdrawn by Section 1. P.D. No. 1931, were, therefore, the same NPC tax
exemption privileges withdrawn by Section 23, P.D. No. 1177. NPC could no longer obtain a subsidy for
the taxes it had to pay. It could, however, under P.D. No. 1931, ask for a total restoration of its tax
exemption privileges, which, it did, and the same were granted under FIRB Resolutions Nos. 10-85 67 and
1-86 68 as approved by the Minister of Finance.

Consequently, contrary to petitioner's submission, FIRB Resolutions Nos. 10-85 and 1-86 were both
legally and validly issued by the FIRB pursuant to P.D. No. 1931. FIRB did not created NPC's tax
exemption status but merely restored it. 69

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

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

The rule, therefore, that under the 1973 Constitution "no law granting a tax exemption shall be passed
without the concurrence of a majority of all the members of the Batasang Pambansa" 77 does not apply as
said P.D. No. 1931 was not passed by the Interim Batasang Pambansa but by then President Marcos
under His Amendment No. 6 power.

P.D. No. 1931 was, therefore, validly issued by then President Marcos under his Amendment No. 6
authority.

Under E.O No. 93 (S'86) NPC's tax exemption privileges were again clipped by, this time, President
Aquino. Its section 2 allowed the NPC to apply for the restoration of its tax exemption privileges. The
same was granted under FIRB Resolution No. 17-87 78 dated June 24, 1987 which restored NPC's tax
exemption privileges effective, starting March 10, 1987, the date of effectivity of E.O. No. 93 (S'86).
FIRB Resolution No. 17-87 was approved by the President on October 5, 1987. 79 There is no indication,
however, from the records of the case whether or not similar approvals were given by then President
Marcos for FIRB Resolutions Nos. 10-85 and 1- 86. This has led some quarters to believe that a "travesty
of justice" might have occurred when the Minister of Finance approved his own recommendation as
Chairman of the Fiscal Incentives Review Board as what happened in Zambales Chromate vs. Court of
Appeals 80 when the Secretary of Agriculture and Natural Resources approved a decision earlier rendered
by him when he was the Director of Mines, 81 and in Anzaldo vs. Clave 82 where Presidential Executive
Assistant Clave affirmed, on appeal to Malacaang, his own decision as Chairman of the Civil Service
Commission. 83

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

In Zambales Chromite and Anzaldo, two (2) different parties were involved: mining groups and scientist-
doctors, respectively. Thus, there was a need for procedural due process to be followed.

In the case of the tax exemption restoration of NPC, there is no other comparable entity not even a
single public or private corporation whose rights would be violated if NPC's tax exemption privileges
were to be restored. While there might have been a MERALCO before Martial Law, it is of public
knowledge that the MERALCO generating plants were sold to the NPC in line with the State policy that
NPC was to be the State implementing arm for the electrification of the entire country. Besides,
MERALCO was limited to Manila and its environs. And as of 1984, there was no more MERALCO as a
producer of electricity which could have objected to the restoration of NPC's tax exemption privileges.

It should be noted that NPC was not asking to be granted tax exemption privileges for the first time. It was
just asking that its tax exemption privileges be restored. It is for these reasons that, at least in NPC's
case, the recommendation and approval of NPC's tax exemption privileges under FIRB Resolution Nos.
10-85 and 1-86, done by the same person acting in his dual capacities as Chairman of the Fiscal
Incentives Review Board and Minister of Finance, respectively, do not violate procedural due process.

While as above-mentioned, FIRB Resolution No. 17-87 was approved by President Aquino on October 5,
1987, the view has been expressed that President Aquino, at least with regard to E.O. 93 (S'86), had no
authority to sub-delegate to the FIRB, which was allegedly not a delegate of the legislature, the power
delegated to her thereunder.

A misconception must be cleared up.

When E.O No. 93 (S'86) was issued, President Aquino was exercising both Executive and Legislative
powers. Thus, there was no power delegated to her, rather it was she who was delegating her power. She
delegated it to the FIRB, which, for purposes of E.O No. 93 (S'86), is a delegate of the legislature. Clearly,
she was not sub-delegating her power.

And E.O. No. 93 (S'86), as a delegating law, was complete in itself it set forth the policy to be carried
out 85 and it fixed the standard to which the delegate had to conform in the performance of his
functions, 86 both qualities having been enunciated by this Court in Pelaez vs. Auditor General. 87

Thus, after all has been said, it is clear that the NPC had its tax exemption privileges restored from June
11, 1984 up to the present.

VII

The next question that projects itself is who pays the tax?
The answer to the question could be gleamed from the manner by which the Commissaries of the Armed
Forces of the Philippines sell their goods.

By virtue of P.D. No. 83, 88 veterans, members of the Armed of the Philippines, and their defendants but
groceries and other goods free of all taxes and duties if bought from any AFP Commissaries.

In practice, the AFP Commissary suppliers probably treat the unchargeable specific, ad valorem and
other taxes on the goods earmarked for AFP Commissaries as an added cost of operation and distribute it
over the total units of goods sold as it would any other cost. Thus, even the ordinary supermarket buyer
probably pays for the specific, ad valorem and other taxes which theses suppliers do not charge the AFP
Commissaries. 89

IN MUCH THE SAME MANNER, it is clear that private respondents-oil companies have to absorb the
taxes they add to the bunker fuel oil they sell to NPC.

It should be stated at this juncture that, as early as May 14, 1954, the Secretary of Justice renders an
opinion, 90wherein he stated and We quote:

xxx xxx xxx

Republic Act No. 358 exempts the National Power Corporation from "all taxes, duties,
fees, imposts, charges, and restrictions of the Republic of the Philippines and its
provinces, cities, and municipalities." This exemption is broad enough to include all taxes,
whether direct or indirect, which the National Power Corporation may be required to pay,
such as the specific tax on petroleum products. That it is indirect or is of no amount
[should be of no moment], for it is the corporation that ultimately pays it. The view which
refuses to accord the exemption because the tax is first paid by the seller disregards
realities and gives more importance to form than to substance. Equity and law always
exalt substance over from.

xxx xxx xxx

Tax exemptions are undoubtedly to be construed strictly but not so grudgingly as

knowledge that many impositions taxpayers have to pay are in the nature of indirect
taxes. To limit the exemption granted the National Power Corporation to direct taxes
notwithstanding the general and broad language of the statue will be to thwrat the
legislative intention in giving exemption from all forms of taxes and impositions without
distinguishing between those that are direct and those that are not. (Emphasis supplied)

In view of all the foregoing, the Court rules and declares that the oil companies which supply bunker fuel
oil to NPC have to pay the taxes imposed upon said bunker fuel oil sold to NPC. By the very nature of
indirect taxation, the economic burden of such taxation is expected to be passed on through the channels
of commerce to the user or consumer of the goods sold. Because, however, the NPC has been exempted
from both direct and indirect taxation, the NPC must beheld exempted from absorbing the economic
burden of indirect taxation. This means, on the one hand, that the oil companies which wish to sell to NPC
absorb all or part of the economic burden of the taxes previously paid to BIR, which could they shift to
NPC if NPC did not enjoy exemption from indirect taxes. This means also, on the other hand, that the
NPC may refuse to pay the part of the "normal" purchase price of bunker fuel oil which represents all or
part of the taxes previously paid by the oil companies to BIR. If NPC nonetheless purchases such oil from
the oil companies because to do so may be more convenient and ultimately less costly for NPC than
NPC itself importing and hauling and storing the oil from overseas NPC is entitled to be reimbursed by
the BIR for that part of the buying price of NPC which verifiably represents the tax already paid by the oil
company-vendor to the BIR.
It should be noted at this point in time that the whole issue of who WILL pay these indirect taxes HAS
BEEN RENDERED moot and academic by E.O. No. 195 issued on June 16, 1987 by virtue of which
the ad valorem tax rate on bunker fuel oil was reduced to ZERO (0%) PER CENTUM. Said E.O. no. 195
reads as follows:

EXECUTIVE ORDER NO. 195

AMENDING PARAGRAPH (b) OF SECTION 128 OF THE NATIONAL INTERNAL

REVENUE CODE, AS AMENDED BY REVISING THE EXCISE TAX RATES OF
CERTAIN PETROLEUM PRODUCTS.

xxx xxx xxx

Sec. 1. Paragraph (b) of Section 128 of the National Internal Revenue Code, as
amended, is hereby amended to read as follows:

Par. (b) For products subject to ad valorem tax only:

PRODUCT AD VALOREM TAX RATE

1. . . .

2. . . .

3. . . .

4. Fuel oil, commercially known as bunker oil and on similar fuel oils having more or less
the same generating power 0%

xxx xxx xxx

Sec. 3. This Executive Order shall take effect immediately.

Done in the city of Manila, this 17th day of June, in the year of Our Lord, nineteen
hundred and eighty-seven. (Emphasis supplied)

The oil companies can now deliver bunker fuel oil to NPC without having to worry about who is going to
bear the economic burden of the ad valorem taxes. What this Court will now dispose of are petitioner's
complaints that some indirect tax money has been illegally refunded by the Bureau of Internal Revenue to
the NPC and that more claims for refunds by the NPC are being processed for payment by the BIR.

A case in point is the Tax Credit Memo issued by the Bureau of Internal Revenue in favor of the NPC last
July 7, 1986 for P58.020.110.79 which were for "erroneously paid specific and ad valorem taxes during
the period from October 31, 1984 to April 27, 1985. 91 Petitioner asks Us to declare this Tax Credit Memo
illegal as the PNC did not have indirect tax exemptions with the enactment of P.D. No. 938. As We have
already ruled otherwise, the only questions left are whether NPC Is entitled to a tax refund for the tax
component of the price of the bunker fuel oil purchased from Caltex (Phils.) Inc. and whether the Bureau
of Internal Revenue properly refunded the amount to NPC.

After P.D. No. 1931 was issued on June 11, 1984 withdrawing the
tax exemptions of all GOCCs NPC included, it was only on May 8, 1985 when the BIR issues its letter
authority to the NPC authorizing it to withdraw tax-free bunker fuel oil from the oil companies pursuant to
FIRB Resolution No. 10-85. 92 Since the tax exemption restoration was retroactive to June 11, 1984 there
was a need. therefore, to recover said amount as Caltex (PhiIs.) Inc. had already paid the BIR the specific
and ad valorem taxes on the bunker oil it sold NPC during the period above indicated and had billed NPC
correspondingly. 93 It should be noted that the NPC, in its letter-claim dated September 11, 1985 to the
Commissioner of the Bureau of Internal Revenue DID NOT CATEGORICALLY AND UNEQUIVOCALLY
STATE that itself paid the P58.020,110.79 as part of the bunker fuel oil price it purchased from Caltex
(Phils) Inc. 94

The law governing recovery of erroneously or illegally, collected taxes is section 230 of the National
Internal Revenue Code of 1977, as amended which reads as follows:

Sec. 230. Recover of tax erroneously or illegally collected. No suit or proceeding shall
be maintained in any court for the recovery of any national internal revenue tax hereafter
alleged to have been erroneously or illegally assessed or collected, or of any penalty
claimed to have been collected without authority, or of any sum alleged to have been
excessive or in any Manner wrongfully collected. until a claim for refund or credit has
been duly filed with the Commissioner; but such suit or proceeding may be maintained,
whether or not such tax, penalty, or sum has been paid under protest or duress.

In any case, no such suit or proceeding shall be begun after the expiration of two years
from the date of payment of the tax or penalty regardless of any supervening cause that
may arise after payment; Provided, however, That the Commissioner may, even without a
written claim therefor, refund or credit any tax, where on the face of the return upon which
payment was made, such payment appears clearly, to have been erroneously paid.

xxx xxx xxx

95
Inasmuch as NPC filled its claim for P58.020,110.79 on September 11, 1985, the Commissioner
correctly issued the Tax Credit Memo in view of NPC's indirect tax exemption.

Petitioner, however, asks Us to restrain the Commissioner from acting favorably on NPC's claim for
P410.580,000.00 which represents specific and ad valorem taxes paid by the oil companies to the BIR
from June 11, 1984 to the early part of 1986. 96

A careful examination of petitioner's pleadings and annexes attached thereto does not reveal when the
alleged claim for a P410,580,000.00 tax refund was filed. It is only stated In paragraph No. 2 of the Deed
of Assignment 97executed by and between NPC and Caltex (Phils.) Inc., as follows:

That the ASSIGNOR(NPC) has a pending tax credit claim with the Bureau of Internal
Revenue amounting to P442,887,716.16. P58.020,110.79 of which is due to Assignor's oil
purchases from the Assignee (Caltex [Phils.] Inc.)

Actually, as the Court sees it, this is a clear case of a "Mexican standoff." We cannot restrain the BIR from
refunding said amount because of Our ruling that NPC has both direct and indirect tax exemption
privileges. Neither can We order the BIR to refund said amount to NPC as there is no pending petition for
review on certiorari of a suit for its collection before Us. At any rate, at this point in time, NPC can no
longer file any suit to collect said amount EVEN IF lt has previously filed a claim with the BIR because it is
time-barred under Section 230 of the National Internal Revenue Code of 1977. as amended, which states:

In any case, no such suit or proceeding shall be begun after the expiration of two years
from the date of payment of the tax or penalty REGARDLESS of any supervening cause
that may arise after payment. . . . (Emphasis supplied)
The date of the Deed of Assignment is June 6. 1986. Even if We were to assume that payment by NPC
for the amount of P410,580,000.00 had been made on said date. it is clear that more than two (2) years
had already elapsed from said date. At the same time, We should note that there is no legal obstacle to
the BIR granting, even without a suit by NPC, the tax credit or refund claimed by NPC, assuming that
NPC's claim had been made seasonably, and assuming the amounts covered had actually been paid
previously by the oil companies to the BIR.

WHEREFORE, in view of all the foregoing, the Motion for Reconsideration of petitioner is hereby DENIED
for lack of merit and the decision of this Court promulgated on May 31, 1991 is hereby AFFIRMED.

SO ORDERED.

[G.R. Nos. L-8830 & L-8837-39. May 11, 1956.]

BISAYA LAND TRANSPORTATION COMPANY, INC., Petitioner, vs. HON. MANUEL M. MEJIA, ET
AL., Respondents.

DECISION
CONCEPCION, J.:
These are four petitions for a writ of certiorari, to annul an order of Respondent, Hon. Manuel M. Mejia, as
Judge of First Instance of Cebu, dated February 22, 1955, denying a motion of Petitionerherein, Bisaya
Land Transportation Co., Inc., as Defendant in civil cases Nos. R-1768, R-1769, R-1775 and R-1776 of
said court, for the suspension of the trial of said cases until the rendition of final judgment in criminal case
No. V-3142 of the same court. Upon the filing of the corresponding bond, we issued a writ of preliminary
injunction directing Respondent judge to desist and refrain, until further orders from this Court, from trying
or hearing the four civil cases already referred to.
It appears that on November 1, 1951, Tan Sims cargo truck No. T- 17137, driven by Antonio Varga, and
passenger truck No. TPU-10284 of Petitioner Bisaya Land Transportation Co., Inc., driven by Teofilo
Mongaya, collided with each other in the municipality of Compostela, province of Cebu. As a
consequence, the passenger of the latter truck sustained physical injuries, and some of them died.
Hence, on January 17, 1952, the provincial fiscal of Cebu commenced criminal case No. V-3142 of the
Court of First Instance of Cebu entitled People vs. Antonio Varga and Teofilo Mongaya the drivers of
both trucks for multiple homicide with serious, less serious and slight physical injuries, through reckless
imprudence. Moreover, the heirs of Jose Yap Cabatingan, Jose Pestao, Cresencia Placencia and Lucas,
Maramara, some of the deceased passengers of the Bisaya truck No. TPU-10284, instituted in said court,
the following civil cases, for damages allegedly sustained by reason of the accident above
mentioned:chanroblesvirtuallawlibrary
1. Civil Case No. R-1768, entitled Angel Cabatingan, et al. vs. Bisaya Land Transportation Co., Inc.,
Antonio Varga and Tan Sim;
2. Civil Case No. R-1769, entitled Nely E. Pestao et al. vs. Bisaya Land Transportation Co., Inc.,
Antonio Varga and Tan Sim;
3. Civil Case No. R-1775, entitled Macaria Tolda de Placencia et al. vs. Bisaya Land Transportation Co.,
Inc., Antonio Varga and Tan Sim; chan roblesvirtualawlibraryand
4. Civil Case No. R-1776, entitled Teofila Misa, et al. vs. Bisaya Land Transportation Co., Inc., Antonio
Varga and Tan Sim.
On or about February 17, 1955, Petitioner herein filed a motion, in said four (4) civil cases, praying that
the trial thereof, which was scheduled to take place, jointly, on February 22, 1955, before the Fifth Branch
of the Court of First Instance of Cebu, presided over by Respondent Judge, be suspended until final
disposition of the aforementioned criminal case No. V-3142, the hearing of which had already begun. This
motion was denied by an order of Respondent Judge dated February 22, 1955. On the same date,
however, Respondent Judge issued another order, postponing the hearing of said civil cases to March 4,
1955, so that Petitioner may have an opportunity to seek from this Court such relief as it may deem fit.
Hence, soon thereafter, Petitioner instituted the cases at bar, for the purpose of annulling said order
denying the motion for suspension of the hearing of the civil cases already adverted to.
Petitioner assails said order, upon the ground that it was issued by Respondent Judge with abuse of
discretion, and without, or in excess of his, jurisdiction, as well as in violation of Rule 107, section 1(c), of
the Rules of Court and of the doctrines laid down in the cases of Francisco vs. Onrubia, 46 Phil., 327 and
De Leon vs. Mabanag, 70 Phil., 202. However, said provision of the Rules of Court and the decisions
cited are not in point. Section 1(c) of Rule 107 of the Rules of Court refers to civil actions arising from the
same offense charged in the criminal action. Such was the civil action instituted by Francisco against
Onrubia, supra, who, while driving a car, hit a pedestrian with whom he had no contractual relation
whatsoever), killing the latter. A judgment of acquittal having been rendered in the corresponding criminal
action against Onrubia, for homicide through reckless negligence, it followed that the civil action for
damages, based upon the crime allegedly committed by him, could not prosper. Upon the other hand, the
principle enunciated in the De Leon case, supra, is, at best, adverse to Petitioners contention, it having
been held, in said case, that a pending civil action, hinging upon the genuineness or spurious nature of a
given document, had to be decided before a criminal action for alleged falsification of said document be
instituted.
Insofar as herein Petitioner is concerned, the complaints in the civil cases aforementioned are specifically
based upon an alleged breach of the contractual relation between said Petitioner, as owner and
operator of truck No. TPU-10284, and its passengers, Jose Cabatingan, Jose Pestao, Cresencia
Placencia and Lucas Maramara, which relation is governed by Articles 1755 to 1763 of the Civil Code of
the Philippines, not by the Revised Penal Code, and is, therefore, independent of the provisions of the
latter and of such criminal responsibility as may exist thereunder. Indeed, Articles 31 and 33 of the Civil
Code of the Philippines explicitly provide:chanroblesvirtuallawlibrary
ART. 31. When the civil action is based on an obligation not arising from the act or omission complained
of as a felony, such civil action may proceed independently of the criminal proceedings and regardless of
the result of the latter.
ART. 33. In cases of defamation, fraud, and physical injuries, a civil action for damages, entirely
separate and distinct from the criminal action, may be brought by the injured party. Such civil action shall
proceed independently of the criminal prosecution, and shall require only a preponderance of evidence.
In view of these clear and positive legal precepts and in line with the well established practice in this
jurisdiction (Rakes vs. Atlantic Gulf and Pacific Co., 7 Phil., 359, 362-365; chan
roblesvirtualawlibraryBarredo vs. Garcia and Almario, 73 Phil., 607, 611; chan
roblesvirtualawlibraryRamcar vs. De Leon, 44 Off. Gaz., 3795; chan roblesvirtualawlibraryCastro vs. Acro
Taxicab Co., 46 Off. Gaz., 2023; chan roblesvirtualawlibrarySan Pedro Bus Line vs. Navarro, 94 Phil.,
846, decided on April 29, 1954; chan roblesvirtualawlibrarySon vs. Cebu Autobus Co., 94 Phil., 892,
decided April 30, 1954; chan roblesvirtualawlibraryIbaez et al. vs. North Negros Sugar Co., 96 Phil., 980,
decided March 28, 1955; chan roblesvirtualawlibraryCarandang vs. Santiago, 97 Phil., 94, decided May
25, 1955), we hold that, as regards Petitioner herein, the aforementioned civil cases Nos. R-1768, R-
1769, R-1775 and R-1776 may proceed independently of said criminal case No. V-3142 and that,
accordingly, His Honor, Respondent judge, did not err in issuing the order complained of.
Wherefore, the petitions are dismissed and the writ of preliminary injunction heretofore issued hereby
dissolved and set aside, with costs against the Petitioner. It is SO ORDERED.
RENATO V. DIAZ and G.R. No. 193007
AURORA MA. F. TIMBOL,
Petitioners, Present:
CORONA, C.J.,
CARPIO,
VELASCO, JR.,
LEONARDO-DE CASTRO,
BRION,
 - versus - PERALTA,
BERSAMIN,*
DEL CASTILLO,
ABAD,
VILLARAMA, JR.,
PEREZ,
MENDOZA, and
SERENO,** JJ.
THE SECRETARY OF FINANCE
and THE COMMISSIONER OF Promulgated:
INTERNAL REVENUE,
Respondents. July 19, 2011

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

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
relief[1] 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]

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 reply[6] 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 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 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 tax[30] 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]

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.

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.

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 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

7
but the same is AFFIRMED in all other respect.

Aggrieved, the YMCA asked for reconsideration based on the following grounds:

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:

In holding that it had departed from the findings of fact of Respondent Court of Tax
Appeals when it rendered its Decision dated February 16, 1994; and

II

In affirming the conclusion of Respondent Court of Tax Appeals that the income of private
respondent from rentals of small shops and parking fees [is] exempt from taxation. 11

This Court's Ruling

The petition is meritorious.

First Issue:
Factual Findings of the CTA

Private respondent contends that the February 16, 1994 CA Decision reversed the factual findings of the
CTA. On the other hand, petitioner argues that the CA merely reversed the "ruling of the CTA that the
leasing of private 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:

Sec. 27. Exemptions from tax on corporations. The following organizations shall not be
taxed under this Title in respect to income received by them as such

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, 20the 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 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 property taxes 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 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. 195909 September 26, 2012

COMMISSIONER OF INTERNAL REVENUE, PETITIONER,
vs.
ST. LUKE'S MEDICAL CENTER, INC., RESPONDENT.

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

G.R. No. 195960

ST. LUKE'S MEDICAL CENTER, INC., PETITIONER,

vs.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

DECISION

CARPIO, J.:

The Case

These are consolidated 1 petitions for review on certiorari under Rule 45 of the Rules of Court assailing
the Decision of 19 November 2010 of the Court of Tax Appeals (CTA) En Banc and its Resolution 2 of 1
March 2011 in CTA Case No. 6746. This Court resolves this case on a pure question of law, which
involves the interpretation of Section 27(B) vis--vis Section 30(E) and (G) of the National Internal
Revenue Code of the Philippines (NIRC), on the income tax treatment of proprietary non-profit hospitals.

The Facts

St. Luke's Medical Center, Inc. (St. Luke's) is a hospital organized as a non-stock and non-profit
corporation. Under its articles of incorporation, among its corporate purposes are:

(a) To establish, equip, operate and maintain a non-stock, non-profit Christian, benevolent,
charitable and scientific hospital which shall give curative, rehabilitative and spiritual care to the
sick, diseased and disabled persons; provided that purely medical and surgical services shall be
performed by duly licensed physicians and surgeons who may be freely and individually
contracted by patients;

(b) To provide a career of health science education and provide medical services to the
community through organized clinics in such specialties as the facilities and resources of the
corporation make possible;

(c) To carry on educational activities related to the maintenance and promotion of health as well
as provide facilities for scientific and medical researches which, in the opinion of the Board of
Trustees, may be justified by the facilities, personnel, funds, or other requirements that are
available;

(d) To cooperate with organized medical societies, agencies of both government and private
sector; establish rules and regulations consistent with the highest professional ethics;

xxxx3

On 16 December 2002, the Bureau of Internal Revenue (BIR) assessed St. Luke's deficiency taxes
amounting to P76,063,116.06 for 1998, comprised of deficiency income tax, value-added tax, withholding
tax on compensation and expanded withholding tax. The BIR reduced the amount to P63,935,351.57
during trial in the First Division of the CTA. 4
On 14 January 2003, St. Luke's filed an administrative protest with the BIR against the deficiency tax
assessments. The BIR did not act on the protest within the 180-day period under Section 228 of the
NIRC. Thus, St. Luke's appealed to the CTA.

The BIR argued before the CTA that Section 27(B) of the NIRC, which imposes a 10% preferential tax
rate on the income of proprietary non-profit hospitals, should be applicable to St. Luke's. According to the
BIR, Section 27(B), introduced in 1997, "is a new provision intended to amend the exemption on non-
profit hospitals that were previously categorized as non-stock, non-profit corporations under Section 26 of
the 1997 Tax Code x x x." 5 It is a specific provision which prevails over the general exemption on income
tax granted under Section 30(E) and (G) for non-stock, non-profit charitable institutions and civic
organizations promoting social welfare. 6

The BIR claimed that St. Luke's was actually operating for profit in 1998 because only 13% of its
revenues came from charitable purposes. Moreover, the hospital's board of trustees, officers and
employees directly benefit from its profits and assets. St. Luke's had total revenues of P1,730,367,965 or
approximately P1.73 billion from patient services in 1998. 7

St. Luke's contended that the BIR should not consider its total revenues, because its free services to
patients was P218,187,498 or 65.20% of its 1998 operating income (i.e., total revenues less operating
expenses) of P334,642,615. 8 St. Luke's also claimed that its income does not inure to the benefit of any
individual.

St. Luke's maintained that it is a non-stock and non-profit institution for charitable and social welfare
purposes under Section 30(E) and (G) of the NIRC. It argued that the making of profit per se does not
destroy its income tax exemption.

The petition of the BIR before this Court in G.R. No. 195909 reiterates its arguments before the CTA that
Section 27(B) applies to St. Luke's. The petition raises the sole issue of whether the enactment of Section
27(B) takes proprietary non-profit hospitals out of the income tax exemption under Section 30 of the NIRC
and instead, imposes a preferential rate of 10% on their taxable income. The BIR prays that St. Luke's be
ordered to pay P57,659,981.19 as deficiency income and expanded withholding tax for 1998 with
surcharges and interest for late payment.

The petition of St. Luke's in G.R. No. 195960 raises factual matters on the treatment and withholding of a
part of its income, 9 as well as the payment of surcharge and delinquency interest. There is no ground for
this Court to undertake such a factual review. Under the Constitution 10 and the Rules of Court, 11 this
Court's review power is generally limited to "cases in which only an error or question of law is
involved." 12 This Court cannot depart from this limitation if a party fails to invoke a recognized exception.

The Ruling of the Court of Tax Appeals

The CTA En Banc Decision on 19 November 2010 affirmed in toto the CTA First Division Decision dated
23 February 2009 which held:

WHEREFORE, the Amended Petition for Review [by St. Luke's] is hereby PARTIALLY GRANTED.
Accordingly, the 1998 deficiency VAT assessment issued by respondent against petitioner in the amount
of P110,000.00 is hereby CANCELLED and WITHDRAWN. However, petitioner is hereby ORDERED to
PAY deficiency income tax and deficiency expanded withholding tax for the taxable year 1998 in the
respective amounts of P5,496,963.54 and P778,406.84 or in the sum of P6,275,370.38, x x x.

xxxx
In addition, petitioner is hereby ORDERED to PAY twenty percent (20%) delinquency interest on the total
amount of P6,275,370.38 counted from October 15, 2003 until full payment thereof, pursuant to Section
249(C)(3) of the NIRC of 1997.

SO ORDERED. 13

The deficiency income tax of P5,496,963.54, ordered by the CTA En Banc to be paid, arose from the
failure of St. Luke's to prove that part of its income in 1998 (declared as "Other Income-Net") 14 came from
charitable activities. The CTA cancelled the remainder of the P63,113,952.79 deficiency assessed by the
BIR based on the 10% tax rate under Section 27(B) of the NIRC, which the CTA En Banc held was not
applicable to St. Luke's. 15

The CTA ruled that St. Luke's is a non-stock and non-profit charitable institution covered by Section 30(E)
and (G) of the NIRC. This ruling would exempt all income derived by St. Luke's from services to its
patients, whether paying or non-paying. The CTA reiterated its earlier decision in St. Luke's Medical
Center, Inc. v. Commissioner of Internal Revenue, 16 which examined the primary purposes of St. Luke's
under its articles of incorporation and various documents 17 identifying St. Luke's as a charitable
institution.

The CTA adopted the test in Hospital de San Juan de Dios, Inc. v. Pasay City, 18 which states that "a
charitable institution does not lose its charitable character and its consequent exemption from taxation
merely because recipients of its benefits who are able to pay are required to do so, where funds derived
in this manner are devoted to the charitable purposes of the institution x x x." 19 The generation of income
from paying patients does not per se destroy the charitable nature of St. Luke's.

Hospital de San Juan cited Jesus Sacred Heart College v. Collector of Internal Revenue, 20 which ruled
that the old NIRC (Commonwealth Act No. 466, as amended) 21 "positively exempts from taxation those
corporations or associations which, otherwise, would be subject thereto, because of the existence of x x x
net income." 22 The NIRC of 1997 substantially reproduces the provision on charitable institutions of the
old NIRC. Thus, in rejecting the argument that tax exemption is lost whenever there is net income, the
Court in Jesus Sacred Heart College declared: "[E]very responsible organization must be run to at least
insure its existence, by operating within the limits of its own resources, especially its regular income. In
other words, it should always strive, whenever possible, to have a surplus." 23

The CTA held that Section 27(B) of the present NIRC does not apply to St. Luke's. 24 The CTA explained
that to apply the 10% preferential rate, Section 27(B) requires a hospital to be "non-profit." On the other
hand, Congress specifically used the word "non-stock" to qualify a charitable "corporation or association"
in Section 30(E) of the NIRC. According to the CTA, this is unique in the present tax code, indicating an
intent to exempt this type of charitable organization from income tax. Section 27(B) does not require that
the hospital be "non-stock." The CTA stated, "it is clear that non-stock, non-profit hospitals operated
exclusively for charitable purpose are exempt from income tax on income received by them as such,
applying the provision of Section 30(E) of the NIRC of 1997, as amended." 25

The Issue

The sole issue is whether St. Luke's is liable for deficiency income tax in 1998 under Section 27(B) of the
NIRC, which imposes a preferential tax rate of 10% on the income of proprietary non-profit hospitals.

The Ruling of the Court

St. Luke's Petition in G.R. No. 195960

As a preliminary matter, this Court denies the petition of St. Luke's in G.R. No. 195960 because the
petition raises factual issues. Under Section 1, Rule 45 of the Rules of Court, "[t]he petition shall raise
only questions of law which must be distinctly set forth." St. Luke's cites Martinez v. Court of
Appeals 26 which permits factual review "when the Court of Appeals [in this case, the CTA] manifestly
overlooked certain relevant facts not disputed by the parties and which, if properly considered, would
justify a different conclusion." 27

This Court does not see how the CTA overlooked relevant facts. St. Luke's itself stated that the CTA
"disregarded the testimony of [its] witness, Romeo B. Mary, being allegedly self-serving, to show the
nature of the 'Other Income-Net' x x x." 28 This is not a case of overlooking or failing to consider relevant
evidence. The CTA obviously considered the evidence and concluded that it is self-serving. The CTA
declared that it has "gone through the records of this case and found no other evidence aside from the
self-serving affidavit executed by [the] witnesses [of St. Luke's] x x x." 29

The deficiency tax on "Other Income-Net" stands. Thus, St. Luke's is liable to pay the 25% surcharge
under Section 248(A)(3) of the NIRC. There is "[f]ailure to pay the deficiency tax within the time
prescribed for its payment in the notice of assessment[.]" 30 St. Luke's is also liable to pay 20%
delinquency interest under Section 249(C)(3) of the NIRC. 31 As explained by the CTA En Banc, the
amount of P6,275,370.38 in the dispositive portion of the CTA First Division Decision includes only
deficiency interest under Section 249(A) and (B) of the NIRC and not delinquency interest. 32

The Main Issue

The issue raised by the BIR is a purely legal one. It involves the effect of the introduction of Section 27(B)
in the NIRC of 1997 vis--vis Section 30(E) and (G) on the income tax exemption of charitable and social
welfare institutions. The 10% income tax rate under Section 27(B) specifically pertains to proprietary
educational institutions and proprietary non-profit hospitals. The BIR argues that Congress intended to
remove the exemption that non-profit hospitals previously enjoyed under Section 27(E) of the NIRC of
1977, which is now substantially reproduced in Section 30(E) of the NIRC of 1997. 33 Section 27(B) of the
present NIRC provides:

SEC. 27. Rates of Income Tax on Domestic Corporations. -

xxxx

(B) Proprietary Educational Institutions and Hospitals. - Proprietary educational institutions and hospitals
which are non-profit shall pay a tax of ten percent (10%) on their taxable income except those covered by
Subsection (D) hereof: Provided, That if the gross income from unrelated trade, business or other activity
exceeds fifty percent (50%) of the total gross income derived by such educational institutions or hospitals
from all sources, the tax prescribed in Subsection (A) hereof shall be imposed on the entire taxable
income. For purposes of this Subsection, the term 'unrelated trade, business or other activity' means any
trade, business or other activity, the conduct of which is not substantially related to the exercise or
performance by such educational institution or hospital of its primary purpose or function. A 'proprietary
educational institution' is any private school maintained and administered by private individuals or groups
with an issued permit to operate from the Department of Education, Culture and Sports (DECS), or the
Commission on Higher Education (CHED), or the Technical Education and Skills Development Authority
(TESDA), as the case may be, in accordance with existing laws and regulations. (Emphasis supplied)

St. Luke's claims tax exemption under Section 30(E) and (G) of the NIRC. It contends that it is a
charitable institution and an organization promoting social welfare. The arguments of St. Luke's focus on
the wording of Section 30(E) exempting from income tax non-stock, non-profit charitable institutions. 34 St.
Luke's asserts that the legislative intent of introducing Section 27(B) was only to remove the exemption
for "proprietary non-profit" hospitals. 35 The relevant provisions of Section 30 state:
SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall not be taxed under
this Title in respect to income received by them as such:

xxxx

(E) Nonstock corporation or association organized and operated exclusively for religious, charitable,
scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or
asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person;

xxxx

(G) Civic league or organization not organized for profit but operated exclusively for the promotion of
social welfare;

xxxx

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 tax imposed
under this Code. (Emphasis supplied)

The Court partly grants the petition of the BIR but on a different ground. We hold that Section 27(B) of the
NIRC does not remove the income tax exemption of proprietary non-profit hospitals under Section 30(E)
and (G). Section 27(B) on one hand, and Section 30(E) and (G) on the other hand, can be construed
together without the removal of such tax exemption. The effect of the introduction of Section 27(B) is to
subject the taxable income of two specific institutions, namely, proprietary non-profit educational
institutions 36 and proprietary non-profit hospitals, among the institutions covered by Section 30, to the
10% preferential rate under Section 27(B) instead of the ordinary 30% corporate rate under the last
paragraph of Section 30 in relation to Section 27(A)(1).

Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1) proprietary non-profit
educational institutions and (2) proprietary non-profit hospitals. The only qualifications for hospitals are
that they must be proprietary and non-profit. "Proprietary" means private, following the definition of a
"proprietary educational institution" as "any private school maintained and administered by private
individuals or groups" with a government permit. "Non-profit" means no net income or asset accrues to or
benefits any member or specific person, with all the net income or asset devoted to the institution's
purposes and all its activities conducted not for profit.

"Non-profit" does not necessarily mean "charitable." In Collector of Internal Revenue v. Club Filipino Inc.
de Cebu, 37 this Court considered as non-profit a sports club organized for recreation and entertainment of
its stockholders and members. The club was primarily funded by membership fees and dues. If it had
profits, they were used for overhead expenses and improving its golf course. 38 The club was non-profit
because of its purpose and there was no evidence that it was engaged in a profit-making enterprise. 39

The sports club in Club Filipino Inc. de Cebu may be non-profit, but it was not charitable. The Court
defined "charity" in Lung Center of the Philippines v. Quezon City 40 as "a gift, to be applied consistently
with existing laws, for the benefit of an indefinite number of persons, either by bringing their minds and
hearts under the influence of education or religion, by assisting them to establish themselves in life or [by]
otherwise lessening the burden of government." 41 A non-profit club for the benefit of its members fails this
test. An organization may be considered as non-profit if it does not distribute any part of its income to
stockholders or members. However, despite its being a tax exempt institution, any income such institution
earns from activities conducted for profit is taxable, as expressly provided in the last paragraph of Section
30.
To be a charitable institution, however, an organization must meet the substantive test of charity in Lung
Center. The issue in Lung Center concerns exemption from real property tax and not income tax.
However, it provides for the test of charity in our jurisdiction. Charity is essentially a gift to an indefinite
number of persons which lessens the burden of government. In other words, charitable institutions
provide for free goods and services to the public which would otherwise fall on the shoulders of
government. Thus, as a matter of efficiency, the government forgoes taxes which should have been spent
to address public needs, because certain private entities already assume a part of the burden. This is the
rationale for the tax exemption of charitable institutions. The loss of taxes by the government is
compensated by its relief from doing public works which would have been funded by appropriations from
the Treasury. 42

Charitable institutions, however, are not ipso facto entitled to a tax exemption. The requirements for a tax
exemption are specified by the law granting it. The power of Congress to tax implies the power to exempt
from tax. Congress can create tax exemptions, subject to the constitutional provision that "[n]o law
granting any tax exemption shall be passed without the concurrence of a majority of all the Members of
Congress." 43 The requirements for a tax exemption are strictly construed against the taxpayer 44 because
an exemption restricts the collection of taxes necessary for the existence of the government.

The Court in Lung Center declared that the Lung Center of the Philippines is a charitable institution for the
purpose of exemption from real property taxes. This ruling uses the same premise as Hospital de San
Juan 45 and Jesus Sacred Heart College 46 which says that receiving income from paying patients does
not destroy the charitable nature of a hospital.

As a general principle, a charitable institution does not lose its character as such and its exemption from
taxes simply because it derives income from paying patients, whether out-patient, or confined in the
hospital, or receives subsidies from the government, so long as the money received is devoted or used
altogether to the charitable object which it is intended to achieve; and no money inures to the private
benefit of the persons managing or operating the institution. 47

For real property taxes, the incidental generation of income is permissible because the test of exemption
is the use of the property. The Constitution provides that "[c]haritable institutions, churches and
personages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings,
and improvements, actually, directly, and exclusively used for religious, charitable, or educational
purposes shall be exempt from taxation." 48 The test of exemption is not strictly a requirement on the
intrinsic nature or character of the institution. The test requires that the institution use the property in a
certain way, i.e. for a charitable purpose. Thus, the Court held that the Lung Center of the Philippines did
not lose its charitable character when it used a portion of its lot for commercial purposes. The effect of
failing to meet the use requirement is simply to remove from the tax exemption that portion of the property
not devoted to charity.

The Constitution exempts charitable institutions only from real property taxes. In the NIRC, Congress
decided to extend the exemption to income taxes. However, the way Congress crafted Section 30(E) of
the NIRC is materially different from Section 28(3), Article VI of the Constitution. Section 30(E) of the
NIRC defines the corporation or association that is exempt from income tax. On the other hand, Section
28(3), Article VI of the Constitution does not define a charitable institution, but requires that the institution
"actually, directly and exclusively" use the property for a charitable purpose.

Section 30(E) of the NIRC provides that a charitable institution must be:

(1) A non-stock corporation or association;

(2) Organized exclusively for charitable purposes;

(3) Operated exclusively for charitable purposes; and

 (4) No part of its net income or asset shall belong to or inure to the benefit of any member,
organizer, officer or any specific person.

Thus, both the organization and operations of the charitable institution must be devoted "exclusively" for
charitable purposes. The organization of the institution refers to its corporate form, as shown by its
articles of incorporation, by-laws and other constitutive documents. Section 30(E) of the NIRC specifically
requires that the corporation or association be non-stock, which is defined by the Corporation Code as
"one where no part of its income is distributable as dividends to its members, trustees, or officers" 49 and
that any profit "obtain[ed] as an incident to its operations shall, whenever necessary or proper, be used for
the furtherance of the purpose or purposes for which the corporation was organized." 50 However, under
Lung Center, any profit by a charitable institution must not only be plowed back "whenever necessary or
proper," but must be "devoted or used altogether to the charitable object which it is intended to
achieve." 51

The operations of the charitable institution generally refer to its regular activities. Section 30(E) of the
NIRC requires that these operations be exclusive to charity. There is also a specific requirement that "no
part of [the] net income or asset shall belong to or inure to the benefit of any member, organizer, officer or
any specific person." The use of lands, buildings and improvements of the institution is but a part of its
operations.

There is no dispute that St. Luke's is organized as a non-stock and non-profit charitable institution.
However, this does not automatically exempt St. Luke's from paying taxes. This only refers to the
organization of St. Luke's. Even if St. Luke's meets the test of charity, a charitable institution is not ipso
facto tax exempt. To be exempt from real property taxes, Section 28(3), Article VI of the Constitution
requires that a charitable institution use the property "actually, directly and exclusively" for charitable
purposes. To be exempt from income taxes, Section 30(E) of the NIRC requires that a charitable
institution must be "organized and operated exclusively" for charitable purposes. Likewise, to be exempt
from income taxes, Section 30(G) of the NIRC requires that the institution be "operated exclusively" for
social welfare.

However, the last paragraph of Section 30 of the NIRC qualifies the words "organized and operated
exclusively" by providing that:

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 tax imposed
under this Code. (Emphasis supplied)

In short, the last paragraph of Section 30 provides that if a tax exempt charitable institution conducts
"any" activity for profit, such activity is not tax exempt even as its not-for-profit activities remain tax
exempt. This paragraph qualifies the requirements in Section 30(E) that the "[n]on-stock corporation or
association [must be] organized and operated exclusively for x x x charitable x x x purposes x x x." It
likewise qualifies the requirement in Section 30(G) that the civic organization must be "operated
exclusively" for the promotion of social welfare.

Thus, even if the charitable institution must be "organized and operated exclusively" for charitable
purposes, it is nevertheless allowed to engage in "activities conducted for profit" without losing its tax
exempt status for its not-for-profit activities. The only consequence is that the "income of whatever kind
and character" of a charitable institution "from any of its activities conducted for profit, regardless of the
disposition made of such income, shall be subject to tax." Prior to the introduction of Section 27(B), the
tax rate on such income from for-profit activities was the ordinary corporate rate under Section 27(A).
With the introduction of Section 27(B), the tax rate is now 10%.
In 1998, St. Luke's had total revenues of P1,730,367,965 from services to paying patients. It cannot be
disputed that a hospital which receives approximately P1.73 billion from paying patients is not an
institution "operated exclusively" for charitable purposes. Clearly, revenues from paying patients are
income received from "activities conducted for profit." 52 Indeed, St. Luke's admits that it derived profits
from its paying patients. St. Luke's declared P1,730,367,965 as "Revenues from Services to Patients" in
contrast to its "Free Services" expenditure of P218,187,498. In its Comment in G.R. No. 195909, St.
Luke's showed the following "calculation" to support its claim that 65.20% of its "income after expenses
was allocated to free or charitable services" in 1998. 53

REVENUES FROM SERVICES TO PATIENTS P1,730,367,965.00

OPERATING EXPENSES

Professional care of patients P1,016,608,394.00

Administrative 287,319,334.00

Household and Property 91,797,622.00

P1,395,725,350.00

INCOME FROM OPERATIONS P334,642,615.00 100%

Free Services -218,187,498.00 -65.20%

INCOME FROM OPERATIONS, Net of FREE SERVICES P116,455,117.00 34.80%

OTHER INCOME 17,482,304.00

EXCESS OF REVENUES OVER EXPENSES P133,937,421.00

In Lung Center, this Court declared:

"[e]xclusive" 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." x
x x The words "dominant use" or "principal use" cannot be substituted for the words "used exclusively"
without doing violence to the Constitution and the law. Solely is synonymous with exclusively. 54

The Court cannot expand the meaning of the words "operated exclusively" without violating the NIRC.
Services to paying patients are activities conducted for profit. They cannot be considered any other way.
There is a "purpose to make profit over and above the cost" of services. 55 The P1.73 billion total
revenues from paying patients is not even incidental to St. Luke's charity expenditure of P218,187,498 for
non-paying patients.
St. Luke's claims that its charity expenditure of P218,187,498 is 65.20% of its operating income in 1998.
However, if a part of the remaining 34.80% of the operating income is reinvested in property, equipment
or facilities used for services to paying and non-paying patients, then it cannot be said that the income is
"devoted or used altogether to the charitable object which it is intended to achieve." 56 The income is
plowed back to the corporation not entirely for charitable purposes, but for profit as well. In any case, the
last paragraph of Section 30 of the NIRC expressly qualifies that income from activities for profit is taxable
"regardless of the disposition made of such income."

Jesus Sacred Heart College declared that there is no official legislative record explaining the phrase "any
activity conducted for profit." However, it quoted a deposition of Senator Mariano Jesus Cuenco, who was
a member of the Committee of Conference for the Senate, which introduced the phrase "or from any
activity conducted for profit."

P. Cuando ha hablado de la Universidad de Santo Toms que tiene un hospital, no cree Vd. que es una
actividad esencial dicho hospital para el funcionamiento del colegio de medicina de dicha universidad?

xxxx

R. Si el hospital se limita a recibir enformos pobres, mi contestacin seria afirmativa; pero considerando
que el hospital tiene cuartos de pago, y a los mismos generalmente van enfermos de buena posicin
social econmica, lo que se paga por estos enfermos debe estar sujeto a 'income tax', y es una de las
razones que hemos tenido para insertar las palabras o frase 'or from any activity conducted for profit.' 57

The question was whether having a hospital is essential to an educational institution like the College of
Medicine of the University of Santo Tomas. Senator Cuenco answered that if the hospital has paid rooms
generally occupied by people of good economic standing, then it should be subject to income tax. He said
that this was one of the reasons Congress inserted the phrase "or any activity conducted for profit."

The question in Jesus Sacred Heart College involves an educational institution. 58 However, it is
applicable to charitable institutions because Senator Cuenco's response shows an intent to focus on the
activities of charitable institutions. Activities for profit should not escape the reach of taxation. Being a
non-stock and non-profit corporation does not, by this reason alone, completely exempt an institution from
tax. An institution cannot use its corporate form to prevent its profitable activities from being taxed.

The Court finds that St. Luke's is a corporation that is not "operated exclusively" for charitable or social
welfare purposes insofar as its revenues from paying patients are concerned. This ruling is based not only
on a strict interpretation of a provision granting tax exemption, but also on the clear and plain text of
Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires that an institution be "operated
exclusively" for charitable or social welfare purposes to be completely exempt from income tax. An
institution under Section 30(E) or (G) does not lose its tax exemption if it earns income from its for-profit
activities. Such income from for-profit activities, under the last paragraph of Section 30, is merely subject
to income tax, previously at the ordinary corporate rate but now at the preferential 10% rate pursuant to
Section 27(B).

A tax exemption is effectively a social subsidy granted by the State because an exempt institution is
spared from sharing in the expenses of government and yet benefits from them. Tax exemptions for
charitable institutions should therefore be limited to institutions beneficial to the public and those which
improve social welfare. A profit-making entity should not be allowed to exploit this subsidy to the detriment
of the government and other taxpayers.1wphi1

St. Luke's fails to meet the requirements under Section 30(E) and (G) of the NIRC to be completely tax
exempt from all its income. However, it remains a proprietary non-profit hospital under Section 27(B) of
the NIRC as long as it does not distribute any of its profits to its members and such profits are reinvested
pursuant to its corporate purposes. St. Luke's, as a proprietary non-profit hospital, is entitled to the
preferential tax rate of 10% on its net income from its for-profit activities.

St. Luke's is therefore liable for deficiency income tax in 1998 under Section 27(B) of the NIRC. However,
St. Luke's has good reasons to rely on the letter dated 6 June 1990 by the BIR, which opined that St.
Luke's is "a corporation for purely charitable and social welfare purposes"59 and thus exempt from
income tax. 60 In Michael J. Lhuillier, Inc. v. Commissioner of Internal Revenue, 61 the Court said that
"good faith and honest belief that one is not subject to tax on the basis of previous interpretation of
government agencies tasked to implement the tax law, are sufficient justification to delete the imposition
of surcharges and interest." 62

WHEREFORE, the petition of the Commissioner of Internal Revenue in G.R. No. 195909 is PARTLY
GRANTED. The Decision of the Court of Tax Appeals En Banc dated 19 November 2010 and its
Resolution dated 1 March 2011 in CTA Case No. 6746 are MODIFIED. St. Luke's Medical Center, Inc. is
ORDERED TO PAY the deficiency income tax in 1998 based on the 10% preferential income tax rate
under Section 27(B) of the National Internal Revenue Code. However, it is not liable for surcharges and
interest on such deficiency income tax under Sections 248 and 249 of the National Internal Revenue
Code. All other parts of the Decision and Resolution of the Court of Tax Appeals are AFFIRMED.

The petition of St. Luke's Medical Center, Inc. in G.R. No. 195960 is DENIED for violating Section 1, Rule
45 of the Rules of Court.

SO ORDERED.

G.R. No. 144104 June 29, 2004

LUNG CENTER OF THE PHILIPPINES, petitioner,

vs.
QUEZON CITY and CONSTANTINO P. ROSAS, in his capacity as City Assessor of Quezon
City, respondents.

DECISION

CALLEJO, SR., J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Court, as amended, of the
Decision1 dated July 17, 2000 of the Court of Appeals in CA-G.R. SP No. 57014 which affirmed the
decision of the Central Board of Assessment Appeals holding that the lot owned by the petitioner and its
hospital building constructed thereon are subject to assessment for purposes of real property tax.

The Antecedents

The petitioner Lung Center of the Philippines is a non-stock and non-profit entity established on January
16, 1981 by virtue of Presidential Decree No. 1823. 2 It is the registered owner of a parcel of land,
particularly described as Lot No. RP-3-B-3A-1-B-1, SWO-04-000495, located at Quezon Avenue corner
Elliptical Road, Central District, Quezon City. The lot has an area of 121,463 square meters and is
covered by Transfer Certificate of Title (TCT) No. 261320 of the Registry of Deeds of Quezon City.
Erected in the middle of the aforesaid lot is a hospital known as the Lung Center of the Philippines. A big
space at the ground floor is being leased to private parties, for canteen and small store spaces, and to
medical or professional practitioners who use the same as their private clinics for their patients whom they
charge for their professional services. Almost one-half of the entire area on the left side of the building
along Quezon Avenue is vacant and idle, while a big portion on the right side, at the corner of Quezon
Avenue and Elliptical Road, is being leased for commercial purposes to a private enterprise known as the
Elliptical Orchids and Garden Center.

The petitioner accepts paying and non-paying patients. It also renders medical services to out-patients,
both paying and non-paying. Aside from its income from paying patients, the petitioner receives annual
subsidies from the government.

On June 7, 1993, both the land and the hospital building of the petitioner were assessed for real property
taxes in the amount of P4,554,860 by the City Assessor of Quezon City. 3 Accordingly, Tax Declaration
Nos. C-021-01226 (16-2518) and C-021-01231 (15-2518-A) were issued for the land and the hospital
building, respectively.4 On August 25, 1993, the petitioner filed a Claim for Exemption 5 from real property
taxes with the City Assessor, predicated on its claim that it is a charitable institution. The petitioners
request was denied, and a petition was, thereafter, filed before the Local Board of Assessment Appeals of
Quezon City (QC-LBAA, for brevity) for the reversal of the resolution of the City Assessor. The petitioner
alleged that under Section 28, paragraph 3 of the 1987 Constitution, the property is exempt from real
property taxes. It averred that a minimum of 60% of its hospital beds are exclusively used for charity
patients and that the major thrust of its hospital operation is to serve charity patients. The petitioner
contends that it is a charitable institution and, as such, is exempt from real property taxes. The QC-LBAA
rendered judgment dismissing the petition and holding the petitioner liable for real property taxes. 6

The QC-LBAAs decision was, likewise, affirmed on appeal by the Central Board of Assessment Appeals
of Quezon City (CBAA, for brevity) 7 which ruled that the petitioner was not a charitable institution and that
its real properties were not actually, directly and exclusively used for charitable purposes; hence, it was
not entitled to real property tax exemption under the constitution and the law. The petitioner sought relief
from the Court of Appeals, which rendered judgment affirming the decision of the CBAA. 8

Undaunted, the petitioner filed its petition in this Court contending that:

A. THE COURT A QUO ERRED IN DECLARING PETITIONER AS NOT ENTITLED TO REALTY

TAX EXEMPTIONS ON THE GROUND THAT ITS LAND, BUILDING AND IMPROVEMENTS,
SUBJECT OF ASSESSMENT, ARE NOT ACTUALLY, DIRECTLY AND EXCLUSIVELY DEVOTED
FOR CHARITABLE PURPOSES.

B. WHILE PETITIONER IS NOT DECLARED AS REAL PROPERTY TAX EXEMPT UNDER ITS
CHARTER, PD 1823, SAID EXEMPTION MAY NEVERTHELESS BE EXTENDED UPON
PROPER APPLICATION.

The petitioner avers that it is a charitable institution within the context of Section 28(3), Article VI of the
1987 Constitution. It asserts that its character as a charitable institution is not altered by the fact that it
admits paying patients and renders medical services to them, leases portions of the land to private
parties, and rents out portions of the hospital to private medical practitioners from which it derives income
to be used for operational expenses. The petitioner points out that for the years 1995 to 1999, 100% of its
out-patients were charity patients and of the hospitals 282-bed capacity, 60% thereof, or 170 beds, is
allotted to charity patients. It asserts that the fact that it receives subsidies from the government attests to
its character as a charitable institution. It contends that the "exclusivity" required in the Constitution does
not necessarily mean "solely." Hence, even if a portion of its real estate is leased out to private individuals
from whom it derives income, it does not lose its character as a charitable institution, and its exemption
from the payment of real estate taxes on its real property. The petitioner cited our ruling in Herrera v. QC-
BAA9 to bolster its pose. The petitioner further contends that even if P.D. No. 1823 does not exempt it
from the payment of real estate taxes, it is not precluded from seeking tax exemption under the 1987
Constitution.

In their comment on the petition, the respondents aver that the petitioner is not a charitable entity. The
petitioners real property is not exempt from the payment of real estate taxes under P.D. No. 1823 and
even under the 1987 Constitution because it failed to prove that it is a charitable institution and that the
said property is actually, directly and exclusively used for charitable purposes. The respondents noted
that in a newspaper report, it appears that graft charges were filed with the Sandiganbayan against the
director of the petitioner, its administrative officer, and Zenaida Rivera, the proprietress of the Elliptical
Orchids and Garden Center, for entering into a lease contract over 7,663.13 square meters of the
property in 1990 for only P20,000 a month, when the monthly rental should be P357,000 a month as
determined by the Commission on Audit; and that instead of complying with the directive of the COA for
the cancellation of the contract for being grossly prejudicial to the government, the petitioner renewed the
same on March 13, 1995 for a monthly rental of only P24,000. They assert that the petitioner uses the
subsidies granted by the government for charity patients and uses the rest of its income from the property
for the benefit of paying patients, among other purposes. They aver that the petitioner failed to adduce
substantial evidence that 100% of its out-patients and 170 beds in the hospital are reserved for indigent
patients. The respondents further assert, thus:

13. That the claims/allegations of the Petitioner LCP do not speak well of its record of service.
That before a patient is admitted for treatment in the Center, first impression is that it is pay-
patient and required to pay a certain amount as deposit. That even if a patient is living below the
poverty line, he is charged with high hospital bills. And, without these bills being first settled, the
poor patient cannot be allowed to leave the hospital or be discharged without first paying the
hospital bills or issue a promissory note guaranteed and indorsed by an influential agency or
person known only to the Center; that even the remains of deceased poor patients suffered the
same fate. Moreover, before a patient is admitted for treatment as free or charity patient, one
must undergo a series of interviews and must submit all the requirements needed by the Center,
usually accompanied by endorsement by an influential agency or person known only to the
Center. These facts were heard and admitted by the Petitioner LCP during the hearings before
the Honorable QC-BAA and Honorable CBAA. These are the reasons of indigent patients, instead
of seeking treatment with the Center, they prefer to be treated at the Quezon Institute. Can such
practice by the Center be called charitable?10

The Issues

The issues for resolution are the following: (a) whether the petitioner is a charitable institution within the
context of Presidential Decree No. 1823 and the 1973 and 1987 Constitutions and Section 234(b) of
Republic Act No. 7160; and (b) whether the real properties of the petitioner are exempt from real property
taxes.

The Courts Ruling

The petition is partially granted.

On the first issue, we hold that the petitioner is a charitable institution within the context of the 1973 and
1987 Constitutions. To determine whether an enterprise is a charitable institution/entity or not, the
elements which should be considered include the statute creating the enterprise, its corporate purposes,
its constitution and by-laws, the methods of administration, the nature of the actual work performed, the
character of the services rendered, the indefiniteness of the beneficiaries, and the use and occupation of
the properties.11

In the legal sense, a charity may be fully defined as a gift, to be applied consistently with existing laws, for
the benefit of an indefinite number of persons, either by bringing their minds and hearts under the
influence of education or religion, by assisting them to establish themselves in life or otherwise lessening
the burden of government.12 It may be applied to almost anything that tend to promote the well-doing and
well-being of social man. It embraces the improvement and promotion of the happiness of man. 13 The
word "charitable" is not restricted to relief of the poor or sick. 14 The test of a charity and a charitable
organization are in law the same. The test whether an enterprise is charitable or not is whether it exists to
carry out a purpose reorganized in law as charitable or whether it is maintained for gain, profit, or private
advantage.

Under P.D. No. 1823, the petitioner is a non-profit and non-stock corporation which, subject to the
provisions of the decree, is to be administered by the Office of the President of the Philippines with the
Ministry of Health and the Ministry of Human Settlements. It was organized for the welfare and benefit of
the Filipino people principally to help combat the high incidence of lung and pulmonary diseases in the
Philippines. The raison detre for the creation of the petitioner is stated in the decree, viz:

Whereas, for decades, respiratory diseases have been a priority concern, having been the
leading cause of illness and death in the Philippines, comprising more than 45% of the total
annual deaths from all causes, thus, exacting a tremendous toll on human resources, which
ailments are likely to increase and degenerate into serious lung diseases on account of unabated
pollution, industrialization and unchecked cigarette smoking in the country;lavvph!l.net

Whereas, the more common lung diseases are, to a great extent, preventable, and curable with
early and adequate medical care, immunization and through prompt and intensive prevention and
health education programs;

Whereas, there is an urgent need to consolidate and reinforce existing programs, strategies and
efforts at preventing, treating and rehabilitating people affected by lung diseases, and to
undertake research and training on the cure and prevention of lung diseases, through a Lung
Center which will house and nurture the above and related activities and provide tertiary-level
care for more difficult and problematical cases;

Whereas, to achieve this purpose, the Government intends to provide material and financial
support towards the establishment and maintenance of a Lung Center for the welfare and benefit
of the Filipino people.15

The purposes for which the petitioner was created are spelled out in its Articles of Incorporation, thus:

SECOND: That the purposes for which such corporation is formed are as follows:

1. To construct, establish, equip, maintain, administer and conduct an integrated medical

institution which shall specialize in the treatment, care, rehabilitation and/or relief of lung
and allied diseases in line with the concern of the government to assist and provide
material and financial support in the establishment and maintenance of a lung center
primarily to benefit the people of the Philippines and in pursuance of the policy of the
State to secure the well-being of the people by providing them specialized health and
medical services and by minimizing the incidence of lung diseases in the country and
elsewhere.

2. To promote the noble undertaking of scientific research related to the prevention of

lung or pulmonary ailments and the care of lung patients, including the holding of a series
of relevant congresses, conventions, seminars and conferences;

3. To stimulate and, whenever possible, underwrite scientific researches on the biological,

demographic, social, economic, eugenic and physiological aspects of lung or pulmonary
diseases and their control; and to collect and publish the findings of such research for
public consumption;

4. To facilitate the dissemination of ideas and public acceptance of information on lung

consciousness or awareness, and the development of fact-finding, information and
 reporting facilities for and in aid of the general purposes or objects aforesaid, especially
in human lung requirements, general health and physical fitness, and other relevant or
related fields;

5. To encourage the training of physicians, nurses, health officers, social workers and
medical and technical personnel in the practical and scientific implementation of services
to lung patients;

6. To assist universities and research institutions in their studies about lung diseases, to
encourage advanced training in matters of the lung and related fields and to support
educational programs of value to general health;

7. To encourage the formation of other organizations on the national, provincial and/or

city and local levels; and to coordinate their various efforts and activities for the purpose
of achieving a more effective programmatic approach on the common problems relative
to the objectives enumerated herein;

8. To seek and obtain assistance in any form from both international and local
foundations and organizations; and to administer grants and funds that may be given to
the organization;

9. To extend, whenever possible and expedient, medical services to the public and, in
general, to promote and protect the health of the masses of our people, which has long
been recognized as an economic asset and a social blessing;

10. To help prevent, relieve and alleviate the lung or pulmonary afflictions and maladies of
the people in any and all walks of life, including those who are poor and needy, all without
regard to or discrimination, because of race, creed, color or political belief of the persons
helped; and to enable them to obtain treatment when such disorders occur;

11. To participate, as circumstances may warrant, in any activity designed and carried on
to promote the general health of the community;

12. To acquire and/or borrow funds and to own all funds or equipment, educational
materials and supplies by purchase, donation, or otherwise and to dispose of and
distribute the same in such manner, and, on such basis as the Center shall, from time to
time, deem proper and best, under the particular circumstances, to serve its general and
non-profit purposes and objectives;lavvphil.net

13. To buy, purchase, acquire, own, lease, hold, sell, exchange, transfer and dispose of
properties, whether real or personal, for purposes herein mentioned; and

14. To do everything necessary, proper, advisable or convenient for the accomplishment

of any of the powers herein set forth and to do every other act and thing incidental thereto
or connected therewith.16

Hence, the medical services of the petitioner are to be rendered to the public in general in any and all
walks of life including those who are poor and the needy without discrimination. After all, any person, the
rich as well as the poor, may fall sick or be injured or wounded and become a subject of charity. 17

As a general principle, a charitable institution does not lose its character as such and its exemption from
taxes simply because it derives income from paying patients, whether out-patient, or confined in the
hospital, or receives subsidies from the government, so long as the money received is devoted or used
altogether to the charitable object which it is intended to achieve; and no money inures to the private
benefit of the persons managing or operating the institution. 18 In Congregational Sunday School, etc. v.
Board of Review,19 the State Supreme Court of Illinois held, thus:

[A]n institution does not lose its charitable character, and consequent exemption from taxation,
by reason of the fact that those recipients of its benefits who are able to pay are required to do
so, where no profit is made by the institution and the amounts so received are applied in
furthering its charitable purposes, and those benefits are refused to none on account of inability to
pay therefor. The fundamental ground upon which all exemptions in favor of charitable institutions
are based is the benefit conferred upon the public by them, and a consequent relief, to some
extent, of the burden upon the state to care for and advance the interests of its citizens. 20

As aptly stated by the State Supreme Court of South Dakota in Lutheran Hospital Association of South
Dakota v. Baker:21

[T]he fact that paying patients are taken, the profits derived from attendance upon these
patients being exclusively devoted to the maintenance of the charity, seems rather to enhance the
usefulness of the institution to the poor; for it is a matter of common observation amongst those
who have gone about at all amongst the suffering classes, that the deserving poor can with
difficulty be persuaded to enter an asylum of any kind confined to the reception of objects of
charity; and that their honest pride is much less wounded by being placed in an institution in
which paying patients are also received. The fact of receiving money from some of the patients
does not, we think, at all impair the character of the charity, so long as the money thus received is
devoted altogether to the charitable object which the institution is intended to further. 22

The money received by the petitioner becomes a part of the trust fund and must be devoted to public trust
purposes and cannot be diverted to private profit or benefit. 23

Under P.D. No. 1823, the petitioner is entitled to receive donations. The petitioner does not lose its
character as a charitable institution simply because the gift or donation is in the form of subsidies granted
by the government. As held by the State Supreme Court of Utah in Yorgason v. County Board of
Equalization of Salt Lake County:24

Second, the government subsidy payments are provided to the project. Thus, those payments
are like a gift or donation of any other kind except they come from the government. In
both Intermountain Health Careand the present case, the crux is the presence or absence of
material reciprocity. It is entirely irrelevant to this analysis that the government, rather than a
private benefactor, chose to make up the deficit resulting from the exchange between St. Marks
Tower and the tenants by making a contribution to the landlord, just as it would have been
irrelevant in Intermountain Health Care if the patients income supplements had come from
private individuals rather than the government.

Therefore, the fact that subsidization of part of the cost of furnishing such housing is by the
government rather than private charitable contributions does not dictate the denial of a charitable
exemption if the facts otherwise support such an exemption, as they do here. 25

In this case, the petitioner adduced substantial evidence that it spent its income, including the subsidies
from the government for 1991 and 1992 for its patients and for the operation of the hospital. It even
incurred a net loss in 1991 and 1992 from its operations.

Even as we find that the petitioner is a charitable institution, we hold, anent the second issue, that those
portions of its real property that are leased to private entities are not exempt from real property taxes as
these are not actually, directly and exclusively used for charitable purposes.
The settled rule in this jurisdiction is that laws granting exemption from tax are construed strictissimi
juris against the taxpayer and liberally in favor of the taxing power. Taxation is the rule and exemption is
the exception. The effect of an exemption is equivalent to an appropriation. Hence, a claim for exemption
from tax payments must be clearly shown and based on language in the law too plain to be
mistaken.26 As held in Salvation Army v. Hoehn:27

An intention on the part of the legislature to grant an exemption from the taxing power of the state
will never be implied from language which will admit of any other reasonable construction. Such
an intention must be expressed in clear and unmistakable terms, or must appear by necessary
implication from the language used, for it is a well settled principle that, when a special privilege
or exemption is claimed under a statute, charter or act of incorporation, it is to be construed
strictly against the property owner and in favor of the public. This principle applies with peculiar
force to a claim of exemption from taxation . 28

Section 2 of Presidential Decree No. 1823, relied upon by the petitioner, specifically provides that the
petitioner shall enjoy the tax exemptions and privileges:

SEC. 2. TAX EXEMPTIONS AND PRIVILEGES. Being a non-profit, non-stock corporation

organized primarily to help combat the high incidence of lung and pulmonary diseases in the
Philippines, all donations, contributions, endowments and equipment and supplies to be imported
by authorized entities or persons and by the Board of Trustees of the Lung Center of the
Philippines, Inc., for the actual use and benefit of the Lung Center, shall be exempt from income
and gift taxes, the same further deductible in full for the purpose of determining the maximum
deductible amount under Section 30, paragraph (h), of the National Internal Revenue Code, as
amended.

The Lung Center of the Philippines shall be exempt from the payment of taxes, charges and fees
imposed by the Government or any political subdivision or instrumentality thereof with respect to
equipment purchases made by, or for the Lung Center.29

It is plain as day that under the decree, the petitioner does not enjoy any property tax exemption
privileges for its real properties as well as the building constructed thereon. If the intentions were
otherwise, the same should have been among the enumeration of tax exempt privileges under Section 2:

It is a settled rule of statutory construction that the express mention of one person, thing, or
consequence implies the exclusion of all others. The rule is expressed in the familiar
maxim, expressio unius est exclusio alterius.

The rule of expressio unius est exclusio alterius is formulated in a number of ways. One variation
of the rule is the principle that what is expressed puts an end to that which is implied. Expressium
facit cessare tacitum. Thus, where a statute, by its terms, is expressly limited to certain matters, it
may not, by interpretation or construction, be extended to other matters.

...

The rule of expressio unius est exclusio alterius and its variations are canons of restrictive
interpretation. They are based on the rules of logic and the natural workings of the human mind.
They are predicated upon ones own voluntary act and not upon that of others. They proceed
from the premise that the legislature would not have made specified enumeration in a statute had
the intention been not to restrict its meaning and confine its terms to those expressly mentioned. 30

The exemption must not be so enlarged by construction since the reasonable presumption is that the
State has granted in express terms all it intended to grant at all, and that unless the privilege is limited to
the very terms of the statute the favor would be intended beyond what was meant. 31
Section 28(3), Article VI of the 1987 Philippine Constitution provides, thus:

(3) Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques,
non-profit cemeteries, and all lands, buildings, and
improvements, actually, directly and exclusively used for religious, charitable or educational
purposes shall be exempt from taxation.32

The tax exemption under this constitutional provision covers property taxes only.33 As Chief Justice Hilario
G. Davide, Jr., then a member of the 1986 Constitutional Commission, explained: ". . . what is exempted
is not the institution itself . . .; those exempted from real estate taxes are lands, buildings and
improvements actually, directly and exclusively used for religious, charitable or educational purposes." 34

Consequently, the constitutional provision is implemented by Section 234(b) of Republic Act No. 7160
(otherwise known as the Local Government Code of 1991) as follows:

SECTION 234. Exemptions from Real Property Tax. The following are exempted from payment
of the real property tax:

...

(b) Charitable institutions, churches, parsonages or convents appurtenant thereto,

mosques, non-profit or religious cemeteries and all lands, buildings, and
improvements actually, directly, and exclusivelyused for religious, charitable or
educational purposes.35

We note that under the 1935 Constitution, "... all lands, buildings, and improvements used exclusively for
charitable purposes shall be exempt from taxation." 36 However, under the 1973 and the present
Constitutions, for "lands, buildings, and improvements" of the charitable institution to be considered
exempt, the same should not only be "exclusively" used for charitable purposes; it is required that such
property be used "actually" and "directly" for such purposes. 37

In light of the foregoing substantial changes in the Constitution, the petitioner cannot rely on our ruling
in Herrera v. Quezon City Board of Assessment Appeals which was promulgated on September 30, 1961
before the 1973 and 1987 Constitutions took effect. 38 As this Court held in Province of Abra v. Hernando:39

Under the 1935 Constitution: "Cemeteries, churches, and parsonages or convents appurtenant
thereto, and all lands, buildings, and improvements used exclusively for religious, charitable, or
educational purposes shall be exempt from taxation." The present Constitution added "charitable
institutions, mosques, and non-profit cemeteries" and required that for the exemption of "lands,
buildings, and improvements," they should not only be "exclusively" but also "actually" and
"directly" used for religious or charitable purposes. The Constitution is worded differently. The
change should not be ignored. It must be duly taken into consideration. Reliance on past
decisions would have sufficed were the words "actually" as well as "directly" not added. There
must be proof therefore of the actual and direct use of the lands, buildings, and improvements for
religious or charitable purposes to be exempt from taxation.

Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to the exemption,
the petitioner is burdened to prove, by clear and unequivocal proof, that (a) it is a charitable institution;
and (b) its real properties are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes.
"Exclusive" is defined as possessed and enjoyed to the exclusion of others; debarred from participation or
enjoyment; and "exclusively" is defined, "in a manner to exclude; as enjoying a privilege exclusively." 40 If
real property is used for one or more commercial purposes, it is not exclusively used for the exempted
purposes but is subject to taxation. 41 The words "dominant use" or "principal use" cannot be substituted
for the words "used exclusively" without doing violence to the Constitutions and the law. 42 Solely is
synonymous with exclusively.43

What is meant by actual, direct and exclusive use of the property for charitable purposes is the direct and
immediate and actual application of the property itself to the purposes for which the charitable institution
is organized. It is not the use of the income from the real property that is determinative of whether the
property is used for tax-exempt purposes.44

The petitioner failed to discharge its burden to prove that the entirety of its real property is actually,
directly and exclusively used for charitable purposes. While portions of the hospital are used for the
treatment of patients and the dispensation of medical services to them, whether paying or non-paying,
other portions thereof are being leased to private individuals for their clinics and a canteen. Further, a
portion of the land is being leased to a private individual for her business enterprise under the business
name "Elliptical Orchids and Garden Center." Indeed, the petitioners evidence shows that it
collected P1,136,483.45 as rentals in 1991 and P1,679,999.28 for 1992 from the said lessees.

Accordingly, we hold that the portions of the land leased to private entities as well as those parts of the
hospital leased to private individuals are not exempt from such taxes. 45 On the other hand, the portions of
the land occupied by the hospital and portions of the hospital used for its patients, whether paying or non-
paying, are exempt from real property taxes.

IN LIGHT OF ALL THE FOREGOING, the petition is PARTIALLY GRANTED. The respondent Quezon
City Assessor is hereby DIRECTED to determine, after due hearing, the precise portions of the land and
the area thereof which are leased to private persons, and to compute the real property taxes due thereon
as provided for by law.

SO ORDERED.

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 Decision2 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.

SO ORDERED. 5

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.

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 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 10 petitioner 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 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.