Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-7859 December 22, 1955

WALTER LUTZ, as Judicial Administrator of the Intestate Estate of the deceased Antonio
Jayme Ledesma, plaintiff-appellant,
vs.
J. ANTONIO ARANETA, as the Collector of Internal Revenue, defendant-appellee.

Ernesto J. Gonzaga for appellant.

Office of the Solicitor General Ambrosio Padilla, First Assistant Solicitor General Guillermo E.
Torres and Solicitor Felicisimo R. Rosete for appellee.

REYES, J.B L., J.:

This case was initiated in the Court of First Instance of Negros Occidental to test the legality of
the taxes imposed by Commonwealth Act No. 567, otherwise known as the Sugar Adjustment
Act.

Promulgated in 1940, the law in question opens (section 1) with a declaration of emergency, due
to the threat to our industry by the imminent imposition of export taxes upon sugar as provided in
the Tydings-McDuffe Act, and the "eventual loss of its preferential position in the United States
market"; wherefore, the national policy was expressed "to obtain a readjustment of the benefits
derived from the sugar industry by the component elements thereof" and "to stabilize the sugar
industry so as to prepare it for the eventuality of the loss of its preferential position in the United
States market and the imposition of the export taxes."

In section 2, Commonwealth Act 567 provides for an increase of the existing tax on the
manufacture of sugar, on a graduated basis, on each picul of sugar manufactured; while section
3 levies on owners or persons in control of lands devoted to the cultivation of sugar cane and
ceded to others for a consideration, on lease or otherwise —

a tax equivalent to the difference between the money value of the rental or
consideration collected and the amount representing 12 per centum of the
assessed value of such land.

According to section 6 of the law —

SEC. 6. All collections made under this Act shall accrue to a special fund in the
Philippine Treasury, to be known as the 'Sugar Adjustment and Stabilization
Fund,' and shall be paid out only for any or all of the following purposes or to
attain any or all of the following objectives, as may be provided by law.

First, to place the sugar industry in a position to maintain itself, despite the
gradual loss of the preferntial position of the Philippine sugar in the United States
market, and ultimately to insure its continued existence notwithstanding the loss
of that market and the consequent necessity of meeting competition in the free
markets of the world;
 Second, to readjust the benefits derived from the sugar industry by all of the
component elements thereof — the mill, the landowner, the planter of the sugar
cane, and the laborers in the factory and in the field — so that all might continue
profitably to engage therein;lawphi1.net

Third, to limit the production of sugar to areas more economically suited to the
production thereof; and

Fourth, to afford labor employed in the industry a living wage and to improve their
living and working conditions: Provided, That the President of the Philippines
may, until the adjourment of the next regular session of the National Assembly,
make the necessary disbursements from the fund herein created (1) for the
establishment and operation of sugar experiment station or stations and the
undertaking of researchers (a) to increase the recoveries of the centrifugal sugar
factories with the view of reducing manufacturing costs, (b) to produce and
propagate higher yielding varieties of sugar cane more adaptable to different
district conditions in the Philippines, (c) to lower the costs of raising sugar cane,
(d) to improve the buying quality of denatured alcohol from molasses for motor
fuel, (e) to determine the possibility of utilizing the other by-products of the
industry, (f) to determine what crop or crops are suitable for rotation and for the
utilization of excess cane lands, and (g) on other problems the solution of which
would help rehabilitate and stabilize the industry, and (2) for the improvement of
living and working conditions in sugar mills and sugar plantations, authorizing him
to organize the necessary agency or agencies to take charge of the expenditure
and allocation of said funds to carry out the purpose hereinbefore enumerated,
and, likewise, authorizing the disbursement from the fund herein created of the
necessary amount or amounts needed for salaries, wages, travelling expenses,
equipment, and other sundry expenses of said agency or agencies.

Plaintiff, Walter Lutz, in his capacity as Judicial Administrator of the Intestate Estate of Antonio
Jayme Ledesma, seeks to recover from the Collector of Internal Revenue the sum of P14,666.40
paid by the estate as taxes, under section 3 of the Act, for the crop years 1948-1949 and 1949-
1950; alleging that such tax is unconstitutional and void, being levied for the aid and support of
the sugar industry exclusively, which in plaintiff's opinion is not a public purpose for which a tax
may be constitutioally levied. The action having been dismissed by the Court of First Instance,
the plaintifs appealed the case directly to this Court (Judiciary Act, section 17).

The basic defect in the plaintiff's position is his assumption that the tax provided for in
Commonwealth Act No. 567 is a pure exercise of the taxing power. Analysis of the Act, and
particularly of section 6 (heretofore quoted in full), will show that the tax is levied with a regulatory
purpose, to provide means for the rehabilitation and stabilization of the threatened sugar
industry. In other words, the act is primarily an exercise of the police power.

This Court can take judicial notice of the fact that sugar production is one of the great industries
of our nation, sugar occupying a leading position among its export products; that it gives
employment to thousands of laborers in fields and factories; that it is a great source of the state's
wealth, is one of the important sources of foreign exchange needed by our government, and is
thus pivotal in the plans of a regime committed to a policy of currency stability. Its promotion,
protection and advancement, therefore redounds greatly to the general welfare. Hence it was
competent for the legislature to find that the general welfare demanded that the sugar industry
should be stabilized in turn; and in the wide field of its police power, the lawmaking body could
provide that the distribution of benefits therefrom be readjusted among its components to enable
it to resist the added strain of the increase in taxes that it had to sustain (Sligh vs. Kirkwood, 237
U. S. 52, 59 L. Ed. 835; Johnson vs. State ex rel. Marey, 99 Fla. 1311, 128 So. 853; Maxcy Inc.
vs. Mayo, 103 Fla. 552, 139 So. 121).
As stated in Johnson vs. State ex rel. Marey, with reference to the citrus industry in Florida —

The protection of a large industry constituting one of the great sources of the
state's wealth and therefore directly or indirectly affecting the welfare of so great
a portion of the population of the State is affected to such an extent by public
interests as to be within the police power of the sovereign. (128 Sp. 857).

Once it is conceded, as it must, that the protection and promotion of the sugar industry is a
matter of public concern, it follows that the Legislature may determine within reasonable bounds
what is necessary for its protection and expedient for its promotion. Here, the legislative
discretion must be allowed fully play, subject only to the test of reasonableness; and it is not
contended that the means provided in section 6 of the law (above quoted) bear no relation to the
objective pursued or are oppressive in character. If objective and methods are alike
constitutionally valid, no reason is seen why the state may not levy taxes to raise funds for their
prosecution and attainment. Taxation may be made the implement of the state's police power
(Great Atl. & Pac. Tea Co. vs. Grosjean, 301 U. S. 412, 81 L. Ed. 1193; U. S. vs. Butler, 297 U.
S. 1, 80 L. Ed. 477; M'Culloch vs. Maryland, 4 Wheat. 316, 4 L. Ed. 579).

That the tax to be levied should burden the sugar producers themselves can hardly be a ground
of complaint; indeed, it appears rational that the tax be obtained precisely from those who are to
be benefited from the expenditure of the funds derived from it. At any rate, it is inherent in the
power to tax that a state be free to select the subjects of taxation, and it has been repeatedly
held that "inequalities which result from a singling out of one particular class for taxation, or
exemption infringe no constitutional limitation" (Carmichael vs. Southern Coal & Coke Co., 301
U. S. 495, 81 L. Ed. 1245, citing numerous authorities, at p. 1251).

From the point of view we have taken it appears of no moment that the funds raised under the
Sugar Stabilization Act, now in question, should be exclusively spent in aid of the sugar industry,
since it is that very enterprise that is being protected. It may be that other industries are also in
need of similar protection; that the legislature is not required by the Constitution to adhere to a
policy of "all or none." As ruled in Minnesota ex rel. Pearson vs. Probate Court, 309 U. S. 270, 84
L. Ed. 744, "if the law presumably hits the evil where it is most felt, it is not to be overthrown
because there are other instances to which it might have been applied;" and that "the legislative
authority, exerted within its proper field, need not embrace all the evils within its reach" (N. L. R.
B. vs. Jones & Laughlin Steel Corp. 301 U. S. 1, 81 L. Ed. 893).

Even from the standpoint that the Act is a pure tax measure, it cannot be said that the devotion of
tax money to experimental stations to seek increase of efficiency in sugar production, utilization
of by-products and solution of allied problems, as well as to the improvements of living and
working conditions in sugar mills or plantations, without any part of such money being channeled
directly to private persons, constitutes expenditure of tax money for private purposes, (compare
Everson vs. Board of Education, 91 L. Ed. 472, 168 ALR 1392, 1400).

The decision appealed from is affirmed, with costs against appellant. So ordered.

Paras, C. J., Bengzon, Padilla, Reyes, A., Jugo, Bautista Angelo, Labrador, and Concepcion, JJ.,
concur.
Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-23645 October 29, 1968

BENJAMIN P. GOMEZ, petitioner-appellee,

vs.
ENRICO PALOMAR, in his capacity as Postmaster General, HON. BRIGIDO R. VALENCIA,
in his capacity as Secretary of Public Works and Communications, and DOMINGO GOPEZ,
in his capacity as Acting Postmaster of San Fernando, Pampanga, respondent-appellants.

Lorenzo P. Navarro and Narvaro Belar S. Navarro for petitioner-appellee.

Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Frine C. Zaballero and
Solicitor Dominador L. Quiroz for respondents-appellants.

CASTRO, J.:

This appeal puts in issue the constitutionality of Republic Act 1635,1 as amended by Republic Act
2631,2 which provides as follows:

To help raise funds for the Philippine Tuberculosis Society, the Director of Posts
shall order for the period from August nineteen to September thirty every year the
printing and issue of semi-postal stamps of different denominations with face
value showing the regular postage charge plus the additional amount of five
centavos for the said purpose, and during the said period, no mail matter shall be
accepted in the mails unless it bears such semi-postal stamps: Provided, That no
such additional charge of five centavos shall be imposed on newspapers. The
additional proceeds realized from the sale of the semi-postal stamps shall
constitute a special fund and be deposited with the National Treasury to be
expended by the Philippine Tuberculosis Society in carrying out its noble work to
prevent and eradicate tuberculosis.

The respondent Postmaster General, in implementation of the law, thereafter issued four (4)
administrative orders numbered 3 (June 20, 1958), 7 (August 9, 1958), 9 (August 28, 1958), and
10 (July 15, 1960). All these administrative orders were issued with the approval of the
respondent Secretary of Public Works and Communications.

The pertinent portions of Adm. Order 3 read as follows:

Such semi-postal stamps could not be made available during the period from
August 19 to September 30, 1957, for lack of time. However, two denominations
of such stamps, one at "5 + 5" centavos and another at "10 + 5" centavos, will
soon be released for use by the public on their mails to be posted during the
same period starting with the year 1958.

xxx xxx xxx

During the period from August 19 to September 30 each year starting in 1958, no
mail matter of whatever class, and whether domestic or foreign, posted at any
Philippine Post Office and addressed for delivery in this country or abroad, shall
be accepted for mailing unless it bears at least one such semi-postal stamp
 showing the additional value of five centavos intended for the Philippine
Tuberculosis Society.

In the case of second-class mails and mails prepaid by means of mail permits or
impressions of postage meters, each piece of such mail shall bear at least one
such semi-postal stamp if posted during the period above stated starting with the
year 1958, in addition to being charged 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.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Sanchez, Angeles and Capistrano, JJ.,
concur.
Zaldivar, J., is on leave.

Separate Opinions

FERNANDO, J., concurring:

I join fully the rest of my colleagues in the decision upholding Republic Act No. 1635 as amended
by Republic Act No. 2631 and the majority opinion expounded with Justice Castro's usual vigor
and lucidity subject to one qualification. With all due recognition of its inherently persuasive
character, it would seem to me that the same result could be achieved if reliance be had on
police power rather than the attribute of taxation, as the constitutional basis for the challenged
legislation.

1. For me, the state in question is an exercise of the regulatory power connected with the
performance of the public service. I refer of course to the government postal function, one of
respectable and ancient lineage. The United States Constitution of 1787 vests in the federal
government acting through Congress the power to establish post offices.1 The first act providing
for the organization of government departments in the Philippines, approved Sept. 6, 1901,
provided for the Bureau of Post Offices in the Department of Commerce and Police.2 Its creation
is thus a manifestation of one of the many services in which the government may engage for
public convenience and public interest. Such being the case, it seems that any legislation that in
effect would require increase cost of postage is well within the discretionary authority of the
government.

It may not be acting in a proprietary capacity but in fixing the fees that it collects for the use of the
mails, the broad discretion that it enjoys is undeniable. In that sense, the principle announced in
Esteban v. Cabanatuan City,3 in an opinion by our Chief Justice, while not precisely controlling
furnishes for me more than ample support for the validity of the challenged legislation. Thus:
"Certain exactions, imposable under an authority other than police power, are not subject,
however, to qualification as to the amount chargeable, unless the Constitution or the pertinent
laws provide otherwise. For instance, the rates of taxes, whether national or municipal, need not
be reasonable, in the absence of such constitutional or statutory limitation. Similarly, when a
municipal corporation fixes the fees for the use of its properties, such as public markets, it does
not wield the police power, or even the power of taxation. Neither does it assert governmental
authority. It exercises merely a proprietary function. And, like any private owner, it is — in the
absence of the aforementioned limitation, which does not exist in the Charter of Cabanatuan City
(Republic Act No. 526) — free to charge such sums as it may deem best, regardless of the
reasonableness of the amount fixed, for the prospective lessees are free to enter into the
corresponding contract of lease, if they are agreeable to the terms thereof or, otherwise, not
enter into such contract."

2. It would appear likewise that an expression of one's personal view both as to the attitude and
awareness that must be displayed by inferior tribunals when the "delicate and awesome" power
of passing on the validity of a statute would not be inappropriate. "The Constitution is the
supreme law, and statutes are written and enforced in submission to its commands."4 It is
likewise common place in constitutional law that a party adversely affected could, again to quote
from Cardozo, "invoke, when constitutional immunities are threatened, the judgment of the
courts."5

Since the power of judicial review flows logically from the judicial function of ascertaining the
facts and applying the law and since obviously the Constitution is the highest law before which
statutes must bend, then inferior tribunals can, in the discharge of their judicial functions, nullify
legislative acts. As a matter of fact, in clear cases, such is not only their power but their duty. In
the language of the present Chief Justice: "In fact, whenever the conflicting claims of the parties
to a litigation cannot properly be settled without inquiring into the validity of an act of Congress or
of either House thereof, the courts have, not only jurisdiction to pass upon said issue but, also,
the duty to do so, which cannot be evaded without violating the fundamental law and paving the
way to its eventual destruction."6

Nonetheless, the admonition of Cooley, specially addressed to inferior tribunals, must ever be
kept in mind. Thus: "It must be evident to any one that the power to declare a legislative
enactment void is one which the judge, conscious of the fallibility of the human judgment, will
shrink from exercising in any case where he can conscientiously and with due regard to duty and
official oath decline the responsibility."7

There must be a caveat however to the above Cooley pronouncement. Such should not be the
case, to paraphrase Freund, when the challenged legislation imperils freedom of the mind and of
the person, for given such an undesirable situation, "it is freedom that commands a momentum
of respect." Here then, fidelity to the great ideal of liberty enshrined in the Constitution may
require the judiciary to take an uncompromising and militant stand. As phrased by us in a recent
decision, "if the liberty involved were freedom of the mind or the person, the standard of its
validity of governmental acts is much more rigorous and exacting."8

So much for the appropriate judicial attitude. Now on the question of awareness of the controlling
constitutional doctrines.

There is nothing I can add to the enlightening discussion of the equal protection aspect as found
in the majority opinion. It may not be amiss to recall to mind, however, the language of Justice
Laurel in the leading case of People v. Vera,9 to the effect that the basic individual right of equal
protection "is a restraint on all the three grand departments of our government and on the
subordinate instrumentalities and subdivisions thereof, and on many constitutional powers, like
the police power, taxation and eminent domain."10 Nonetheless, no jurist was more careful in
avoiding the dire consequences to what the legislative body might have deemed necessary to
promote the ends of public welfare if the equal protection guaranty were made to constitute an
insurmountable obstacle.
A similar sense of realism was invariably displayed by Justice Frankfurter, as is quite evident
from the various citations from his pen found in the majority opinion. For him, it would be a
misreading of the equal protection clause to ignore actual conditions and settled practices. Not
for him the at times academic and sterile approach to constitutional problems of this sort. Thus:
"It would be a narrow conception of jurisprudence to confine the notion of 'laws' to what is found
written on the statute books, and to disregard the gloss which life has written upon it. Settled
state practice cannot supplant constitutional guaranties, but it can establish what is state law.
The Equal Protection Clause did not write an empty formalism into the Constitution. Deeply
embedded traditional ways of carrying out state policy, such as those of which petitioner
complains, are often tougher and truer law than the dead words of the written text."11 This too,
from the same distinguished jurist: "The Constitution does not require things which are different
in fact or opinion to be treated in law as though they were the same."12

Now, as to non-delegation. It is to be admitted that the problem of non-delegation of legislative

power at times occasions difficulties. Its strict view has been announced by Justice Laurel in the
aforecited case of People v. Vera in this language. Thus: "In testing whether a statute constitutes
an undue delegation of legislative power or not, it is usual to inquire whether the statute was
complete in all its terms and provisions when it left the hands of the legislature so that nothing
was left to the judgment of any other appointee or delegate of the legislature. .... In United States
v. Ang Tang Ho ..., this court adhered to the foregoing rule; it held an act of the legislature void in
so far as it undertook to authorize the Governor-General, in his discretion, to issue a
proclamation fixing the price of rice and to make the sale of it in violation of the proclamation a
crime."13

Only recently, the present Chief Justice reaffirmed the above view in Pelaez v. Auditor General,14
specially where the delegation deals not with an administrative function but one essentially and
eminently legislative in character. What could properly be stigmatized though to quote Justice
Cardozo, is delegation of authority that is "unconfined and vagrant, one not canalized within
banks which keep it from overflowing."15

This is not the situation as it presents itself to us. What was delegated was power not legislative
in character. Justice Laurel himself, in a later case, People v. Rosenthal,16 admitted that within
certain limits, there being a need for coping with the more intricate problems of society, the
principle of "subordinate legislation" has been accepted, not only in the United States and
England, but in practically all modern governments. This view was reiterated by him in a 1940
decision, Pangasinan Transportation Co., Inc. v. Public Service Commission.17 Thus:
"Accordingly, with the growing complexity of modern life, the multiplication of the subjects of
governmental regulation, and the increased difficulty of administering the laws, there is a
constantly growing tendency toward the delegation of greater powers by the legislature, and
toward the approval of the practice by the courts."

In the light of the above views of eminent jurists, authoritative in character, of both the equal
protection clause and the non-delegation principle, it is apparent how far the lower court departed
from the path of constitutional orthodoxy in nullifying Republic Act No. 1635 as amended.
Fortunately, the matter has been set right with the reversal of its decision, the opinion of the
Court, manifesting its fealty to constitutional law precepts, which have been reiterated time and
time again and for the soundest of reasons.
Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-10405 December 29, 1960

WENCESLAO PASCUAL, in his official capacity as Provincial Governor of Rizal, petitioner-

appellant,
vs.
THE SECRETARY OF PUBLIC WORKS AND COMMUNICATIONS, ET AL., respondents-
appellees.

Asst. Fiscal Noli M. Cortes and Jose P. Santos for appellant.

Office of the Asst. Solicitor General Jose G. Bautista and Solicitor A. A. Torres for appellee.

CONCEPCION, J.:

Appeal, by petitioner Wenceslao Pascual, from a decision of the Court of First Instance of Rizal,
dismissing the above entitled case and dissolving the writ of preliminary injunction therein issued,
without costs.

On August 31, 1954, petitioner Wenceslao Pascual, as Provincial Governor of Rizal, instituted
this action for declaratory relief, with injunction, upon the ground that Republic Act No. 920,
entitled "An Act Appropriating Funds for Public Works", approved on June 20, 1953, contained, in
section 1-C (a) thereof, an item (43[h]) of P85,000.00 "for the construction, reconstruction, repair,
extension and improvement" of Pasig feeder road terminals (Gen. Roxas — Gen. Araneta —
Gen. Lucban — Gen. Capinpin — Gen. Segundo — Gen. Delgado — Gen. Malvar — Gen.
Lim)"; that, at the time of the passage and approval of said Act, the aforementioned feeder roads
were "nothing but projected and planned subdivision roads, not yet constructed, . . . within the
Antonio Subdivision . . . situated at . . . Pasig, Rizal" (according to the tracings attached to the
petition as Annexes A and B, near Shaw Boulevard, not far away from the intersection between
the latter and Highway 54), which projected feeder roads "do not connect any government
property or any important premises to the main highway"; that the aforementioned Antonio
Subdivision (as well as the lands on which said feeder roads were to be construed) were private
properties of respondent Jose C. Zulueta, who, at the time of the passage and approval of said
Act, was a member of the Senate of the Philippines; that on May, 1953, respondent Zulueta,
addressed a letter to the Municipal Council of Pasig, Rizal, offering to donate said projected
feeder roads to the municipality of Pasig, Rizal; that, on June 13, 1953, the offer was accepted
by the council, subject to the condition "that the donor would submit a plan of the said roads and
agree to change the names of two of them"; that no deed of donation in favor of the municipality
of Pasig was, however, executed; that on July 10, 1953, respondent Zulueta wrote another letter
to said council, calling attention to the approval of Republic Act. No. 920, and the sum of
P85,000.00 appropriated therein for the construction of the projected feeder roads in question;
that the municipal council of Pasig endorsed said letter of respondent Zulueta to the District
Engineer of Rizal, who, up to the present "has not made any endorsement thereon" that
inasmuch as the projected feeder roads in question were private property at the time of the
passage and approval of Republic Act No. 920, the appropriation of P85,000.00 therein made,
for the construction, reconstruction, repair, extension and improvement of said projected feeder
roads, was illegal and, therefore, void ab initio"; that said appropriation of P85,000.00 was made
by Congress because its members were made to believe that the projected feeder roads in
question were "public roads and not private streets of a private subdivision"'; that, "in order to
give a semblance of legality, when there is absolutely none, to the aforementioned
appropriation", respondents Zulueta executed on December 12, 1953, while he was a member of
the Senate of the Philippines, an alleged deed of donation — copy of which is annexed to the
petition — of the four (4) parcels of land constituting said projected feeder roads, in favor of the
Government of the Republic of the Philippines; that said alleged deed of donation was, on the
same date, accepted by the then Executive Secretary; that being subject to an onerous
condition, said donation partook of the nature of a contract; that, such, said donation violated the
provision of our fundamental law prohibiting members of Congress from being directly or
indirectly financially interested in any contract with the Government, and, hence, is
unconstitutional, as well as null and void ab initio, for the construction of the projected feeder
roads in question with public funds would greatly enhance or increase the value of the
aforementioned subdivision of respondent Zulueta, "aside from relieving him from the burden of
constructing his subdivision streets or roads at his own expense"; that the construction of said
projected feeder roads was then being undertaken by the Bureau of Public Highways; and that,
unless restrained by the court, the respondents would continue to execute, comply with, follow
and implement the aforementioned illegal provision of law, "to the irreparable damage, detriment
and prejudice not only to the petitioner but to the Filipino nation."

Petitioner prayed, therefore, that the contested item of Republic Act No. 920 be declared null and
void; that the alleged deed of donation of the feeder roads in question be "declared
unconstitutional and, therefor, illegal"; that a writ of injunction be issued enjoining the Secretary
of Public Works and Communications, the Director of the Bureau of Public Works and Highways
and Jose C. Zulueta from ordering or allowing the continuance of the above-mentioned feeder
roads project, and from making and securing any new and further releases on the
aforementioned item of Republic Act No. 920, and the disbursing officers of the Department of
Public Works and Highways from making any further payments out of said funds provided for in
Republic Act No. 920; and that pending final hearing on the merits, a writ of preliminary injunction
be issued enjoining the aforementioned parties respondent from making and securing any new
and further releases on the aforesaid item of Republic Act No. 920 and from making any further
payments out of said illegally appropriated funds.

Respondents moved to dismiss the petition upon the ground that petitioner had "no legal
capacity to sue", and that the petition did "not state a cause of action". In support to this motion,
respondent Zulueta alleged that the Provincial Fiscal of Rizal, not its provincial governor, should
represent the Province of Rizal, pursuant to section 1683 of the Revised Administrative Code;
that said respondent is " not aware of any law which makes illegal the appropriation of public
funds for the improvements of . . . private property"; and that, the constitutional provision invoked
by petitioner is inapplicable to the donation in question, the same being a pure act of liberality,
not a contract. The other respondents, in turn, maintained that petitioner could not assail the
appropriation in question because "there is no actual bona fide case . . . in which the validity of
Republic Act No. 920 is necessarily involved" and petitioner "has not shown that he has a
personal and substantial interest" in said Act "and that its enforcement has caused or will cause
him a direct injury."

Acting upon said motions to dismiss, the lower court rendered the aforementioned decision,
dated October 29, 1953, holding that, since public interest is involved in this case, the Provincial
Governor of Rizal and the provincial fiscal thereof who represents him therein, "have the
requisite personalities" to question the constitutionality of the disputed item of Republic Act No.
920; that "the legislature is without power appropriate public revenues for anything but a public
purpose", that the instructions and improvement of the feeder roads in question, if such roads
where private property, would not be a public purpose; that, being subject to the following
condition:

The within donation is hereby made upon the condition that the Government of
the Republic of the Philippines will use the parcels of land hereby donated for
street purposes only and for no other purposes whatsoever; it being expressly
understood that should the Government of the Republic of the Philippines violate
the condition hereby imposed upon it, the title to the land hereby donated shall,
 upon such violation, ipso facto revert to the DONOR, JOSE C. ZULUETA.
(Emphasis supplied.)

which is onerous, the donation in question is a contract; that said donation or contract is
"absolutely forbidden by the Constitution" and consequently "illegal", for Article 1409 of the Civil
Code of the Philippines, declares in existence and void from the very beginning contracts "whose
cause, objector purpose is contrary to law, morals . . . or public policy"; that the legality of said
donation may not be contested, however, by petitioner herein, because his "interest are not
directly affected" thereby; and that, accordingly, the appropriation in question "should be upheld"
and the case dismissed.

At the outset, it should be noted that we are concerned with a decision granting the
aforementioned motions to dismiss, which as much, are deemed to have admitted hypothetically
the allegations of fact made in the petition of appellant herein. According to said petition,
respondent Zulueta is the owner of several parcels of residential land situated in Pasig, Rizal,
and known as the Antonio Subdivision, certain portions of which had been reserved for the
projected feeder roads aforementioned, which, admittedly, were private property of said
respondent when Republic Act No. 920, appropriating P85,000.00 for the "construction,
reconstruction, repair, extension and improvement" of said roads, was passed by Congress, as
well as when it was approved by the President on June 20, 1953. The petition further alleges that
the construction of said roads, to be undertaken with the aforementioned appropriation of
P85,000.00, would have the effect of relieving respondent Zulueta of the burden of constructing
his subdivision streets or roads at his own expenses, 1and would "greatly enhance or increase
the value of the subdivision" of said respondent. The lower court held that under these
circumstances, the appropriation in question was "clearly for a private, not a public purpose."

Respondents do not deny the accuracy of this conclusion, which is self-evident. 2However,
respondent Zulueta contended, in his motion to dismiss that:

A law passed by Congress and approved by the President can never be illegal
because Congress is the source of all laws . . . Aside from the fact that movant is
not aware of any law which makes illegal the appropriation of public funds for the
improvement of what we, in the meantime, may assume as private property . . .
(Record on Appeal, p. 33.)

The first proposition must be rejected most emphatically, it being inconsistent with the nature of
the Government established under the Constitution of the Republic of the Philippines and the
system of checks and balances underlying our political structure. Moreover, it is refuted by the
decisions of this Court invalidating legislative enactments deemed violative of the Constitution or
organic laws. 3

As regards the legal feasibility of appropriating public funds for a public purpose, the principle
according to Ruling Case Law, is this:

It is a general rule that the legislature is without power to appropriate public

revenue for anything but a public purpose. . . . It is the essential character of the
direct object of the expenditure which must determine its validity as justifying a
tax, and not the magnitude of the interest to be affected nor the degree to which
the general advantage of the community, and thus the public welfare, may be
ultimately benefited by their promotion. Incidental to the public or to the state,
which results from the promotion of private interest and the prosperity of private
enterprises or business, does not justify their aid by the use public money. (25
R.L.C. pp. 398-400; Emphasis supplied.)

The rule is set forth in Corpus Juris Secundum in the following language:
 In accordance with the rule that the taxing power must be exercised for public
purposes only, discussed supra sec. 14, money raised by taxation can be
expended only for public purposes and not for the advantage of private
individuals. (85 C.J.S. pp. 645-646; emphasis supplied.)

Explaining the reason underlying said rule, Corpus Juris Secundum states:

Generally, under the express or implied provisions of the constitution, public

funds may be used only for public purpose. The right of the legislature to
appropriate funds is correlative with its right to tax, and, under constitutional
provisions against taxation except for public purposes and prohibiting the
collection of a tax for one purpose and the devotion thereof to another purpose,
no appropriation of state funds can be made for other than for a public purpose.

xxx xxx xxx

The test of the constitutionality of a statute requiring the use of public funds is
whether the statute is designed to promote the public interest, as opposed to the
furtherance of the advantage of individuals, although each advantage to
individuals might incidentally serve the public. (81 C.J.S. pp. 1147; emphasis
supplied.)

Needless to say, this Court is fully in accord with the foregoing views which, apart from being
patently sound, are a necessary corollary to our democratic system of government, which, as
such, exists primarily for the promotion of the general welfare. Besides, reflecting as they do, the
established jurisprudence in the United States, after whose constitutional system ours has been
patterned, said views and jurisprudence are, likewise, part and parcel of our own constitutional
law.lawphil.net

This notwithstanding, the lower court felt constrained to uphold the appropriation in question,
upon the ground that petitioner may not contest the legality of the donation above referred to
because the same does not affect him directly. This conclusion is, presumably, based upon the
following premises, namely: (1) that, if valid, said donation cured the constitutional infirmity of the
aforementioned appropriation; (2) that the latter may not be annulled without a previous
declaration of unconstitutionality of the said donation; and (3) that the rule set forth in Article
1421 of the Civil Code is absolute, and admits of no exception. We do not agree with these
premises.

The validity of a statute depends upon the powers of Congress at the time of its passage or
approval, not upon events occurring, or acts performed, subsequently thereto, unless the latter
consists of an amendment of the organic law, removing, with retrospective operation, the
constitutional limitation infringed by said statute. Referring to the P85,000.00 appropriation for the
projected feeder roads in question, the legality thereof depended upon whether said roads were
public or private property when the bill, which, latter on, became Republic Act 920, was passed
by Congress, or, when said bill was approved by the President and the disbursement of said sum
became effective, or on June 20, 1953 (see section 13 of said Act). Inasmuch as the land on
which the projected feeder roads were to be constructed belonged then to respondent Zulueta,
the result is that said appropriation sought a private purpose, and hence, was null and void. 4
The donation to the Government, over five (5) months after the approval and effectivity of said
Act, made, according to the petition, for the purpose of giving a "semblance of legality", or
legalizing, the appropriation in question, did not cure its aforementioned basic defect.
Consequently, a judicial nullification of said donation need not precede the declaration of
unconstitutionality of said appropriation.

Again, Article 1421 of our Civil Code, like many other statutory enactments, is subject to
exceptions. For instance, the creditors of a party to an illegal contract may, under the conditions
set forth in Article 1177 of said Code, exercise the rights and actions of the latter, except only
those which are inherent in his person, including therefore, his right to the annulment of said
contract, even though such creditors are not affected by the same, except indirectly, in the
manner indicated in said legal provision.

Again, it is well-stated that the validity of a statute may be contested only by one who will sustain
a direct injury in consequence of its enforcement. Yet, there are many decisions nullifying, at the
instance of taxpayers, laws providing for the disbursement of public funds, 5upon the theory that
"the expenditure of public funds by an officer of the State for the purpose of administering an
unconstitutional act constitutes a misapplication of such funds," which may be enjoined at the
request of a taxpayer. 6Although there are some decisions to the contrary, 7the prevailing view in
the United States is stated in the American Jurisprudence as follows:

In the determination of the degree of interest essential to give the requisite

standing to attack the constitutionality of a statute, the general rule is that not only
persons individually affected, but also taxpayers, have sufficient interest in
preventing the illegal expenditure of moneys raised by taxation and may therefore
question the constitutionality of statutes requiring expenditure of public moneys.
(11 Am. Jur. 761; emphasis supplied.)

However, this view was not favored by the Supreme Court of the U.S. in Frothingham vs. Mellon
(262 U.S. 447), insofar as federal laws are concerned, upon the ground that the relationship of a
taxpayer of the U.S. to its Federal Government is different from that of a taxpayer of a municipal
corporation to its government. Indeed, under the composite system of government existing in the
U.S., the states of the Union are integral part of the Federation from an international viewpoint,
but, each state enjoys internally a substantial measure of sovereignty, subject to the limitations
imposed by the Federal Constitution. In fact, the same was made by representatives of each
state of the Union, not of the people of the U.S., except insofar as the former represented the
people of the respective States, and the people of each State has, independently of that of the
others, ratified said Constitution. In other words, the Federal Constitution and the Federal
statutes have become binding upon the people of the U.S. in consequence of an act of, and, in
this sense, through the respective states of the Union of which they are citizens. The peculiar
nature of the relation between said people and the Federal Government of the U.S. is reflected in
the election of its President, who is chosen directly, not by the people of the U.S., but by electors
chosen by each State, in such manner as the legislature thereof may direct (Article II, section 2,
of the Federal Constitution).lawphi1.net

The relation between the people of the Philippines and its taxpayers, on the other hand, and the
Republic of the Philippines, on the other, is not identical to that obtaining between the people and
taxpayers of the U.S. and its Federal Government. It is closer, from a domestic viewpoint, to that
existing between the people and taxpayers of each state and the government thereof, except that
the authority of the Republic of the Philippines over the people of the Philippines is more fully
direct than that of the states of the Union, insofar as the simple and unitary type of our national
government is not subject to limitations analogous to those imposed by the Federal Constitution
upon the states of the Union, and those imposed upon the Federal Government in the interest of
the Union. For this reason, the rule recognizing the right of taxpayers to assail the
constitutionality of a legislation appropriating local or state public funds — which has been upheld
by the Federal Supreme Court (Crampton vs. Zabriskie, 101 U.S. 601) — has greater application
in the Philippines than that adopted with respect to acts of Congress of the United States
appropriating federal funds.

Indeed, in the Province of Tayabas vs. Perez (56 Phil., 257), involving the expropriation of a land
by the Province of Tayabas, two (2) taxpayers thereof were allowed to intervene for the purpose
of contesting the price being paid to the owner thereof, as unduly exorbitant. It is true that in
Custodio vs. President of the Senate (42 Off. Gaz., 1243), a taxpayer and employee of the
Government was not permitted to question the constitutionality of an appropriation for backpay of
members of Congress. However, in Rodriguez vs. Treasurer of the Philippines and Barredo vs.
Commission on Elections (84 Phil., 368; 45 Off. Gaz., 4411), we entertained the action of
taxpayers impugning the validity of certain appropriations of public funds, and invalidated the
same. Moreover, the reason that impelled this Court to take such position in said two (2) cases
— the importance of the issues therein raised — is present in the case at bar. Again, like the
petitioners in the Rodriguez and Barredo cases, petitioner herein is not merely a taxpayer. The
Province of Rizal, which he represents officially as its Provincial Governor, is our most populated
political subdivision, 8and, the taxpayers therein bear a substantial portion of the burden of
taxation, in the Philippines.

Hence, it is our considered opinion that the circumstances surrounding this case sufficiently
justify petitioners action in contesting the appropriation and donation in question; that this action
should not have been dismissed by the lower court; and that the writ of preliminary injunction
should have been maintained.

Wherefore, the decision appealed from is hereby reversed, and the records are remanded to the
lower court for further proceedings not inconsistent with this decision, with the costs of this
instance against respondent Jose C. Zulueta. It is so ordered.

Paras, C.J., Bengzon, Padilla, Bautista Angelo, Labrador, Reyes, J.B.L., Barrera, Gutierrez
David, Paredes, and Dizon, JJ., concur.
Republic of the Philippines

Supreme Court
Manila

THIRD DIVISION

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

Petitioner,
Present:

YNARES-SANTIAGO, J.,
Chairperson,

AUSTRIA-MARTINEZ,

- versus - CHICO-NAZARIO,
NACHURA, and
REYES, JJ.

Promulgated:
FERTIPHIL CORPORATION,
Respondent. March 14, 2008

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

DECISION

REYES, R.T., J.:

 THE Regional Trial Courts (RTC) have the authority and jurisdiction to
consider the constitutionality of statutes, executive orders, presidential decrees
and other issuances. The Constitution vests that power not only in the Supreme
Court but in all Regional Trial Courts.

The principle is relevant in this petition for review on certiorari of the

Decision1 of the Court of Appeals (CA) affirming with modification that of
the RTC in Makati City,2 finding petitioner Planters Products, Inc. (PPI) liable to
private respondent Fertiphil Corporation (Fertiphil) for the levies it paid under
Letter of Instruction (LOI) No. 1465.

The Facts

Petitioner PPI and private respondent Fertiphil are private corporations

incorporated under Philippine laws.3 They are both engaged in the importation
and distribution of fertilizers, pesticides and agricultural chemicals.

On June 3, 1985, then President Ferdinand Marcos, exercising his

legislative powers, issued LOI No. 1465 which provided, among others, for the
imposition of a capital recovery component (CRC) on the domestic sale of all
grades of fertilizers in the Philippines.4 The LOI provides:

3. The Administrator of the Fertilizer Pesticide Authority to include in its

fertilizer pricing formula a capital contribution component of not less than
P10 per bag. This capital contribution shall be collected until adequate
capital is raised to make PPI viable. Such capital contribution shall be
 applied by FPA to all domestic sales of fertilizers in the Philippines.5
(Underscoring supplied)

Pursuant to the LOI, Fertiphil paid P10 for every bag of fertilizer it sold in
the domestic market to the Fertilizer and Pesticide Authority (FPA). FPA then
remitted the amount collected to the Far East Bank and Trust Company, the
depositary bank of PPI. Fertiphil paid P6,689,144 to FPA from July 8, 1985 to
January 24, 1986.6

After the 1986 Edsa Revolution, FPA voluntarily stopped the imposition
of the P10 levy. With the return of democracy, Fertiphil demanded from PPI a
refund of the amounts it paid under LOI No. 1465, but PPI refused to accede to
the demand.7

Fertiphil filed a complaint for collection and damages8 against FPA and
PPI with the RTC in Makati. It questioned the constitutionality of LOI No. 1465
for being unjust, unreasonable, oppressive, invalid and an unlawful imposition
that amounted to a denial of due process of law.9 Fertiphil alleged that the LOI
solely favored PPI, a privately owned corporation, which used the proceeds to
maintain its monopoly of the fertilizer industry.

In its Answer,10 FPA, through the Solicitor General, countered that the
issuance of LOI No. 1465 was a valid exercise of the police power of the State in
ensuring the stability of the fertilizer industry in the country. It also averred that
Fertiphil did not sustain any damage from the LOI because the burden imposed
by the levy fell on the ultimate consumer, not the seller.

RTC Disposition

On November 20, 1991, the RTC rendered judgment in favor of Fertiphil,

disposing as follows:

WHEREFORE, in view of the foregoing, the Court hereby renders

judgment in favor of the plaintiff and against the defendant Planters Product,
Inc., ordering the latter to pay the former:

1) the sum of P6,698,144.00 with interest at 12% from the time

of judicial demand;
2) the sum of P100,000 as attorneys fees;
3) the cost of suit.
 SO ORDERED.11

Ruling that the imposition of the P10 CRC was an exercise of the States
inherent power of taxation, the RTC invalidated the levy for violating the basic
principle that taxes can only be levied for public purpose, viz.:

It is apparent that the imposition of P10 per fertilizer bag sold in the
country by LOI 1465 is purportedly in the exercise of the power of taxation. It
is a settled principle that the power of taxation by the state is plenary.
Comprehensive and supreme, the principal check upon its abuse resting in the
responsibility of the members of the legislature to their constituents. However,
there are two kinds of limitations on the power of taxation: the inherent
limitations and the constitutional limitations.

One of the inherent limitations is that a tax may be levied only for public
purposes:

The power to tax can be resorted to only for a

constitutionally valid public purpose. By the same token, taxes
may not be levied for purely private purposes, for building up of
private fortunes, or for the redress of private wrongs. They
cannot be levied for the improvement of private property, or for
the benefit, and promotion of private enterprises, except where
the aid is incident to the public benefit. It is well-settled principle
of constitutional law that no general tax can be levied except for
the purpose of raising money which is to be expended for public
use. Funds cannot be exacted under the guise of taxation to
promote a purpose that is not of public interest. Without such
limitation, the power to tax could be exercised or employed as
 an authority to destroy the economy of the people. A tax,
however, is not held void on the ground of want of public interest
unless the want of such interest is clear. (71 Am. Jur. pp. 371-
372)

In the case at bar, the plaintiff paid the amount of P6,698,144.00 to the
Fertilizer and Pesticide Authority pursuant to the P10 per bag of fertilizer sold
imposition under LOI 1465 which, in turn, remitted the amount to the defendant
Planters Products, Inc. thru the latters depository bank, Far East Bank and Trust
Co. Thus, by virtue of LOI 1465 the plaintiff, Fertiphil Corporation, which is a
private domestic corporation, became poorer by the amount of P6,698,144.00
and the defendant, Planters Product, Inc., another private domestic corporation,
became richer by the amount of P6,698,144.00.

Tested by the standards of constitutionality as set forth in the afore-

quoted jurisprudence, it is quite evident that LOI 1465 insofar as it imposes the
amount of P10 per fertilizer bag sold in the country and orders that the said
amount should go to the defendant Planters Product, Inc. is unlawful because it
violates the mandate that a tax can be levied only for a public purpose and not
to benefit, aid and promote a private enterprise such as Planters Product, Inc.12

PPI moved for reconsideration but its motion was denied.13 PPI then filed
a notice of appeal with the RTC but it failed to pay the requisite appeal docket
fee. In a separate but related proceeding, this Court14 allowed the appeal of PPI
and remanded the case to the CA for proper disposition.

CA Decision
 On November 28, 2003, the CA handed down its decision affirming with
modification that of the RTC, with the following fallo:

IN VIEW OF ALL THE FOREGOING, the decision appealed from is

hereby AFFIRMED, subject to the MODIFICATION that the award of
attorneys fees is hereby DELETED.15

In affirming the RTC decision, the CA ruled that the lis mota of the
complaint for collection was the constitutionality of LOI No. 1465, thus:

The question then is whether it was proper for the trial court to exercise
its power to judicially determine the constitutionality of the subject statute in
the instant case.

As a rule, where the controversy can be settled on other grounds, the

courts will not resolve the constitutionality of a law (Lim v. Pacquing, 240
SCRA 649 [1995]). The policy of the courts is to avoid ruling on constitutional
questions and to presume that the acts of political departments are valid, absent
a clear and unmistakable showing to the contrary.

However, the courts are not precluded from exercising such power when
the following requisites are obtaining in a controversy before it: First, there must
be before the court an actual case calling for the exercise of judicial review.
Second, the question must be ripe for adjudication. Third, the person
challenging the validity of the act must have standing to challenge. Fourth, the
question of constitutionality must have been raised at the earliest opportunity;
and lastly, the issue of constitutionality must be the very lis mota of the case
(Integrated Bar of the Philippines v. Zamora, 338 SCRA 81 [2000]).
 Indisputably, the present case was primarily instituted for collection and
damages. However, a perusal of the complaint also reveals
 that the instant action is founded on the claim that the levy imposed was an
unlawful and unconstitutional special assessment. Consequently, the requisite
that the constitutionality of the law in question be the very lis mota of the case
is present, making it proper for the trial court to rule on the constitutionality of
LOI 1465.16

The CA held that even on the assumption that LOI No. 1465 was issued
under the police power of the state, it is still unconstitutional because it did not
promote public welfare. The CA explained:

In declaring LOI 1465 unconstitutional, the trial court held that the levy
imposed under the said law was an invalid exercise of the States power of
taxation inasmuch as it violated the inherent and constitutional prescription that
taxes be levied only for public purposes. It reasoned out that the amount
collected under the levy was remitted to the depository bank of PPI, which the
latter used to advance its private interest.

On the other hand, appellant submits that the subject statutes passage
was a valid exercise of police power. In addition, it disputes the court a quos
findings arguing that the collections under LOI 1465 was for the benefit of
Planters Foundation, Incorporated (PFI), a foundation created by law to hold in
trust for millions of farmers, the stock ownership of PPI.

Of the three fundamental powers of the State, the exercise of police

power has been characterized as the most essential, insistent and the least
limitable of powers, extending as it does to all the great public needs. It may be
exercised as long as the activity or the property sought to be regulated has some
relevance to public welfare (Constitutional Law, by Isagani A. Cruz, p. 38, 1995
Edition).

Vast as the power is, however, it must be exercised within the limits set
by the Constitution, which requires the concurrence of a lawful subject and a
lawful method. Thus, our courts have laid down the test to determine the validity
of a police measure as follows: (1) the interests of the public generally, as
distinguished from those of a particular class, requires its exercise; and (2) the
means employed are reasonably necessary for the accomplishment of the
purpose and not unduly oppressive upon individuals (National Development
Company v. Philippine Veterans Bank, 192 SCRA 257 [1990]).
 It is upon applying this established tests that We sustain the trial courts
holding LOI 1465 unconstitutional. To be sure, ensuring the continued supply
and distribution of fertilizer in the country is an undertaking imbued with public
interest. However, the method by which LOI 1465 sought to achieve this is by
no means a measure that will promote the public welfare. The governments
commitment to support the successful rehabilitation and continued viability of
PPI, a private corporation, is an unmistakable attempt to mask the subject
statutes impartiality. There is no way to treat the self-interest of a favored entity,
 like PPI, as identical with the general interest of the countrys farmers or even
the Filipino people in general. Well to stress, substantive due process exacts
fairness and equal protection disallows distinction where none is needed. When
a statutes public purpose is spoiled by private interest, the use of police power
becomes a travesty which must be struck down for being an arbitrary exercise
of government power. To rule in favor of appellant would contravene the
general principle that revenues derived from taxes cannot be used for purely
private purposes or for the exclusive benefit of private individuals.17

The CA did not accept PPIs claim that the levy imposed under LOI No.
1465 was for the benefit of Planters Foundation, Inc., a foundation created to hold
in trust the stock ownership of PPI. The CA stated:

Appellant next claims that the collections under LOI 1465 was for the
benefit of Planters Foundation, Incorporated (PFI), a foundation created by law
to hold in trust for millions of farmers, the stock ownership of PFI on the
strength of Letter of Undertaking (LOU) issued by then Prime Minister Cesar
Virata on April 18, 1985 and affirmed by the Secretary of Justice in an Opinion
dated October 12, 1987, to wit:

2. Upon the effective date of this Letter of Undertaking,

the Republic shall cause FPA to include in its fertilizer pricing
formula a capital recovery component, the proceeds of which
will be used initially for the purpose of funding the unpaid
portion of the outstanding capital stock of Planters presently held
in trust by Planters Foundation, Inc. (Planters Foundation),
which unpaid capital is estimated at approximately P206 million
(subject to validation by Planters and Planters Foundation) (such
unpaid portion of the outstanding capital stock of Planters being
hereafter referred to as the Unpaid Capital), and subsequently for
such capital increases as may be required for the continuing
viability of Planters.

The capital recovery component shall be in the minimum

amount of P10 per bag, which will be added to the price of all
domestic sales of fertilizer in the Philippines by any importer
and/or fertilizer mother company. In this connection, the
Republic hereby acknowledges that the advances by Planters to
 Planters Foundation which were applied to the payment of the
Planters shares now held in trust by Planters Foundation, have
been assigned to, among others, the Creditors. Accordingly, the
Republic, through FPA, hereby agrees to deposit the proceeds of
the capital recovery component in the special trust account
designated in the notice dated April 2, 1985, addressed by
counsel for the Creditors to Planters Foundation. Such proceeds
shall be deposited by FPA on or before the 15th day of each
month.

The capital recovery component shall continue to be

charged and collected until payment in full of (a) the Unpaid
Capital and/or (b) any shortfall in the payment of the Subsidy
Receivables, (c) any carrying cost accruing from the date hereof
on the amounts which may be outstanding from time to time of
the Unpaid Capital and/or the Subsidy Receivables and (d) the
capital increases contemplated in paragraph 2 hereof. For the
purpose of the foregoing clause (c), the carrying cost shall be at
such rate as will represent the full and reasonable cost to Planters
of servicing its debts, taking into account both its peso and
foreign currency-denominated obligations. (Records, pp. 42-43)

Appellants proposition is open to question, to say the least. The LOU

issued by then Prime Minister Virata taken together with the Justice Secretarys
Opinion does not preponderantly demonstrate that the collections made were
held in trust in favor of millions of farmers. Unfortunately for appellant, in the
absence of sufficient evidence to establish its claims, this Court is constrained
to rely on what is explicitly provided in LOI 1465 that one of the primary aims
in imposing the levy is to support the successful rehabilitation and continued
viability of PPI.18

PPI moved for reconsideration but its motion was denied.19 It then filed
the present petition with this Court.
 Issues

Petitioner PPI raises four issues for Our consideration, viz.:

THE CONSTITUTIONALITY OF LOI 1465 CANNOT BE

COLLATERALLY ATTACKED AND BE DECREED VIA A DEFAULT
JUDGMENT IN A CASE FILED FOR COLLECTION AND DAMAGES
WHERE THE ISSUE OF CONSTITUTIONALITY IS NOT THE VERY LIS
MOTA OF THE CASE. NEITHER CAN LOI 1465 BE CHALLENGED BY
ANY PERSON OR ENTITY WHICH HAS NO STANDING TO DO SO.

II
LOI 1465, BEING A LAW IMPLEMENTED FOR THE PURPOSE OF
ASSURING THE FERTILIZER SUPPLY AND DISTRIBUTION IN THE
COUNTRY, AND FOR BENEFITING A FOUNDATION CREATED BY
LAW TO HOLD IN TRUST FOR MILLIONS OF FARMERS THEIR STOCK
OWNERSHIP IN PPI CONSTITUTES A VALID LEGISLATION
PURSUANT TO THE EXERCISE OF TAXATION AND POLICE POWER
FOR PUBLIC PURPOSES.

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

IV
THE PRINCIPLE OF UNJUST VEXATION (SHOULD BE ENRICHMENT)
FINDS NO APPLICATION IN THE INSTANT CASE. 20 (Underscoring
supplied)
 Our Ruling

We shall first tackle the procedural issues of locus standi and the
jurisdiction of the RTC to resolve constitutional issues.

Fertiphil has locus standi because it

suffered direct injury; doctrine of
standing is a mere procedural
technicality which may be waived.

PPI argues that Fertiphil has no locus standi to question the

constitutionality of LOI No. 1465 because it does not have a personal and
substantial interest in the case or will sustain direct injury as a result of its
enforcement.21 It asserts that Fertiphil did not suffer any damage from the CRC
imposition because incidence of the levy fell on the ultimate consumer or the
farmers themselves, not on the seller fertilizer company.22

We cannot agree. The doctrine of locus standi or the right of appearance in

a court of justice has been adequately discussed by this Court in a catena of cases.
Succinctly put, the doctrine requires a litigant to have a material interest in the
outcome of a case. In private suits, locus standi requires a litigant to be a real
party in interest, which is defined as the
party who stands to be benefited or injured by the judgment in the suit or the party
entitled to the avails of the suit.23

In public suits, this Court recognizes the difficulty of applying the doctrine
especially when plaintiff asserts a public right on behalf of the general public
because of conflicting public policy issues. 24 On one end, there is the right of
the ordinary citizen to petition the courts to be freed from unlawful government
intrusion and illegal official action. At the other end, there is the public policy
precluding excessive judicial interference in official acts, which may
unnecessarily hinder the delivery of basic public services.

In this jurisdiction, We have adopted the direct injury test to determine

locus standi in public suits. In People v. Vera,25 it was held that a person who
impugns the validity of a statute must have a personal and substantial interest in
the case such that he has sustained, or will sustain direct injury as a result. The
direct injury test in public suits is similar to the real party in interest rule for
private suits under Section 2, Rule 3 of the 1997 Rules of Civil Procedure.26
 Recognizing that a strict application of the direct injury test may hamper
public interest, this Court relaxed the requirement in cases of transcendental
importance or with far reaching implications. Being a mere procedural
technicality, it has also been held that locus standi may be waived in the public
interest.27

Whether or not the complaint for collection is characterized as a private or

public suit, Fertiphil has locus standi to file it. Fertiphil suffered a direct injury
from the enforcement of LOI No. 1465. It was required, and it did pay, the P10
levy imposed for every bag of fertilizer sold on the domestic market. It may be
true that Fertiphil has passed some or all of the levy to the ultimate consumer, but
that does not disqualify it from attacking the constitutionality of the LOI or from
seeking a refund. As seller, it bore the ultimate burden of paying the levy. It faced
the possibility of severe sanctions for failure to pay the levy. The fact of payment
is sufficient injury to Fertiphil.
 Moreover, Fertiphil suffered harm from the enforcement of the LOI
because it was compelled to factor in its product the levy. The levy certainly
rendered the fertilizer products of Fertiphil and other domestic sellers much more
expensive. The harm to their business consists not only in fewer clients because
of the increased price, but also in adopting alternative corporate strategies to meet
the demands of LOI No. 1465. Fertiphil and other fertilizer sellers may have
shouldered all or part of the levy just to be competitive in the market. The harm
occasioned on the business of Fertiphil is sufficient injury for purposes of locus
standi.

Even assuming arguendo that there is no direct injury, We find that the
liberal policy consistently adopted by this Court on locus standi must apply. The
issues raised by Fertiphil are of paramount public importance. It involves not only
the constitutionality of a tax law but, more importantly, the use of taxes for public
purpose. Former President Marcos issued LOI No. 1465 with the intention of
rehabilitating an ailing private company. This is clear from the text of the LOI.
PPI is expressly named in the LOI as the direct beneficiary of the levy. Worse,
the levy was made dependent and conditional upon PPI becoming financially
viable. The LOI provided that the capital contribution shall be collected until
adequate capital is raised to make PPI viable.

The constitutionality of the levy is already in doubt on a plain reading of

the statute. It is Our constitutional duty to squarely resolve the issue as the final
arbiter of all justiciable controversies. The doctrine of standing, being a mere
procedural technicality, should be waived, if at all, to adequately thresh out an
important constitutional issue.
RTC may resolve constitutional issues;
the constitutional issue was adequately
raised in the complaint; it is the lis mota
of the case.

PPI insists that the RTC and the CA erred in ruling on the constitutionality
of the LOI. It asserts that the constitutionality of the LOI cannot be collaterally
attacked in a complaint for collection. 28 Alternatively, the resolution of the
constitutional issue is not necessary for a determination of the complaint for
collection.29

Fertiphil counters that the constitutionality of the LOI was adequately

pleaded in its complaint. It claims that the constitutionality of LOI No. 1465 is
the very lis mota of the case because the trial court cannot determine its claim
without resolving the issue.30
 It is settled that the RTC has jurisdiction to resolve the constitutionality of
a statute, presidential decree or an executive order. This is clear from Section 5,
Article VIII of the 1987 Constitution, which provides:

SECTION 5. The Supreme Court shall have the following powers:

xxxx

(2) Review, revise, reverse, modify, or affirm on appeal or certiorari,

as the law or the Rules of Court may provide, final judgments and orders of
lower courts in:

(a) All cases in which the constitutionality or validity

of any treaty, international or executive agreement, law,
presidential decree, proclamation, order, instruction, ordinance,
or regulation is in question. (Underscoring supplied)

In Mirasol v. Court of Appeals,31 this Court recognized the power of the

RTC to resolve constitutional issues, thus:

On the first issue. It is settled that Regional Trial Courts have the
authority and jurisdiction to consider the constitutionality of a statute,
presidential decree, or executive order. The Constitution vests the power of
judicial review or the power to declare a law, treaty, international or executive
 agreement, presidential decree, order, instruction, ordinance, or regulation not
only in this Court, but in all Regional Trial Courts.32

In the recent case of Equi-Asia Placement, Inc. v. Department of Foreign

Affairs,33 this Court reiterated:

There is no denying that regular courts have jurisdiction over cases

involving the validity or constitutionality of a rule or regulation issued by
administrative agencies. Such jurisdiction, however, is not limited to the Court
of Appeals or to this Court alone for even the regional trial courts can take
cognizance of actions assailing a specific rule or set of rules promulgated by
administrative bodies. Indeed, the Constitution vests the power of judicial
review or the power to declare a law, treaty, international or executive
agreement, presidential decree, order, instruction, ordinance, or regulation in
the courts, including the regional trial courts.34

Judicial review of official acts on the ground of unconstitutionality may be

sought or availed of through any of the actions cognizable by courts of justice,
not necessarily in a suit for declaratory relief. Such review may be had in criminal
actions, as in People v. Ferrer 35 involving the constitutionality of the now
defunct Anti-Subversion law, or in ordinary actions, as in Krivenko v. Register of
Deeds36 involving the constitutionality of laws prohibiting aliens from acquiring
public lands. The constitutional issue, however, (a) must be properly raised and
presented in the case, and (b) its resolution is necessary to a determination of the
case, i.e., the issue of constitutionality must be the very lis mota presented.37

Contrary to PPIs claim, the constitutionality of LOI No. 1465 was properly
and adequately raised in the complaint for collection filed with the RTC. The
pertinent portions of the complaint allege:

6. The CRC of P10 per bag levied under LOI 1465 on domestic sales of
all grades of fertilizer in the Philippines, is unlawful, unjust, uncalled for,
unreasonable, inequitable and oppressive because:
xxxx

(c) It favors only one private domestic corporation, i.e.,

defendant PPPI, and imposed at the expense and disadvantage of
the other fertilizer importers/distributors who were themselves
in tight business situation and were then exerting all efforts and
maximizing management and marketing skills to remain viable;

xxxx

(e) It was a glaring example of crony capitalism, a forced

program through which the PPI, having been presumptuously
masqueraded as the fertilizer industry itself, was the sole and
anointed beneficiary;

7. The CRC was an unlawful; and unconstitutional special assessment

and its imposition is tantamount to illegal exaction amounting to a denial of due
process since the persons of entities which had to bear the burden of paying the
CRC derived no benefit therefrom; that on the contrary it was used by PPI in
 trying to regain its former despicable monopoly of the fertilizer industry to the
detriment of other distributors and importers.38 (Underscoring supplied)

The constitutionality of LOI No. 1465 is also the very lis mota of the
complaint for collection. Fertiphil filed the complaint to compel PPI to refund the
levies paid under the statute on the ground that the law imposing the levy is
unconstitutional. The thesis is that an unconstitutional law is void. It has no legal
effect. Being void, Fertiphil had no legal obligation to pay the levy. Necessarily,
all levies duly paid pursuant to an unconstitutional law should be refunded under
the civil code principle against unjust enrichment. The refund is a mere
consequence of the law being declared unconstitutional. The RTC surely cannot
order PPI to refund Fertiphil if it does not declare the LOI unconstitutional. It is
the unconstitutionality of the LOI which triggers the refund. The issue of
constitutionality is the very lis mota of the complaint with the RTC.

The P10 levy under LOI No. 1465 is an

exercise of the power of taxation.

At any rate, the Court holds that the RTC and the CA did not err in ruling
against the constitutionality of the LOI.

PPI insists that LOI No. 1465 is a valid exercise either of the police power
or the power of taxation. It claims that the LOI was implemented for the purpose
of assuring the fertilizer supply and distribution in the country and for benefiting
a foundation created by law to hold in trust for millions of farmers their stock
ownership in PPI.

Fertiphil counters that the LOI is unconstitutional because it was enacted

to give benefit to a private company. The levy was imposed to pay the corporate
debt of PPI. Fertiphil also argues that, even if the LOI is enacted under the police
power, it is still unconstitutional because it did not promote the general welfare
of the people or public interest.

Police power and the power of taxation are inherent powers of the State.
These powers are distinct and have different tests for validity. Police power is the
power of the State to enact legislation that may interfere with personal liberty or
property in order to promote the general welfare,39 while the power of taxation
is the power to levy taxes to be used for public purpose. The main purpose of
police power is the regulation of a behavior or conduct, while taxation is revenue
generation. The lawful subjects and lawful means tests are used to determine the
validity of a law enacted under the police power.40 The power of taxation, on the
other hand, is circumscribed by inherent and constitutional limitations.
 We agree with the RTC that the imposition of the levy was an exercise by
the State of its taxation power. While it is true that the power of taxation can be
used as an implement of police power,41 the primary purpose of the levy is
revenue generation. If the purpose is primarily revenue, or if revenue is, at least,
one of the real and substantial purposes, then the exaction is properly called a
tax.42

In Philippine Airlines, Inc. v. Edu,43 it was held that the imposition of a

vehicle registration fee is not an exercise by the State of its police power, but of
its taxation power, thus:

It is clear from the provisions of Section 73 of Commonwealth Act 123

and Section 61 of the Land Transportation and Traffic Code that the legislative
intent and purpose behind the law requiring owners of vehicles to pay for their
registration is mainly to raise funds for the construction and maintenance of
highways and to a much lesser degree, pay for the operating expenses of the
administering agency. x x x Fees may be properly regarded as taxes even though
they also serve as an instrument of regulation.

Taxation may be made the implement of the state's police power (Lutz
v. Araneta, 98 Phil. 148). If the purpose is primarily revenue, or if revenue is,
at least, one of the real and substantial purposes, then the exaction is properly
called a tax. Such is the case of motor vehicle registration fees. The same
provision appears as Section 59(b) in the Land Transportation Code. It is patent
 therefrom that the legislators had in mind a regulatory tax as the law refers to
the imposition on the registration, operation or ownership of a motor vehicle as
a tax or fee. x x x Simply put, if the exaction under Rep. Act 4136 were merely
a regulatory fee, the imposition in Rep. Act 5448 need not be an additional tax.
Rep. Act 4136 also speaks of other fees such as the special permit fees for
certain types of motor vehicles (Sec. 10) and additional fees for change of
registration (Sec. 11). These are not to be understood as taxes because such fees
are very minimal to be revenue-raising. Thus, they are not mentioned by Sec.
59(b) of the Code as taxes like the motor vehicle registration fee and chauffeurs
license fee. Such fees are to go into the expenditures of the Land Transportation
Commission as provided for in the last proviso of Sec. 61.44 (Underscoring
supplied)

The P10 levy under LOI No. 1465 is too excessive to serve a mere
regulatory purpose. The levy, no doubt, was a big burden on the seller or the
ultimate consumer. It increased the price of a bag of fertilizer by as much as five
percent.45 A plain reading of the LOI also supports the conclusion that the levy
was for revenue generation. The LOI expressly provided that the levy was
imposed until adequate capital is raised to make PPI viable.

Taxes are exacted only for a public

purpose. The P10 levy is unconstitutional
because it was not for a public purpose.
The levy was imposed to give undue
benefit to PPI.
 An inherent limitation on the power of taxation is public purpose. Taxes
are exacted only for a public purpose. They cannot be used for purely private
purposes or for the exclusive benefit of private persons.46 The reason for this is
simple. The power to tax exists for the general welfare; hence, implicit in its
power is the limitation that it should be used only for a public purpose. It would
be a robbery for the State to tax its citizens and use the funds generated for a
private purpose. As an old United States case bluntly put it: To lay with one hand,
the power of the government on the property of the citizen, and with the other to
bestow it upon favored individuals to aid private enterprises and build up private
fortunes, is nonetheless a robbery because it is done under the forms of law and
is called taxation.47

The term public purpose is not defined. It is an elastic concept that can be
hammered to fit modern standards. Jurisprudence states that public purpose
should be given a broad interpretation. It does not only pertain to those purposes
which are traditionally viewed as essentially government functions, such as
building roads and delivery of basic services, but also includes those purposes
designed to promote social justice. Thus, public money may now be used for the
relocation of illegal settlers, low-cost housing and urban or agrarian reform.

While the categories of what may constitute a public purpose are

continually expanding in light of the expansion of government functions, the
inherent requirement that taxes can only be exacted for a public purpose still
stands. Public purpose is the heart of a tax law. When a tax law is only a mask to
exact funds from the public when its true intent is to give undue benefit and
advantage to a private enterprise, that law will not satisfy the requirement of
public purpose.

The purpose of a law is evident from its text or inferable from other
secondary sources. Here, We agree with the RTC and that CA that the levy
imposed under LOI No. 1465 was not for a public purpose.

First, the LOI expressly provided that the levy be imposed to benefit PPI,
a private company. The purpose is explicit from Clause 3 of the law, thus:

3. The Administrator of the Fertilizer Pesticide Authority to include in its

fertilizer pricing formula a capital contribution component of not less than
P10 per bag. This capital contribution shall be collected until adequate
capital is raised to make PPI viable. Such capital contribution shall be
applied by FPA to all domestic sales of fertilizers in the Philippines.48
(Underscoring supplied)
 It is a basic rule of statutory construction that the text of a statute should be
given a literal meaning. In this case, the text of the LOI is plain that the levy was
imposed in order to raise capital for PPI. The framers of the LOI did not even
hide the insidious purpose of the law. They were cavalier enough to name PPI as
the ultimate beneficiary of the taxes levied under the LOI. We find it utterly
repulsive that a tax law would expressly name a private company as the ultimate
beneficiary of the taxes to be levied from the public. This is a clear case of crony
capitalism.

Second, the LOI provides that the imposition of the P10 levy was
conditional and dependent upon PPI becoming financially viable. This suggests
that the levy was actually imposed to benefit PPI. The LOI notably does not fix a
maximum amount when PPI is deemed financially viable. Worse, the liability of
Fertiphil and other domestic sellers of fertilizer to pay the levy is made indefinite.
They are required to continuously pay the levy until adequate capital is raised for
PPI.

Third, the RTC and the CA held that the levies paid under the LOI were
directly remitted and deposited by FPA to Far East Bank and Trust Company, the
depositary bank of PPI.49 This proves that PPI benefited from the LOI. It is also
proves that the main purpose of the law was to give undue benefit and advantage
to PPI.
 Fourth, the levy was used to pay the corporate debts of PPI. A reading of
the Letter of Understanding50 dated May 18, 1985 signed by then Prime Minister
Cesar Virata reveals that PPI was in deep financial problem because of its huge
corporate debts. There were pending petitions for rehabilitation against PPI
before the Securities and Exchange Commission. The government guaranteed
payment of PPIs debts to its foreign creditors. To fund the payment, President
Marcos issued LOI No. 1465. The pertinent portions of the letter of understanding
read:

Republic of the Philippines

Office of the Prime Minister
Manila

LETTER OF UNDERTAKING

May 18, 1985

TO: THE BANKING AND FINANCIAL INSTITUTIONS

LISTED IN ANNEX A HERETO WHICH ARE
CREDITORS (COLLECTIVELY, THE CREDITORS)
OF PLANTERS PRODUCTS, INC. (PLANTERS)

Gentlemen:

This has reference to Planters which is the principal importer and

distributor of fertilizer, pesticides and agricultural chemicals in the Philippines.
As regards Planters, the Philippine Government confirms its awareness of the
following: (1) that Planters has outstanding obligations in foreign currency
and/or pesos, to the Creditors, (2) that Planters is currently experiencing
financial difficulties, and (3) that there are presently pending with the Securities
and Exchange Commission of the Philippines a petition filed at Planters own
behest for the suspension of payment of all its obligations, and a separate
petition filed by Manufacturers Hanover Trust Company, Manila Offshore
Branch for the appointment of a rehabilitation receiver for Planters.

In connection with the foregoing, the Republic of the Philippines (the

Republic) confirms that it considers and continues to consider Planters as a
 major fertilizer distributor. Accordingly, for and in consideration of your
expressed willingness to consider and participate in the effort to rehabilitate
Planters, the Republic hereby manifests its full and unqualified support of the
successful rehabilitation and continuing viability of Planters, and to that end,
hereby binds and obligates itself to the creditors and Planters, as follows:

xxxx

2. Upon the effective date of this Letter of Undertaking, the Republic

shall cause FPA to include in its fertilizer pricing formula a capital recovery
component, the proceeds of which will be used initially for the purpose of
funding the unpaid portion of the outstanding capital stock of Planters presently
held in trust by Planters Foundation, Inc. (Planters Foundation), which unpaid
capital is estimated at approximately P206 million (subject to validation by
Planters and Planters Foundation) such unpaid portion of the outstanding capital
stock of Planters being hereafter referred to as the Unpaid Capital), and
subsequently for such capital increases as may be required for the continuing
viability of Planters.

xxxx

The capital recovery component shall continue to be charged and

collected until payment in full of (a) the Unpaid Capital and/or (b) any shortfall
in the payment of the Subsidy Receivables, (c) any carrying cost accruing from
the date hereof on the amounts which may be outstanding from time to time of
the Unpaid Capital and/or the Subsidy Receivables, and (d) the capital increases
contemplated in paragraph 2 hereof. For the purpose of the foregoing clause (c),
the carrying cost shall be at such rate as will represent the full and reasonable
cost to Planters of servicing its debts, taking into account both its peso and
foreign currency-denominated obligations.

REPUBLIC OF THE PHILIPPINES

By:
(signed)
CESAR E. A. VIRATA

Prime Minister and Minister of Finance51

It is clear from the Letter of Understanding that the levy was imposed
precisely to pay the corporate debts of PPI. We cannot agree with PPI that the
levy was imposed to ensure the stability of the fertilizer industry in the country.
The letter of understanding and the plain text of the LOI clearly indicate that the
levy was exacted for the benefit of a private corporation.

All told, the RTC and the CA did not err in holding that the levy imposed
under LOI No. 1465 was not for a public purpose. LOI No. 1465 failed to comply
with the public purpose requirement for tax laws.

The LOI is still unconstitutional even if

enacted under the police power; it did not
promote public interest.

Even if We consider LOI No. 1695 enacted under the police power of the
State, it would still be invalid for failing to comply with the test of lawful subjects
and lawful means. Jurisprudence states the test as follows: (1) the interest of the
public generally, as distinguished from those of particular class, requires its
exercise; and (2) the means employed are reasonably necessary for the
accomplishment of the purpose and not unduly oppressive upon individuals.52

For the same reasons as discussed, LOI No. 1695 is invalid because it did
not promote public interest. The law was enacted to give undue advantage to a
private corporation. We quote with approval the CA ratiocination on this point,
thus:
 It is upon applying this established tests that We sustain the trial courts
holding LOI 1465 unconstitutional. To be sure, ensuring the continued supply
and distribution of fertilizer in the country is an undertaking imbued with public
interest. However, the method by which LOI 1465 sought to achieve this is by
no means a measure that will promote the public welfare. The governments
commitment to support the successful rehabilitation and continued viability of
PPI, a private corporation, is an unmistakable attempt to mask the subject
statutes impartiality. There is no way to treat the self-interest of a favored entity,
like PPI, as identical with the general interest of the countrys farmers or even
the Filipino people in general. Well to stress, substantive due process exacts
fairness and equal protection disallows distinction where none is needed. When
a statutes public purpose is spoiled by private interest, the use of police power
becomes a travesty which must be struck down for being an arbitrary exercise
of government power. To rule in favor of appellant would contravene the
general principle that revenues derived from taxes cannot be used for purely
private purposes or for the exclusive benefit of private individuals.
(Underscoring supplied)

The general rule is that an

unconstitutional law is void; the doctrine
of operative fact is inapplicable.

PPI also argues that Fertiphil cannot seek a refund even if LOI No. 1465 is
declared unconstitutional. It banks on the doctrine of operative fact, which
provides that an unconstitutional law has an effect before being declared
unconstitutional. PPI wants to retain the levies paid under LOI No. 1465 even if
it is subsequently declared to be unconstitutional.

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

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

At any rate, We find the doctrine inapplicable. The general rule is that an
unconstitutional law is void. It produces no rights, imposes no duties and affords
no protection. It has no legal effect. It is, in legal contemplation, inoperative as if
it has not been passed.54 Being void, Fertiphil is not required to pay the levy. All
levies paid should be refunded in accordance with the general civil code principle
against unjust enrichment. The general rule is supported by Article 7 of the Civil
Code, which provides:

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

When the courts declare a law to be inconsistent with the Constitution,

the former shall be void and the latter shall govern.

The doctrine of operative fact, as an exception to the general rule, only

applies as a matter of equity and fair play. 55 It nullifies the effects of an
unconstitutional law by recognizing that the existence of a statute prior to a
determination of unconstitutionality is an operative fact and may have
consequences which cannot always be ignored. The past cannot always be erased
by a new judicial declaration.56

The doctrine is applicable when a declaration of unconstitutionality will

impose an undue burden on those who have relied on the invalid law. Thus, it was
applied to a criminal case when a declaration of unconstitutionality would put the
accused in double jeopardy 57 or would put in limbo the acts done by a
municipality in reliance upon a law creating it.58

Here, We do not find anything iniquitous in ordering PPI to refund the

amounts paid by Fertiphil under LOI No. 1465. It unduly benefited from the levy.
It was proven during the trial that the levies paid were remitted and deposited to
its bank account. Quite the reverse, it would be inequitable and unjust not to order
a refund. To do so would unjustly enrich PPI at the expense of Fertiphil. Article
22 of the Civil Code explicitly provides that every person who, through an act of
performance by another comes into possession of something at the expense of the
latter without just or legal ground shall return the same to him. We cannot allow
PPI to profit from an unconstitutional law. Justice and equity dictate that PPI must
refund the amounts paid by Fertiphil.
 WHEREFORE, the petition is DENIED. The Court of Appeals Decision
dated November 28, 2003 is AFFIRMED.

SO ORDERED.

RUBEN T. REYES
Associate Justice

WE CONCUR:

CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson

MA. ALICIA AUSTRIA-MARTINEZ MINITA V. CHICO-NAZARIO

Associate Justice Associate Justice

ANTONIO EDUARDO B. NACHURA

Associate Justice

ATTESTATION
 I attest that the conclusions in the above Decision had been reached in
consultation before the case was assigned to the writer of the opinion of the Courts
Division.

CONSUELO YNARES-SANTIAGO

Associate Justice

Chairperson

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution and the Division
Chairpersons Attestation, I certify that the conclusions in the above Decision had
been reached in consultation before the case was assigned to the writer of the
opinion of the Courts Division.

REYNATO S. PUNO
 Chief Justice

EN BANC

ABAKADA GURO PARTY LIST (Formerly G.R. No. 168056

AASJAS) OFFICERS SAMSON S.
ALCANTARA and ED VINCENT S.
ALBANO,
Petitioners, Present:

DAVIDE, JR., C.J.,

PUNO,
PANGANIBAN,
QUISUMBING,
YNARES-SANTIAGO,
SANDOVAL-GUTIERREZ,
- versus - CARPIO,
AUSTRIA-MARTINEZ,
 CORONA,
CARPIO-MORALES,

CALLEJO, SR.,
AZCUNA,
TINGA,
CHICO-NAZARIO, and
GARCIA, JJ.
THE HONORABLE EXECUTIVE
SECRETARY EDUARDO ERMITA;
HONORABLE SECRETARY OF THE
DEPARTMENT OF FINANCE CESAR
PURISIMA; and HONORABLE
COMMISSIONER OF INTERNAL
REVENUE GUILLERMO PARAYNO, JR.,
Respondents.

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

AQUILINO Q. PIMENTEL, JR., LUISA P. G.R. No. 168207

EJERCITO-ESTRADA, JINGGOY E.
ESTRADA, PANFILO M. LACSON,
ALFREDO S. LIM, JAMBY A.S.
MADRIGAL, AND SERGIO R. OSMEA III,
Petitioners,

- versus -

EXECUTIVE SECRETARY EDUARDO R.

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

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

ASSOCIATION OF PILIPINAS SHELL G.R. No. 168461

DEALERS, INC. represented by its
President, ROSARIO ANTONIO; PETRON
DEALERS ASSOCIATION represented by
its President, RUTH E. BARBIBI;
ASSOCIATION OF CALTEX DEALERS OF
THE PHILIPPINES represented by its
President, MERCEDITAS A. GARCIA;
ROSARIO ANTONIO doing business
under the name and style of ANB
NORTH SHELL SERVICE STATION;
LOURDES MARTINEZ doing business
under the name and style of SHELL
GATE N. DOMINGO; BETHZAIDA TAN
doing business under the name and
style of ADVANCE SHELL STATION;
REYNALDO P. MONTOYA doing
business under the name and style of
NEW LAMUAN SHELL SERVICE
STATION; EFREN SOTTO doing business
under the name and style of RED FIELD
SHELL SERVICE STATION; DONICA
CORPORATION represented by its
President, DESI TOMACRUZ; RUTH E.
MARBIBI doing business under the
name and style of R&R PETRON
STATION; PETER M. UNGSON doing
business under the name and style of
CLASSIC STAR GASOLINE SERVICE
STATION; MARIAN SHEILA A. LEE doing
business under the name and style of
NTE GASOLINE & SERVICE STATION;
JULIAN CESAR P. POSADAS doing
business under the name and style of
STARCARGA ENTERPRISES;
ADORACION MAEBO doing business
under the name and style of CMA
MOTORISTS CENTER; SUSAN M.
ENTRATA doing business under the
name and style of LEONAS GASOLINE
STATION and SERVICE CENTER;
CARMELITA BALDONADO doing
business under the name and style of
FIRST CHOICE SERVICE CENTER;
MERCEDITAS A. GARCIA doing business
under the name and style of LORPED
SERVICE CENTER; RHEAMAR A. RAMOS
doing business under the name and
style of RJRAM PTT GAS STATION; MA.
ISABEL VIOLAGO doing business under
the name and style of VIOLAGO-PTT
SERVICE CENTER; MOTORISTS HEART
CORPORATION represented by its Vice-
President for Operations, JOSELITO F.
FLORDELIZA; MOTORISTS HARVARD
CORPORATION represented by its Vice-
President for Operations, JOSELITO F.
FLORDELIZA; MOTORISTS HERITAGE
CORPORATION represented by its Vice-
President for Operations, JOSELITO F.
FLORDELIZA; PHILIPPINE STANDARD
OIL CORPORATION represented by its
Vice-President for Operations,
JOSELITO F. FLORDELIZA; ROMEO
MANUEL doing business under the
name and style of ROMMAN GASOLINE
STATION; ANTHONY ALBERT CRUZ III
doing business under the name and
style of TRUE SERVICE STATION,
Petitioners,

- versus -

CESAR V. PURISIMA, in his capacity as

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

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

FRANCIS JOSEPH G. ESCUDERO, G.R. No. 168463

VINCENT CRISOLOGO, EMMANUEL
JOEL J. VILLANUEVA, RODOLFO G.
PLAZA, DARLENE ANTONINO-
CUSTODIO, OSCAR G. MALAPITAN,
BENJAMIN C. AGARAO, JR. JUAN
EDGARDO M. ANGARA, JUSTIN MARC
SB. CHIPECO, FLORENCIO G. NOEL,
MUJIV S. HATAMAN, RENATO B.
MAGTUBO, JOSEPH A. SANTIAGO,
TEOFISTO DL. GUINGONA III, RUY ELIAS
C. LOPEZ, RODOLFO Q. AGBAYANI and
TEODORO A. CASIO,
Petitioners,
 - versus -

CESAR V. PURISIMA, in his capacity as

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

Respondents.

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

BATAAN GOVERNOR ENRIQUE T. G.R. No. 168730

GARCIA, JR.
Petitioner,

- versus -

HON. EDUARDO R. ERMITA, in his

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

Promulgated:
 Respondents. September 1, 2005

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

DECISION

AUSTRIA-MARTINEZ, J.:

The expenses of government, having for their object the interest of all, should be borne by
everyone, and the more man enjoys the advantages of society, the more he ought to hold
himself honored in contributing to those expenses.

-Anne Robert Jacques Turgot (1727-1781)

French statesman and economist

Mounting budget deficit, revenue generation, inadequate fiscal allocation

for education, increased emoluments for health workers, and wider coverage

for full value-added tax benefits these are the reasons why Republic Act No.

9337 (R.A. No. 9337)[1] was enacted. Reasons, the wisdom of which, the Court

even with its extensive constitutional power of review, cannot probe. The

petitioners in these cases, however, question not only the wisdom of the law,

but also perceived constitutional infirmities in its passage.

 Every law enjoys in its favor the presumption of constitutionality. Their

arguments notwithstanding, petitioners failed to justify their call for the

invalidity of the law. Hence, R.A. No. 9337 is not unconstitutional.

LEGISLATIVE HISTORY

R.A. No. 9337 is a consolidation of three legislative bills namely, House Bill

Nos. 3555 and 3705, and Senate Bill No. 1950.

House Bill No. 3555[2] was introduced on first reading on January 7, 2005.

The House Committee on Ways and Means approved the bill, in substitution of

House Bill No. 1468, which Representative (Rep.) Eric D. Singson introduced on

August 8, 2004. The President certified the bill on January 7, 2005 for immediate

enactment. On January 27, 2005, the House of Representatives approved the

bill on second and third reading.

House Bill No. 3705[3] on the other hand, substituted House Bill No. 3105

introduced by Rep. Salacnib F. Baterina, and House Bill No. 3381 introduced by

Rep. Jacinto V. Paras. Its mother bill is House Bill No. 3555. The House

Committee on Ways and Means approved the bill on February 2, 2005. The
President also certified it as urgent on February 8, 2005. The House of

Representatives approved the bill on second and third reading on February 28,

2005.

Meanwhile, the Senate Committee on Ways and Means approved Senate

Bill No. 1950[4] on March 7, 2005, in substitution of Senate Bill Nos. 1337, 1838

and 1873, taking into consideration House Bill Nos. 3555 and 3705. Senator

Ralph G. Recto sponsored Senate Bill No. 1337, while Senate Bill Nos. 1838 and

1873 were both sponsored by Sens. Franklin M. Drilon, Juan M. Flavier and

Francis N. Pangilinan. The President certified the bill on March 11, 2005, and was

approved by the Senate on second and third reading on April 13, 2005.

On the same date, April 13, 2005, the Senate agreed to the request of the

House of Representatives for a committee conference on the disagreeing

provisions of the proposed bills.

Before long, the Conference Committee on the Disagreeing Provisions of

House Bill No. 3555, House Bill No. 3705, and Senate Bill No. 1950, after having

met and discussed in full free and conference, recommended the approval of its
report, which the Senate did on May 10, 2005, and with the House of

Representatives agreeing thereto the next day, May 11, 2005.

On May 23, 2005, the enrolled copy of the consolidated House and Senate

version was transmitted to the President, who signed the same into law on May

24, 2005. Thus, came R.A. No. 9337.

July 1, 2005 is the effectivity date of R.A. No. 9337.[5] When said date

came, the Court issued a temporary restraining order, effective immediately and

continuing until further orders, enjoining respondents from enforcing and

implementing the law.

Oral arguments were held on July 14, 2005. Significantly, during the

hearing, the Court speaking through Mr. Justice Artemio V. Panganiban, voiced

the rationale for its issuance of the temporary restraining order on July 1, 2005,

to wit:

J. PANGANIBAN : . . . But before I go into the details of your presentation, let

me just tell you a little background. You know when the
law took effect on July 1, 2005, the Court issued a TRO
at about 5 oclock in the afternoon. But before that,
there was a lot of complaints aired on television and on
radio. Some people in a gas station were complaining
that the gas prices went up by 10%. Some people were
complaining that their electric bill will go up by 10%.
Other times people riding in domestic air carrier were
 complaining that the prices that theyll have to pay
would have to go up by 10%. While all that was being
aired, per your presentation and per our own
understanding of the law, thats not true. Its not true
that the e-vat law necessarily increased prices by 10%
uniformly isnt it?

ATTY. BANIQUED : No, Your Honor.

J. PANGANIBAN : It is not?

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

J. PANGANIBAN : Thats correct . . .

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

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

ATTY. BANIQUED : Yes, Your Honor.

J. PANGANIBAN : As a matter of fact a part of the mitigating measures would

be the elimination of the Excise Tax and the import
duties. That is why, it is not correct to say that the VAT
as to petroleum dealers increased prices by 10%.

ATTY. BANIQUED : Yes, Your Honor.

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

J. PANGANIBAN : Now. For instance, Domestic Airline companies, Mr. Counsel,

are at present imposed a Sales Tax of 3%. When this E-
Vat law took effect the Sales Tax was also removed as a
mitigating measure. So, therefore, there is no
justification to increase the fares by 10% at best 7%,
correct?

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

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

ATTY. BANIQUED : Yes, Your Honor.

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

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

G.R. No. 168056

Before R.A. No. 9337 took effect, petitioners ABAKADA GURO Party List,

et al., filed a petition for prohibition on May 27, 2005. They question the

constitutionality of Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106,

107 and 108, respectively, of the National Internal Revenue Code (NIRC). Section

4 imposes a 10% VAT on sale of goods and properties, Section 5 imposes a 10%

VAT on importation of goods, and Section 6 imposes a 10% VAT on sale of

services and use or lease of properties. These questioned provisions contain a

uniform proviso authorizing the President, upon recommendation of the

Secretary of Finance, to raise the VAT rate to 12%, effective January 1, 2006,

after any of the following conditions have been satisfied, to wit:

. . . That the President, upon the recommendation of the Secretary of

Finance, shall, effective January 1, 2006, raise the rate of value-added tax to
twelve percent (12%), after any of the following conditions has been satisfied:
 (i) Value-added tax collection as a percentage of Gross Domestic
Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%);
or

(ii) National government deficit as a percentage of GDP of the previous

year exceeds one and one-half percent (1 %).

Petitioners argue that the law is unconstitutional, as it constitutes

abandonment by Congress of its exclusive authority to fix the rate of taxes under

Article VI, Section 28(2) of the 1987 Philippine Constitution.

G.R. No. 168207

On June 9, 2005, Sen. Aquilino Q. Pimentel, Jr., et al., filed a petition for

certiorari likewise assailing the constitutionality of Sections 4, 5 and 6 of R.A. No.

9337.

Aside from questioning the so-called stand-by authority of the President

to increase the VAT rate to 12%, on the ground that it amounts to an undue

delegation of legislative power, petitioners also contend that the increase in the

VAT rate to 12% contingent on any of the two conditions being satisfied violates

the due process clause embodied in Article III, Section 1 of the Constitution, as

it imposes an unfair and additional tax burden on the people, in that: (1) the 12%
increase is ambiguous because it does not state if the rate would be returned to

the original 10% if the conditions are no longer satisfied; (2) the rate is unfair

and unreasonable, as the people are unsure of the applicable VAT rate from year

to year; and (3) the increase in the VAT rate, which is supposed to be an incentive

to the President to raise the VAT collection to at least 2 4/5 of the GDP of the

previous year, should only be based on fiscal adequacy.

Petitioners further claim that the inclusion of a stand-by authority granted

to the President by the Bicameral Conference Committee is a violation of the

no-amendment rule upon last reading of a bill laid down in Article VI, Section

26(2) of the Constitution.

G.R. No. 168461

Thereafter, a petition for prohibition was filed on June 29, 2005, by the

Association of Pilipinas Shell Dealers, Inc., et al., assailing the following

provisions of R.A. No. 9337:

1) Section 8, amending Section 110 (A)(2) of the NIRC, requiring that the input
tax on depreciable goods shall be amortized over a 60-month period, if
the acquisition, excluding the VAT components, exceeds One Million
Pesos (P1, 000,000.00);
 2) Section 8, amending Section 110 (B) of the NIRC, imposing a 70% limit on
the amount of input tax to be credited against the output tax; and

3) Section 12, amending Section 114 (c) of the NIRC, authorizing the
Government or any of its political subdivisions, instrumentalities or
agencies, including GOCCs, to deduct a 5% final withholding tax on
gross payments of goods and services, which are subject to 10% VAT
under Sections 106 (sale of goods and properties) and 108 (sale of
services and use or lease of properties) of the NIRC.

Petitioners contend that these provisions are unconstitutional for being

arbitrary, oppressive, excessive, and confiscatory.

Petitioners argument is premised on the constitutional right of non-

deprivation of life, liberty or property without due process of law under Article

III, Section 1 of the Constitution. According to petitioners, the contested sections

impose limitations on the amount of input tax that may be claimed. Petitioners

also argue that the input tax partakes the nature of a property that may not be

confiscated, appropriated, or limited without due process of law. Petitioners

further contend that like any other property or property right, the input tax

credit may be transferred or disposed of, and that by limiting the same, the

government gets to tax a profit or value-added even if there is no profit or value-

added.
 Petitioners also believe that these provisions violate the constitutional

guarantee of equal protection of the law under Article III, Section 1 of the

Constitution, as the limitation on the creditable input tax if: (1) the entity has a

high ratio of input tax; or (2) invests in capital equipment; or (3) has several

transactions with the government, is not based on real and substantial

differences to meet a valid classification.

Lastly, petitioners contend that the 70% limit is anything but progressive,

violative of Article VI, Section 28(1) of the Constitution, and that it is the smaller

businesses with higher input tax to output tax ratio that will suffer the

consequences thereof for it wipes out whatever meager margins the petitioners

make.

G.R. No. 168463

Several members of the House of Representatives led by Rep. Francis

Joseph G. Escudero filed this petition for certiorari on June 30, 2005. They

question the constitutionality of R.A. No. 9337 on the following grounds:

1) Sections 4, 5, and 6 of R.A. No. 9337 constitute an undue delegation of

legislative power, in violation of Article VI, Section 28(2) of the
Constitution;
 2) The Bicameral Conference Committee acted without jurisdiction in deleting
the no pass on provisions present in Senate Bill No. 1950 and House Bill
No. 3705; and

3) Insertion by the Bicameral Conference Committee of Sections 27, 28, 34,

116, 117, 119, 121, 125,[7] 148, 151, 236, 237 and 288, which were
present in Senate Bill No. 1950, violates Article VI, Section 24(1) of the
Constitution, which provides that all appropriation, revenue or tariff
bills shall originate exclusively in the House of Representatives

G.R. No. 168730

On the eleventh hour, Governor Enrique T. Garcia filed a petition for

certiorari and prohibition on July 20, 2005, alleging unconstitutionality of the

law on the ground that the limitation on the creditable input tax in effect allows

VAT-registered establishments to retain a portion of the taxes they collect, thus

violating the principle that tax collection and revenue should be solely allocated

for public purposes and expenditures. Petitioner Garcia further claims that

allowing these establishments to pass on the tax to the consumers is inequitable,

in violation of Article VI, Section 28(1) of the Constitution.

RESPONDENTS COMMENT
 The Office of the Solicitor General (OSG) filed a Comment in behalf of

respondents. Preliminarily, respondents contend that R.A. No. 9337 enjoys the

presumption of constitutionality and petitioners failed to cast doubt on its

validity.

Relying on the case of Tolentino vs. Secretary of Finance, 235 SCRA

630 (1994), respondents argue that the procedural issues raised by petitioners,

i.e., legality of the bicameral proceedings, exclusive origination of revenue

measures and the power of the Senate concomitant thereto, have already been

settled. With regard to the issue of undue delegation of legislative power to the

President, respondents contend that the law is complete and leaves no

discretion to the President but to increase the rate to 12% once any of the two

conditions provided therein arise.

Respondents also refute petitioners argument that the increase to 12%,

as well as the 70% limitation on the creditable input tax, the 60-month

amortization on the purchase or importation of capital goods exceeding

P1,000,000.00, and the 5% final withholding tax by government agencies, is

arbitrary, oppressive, and confiscatory, and that it violates the constitutional

principle on progressive taxation, among others.

 Finally, respondents manifest that R.A. No. 9337 is the anchor of the

governments fiscal reform agenda. A reform in the value-added system of

taxation is the core revenue measure that will tilt the balance towards a

sustainable macroeconomic environment necessary for economic growth.

ISSUES

The Court defined the issues, as follows:

PROCEDURAL ISSUE

Whether R.A. No. 9337 violates the following provisions of the

Constitution:

a. Article VI, Section 24, and

b. Article VI, Section 26(2)

SUBSTANTIVE ISSUES

1. Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107
and 108 of the NIRC, violate the following provisions of the Constitution:

a. Article VI, Section 28(1), and

b. Article VI, Section 28(2)
 2. Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B)
of the NIRC; and Section 12 of R.A. No. 9337, amending Section 114(C) of the
NIRC, violate the following provisions of the Constitution:

a. Article VI, Section 28(1), and

b. Article III, Section 1

RULING OF THE COURT

As a prelude, the Court deems it apt to restate the general principles and

concepts of value-added tax (VAT), as the confusion and inevitably, litigation,

breeds from a fallacious notion of its nature.

The VAT is a tax on spending or consumption. It is levied on the sale,

barter, exchange or lease of goods or properties and services.[8] Being an

indirect tax on expenditure, the seller of goods or services may pass on the

amount of tax paid to the buyer,[9] with the seller acting merely as a tax

collector.[10] The burden of VAT is intended to fall on the immediate buyers and

ultimately, the end-consumers.

In contrast, a direct tax is a tax for which a taxpayer is directly liable on

the transaction or business it engages in, without transferring the burden to

someone else.[11] Examples are individual and corporate income taxes, transfer

taxes, and residence taxes.[12]

In the Philippines, the value-added system of sales taxation has long been

in existence, albeit in a different mode. Prior to 1978, the system was a single-

stage tax computed under the cost deduction method and was payable only by

the original sellers. The single-stage system was subsequently modified, and a

mixture of the cost deduction method and tax credit method was used to

determine the value-added tax payable.[13] Under the tax credit method, an

entity can credit against or subtract from the VAT charged on its sales or outputs

the VAT paid on its purchases, inputs and imports.[14]

It was only in 1987, when President Corazon C. Aquino issued Executive

Order No. 273, that the VAT system was rationalized by imposing a multi-stage

tax rate of 0% or 10% on all sales using the tax credit method.[15]

E.O. No. 273 was followed by R.A. No. 7716 or the Expanded VAT Law,[16]

R.A. No. 8241 or the Improved VAT Law,[17] R.A. No. 8424 or the Tax Reform

Act of 1997,[18] and finally, the presently beleaguered R.A. No. 9337, also

referred to by respondents as the VAT Reform Act.

 The Court will now discuss the issues in logical sequence.

PROCEDURAL ISSUE

I.

Whether R.A. No. 9337 violates the following provisions of the Constitution:

a. Article VI, Section 24, and

b. Article VI, Section 26(2)

A. The Bicameral Conference Committee

Petitioners Escudero, et al., and Pimentel, et al., allege that the Bicameral

Conference Committee exceeded its authority by:

1) Inserting the stand-by authority in favor of the President in Sections 4, 5,

and 6 of R.A. No. 9337;

2) Deleting entirely the no pass-on provisions found in both the House and
Senate bills;

3) Inserting the provision imposing a 70% limit on the amount of input tax to
be credited against the output tax; and

4) Including the amendments introduced only by Senate Bill No. 1950

regarding other kinds of taxes in addition to the value-added tax.
 Petitioners now beseech the Court to define the powers of the Bicameral

Conference Committee.

It should be borne in mind that the power of internal regulation and

discipline are intrinsic in any legislative body for, as unerringly elucidated by

Justice Story, [i]f the power did not exist, it would be utterly impracticable to

transact the business of the nation, either at all, or at least with decency,

deliberation, and order.[19] Thus, Article VI, Section 16 (3) of the Constitution

provides that each House may determine the rules of its proceedings. Pursuant

to this inherent constitutional power to promulgate and implement its own rules

of procedure, the respective rules of each house of Congress provided for the

creation of a Bicameral Conference Committee.

Thus, Rule XIV, Sections 88 and 89 of the Rules of House of

Representatives provides as follows:

Sec. 88. Conference Committee. In the event that the House does not
agree with the Senate on the amendment to any bill or joint resolution, the
differences may be settled by the conference committees of both chambers.
 In resolving the differences with the Senate, the House panel shall, as
much as possible, adhere to and support the House Bill. If the differences with
the Senate are so substantial that they materially impair the House Bill, the
panel shall report such fact to the House for the latters appropriate action.

Sec. 89. Conference Committee Reports. . . . Each report shall contain a

detailed, sufficiently explicit statement of the changes in or amendments to
the subject measure.

...

The Chairman of the House panel may be interpellated on the

Conference Committee Report prior to the voting thereon. The House shall
vote on the Conference Committee Report in the same manner and procedure
as it votes on a bill on third and final reading.

Rule XII, Section 35 of the Rules of the Senate states:

Sec. 35. In the event that the Senate does not agree with the House of
Representatives on the provision of any bill or joint resolution, the differences
shall be settled by a conference committee of both Houses which shall meet
within ten (10) days after their composition. The President shall designate the
members of the Senate Panel in the conference committee with the approval
of the Senate.

Each Conference Committee Report shall contain a detailed and

sufficiently explicit statement of the changes in, or amendments to the subject
measure, and shall be signed by a majority of the members of each House
panel, voting separately.

A comparative presentation of the conflicting House and Senate

provisions and a reconciled version thereof with the explanatory statement of
the conference committee shall be attached to the report.
...

The creation of such conference committee was apparently in response

to a problem, not addressed by any constitutional provision, where the two

houses of Congress find themselves in disagreement over changes or

amendments introduced by the other house in a legislative bill. Given that one

of the most basic powers of the legislative branch is to formulate and implement

its own rules of proceedings and to discipline its members, may the Court then

delve into the details of how Congress complies with its internal rules or how it

conducts its business of passing legislation? Note that in the present petitions,

the issue is not whether provisions of the rules of both houses creating the

bicameral conference committee are unconstitutional, but whether the

bicameral conference committee has strictly complied with the rules of both

houses, thereby remaining within the jurisdiction conferred upon it by

Congress.

In the recent case of Farias vs. The Executive Secretary,[20] the Court En

Banc, unanimously reiterated and emphasized its adherence to the enrolled bill

doctrine, thus, declining therein petitioners plea for the Court to go behind the
enrolled copy of the bill. Assailed in said case was Congresss creation of two sets

of bicameral conference committees, the lack of records of said committees

proceedings, the alleged violation of said committees of the rules of both houses,

and the disappearance or deletion of one of the provisions in the compromise

bill submitted by the bicameral conference committee. It was argued that such

irregularities in the passage of the law nullified R.A. No. 9006, or the Fair Election

Act.

Striking down such argument, the Court held thus:

Under the enrolled bill doctrine, the signing of a bill by the Speaker of the House and the
Senate President and the certification of the Secretaries of both Houses of Congress that it
was passed are conclusive of its due enactment. A review of cases reveals the Courts
consistent adherence to the rule. The Court finds no reason to deviate from the salutary
rule in this case where the irregularities alleged by the petitioners mostly involved the
internal rules of Congress, e.g., creation of the 2nd or 3rd Bicameral Conference
Committee by the House. This Court is not the proper forum for the enforcement of
these internal rules of Congress, whether House or Senate. Parliamentary rules are
merely procedural and with their observance the courts have no concern. Whatever
doubts there may be as to the formal validity of Rep. Act No. 9006 must be resolved in
its favor. The Court reiterates its ruling in Arroyo vs. De Venecia, viz.:

But the cases, both here and abroad, in varying forms

of expression, all deny to the courts the power to inquire into
allegations that, in enacting a law, a House of Congress failed
to comply with its own rules, in the absence of showing that
there was a violation of a constitutional provision or the rights
of private individuals. In Osmea v. Pendatun, it was held: At any
rate, courts have declared that the rules adopted by
deliberative bodies are subject to revocation, modification or
waiver at the pleasure of the body adopting them. And it has
been said that Parliamentary rules are merely procedural, and
 with their observance, the courts have no concern. They may
be waived or disregarded by the legislative body.
Consequently, mere failure to conform to parliamentary usage
will not invalidate the action (taken by a deliberative body)
when the requisite number of members have agreed to a
particular measure.[21] (Emphasis supplied)

The foregoing declaration is exactly in point with the present cases, where

petitioners allege irregularities committed by the conference committee in

introducing changes or deleting provisions in the House and Senate bills. Akin to

the Farias case,[22] the present petitions also raise an issue regarding the

actions taken by the conference committee on matters regarding Congress

compliance with its own internal rules. As stated earlier, one of the most basic

and inherent power of the legislature is the power to formulate rules for its

proceedings and the discipline of its members. Congress is the best judge of how

it should conduct its own business expeditiously and in the most orderly manner.

It is also the sole

concern of Congress to instill discipline among the members of its conference

committee if it believes that said members violated any of its rules of

proceedings. Even the expanded jurisdiction of this Court cannot apply to

questions regarding only the internal operation of Congress, thus, the Court is

wont to deny a review of the internal proceedings of a co-equal branch of

government.
 Moreover, as far back as 1994 or more than ten years ago, in the case of

Tolentino vs. Secretary of Finance,[23] the Court already made the

pronouncement that [i]f a change is desired in the practice [of the Bicameral

Conference Committee] it must be sought in Congress since this question is

not covered by any constitutional provision but is only an internal rule of each

house. [24] To date, Congress has not seen it fit to make such changes adverted

to by the Court. It seems, therefore, that Congress finds the practices of the

bicameral conference committee to be very useful for purposes of prompt and

efficient legislative action.

Nevertheless, just to put minds at ease that no blatant irregularities

tainted the proceedings of the bicameral conference committees, the Court

deems it necessary to dwell on the issue. The Court observes that there was a

necessity for a conference committee because a comparison of the provisions

of House Bill Nos. 3555 and 3705 on one hand, and Senate Bill No. 1950 on the

other, reveals that there were indeed disagreements. As pointed out in the

petitions, said disagreements were as follows:

House Bill No. 3555 House Bill No.3705 Senate Bill No. 1950
 With regard to Stand-By Authority in favor of President

Provides for 12% VAT on Provides for 12% VAT in Provides for a single rate
every sale of goods or general on sales of goods or of 10% VAT on sale of
properties (amending properties and reduced rates goods or properties
Sec. 106 of NIRC); 12% for sale of certain locally (amending Sec. 106 of
VAT on importation of manufactured goods and NIRC), 10% VAT on sale of
goods (amending Sec. petroleum products and raw services including sale of
107 of NIRC); and 12% materials to be used in the electricity by generation
VAT on sale of services manufacture thereof companies, transmission
and use or lease of (amending Sec. 106 of NIRC); and distribution
properties (amending 12% VAT on importation of companies, and use or
Sec. 108 of NIRC) goods and reduced rates for lease of properties
certain imported products (amending Sec. 108 of
including petroleum NIRC)
products (amending Sec. 107
of NIRC); and 12% VAT on
sale of services and use or
lease of properties and a
reduced rate for certain
services including power
generation (amending Sec.
108 of NIRC)

With regard to the no pass-on provision

No similar provision Provides that the VAT Provides that the VAT
imposed on power imposed on sales of
generation and on the sale of electricity by generation
petroleum products shall be companies and services of
absorbed by generation transmission companies
companies or sellers, and distribution
respectively, and shall not be companies, as well as
passed on to consumers those of franchise
grantees of electric
utilities shall not apply to
residential
end-users. VAT shall be
absorbed by generation,
 transmission, and
distribution companies.
With regard to 70% limit on input tax credit

Provides that the input No similar provision Provides that the input tax
tax credit for capital credit for capital goods on
goods on which a VAT which a VAT has been paid
has been paid shall be shall be equally
equally distributed over distributed over 5 years or
5 years or the the depreciable life of
depreciable life of such such capital goods; the
capital goods; the input input tax credit for goods
tax credit for goods and and services other than
services other than capital goods shall not
capital goods shall not exceed 90% of the output
exceed 5% of the total VAT.
amount of such goods
and services; and for
persons engaged in retail
trading of goods, the
allowable input tax
credit shall not exceed
11% of the total amount
of goods purchased.

With regard to amendments to be made to NIRC provisions regarding income and

excise taxes

No similar provision No similar provision Provided for amendments

to several NIRC provisions
regarding corporate
income, percentage,
franchise and excise taxes

The disagreements between the provisions in the House bills and the

Senate bill were with regard to (1) what rate of VAT is to be imposed; (2)
whether only the VAT imposed on electricity generation, transmission and

distribution companies should not be passed on to consumers, as proposed in

the Senate bill, or both the VAT imposed on electricity generation, transmission

and distribution companies and the VAT imposed on sale of petroleum products

should not be passed on to consumers, as proposed in the House bill; (3) in what

manner input tax credits should be limited; (4) and whether the NIRC provisions

on corporate income taxes, percentage, franchise and excise taxes should be

amended.

There being differences and/or disagreements on the foregoing

provisions of the House and Senate bills, the Bicameral Conference Committee

was mandated by the rules of both houses of Congress to act on the same by

settling said differences and/or disagreements. The Bicameral Conference

Committee acted on the disagreeing provisions by making the following changes:

1. With regard to the disagreement on the rate of VAT to be imposed, it would appear from the Conference Committee Report that
the Bicameral Conference Committee tried to bridge the gap in the difference between the 10% VAT rate proposed by the Senate, and
the various rates with 12% as the highest VAT rate proposed by the House, by striking a compromise whereby the present 10% VAT
rate would be retained until certain conditions arise, i.e., the value-added tax collection as a percentage of gross domestic product
(GDP) of the previous year exceeds 2 4/5%, or National Government deficit as a percentage of GDP of the previous year exceeds 1%,
when the President, upon recommendation of the Secretary of Finance shall raise the rate of VAT to 12% effective January 1, 2006.

2. With regard to the disagreement on whether only the VAT imposed on

electricity generation, transmission and distribution companies should not be
passed on to consumers or whether both the VAT imposed on electricity
generation, transmission and distribution companies and the VAT imposed on
sale of petroleum products may be passed on to consumers, the Bicameral
Conference Committee chose to settle such disagreement by altogether deleting
from its Report any no pass-on provision.

3. With regard to the disagreement on whether input tax credits should be limited or not, the Bicameral Conference Committee
decided to adopt the position of the House by putting a limitation on the amount of input tax that may be credited against the output
tax, although it crafted its own language as to the amount of the limitation on input tax credits and the manner of computing the
same by providing thus:

(A) Creditable Input Tax. . . .

...

Provided, The input tax on goods purchased or imported in a

calendar month for use in trade or business for which deduction
for depreciation is allowed under this Code, shall be spread
evenly over the month of acquisition and the fifty-nine (59)
succeeding months if the aggregate acquisition cost for such
goods, excluding the VAT component thereof, exceeds one
million Pesos (P1,000,000.00): PROVIDED, however, that if the
estimated useful life of the capital good is less than five (5) years,
as used for depreciation purposes, then the input VAT shall be
spread over such shorter period: . . .

(B) Excess Output or Input Tax. If at the end of any taxable

quarter the output tax exceeds the input tax, the excess shall
be paid by the VAT-registered person. If the input tax exceeds
the output tax, the excess shall be carried over to the
succeeding quarter or quarters: PROVIDED that the input tax
inclusive of input VAT carried over from the previous quarter
that may be credited in every quarter shall not exceed seventy
percent (70%) of the output VAT: PROVIDED, HOWEVER, THAT
any input tax attributable to zero-rated sales by a VAT-
registered person may at his option be refunded or credited
against other internal revenue taxes, . . .
 4. With regard to the amendments to other provisions of the NIRC on
corporate income tax, franchise, percentage and excise taxes, the conference
committee decided to include such amendments and basically adopted the
provisions found in Senate Bill No. 1950, with some changes as to the rate of the
tax to be imposed.

Under the provisions of both the Rules of the House of Representatives

and Senate Rules, the Bicameral Conference Committee is mandated to settle

the differences between the disagreeing provisions in the House bill and the

Senate bill. The term settle is synonymous to reconcile and harmonize.[25] To

reconcile or harmonize disagreeing provisions, the Bicameral Conference

Committee may then (a) adopt the specific provisions of either the House bill or

Senate bill, (b) decide that neither provisions in the House bill or the provisions

in the Senate bill would

be carried into the final form of the bill, and/or (c) try to arrive at a compromise

between the disagreeing provisions.

In the present case, the changes introduced by the Bicameral Conference

Committee on disagreeing provisions were meant only to reconcile and

harmonize the disagreeing provisions for it did not inject any idea or intent that

is wholly foreign to the subject embraced by the original provisions.

 The so-called stand-by authority in favor of the President, whereby the

rate of 10% VAT wanted by the Senate is retained until such time that certain

conditions arise when the 12% VAT wanted by the House shall be imposed,

appears to be a compromise to try to bridge the difference in the rate of VAT

proposed by the two houses of Congress. Nevertheless, such compromise is still

totally within the subject of what rate of VAT should be imposed on taxpayers.

The no pass-on provision was deleted altogether. In the transcripts of the

proceedings of the Bicameral Conference Committee held on May 10, 2005, Sen.

Ralph Recto, Chairman of the Senate Panel, explained the reason for deleting

the no pass-on provision in this wise:

. . . the thinking was just to keep the VAT law or the VAT bill simple. And we were thinking
that no sector should be a beneficiary of legislative grace, neither should any sector be
discriminated on. The VAT is an indirect tax. It is a pass on-tax. And lets keep it plain and
simple. Lets not confuse the bill and put a no pass-on provision. Two-thirds of the world have
a VAT system and in this two-thirds of the globe, I have yet to see a VAT with a no pass-
though provision. So, the thinking of the Senate is basically simple, lets keep the VAT
simple.[26] (Emphasis supplied)

Rep. Teodoro Locsin further made the manifestation that the no pass-on

provision never really enjoyed the support of either House.[27]

 With regard to the amount of input tax to be credited against output tax,

the Bicameral Conference Committee came to a compromise on the percentage

rate of the limitation or cap on such input tax credit, but again, the change

introduced by the Bicameral Conference Committee was totally within the

intent of both houses to put a cap on input tax that may be

credited against the output tax. From the inception of the subject revenue bill

in the House of Representatives, one of the major objectives was to plug a

glaring loophole in the tax policy and administration by creating vital restrictions

on the claiming of input VAT tax credits . . . and [b]y introducing limitations on

the claiming of tax credit, we are capping a major leakage that has placed our

collection efforts at an apparent disadvantage.[28]

As to the amendments to NIRC provisions on taxes other than the value-

added tax proposed in Senate Bill No. 1950, since said provisions were among

those referred to it, the conference committee had to act on the same and it

basically adopted the version of the Senate.

Thus, all the changes or modifications made by the Bicameral Conference

Committee were germane to subjects of the provisions referred

to it for reconciliation. Such being the case, the Court does not see any grave

abuse of discretion amounting to lack or excess of jurisdiction committed by the

Bicameral Conference Committee. In the earlier cases of Philippine Judges

Association vs. Prado[29] and Tolentino vs. Secretary of Finance,[30] the Court

recognized the long-standing legislative practice of giving said conference

committee ample latitude for compromising differences between the Senate

and the House. Thus, in the Tolentino case, it was held that:

. . . it is within the power of a conference committee to include in its

report an entirely new provision that is not found either in the House bill or in
the Senate bill. If the committee can propose an amendment consisting of one
or two provisions, there is no reason why it cannot propose several provisions,
collectively considered as an amendment in the nature of a substitute, so long
as such amendment is germane to the subject of the bills before the
committee. After all, its report was not final but needed the approval of both
houses of Congress to become valid as an act of the legislative department.
The charge that in this case the Conference Committee acted as a third
legislative chamber is thus without any basis.[31] (Emphasis supplied)

B. R.A. No. 9337 Does Not Violate Article VI, Section

26(2) of the Constitution on the No-Amendment
Rule

Article VI, Sec. 26 (2) of the Constitution, states:

 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.

Petitioners argument that the practice where a bicameral conference

committee is allowed to add or delete provisions in the House bill and the Senate

bill after these had passed three readings is in effect a circumvention of the no

amendment rule (Sec. 26 (2), Art. VI of the 1987 Constitution), fails to convince

the Court to deviate from its ruling in the Tolentino case that:

Nor is there any reason for requiring that the Committees Report in
these cases must have undergone three readings in each of the two houses. If
that be the case, there would be no end to negotiation since each house may
seek modification of the compromise bill. . . .

Art. VI. 26 (2) must, therefore, be construed as referring only to bills

introduced for the first time in either house of Congress, not to the
conference committee report.[32] (Emphasis supplied)

The Court reiterates here that the no-amendment rule refers only to the

procedure to be followed by each house of Congress with regard to bills

initiated in each of said respective houses, before said bill is transmitted to the
other house for its concurrence or amendment. Verily, to construe said

provision in a way as to proscribe any further changes to a bill after one house

has voted on it would lead to absurdity as this would mean that the other house

of Congress would be deprived of its constitutional power to amend or introduce

changes to said bill. Thus, Art. VI, Sec. 26 (2) of the Constitution cannot be taken

to mean that the introduction by the Bicameral Conference Committee of

amendments and modifications to disagreeing provisions in bills that have been

acted upon by both houses of Congress is prohibited.

C. R.A. No. 9337 Does Not Violate Article VI, Section 24

of the Constitution on Exclusive Origination of
Revenue Bills

Coming to the issue of the validity of the amendments made regarding

the NIRC provisions on corporate income taxes and percentage, excise taxes.

Petitioners refer to the following provisions, to wit:

Section
27
Rates of Income Tax on Domestic
Corporation
28(A)(1) Tax on Resident Foreign Corporation
28(B)(1) Inter-corporate Dividends
34(B)(1) Inter-corporate Dividends
116 Tax on Persons Exempt from VAT
 117 Percentage Tax on domestic carriers and
keepers of Garage
119 Tax on franchises
121 Tax on banks and Non-Bank Financial
Intermediaries
148 Excise Tax on manufactured oils and other
fuels
151 Excise Tax on mineral products
236 Registration requirements
237 Issuance of receipts or sales or commercial
invoices
288 Disposition of Incremental Revenue

Petitioners claim that the amendments to these provisions of the NIRC did

not at all originate from the House. They aver that House Bill No. 3555 proposed

amendments only regarding Sections 106, 107, 108, 110 and 114 of the NIRC,

while House Bill No. 3705 proposed amendments only to Sections 106, 107,108,

109, 110 and 111 of the NIRC; thus, the other sections of the NIRC which the

Senate amended but which amendments were not found in the House bills are

not intended to be amended by the House of Representatives. Hence, they

argue that since the proposed amendments did not originate from the House,

such amendments are a violation of Article VI, Section 24 of the Constitution.

The argument does not hold water.

Article VI, Section 24 of the Constitution reads:

 Sec. 24. All appropriation, revenue or tariff bills, bills authorizing
increase of the public debt, bills of local application, and private bills shall
originate exclusively in the House of Representatives but the Senate may
propose or concur with amendments.

In the present cases, petitioners admit that it was indeed House Bill Nos.

3555 and 3705 that initiated the move for amending provisions of the NIRC

dealing mainly with the value-added tax. Upon transmittal of said House bills to

the Senate, the Senate came out with Senate Bill No. 1950 proposing

amendments not only to NIRC provisions on the value-added tax but also

amendments to NIRC provisions on other kinds of taxes. Is the introduction by

the Senate of provisions not dealing directly with the value- added tax, which is

the only kind of tax being amended in the House bills, still within the purview of

the constitutional provision authorizing the Senate to propose or concur with

amendments to a revenue bill that originated from the House?

The foregoing question had been squarely answered in the Tolentino case,

wherein the Court held, thus:

. . . To begin with, it is not the law but the revenue bill which is required
by the Constitution to originate exclusively in the House of Representatives. It
is important to emphasize this, because a bill originating in the House may
undergo such extensive changes in the Senate that the result may be a
rewriting of the whole. . . . At this point, what is important to note is that, as a
result of the Senate action, a distinct bill may be produced. To insist that a
 revenue statute and not only the bill which initiated the legislative process
culminating in the enactment of the law must substantially be the same as
the House bill would be to deny the Senates power not only to concur with
amendments but also to propose amendments. It would be to violate the
coequality of legislative power of the two houses of Congress and in fact make
the House superior to the Senate.

Given, then, the power of the Senate to propose amendments, the

Senate can propose its own version even with respect to bills which are
required by the Constitution to originate in the House.
...

Indeed, what the Constitution simply means is that the initiative for
filing revenue, tariff or tax bills, bills authorizing an increase of the public debt,
private bills and bills of local application must come from the House of
Representatives on the theory that, elected as they are from the districts, the
members of the House can be expected to be more sensitive to the local
needs and problems. On the other hand, the senators, who are elected at
large, are expected to approach the same problems from the national
perspective. Both views are thereby made to bear on the enactment of such
laws.[33] (Emphasis supplied)

Since there is no question that the revenue bill exclusively originated in

the House of Representatives, the Senate was acting within its

constitutional power to introduce amendments to the House bill when it

included provisions in Senate Bill No. 1950 amending corporate income taxes,

percentage, excise and franchise taxes. Verily, Article VI, Section 24 of the

Constitution does not contain any prohibition or limitation on the extent of the

amendments that may be introduced by the Senate to the House revenue bill.
 Furthermore, the amendments introduced by the Senate to the NIRC

provisions that had not been touched in the House bills are still in furtherance

of the intent of the House in initiating the subject revenue bills. The Explanatory

Note of House Bill No. 1468, the very first House bill introduced on the floor,

which was later substituted by House Bill No. 3555, stated:

One of the challenges faced by the present administration is the urgent

and daunting task of solving the countrys serious financial problems. To do this,
government expenditures must be strictly monitored and controlled and
revenues must be significantly increased. This may be easier said than done,
but our fiscal authorities are still optimistic the government will be operating
on a balanced budget by the year 2009. In fact, several measures that will
result to significant expenditure savings have been identified by the
administration. It is supported with a credible package of revenue measures
that include measures to improve tax administration and control the
leakages in revenues from income taxes and the value-added tax (VAT).
(Emphasis supplied)

Rep. Eric D. Singson, in his sponsorship speech for House Bill No. 3555,

declared that:

In the budget message of our President in the year 2005, she reiterated
that we all acknowledged that on top of our agenda must be the restoration
of the health of our fiscal system.

In order to considerably lower the consolidated public sector deficit

and eventually achieve a balanced budget by the year 2009, we need to seize
windows of opportunities which might seem poignant in the beginning, but
 in the long run prove effective and beneficial to the overall status of our
economy. One such opportunity is a review of existing tax rates, evaluating
the relevance given our present conditions.[34] (Emphasis supplied)

Notably therefore, the main purpose of the bills emanating from the

House of Representatives is to bring in sizeable revenues for the government

to supplement our countrys serious financial problems, and improve tax

administration and control of the leakages in revenues from income taxes and

value-added taxes. As these house bills were transmitted to the Senate, the

latter, approaching the measures from the point of national perspective, can

introduce amendments within the purposes of those bills. It can provide for

ways that would soften the impact of the VAT measure on the consumer, i.e., by

distributing the burden across all sectors instead of putting it entirely on the

shoulders of the consumers. The sponsorship speech of Sen. Ralph Recto on why

the provisions on income tax on corporation were included is worth quoting:

All in all, the proposal of the Senate Committee on Ways and Means
will raise P64.3 billion in additional revenues annually even while by mitigating
prices of power, services and petroleum products.

However, not all of this will be wrung out of VAT. In fact, only P48.7
billion amount is from the VAT on twelve goods and services. The rest of the
tab P10.5 billion- will be picked by corporations.
 What we therefore prescribe is a burden sharing between corporate
Philippines and the consumer. Why should the latter bear all the pain? Why
should the fiscal salvation be only on the burden of the consumer?

The corporate worlds equity is in form of the increase in the corporate

income tax from 32 to 35 percent, but up to 2008 only. This will raise P10.5
billion a year. After that, the rate will slide back, not to its old rate of 32 percent,
but two notches lower, to 30 percent.

Clearly, we are telling those with the capacity to pay, corporations, to

bear with this emergency provision that will be in effect for 1,200 days, while
we put our fiscal house in order. This fiscal medicine will have an expiry date.

For their assistance, a reward of tax reduction awaits them. We intend

to keep the length of their sacrifice brief. We would like to assure them that
not because there is a light at the end of the tunnel, this government will keep
on making the tunnel long.

The responsibility will not rest solely on the weary shoulders of the
small man. Big business will be there to share the burden.[35]

As the Court has said, the Senate can propose amendments and in fact,

the amendments made on provisions in the tax on income of corporations are

germane to the purpose of the house bills which is to raise revenues for the

government.

Likewise, the Court finds the sections referring to other percentage and

excise taxes germane to the reforms to the VAT system, as these sections would
cushion the effects of VAT on consumers. Considering that certain goods and

services which were subject to percentage tax and excise tax would no longer

be VAT-exempt, the consumer would be burdened more as they would be

paying the VAT in addition to these taxes. Thus, there is a need to amend these

sections to soften the impact of VAT. Again, in his sponsorship speech, Sen.

Recto said:

However, for power plants that run on oil, we will reduce to zero the present excise tax on
bunker fuel, to lessen the effect of a VAT on this product.

For electric utilities like Meralco, we will wipe out the franchise tax in
exchange for a VAT.

And in the case of petroleum, while we will levy the VAT on oil products,
so as not to destroy the VAT chain, we will however bring down the excise tax
on socially sensitive products such as diesel, bunker, fuel and kerosene.

...

What do all these exercises point to? These are not contortions of
giving to the left hand what was taken from the right. Rather, these sprang
from our concern of softening the impact of VAT, so that the people can
cushion the blow of higher prices they will have to pay as a result of VAT.[36]

The other sections amended by the Senate pertained to matters of tax

administration which are necessary for the implementation of the changes in

the VAT system.

 To reiterate, the sections introduced by the Senate are germane to the

subject matter and purposes of the house bills, which is to supplement our

countrys fiscal deficit, among others. Thus, the Senate acted within its power to

propose those amendments.

SUBSTANTIVE ISSUES

I.

Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and
108 of the NIRC, violate the following provisions of the Constitution:

a. Article VI, Section 28(1), and

b. Article VI, Section 28(2)
A. No Undue Delegation of Legislative Power

Petitioners ABAKADA GURO Party List, et al., Pimentel, Jr., et al., and

Escudero, et al. contend in common that Sections 4, 5 and 6 of R.A. No. 9337,

amending Sections 106, 107 and 108, respectively, of the NIRC giving the

President the stand-by authority to raise the VAT rate from 10% to 12% when a

certain condition is met, constitutes undue delegation of the legislative power

to tax.
The assailed provisions read as follows:

SEC. 4. Sec. 106 of the same Code, as amended, is hereby further

amended to read as follows:

SEC. 106. Value-Added Tax on Sale of Goods or Properties.

(A) Rate and Base of Tax. There shall be levied, assessed and
collected on every sale, barter or exchange of goods or
properties, a value-added tax equivalent to ten percent (10%)
of the gross selling price or gross value in money of the goods
or properties sold, bartered or exchanged, such tax to be paid
by the seller or transferor: provided, that the President, upon
the recommendation of the Secretary of Finance, shall,
effective January 1, 2006, raise the rate of value-added tax to
twelve percent (12%), after any of the following conditions has
been satisfied.

(i) value-added tax collection as a percentage of Gross

Domestic Product (GDP) of the previous year exceeds
two and four-fifth percent (2 4/5%) or

(ii) national government deficit as a percentage of GDP of the

previous year exceeds one and one-half percent (1 %).

SEC. 5. Section 107 of the same Code, as amended, is hereby further

amended to read as follows:

SEC. 107. Value-Added Tax on Importation of Goods.

(A) In General. There shall be levied, assessed and collected on
every importation of goods a value-added tax equivalent to ten
percent (10%) based on the total value used by the Bureau of
Customs in determining tariff and customs duties, plus customs
duties, excise taxes, if any, and other charges, such tax to be
paid by the importer prior to the release of such goods from
 customs custody: Provided, That where the customs duties are
determined on the basis of the quantity or volume of the goods,
the value-added tax shall be based on the landed cost plus
excise taxes, if any: provided, further, that the President, upon
the recommendation of the Secretary of Finance, shall,
effective January 1, 2006, raise the rate of value-added tax to
twelve percent (12%) after any of the following conditions has
been satisfied.

(i) value-added tax collection as a percentage of Gross

Domestic Product (GDP) of the previous year exceeds
two and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of the
previous year exceeds one and one-half percent (1 %).

SEC. 6. Section 108 of the same Code, as amended, is hereby further amended to read as
follows:

SEC. 108. Value-added Tax on Sale of Services and Use or

Lease of Properties

(A) Rate and Base of Tax. There shall be levied, assessed and
collected, a value-added tax equivalent to ten percent (10%) of
gross receipts derived from the sale or exchange of services:
provided, that the President, upon the recommendation of
the Secretary of Finance, shall, effective January 1, 2006, raise
the rate of value-added tax to twelve percent (12%), after any
of the following conditions has been satisfied.

(i) value-added tax collection as a percentage of Gross

Domestic Product (GDP) of the previous year exceeds
two and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of the
previous year exceeds one and one-half percent (1 %).
(Emphasis supplied)
 Petitioners allege that the grant of the stand-by authority to the President

to increase the VAT rate is a virtual abdication by Congress of its exclusive power

to tax because such delegation is not within the purview of Section 28 (2), Article

VI of the Constitution, which provides:

The Congress may, by law, authorize the President to fix within specified limits, and may
impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or
imposts within the framework of the national development program of the government.

They argue that the VAT is a tax levied on the sale, barter or exchange of

goods and properties as well as on the sale or exchange of services, which

cannot be included within the purview of tariffs under the exempted delegation

as the latter refers to customs duties, tolls or tribute payable upon merchandise

to the government and usually imposed on goods or merchandise imported or

exported.

Petitioners ABAKADA GURO Party List, et al., further contend that

delegating to the President the legislative power to tax is contrary to

republicanism. They insist that accountability, responsibility and transparency

should dictate the actions of Congress and they should not pass to the President

the decision to impose taxes. They also argue that the law also effectively
nullified the Presidents power of control, which includes the authority to set

aside and nullify the acts of her subordinates like the Secretary of Finance, by

mandating the fixing of the tax rate by the President upon the recommendation

of the Secretary of Finance.

Petitioners Pimentel, et al. aver that the President has ample powers to

cause, influence or create the conditions provided by the law to bring about

either or both the conditions precedent.

On the other hand, petitioners Escudero, et al. find bizarre and revolting

the situation that the imposition of the 12% rate would be subject to the whim

of the Secretary of Finance, an unelected bureaucrat, contrary to the principle

of no taxation without representation. They submit that the Secretary of Finance

is not mandated to give a favorable recommendation and he may not even give

his recommendation. Moreover, they allege that no guiding standards are

provided in the law on what basis and as to how he will make his

recommendation. They claim, nonetheless, that any recommendation of the

Secretary of Finance can easily be brushed aside by the President since the

former is a mere alter ego of the latter, such that, ultimately, it is the President

who decides whether to impose the increased tax rate or not.

 A brief discourse on the principle of non-delegation of powers is

instructive.

The principle of separation of powers ordains that each of the three great

branches of government has exclusive cognizance of and is supreme in matters

falling within its own constitutionally allocated sphere.[37] A logical

corollary to the doctrine of separation of powers is the principle of non-

delegation of powers, as expressed in the Latin maxim: potestas delegata non

delegari potest which means what has been delegated, cannot be delegated.[38]

This doctrine is based on the ethical principle that such as delegated power

constitutes not only a right but a duty to be performed by the delegate through

the instrumentality of his own judgment and not through the intervening mind

of another.[39]

With respect to the Legislature, Section 1 of Article VI of the Constitution

provides that the Legislative power shall be vested in the Congress of the

Philippines which shall consist of a Senate and a House of Representatives. The

powers which Congress is prohibited from delegating are those which are strictly,

or inherently and exclusively, legislative. Purely legislative power, which can

never be delegated, has been described as the authority to make a complete

law complete as to the time when it shall take effect and as to whom it shall

be applicable and to determine the expediency of its enactment.[40] Thus, the

rule is that in order that a court may be justified in holding a statute

unconstitutional as a delegation of legislative power, it must appear that the

power involved is purely legislative in nature that is, one appertaining

exclusively to the legislative department. It is the nature of the power, and not

the liability of its use or the manner of its exercise, which determines the validity

of its delegation.

Nonetheless, the general rule barring delegation of legislative powers is

subject to the following recognized limitations or exceptions:

(1) Delegation of tariff powers to the President under Section 28 (2) of Article VI of
the Constitution;

(2) Delegation of emergency powers to the President under Section 23 (2) of Article
VI of the Constitution;

(3) Delegation to the people at large;

(4) Delegation to local governments; and

(5) Delegation to administrative bodies.

 In every case of permissible delegation, there must be a showing that the

delegation itself is valid. It is valid only if the law (a) is complete in itself, setting

forth therein the policy to be executed, carried out, or implemented by the

delegate;[41] and (b) fixes a standard the limits of which are sufficiently

determinate and determinable to which the delegate must conform in the

performance of his functions.[42] A sufficient standard is one which defines

legislative policy, marks its limits, maps out its boundaries and specifies the

public agency to apply it. It indicates the circumstances under which the

legislative command is to be effected.[43] Both tests are intended to prevent a

total transference of legislative authority to the delegate, who is not allowed to

step into the shoes of the legislature and exercise a power essentially

legislative.[44]

In People vs. Vera,[45] the Court, through eminent Justice Jose P. Laurel,

expounded on the concept and extent of delegation of power in this wise:

In testing whether a statute constitutes an undue delegation of

legislative power or not, it is usual to inquire whether the statute was complete
in all its terms and provisions when it left the hands of the legislature so that
nothing was left to the judgment of any other appointee or delegate of the
legislature.

...
 The true distinction, says Judge Ranney, is between the delegation of
power to make the law, which necessarily involves a discretion as to what it
shall be, and conferring an authority or discretion as to its execution, to be
exercised under and in pursuance of the law. The first cannot be done; to the
latter no valid objection can be made.

...

It is contended, however, that a legislative act may be made to the

effect as law after it leaves the hands of the legislature. It is true that laws may
be made effective on certain contingencies, as by proclamation of the
executive or the adoption by the people of a particular community. In Wayman
vs. Southard, the Supreme Court of the United States ruled that the legislature
may delegate a power not legislative which it may itself rightfully exercise. The
power to ascertain facts is such a power which may be delegated. There is
nothing essentially legislative in ascertaining the existence of facts or
conditions as the basis of the taking into effect of a law. That is a mental
process common to all branches of the government. Notwithstanding the
apparent tendency, however, to relax the rule prohibiting delegation of
legislative authority on account of the complexity arising from social and
economic forces at work in this modern industrial age, the orthodox
pronouncement of Judge Cooley in his work on Constitutional Limitations finds
restatement in Prof. Willoughby's treatise on the Constitution of the United
States in the following language speaking of declaration of legislative power to
administrative agencies: The principle which permits the legislature to
provide that the administrative agent may determine when the
circumstances are such as require the application of a law is defended upon
the ground that at the time this authority is granted, the rule of public policy,
which is the essence of the legislative act, is determined by the legislature.
In other words, the legislature, as it is its duty to do, determines that, under
given circumstances, certain executive or administrative action is to be taken,
and that, under other circumstances, different or no action at all is to be
taken. What is thus left to the administrative official is not the legislative
determination of what public policy demands, but simply the ascertainment
of what the facts of the case require to be done according to the terms of the
law by which he is governed. The efficiency of an Act as a declaration of
legislative will must, of course, come from Congress, but the ascertainment
of the contingency upon which the Act shall take effect may be left to such
agencies as it may designate. The legislature, then, may provide that a law
shall take effect upon the happening of future specified contingencies leaving
to some other person or body the power to determine when the specified
contingency has arisen. (Emphasis supplied).[46]
 In Edu vs. Ericta,[47] the Court reiterated:

What cannot be delegated is the authority under the Constitution to

make laws and to alter and repeal them; the test is the completeness of the
statute in all its terms and provisions when it leaves the hands of the legislature.
To determine whether or not there is an undue delegation of legislative power,
the inquiry must be directed to the scope and definiteness of the measure
enacted. The legislative does not abdicate its functions when it describes
what job must be done, who is to do it, and what is the scope of his authority.
For a complex economy, that may be the only way in which the legislative
process can go forward. A distinction has rightfully been made between
delegation of power to make the laws which necessarily involves a discretion
as to what it shall be, which constitutionally may not be done, and delegation
of authority or discretion as to its execution to be exercised under and in
pursuance of the law, to which no valid objection can be made. The
Constitution is thus not to be regarded as denying the legislature the necessary
resources of flexibility and practicability. (Emphasis supplied).[48]

Clearly, the legislature may delegate to executive officers or bodies the

power to determine certain facts or conditions, or the happening of

contingencies, on which the operation of a statute is, by its terms, made to

depend, but the legislature must prescribe sufficient standards, policies or

limitations on their authority.[49] While the power to tax cannot be delegated

to executive agencies, details as to the enforcement and administration of an

exercise of such power may be left to them, including the power to determine

the existence of facts on which its operation depends.[50]

 The rationale for this is that the preliminary ascertainment of facts as

basis for the enactment of legislation is not of itself a legislative function, but is

simply ancillary to legislation. Thus, the duty of correlating information and

making recommendations is the kind of subsidiary activity which the legislature

may perform through its members, or which it may delegate to others to

perform. Intelligent legislation on the complicated problems of modern society

is impossible in the absence of accurate information on the part of the legislators,

and any reasonable method of securing such information is proper.[51] The

Constitution as a continuously operative charter of government does not

require that Congress find for itself

every fact upon which it desires to base legislative action or that it make for itself

detailed determinations which it has declared to be prerequisite to application

of legislative policy to particular facts and circumstances impossible for Congress

itself properly to investigate.[52]

In the present case, the challenged section of R.A. No. 9337 is the

common proviso in Sections 4, 5 and 6 which reads as follows:

That the President, upon the recommendation of the Secretary of

Finance, shall, effective January 1, 2006, raise the rate of value-added tax to
twelve percent (12%), after any of the following conditions has been satisfied:
 (i) Value-added tax collection as a percentage of Gross
Domestic Product (GDP) of the previous year exceeds two and
four-fifth percent (2 4/5%); or

(ii) National government deficit as a percentage of GDP

of the previous year exceeds one and one-half percent (1 %).

The case before the Court is not a delegation of legislative power. It is simply a delegation of ascertainment of facts upon which
enforcement and administration of the increase rate under the law is contingent. The legislature has made the operation of the 12%
rate effective January 1, 2006, contingent upon a specified fact or condition. It leaves the entire operation or non-operation of the
12% rate upon factual matters outside of the control of the executive.

No discretion would be exercised by the President. Highlighting the

absence of discretion is the fact that the word shall is used in the common

proviso. The use of the word shall connotes a mandatory order. Its use in a

statute denotes an imperative obligation and is inconsistent with the idea of

discretion.[53] Where the law is clear and unambiguous, it must be taken to

mean exactly what it says, and courts have no choice but to see to it that the

mandate is obeyed.[54]

Thus, it is the ministerial duty of the President to immediately impose the

12% rate upon the existence of any of the conditions specified by Congress. This

is a duty which cannot be evaded by the President. Inasmuch as the law

specifically uses the word shall, the exercise of discretion by the President does

not come into play. It is a clear directive to impose the 12% VAT rate when the
specified conditions are present. The time of taking into effect of the 12% VAT

rate is based on the happening of a certain specified contingency, or upon the

ascertainment of certain facts or conditions by a person or body other than the

legislature itself.

The Court finds no merit to the contention of petitioners ABAKADA GURO

Party List, et al. that the law effectively nullified the Presidents power of control

over the Secretary of Finance by mandating the fixing of the tax rate by the

President upon the recommendation of the Secretary of Finance. The Court

cannot also subscribe to the position of petitioners

Pimentel, et al. that the word shall should be interpreted to mean may in view

of the phrase upon the recommendation of the Secretary of Finance. Neither

does the Court find persuasive the submission of petitioners Escudero, et al. that

any recommendation by the Secretary of Finance can easily be brushed aside by

the President since the former is a mere alter ego of the latter.

When one speaks of the Secretary of Finance as the alter ego of the

President, it simply means that as head of the Department of Finance he is the

assistant and agent of the Chief Executive. The multifarious executive and

administrative functions of the Chief Executive are performed by and through

the executive departments, and the acts of the secretaries of such departments,

such as the Department of Finance, performed and promulgated in the regular

course of business, are, unless disapproved or reprobated by the Chief Executive,

presumptively the acts of the Chief Executive. The Secretary of Finance, as such,

occupies a political position and holds office in an advisory capacity, and, in the

language of Thomas Jefferson, "should be of the President's bosom confidence"

and, in the language of Attorney-General Cushing, is subject to the direction of

the President."[55]

In the present case, in making his recommendation to the President on

the existence of either of the two conditions, the Secretary of Finance is not

acting as the alter ego of the President or even her subordinate. In such instance,

he is not subject to the power of control and direction of the President. He is

acting as the agent of the legislative department, to determine and declare the

event upon which its expressed will is to take effect.[56] The Secretary of

Finance becomes the means or tool by which legislative policy is determined and

implemented, considering that he possesses all the facilities to gather data and

information and has a much broader perspective to properly evaluate them. His

function is to gather and collate statistical data and other pertinent information
and verify if any of the two conditions laid out by Congress is present. His

personality in such instance is in reality but a projection of that of Congress. Thus,

being the agent of Congress and not of the President, the President cannot alter

or modify or nullify, or set aside the findings of the Secretary of Finance and to

substitute the judgment of the former for that of the latter.

Congress simply granted the Secretary of Finance the authority to

ascertain the existence of a fact, namely, whether by December 31, 2005, the

value-added tax collection as a percentage of Gross Domestic Product (GDP) of

the previous year exceeds two and four-fifth percent (24/5%) or the national

government deficit as a percentage of GDP of the previous year exceeds one and

one-half percent (1%). If either of these two instances has occurred, the

Secretary of Finance, by legislative mandate, must submit such information to

the President. Then the 12% VAT rate must be imposed by the President

effective January 1, 2006. There is no undue delegation of legislative power but

only of the discretion as to the execution of a law. This is constitutionally

permissible.[57] Congress does not abdicate its functions or unduly delegate

power when it describes what job must be done, who must do it, and what is

the scope of his authority; in our complex economy that is frequently the only

way in which the legislative process can go forward.[58]

 As to the argument of petitioners ABAKADA GURO Party List, et al. that

delegating to the President the legislative power to tax is contrary to the

principle of republicanism, the same deserves scant consideration. Congress did

not delegate the power to tax but the mere implementation of the law. The

intent and will to increase the VAT rate to 12% came from Congress and the task

of the President is to simply execute the legislative policy. That Congress chose

to do so in such a manner is not within the province of the Court to inquire into,

its task being to interpret the law.[59]

The insinuation by petitioners Pimentel, et al. that the President has ample

powers to cause, influence or create the conditions to bring about either or both

the conditions precedent does not deserve any merit as this argument is highly

speculative. The Court does not rule on allegations which are manifestly

conjectural, as these may not exist at all. The Court deals with facts, not fancies;

on realities, not appearances. When the Court acts on appearances instead of

realities, justice and law will be short-lived.

B. The 12% Increase VAT Rate Does Not Impose an

Unfair and Unnecessary Additional Tax Burden
 Petitioners Pimentel, et al. argue that the 12% increase in the VAT rate imposes an unfair and additional tax burden on the people.
Petitioners also argue that the 12% increase, dependent on any of the 2 conditions set forth in the contested provisions, is ambiguous
because it does not state if the VAT rate would be returned to the original 10% if the rates are no longer satisfied. Petitioners also
argue that such rate is unfair and unreasonable, as the people are unsure of the applicable VAT rate from year to year.

Under the common provisos of Sections 4, 5 and 6 of R.A. No. 9337, if any

of the two conditions set forth therein are satisfied, the President shall increase

the VAT rate to 12%. The provisions of the law are clear. It does not provide for

a return to the 10% rate nor does it empower the President to so revert if, after

the rate is increased to 12%, the VAT collection goes below the 24/5 of the GDP

of the previous year or that the national government deficit as a percentage of

GDP of the previous year does not exceed 1%.

Therefore, no statutory construction or interpretation is needed. Neither

can conditions or limitations be introduced where none is provided

for. Rewriting the law is a forbidden ground that only Congress may tread

upon.[60]

Thus, in the absence of any provision providing for a return to the 10%

rate, which in this case the Court finds none, petitioners argument is, at best,

purely speculative. There is no basis for petitioners fear of a fluctuating VAT rate

because the law itself does not provide that the rate should go back to 10% if

the conditions provided in Sections 4, 5 and 6 are no longer present. The rule is
that where the provision of the law is clear and unambiguous, so that there is

no occasion for the court's seeking the legislative intent, the law must be taken

as it is, devoid of judicial addition or subtraction.[61]

Petitioners also contend that the increase in the VAT rate, which was

allegedly an incentive to the President to raise the VAT collection to at least 2

4
/5 of the GDP of the previous year, should be based on fiscal adequacy.

Petitioners obviously overlooked that increase in VAT collection is not the

only condition. There is another condition, i.e., the national government deficit

as a percentage of GDP of the previous year exceeds one and one-half percent

(1 %).

Respondents explained the philosophy behind these alternative

conditions:

1. VAT/GDP Ratio > 2.8%

The condition set for increasing VAT rate to 12% have economic or
fiscal meaning. If VAT/GDP is less than 2.8%, it means that government has
weak or no capability of implementing the VAT or that VAT is not effective in
the function of the tax collection. Therefore, there is no value to increase it to
12% because such action will also be ineffectual.
 2. Natl Govt Deficit/GDP >1.5%

The condition set for increasing VAT when deficit/GDP is 1.5% or less
means the fiscal condition of government has reached a relatively sound
position or is towards the direction of a balanced budget position. Therefore,
there is no need to increase the VAT rate since the fiscal house is in a relatively
healthy position. Otherwise stated, if the ratio is more than 1.5%, there is
indeed a need to increase the VAT rate.[62]

That the first condition amounts to an incentive to the President to

increase the VAT collection does not render it unconstitutional so long as there

is a public purpose for which the law was passed, which in this case, is mainly to

raise revenue. In fact, fiscal adequacy dictated the need for a raise in revenue.

The principle of fiscal adequacy as a characteristic of a sound tax system

was originally stated by Adam Smith in his Canons of Taxation (1776), as:

IV. Every tax ought to be so contrived as both to take out and to keep out of
the pockets of the people as little as possible over and above what it
brings into the public treasury of the state.[63]

It simply means that sources of revenues must be adequate to meet

government expenditures and their variations.[64]

 The dire need for revenue cannot be ignored. Our country is in a quagmire

of financial woe. During the Bicameral Conference Committee hearing, then

Finance Secretary Purisima bluntly depicted the countrys gloomy state of

economic affairs, thus:

First, let me explain the position that the Philippines finds itself in right
now. We are in a position where 90 percent of our revenue is used for debt
service. So, for every peso of revenue that we currently raise, 90 goes to debt
service. Thats interest plus amortization of our debt. So clearly, this is not a
sustainable situation. Thats the first fact.

The second fact is that our debt to GDP level is way out of line
compared to other peer countries that borrow money from that international
financial markets. Our debt to GDP is approximately equal to our GDP. Again,
that shows you that this is not a sustainable situation.

The third thing that Id like to point out is the environment that we are
presently operating in is not as benign as what it used to be the past five years.

What do I mean by that?

In the past five years, weve been lucky because we were operating in a
period of basically global growth and low interest rates. The past few months,
we have seen an inching up, in fact, a rapid increase in the interest rates in the
leading economies of the world. And, therefore, our ability to borrow at
reasonable prices is going to be challenged. In fact, ultimately, the question is
our ability to access the financial markets.

When the President made her speech in July last year, the environment
was not as bad as it is now, at least based on the forecast of most financial
institutions. So, we were assuming that raising 80 billion would put us in a
position where we can then convince them to improve our ability to borrow at
lower rates. But conditions have changed on us because the interest rates have
 gone up. In fact, just within this room, we tried to access the market for a
billion dollars because for this year alone, the Philippines will have to borrow
4 billion dollars. Of that amount, we have borrowed 1.5 billion. We issued last
January a 25-year bond at 9.7 percent cost. We were trying to access last week
and the market was not as favorable and up to now we have not accessed and
we might pull back because the conditions are not very good.

So given this situation, we at the Department of Finance believe that

we really need to front-end our deficit reduction. Because it is deficit that is
causing the increase of the debt and we are in what we call a debt spiral. The
more debt you have, the more deficit you have because interest and debt
service eats and eats more of your revenue. We need to get out of this debt
spiral. And the only way, I think, we can get out of this debt spiral is really have
a front-end adjustment in our revenue base.[65]

The image portrayed is chilling. Congress passed the law hoping for rescue

from an inevitable catastrophe. Whether the law is indeed sufficient to answer

the states economic dilemma is not for the Court to judge. In the Farias case,

the Court refused to consider the various arguments raised therein that dwelt

on the wisdom of Section 14 of R.A. No. 9006 (The Fair Election Act),

pronouncing that:

. . . policy matters are not the concern of the Court. Government policy
is within the exclusive dominion of the political branches of the government.
It is not for this Court to look into the wisdom or propriety of legislative
determination. Indeed, whether an enactment is wise or unwise, whether it is
based on sound economic theory, whether it is the best means to achieve the
desired results, whether, in short, the legislative discretion within its
prescribed limits should be exercised in a particular manner are matters for
the judgment of the legislature, and the serious conflict of opinions does not
suffice to bring them within the range of judicial cognizance.[66]
 In the same vein, the Court in this case will not dawdle on the purpose of

Congress or the executive policy, given that it is not for the judiciary to "pass

upon questions of wisdom, justice or expediency of legislation.[67]

II.

Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B) of
the NIRC; and Section 12 of R.A. No. 9337, amending Section 114(C) of the NIRC,
violate the following provisions of the Constitution:

a. Article VI, Section 28(1), and

b. Article III, Section 1

A. Due Process and Equal Protection Clauses

Petitioners Association of Pilipinas Shell Dealers, Inc., et al. argue that

Section 8 of R.A. No. 9337, amending Sections 110 (A)(2), 110 (B), and Section

12 of R.A. No. 9337, amending Section 114 (C) of the NIRC are arbitrary,

oppressive, excessive and confiscatory. Their argument is premised on the

constitutional right against deprivation of life, liberty of property without due

process of law, as embodied in Article III, Section 1 of the Constitution.

 Petitioners also contend that these provisions violate the constitutional

guarantee of equal protection of the law.

The doctrine is 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.[68]

Section 8 of R.A. No. 9337, amending Section 110(B) of the NIRC imposes

a limitation on the amount of input tax that may be credited against the output

tax. It states, in part: [P]rovided, that the input tax inclusive of the input VAT

carried over from the previous quarter that may be credited in every quarter

shall not exceed seventy percent (70%) of the output VAT:

Input Tax is defined under Section 110(A) of the NIRC, as amended, as the

value-added tax due from or paid by a VAT-registered person on the importation

of goods or local purchase of good and services, including lease or use of

property, in the course of trade or business, from a VAT-registered person, and

Output Tax is the value-added tax due on the sale or lease of taxable goods or
properties or services by any person registered or required to register under the

law.

Petitioners claim that the contested sections impose limitations on the

amount of input tax that may be claimed. In effect, a portion of the input tax

that has already been paid cannot now be credited against the output tax.

Petitioners argument is not absolute. It assumes that the input tax

exceeds 70% of the output tax, and therefore, the input tax in excess of 70%

remains uncredited. However, to the extent that the input tax is less than 70%

of the output tax, then 100% of such input tax is still creditable.

More importantly, the excess input tax, if any, is retained in a businesss

books of accounts and remains creditable in the succeeding quarter/s. This is

explicitly allowed by Section 110(B), which provides that if the input tax exceeds

the output tax, the excess shall be carried over to the succeeding quarter or

quarters. In addition, Section 112(B) allows a VAT-registered person to apply for

the issuance of a tax credit certificate or refund for any unused input taxes, to

the extent that such input taxes have not been applied against the output taxes.
Such unused input tax may be used in payment of his other internal revenue

taxes.

The non-application of the unutilized input tax in a given quarter is not ad

infinitum, as petitioners exaggeratedly contend. Their analysis of the effect of

the 70% limitation is incomplete and one-sided. It ends at the net effect that

there will be unapplied/unutilized inputs VAT for a given quarter. It does not

proceed further to the fact that such unapplied/unutilized input tax may be

credited in the subsequent periods as allowed by the carry-over provision of

Section 110(B) or that it may later on be refunded through a tax credit certificate

under Section 112(B).

Therefore, petitioners argument must be rejected.

On the other hand, it appears that petitioner Garcia failed to comprehend

the operation of the 70% limitation on the input tax. According to petitioner, the

limitation on the creditable input tax in effect allows VAT-registered

establishments to retain a portion of the taxes they collect, which violates the

principle that tax collection and revenue should be for public purposes and

expenditures
 As earlier stated, the input tax is the tax paid by a person, passed on to

him by the seller, when he buys goods. Output tax meanwhile is the tax due to

the person when he sells goods. In computing the VAT payable, three possible

scenarios may arise:

First, if at the end of a taxable quarter the output taxes charged by the

seller are equal to the input taxes that he paid and passed on by the suppliers,

then no payment is required;

Second, when the output taxes exceed the input taxes, the person shall

be liable for the excess, which has to be paid to the Bureau of Internal Revenue

(BIR);[69] and

Third, if the input taxes exceed the output taxes, the excess shall be

carried over to the succeeding quarter or quarters. Should the input taxes result

from zero-rated or effectively zero-rated transactions, any excess over the

output taxes shall instead be refunded to the taxpayer or credited against other

internal revenue taxes, at the taxpayers option.[70]

 Section 8 of R.A. No. 9337 however, imposed a 70% limitation on the input

tax. Thus, a person can credit his input tax only up to the extent of 70% of the

output tax. In laymans term, the value-added taxes that a person/taxpayer paid

and passed on to him by a seller can only be credited up to 70% of the value-

added taxes that is due to him on a taxable transaction. There is no retention of

any tax collection because the person/taxpayer has already previously paid the

input tax to a seller, and the seller will subsequently remit such input tax to the

BIR. The party directly liable for the payment of the tax is the seller.[71] What

only needs to be done is for the person/taxpayer to apply or credit these input

taxes, as evidenced by receipts, against his output taxes.

Petitioners Association of Pilipinas Shell Dealers, Inc., et al. also argue that

the input tax partakes the nature of a property that may not be confiscated,

appropriated, or limited without due process of law.

The input tax is not a property or a property right within the constitutional

purview of the due process clause. A VAT-registered persons entitlement to the

creditable input tax is a mere statutory privilege.

 The distinction between statutory privileges and vested rights must be

borne in mind for persons have no vested rights in statutory privileges. The state

may change or take away rights, which were created by the law of the state,

although it may not take away property, which was vested by virtue of such

rights.[72]

Under the previous system of single-stage taxation, taxes paid at every

level of distribution are not recoverable from the taxes payable, although it

becomes part of the cost, which is deductible from the gross revenue. When

Pres. Aquino issued E.O. No. 273 imposing a 10% multi-stage tax on all sales, it

was then that the crediting of the input tax paid on purchase or importation of

goods and services by VAT-registered persons against the output tax was

introduced.[73] This was adopted by the Expanded VAT Law (R.A. No. 7716),[74]

and The Tax Reform Act of 1997 (R.A. No. 8424).[75] The right to credit input tax

as against the output tax is clearly a privilege created by law, a privilege that also

the law can remove, or in this case, limit.

Petitioners also contest as arbitrary, oppressive, excessive and

confiscatory, Section 8 of R.A. No. 9337, amending Section 110(A) of the NIRC,

which provides:
 SEC. 110. Tax Credits.

(A) Creditable Input Tax.

Provided, That the input tax on goods purchased or imported in a calendar

month for use in trade or business for which deduction for depreciation is
allowed under this Code, shall be spread evenly over the month of acquisition
and the fifty-nine (59) succeeding months if the aggregate acquisition cost for
such goods, excluding the VAT component thereof, exceeds One million pesos
(P1,000,000.00): Provided, however, That if the estimated useful life of the
capital goods is less than five (5) years, as used for depreciation purposes, then
the input VAT shall be spread over such a shorter period: Provided, finally, That
in the case of purchase of services, lease or use of properties, the input tax
shall be creditable to the purchaser, lessee or license upon payment of the
compensation, rental, royalty or fee.

The foregoing section imposes a 60-month period within which to

amortize the creditable input tax on purchase or importation of capital goods

with acquisition cost of P1 Million pesos, exclusive of the VAT component. Such

spread out only poses a delay in the crediting of the input tax. Petitioners

argument is without basis because the taxpayer is not permanently deprived of

his privilege to credit the input tax.

It is worth mentioning that Congress admitted that the spread-out of the

creditable input tax in this case amounts to a 4-year interest-free loan to the

government.[76] In the same breath, Congress also justified its move by saying
that the provision was designed to raise an annual revenue of 22.6 billion.[77]

The legislature also dispelled the fear that the provision will fend off foreign

investments, saying that foreign investors have other tax incentives provided by

law, and citing the case of China, where despite a 17.5% non-creditable VAT,

foreign investments were not deterred.[78] Again, for whatever is the purpose

of the 60-month amortization, this involves executive economic policy and

legislative wisdom in which the Court cannot intervene.

With regard to the 5% creditable withholding tax imposed on payments

made by the government for taxable transactions, Section 12 of R.A. No. 9337,

which amended Section 114 of the NIRC, reads:

SEC. 114. Return and Payment of Value-added Tax.

(C) Withholding of Value-added Tax. The Government or any of its

political subdivisions, instrumentalities or agencies, including government-
owned or controlled corporations (GOCCs) shall, before making payment on
account of each purchase of goods and services which are subject to the value-
added tax imposed in Sections 106 and 108 of this Code, deduct and withhold
a final value-added tax at the rate of five percent (5%) of the gross payment
thereof: Provided, That the payment for lease or use of properties or property
rights to nonresident owners shall be subject to ten percent (10%) withholding
tax at the time of payment. For purposes of this Section, the payor or person
in control of the payment shall be considered as the withholding agent.

The value-added tax withheld under this Section shall be remitted

within ten (10) days following the end of the month the withholding was made.
 Section 114(C) merely provides a method of collection, or as stated by

respondents, a more simplified VAT withholding system. The government in this

case is constituted as a withholding agent with respect to their payments for

goods and services.

Prior to its amendment, Section 114(C) provided for different rates of

value-added taxes to be withheld -- 3% on gross payments for purchases of

goods; 6% on gross payments for services supplied by contractors other than by

public works contractors; 8.5% on gross payments for services supplied by public

work contractors; or 10% on payment for the lease or use of properties or

property rights to nonresident owners. Under the present Section 114(C), these

different rates, except for the 10% on lease or property rights payment to

nonresidents, were deleted, and a uniform rate of 5% is applied.

The Court observes, however, that the law the used the word final. In tax

usage, final, as opposed to creditable, means full. Thus, it is provided in Section

114(C): final value-added tax at the rate of five percent (5%).

 In Revenue Regulations No. 02-98, implementing R.A. No. 8424 (The Tax

Reform Act of 1997), the concept of final withholding tax on income was

explained, to wit:

SECTION 2.57. Withholding of Tax at Source

(A) Final Withholding Tax. Under the final withholding tax system the
amount of income tax withheld by the withholding agent is constituted as full
and final payment of the income tax due from the payee on the said income.
The liability for payment of the tax rests primarily on the payor as a withholding
agent. Thus, in case of his failure to withhold the tax or in case of
underwithholding, the deficiency tax shall be collected from the
payor/withholding agent.

(B) Creditable Withholding Tax. Under the creditable withholding tax

system, taxes withheld on certain income payments are intended to equal or
at least approximate the tax due of the payee on said income. Taxes withheld
on income payments covered by the expanded withholding tax (referred to in
Sec. 2.57.2 of these regulations) and compensation income (referred to in Sec.
2.78 also of these regulations) are creditable in nature.

As applied to value-added tax, this means that taxable transactions with

the government are subject to a 5% rate, which constitutes as full payment of

the tax payable on the transaction. This represents the net VAT payable of the

seller. The other 5% effectively accounts for the standard input VAT (deemed

input VAT), in lieu of the actual input VAT directly or attributable to the taxable

transaction.[79]
 The Court need not explore the rationale behind the provision. It is clear

that Congress intended to treat differently taxable transactions with the

government.[80] This is supported by the fact that under the old provision, the

5% tax withheld by the government remains creditable against the tax liability

of the seller or contractor, to wit:

SEC. 114. Return and Payment of Value-added Tax.

(C) Withholding of Creditable Value-added Tax. The Government or

any of its political subdivisions, instrumentalities or agencies, including
government-owned or controlled corporations (GOCCs) shall, before making
payment on account of each purchase of goods from sellers and services
rendered by contractors which are subject to the value-added tax imposed in
Sections 106 and 108 of this Code, deduct and withhold the value-added tax
due at the rate of three percent (3%) of the gross payment for the purchase of
goods and six percent (6%) on gross receipts for services rendered by
contractors on every sale or installment payment which shall be creditable
against the value-added tax liability of the seller or contractor: Provided,
however, That in the case of government public works contractors, the
withholding rate shall be eight and one-half percent (8.5%): Provided, further,
That the payment for lease or use of properties or property rights to
nonresident owners shall be subject to ten percent (10%) withholding tax at
the time of payment. For this purpose, the payor or person in control of the
payment shall be considered as the withholding agent.

The valued-added tax withheld under this Section shall be remitted within ten (10) days
following the end of the month the withholding was made. (Emphasis supplied)
 As amended, the use of the word final and the deletion of the word

creditable exhibits Congresss intention to treat transactions with the

government differently. Since it has not been shown that the class subject to

the 5% final withholding tax has been unreasonably narrowed, there is no

reason to invalidate the provision. Petitioners, as petroleum dealers, are not the

only ones subjected to the 5% final withholding tax. It applies to all those who

deal with the government.

Moreover, the actual input tax is not totally lost or uncreditable, as

petitioners believe. Revenue Regulations No. 14-2005 or the Consolidated

Value-Added Tax Regulations 2005 issued by the BIR, provides that should the

actual input tax exceed 5% of gross payments, the excess may form part of the

cost. Equally, should the actual input tax be less than 5%, the difference is

treated as income.[81]

Petitioners also argue that by imposing a limitation on the creditable input

tax, the government gets to tax a profit or value-added even if there is no profit

or value-added.
 Petitioners stance is purely hypothetical, argumentative, and again, one-

sided. The Court will not engage in a legal joust where premises are what ifs,

arguments, theoretical and facts, uncertain. Any disquisition by the Court on this

point will only be, as Shakespeare describes life in Macbeth,[82] full of sound

and fury, signifying nothing.

Whats more, petitioners contention assumes the proposition that there

is no profit or value-added. It need not take an astute businessman to know that

it is a matter of exception that a business will sell goods or services without profit

or value-added. It cannot be overstressed that a business is created precisely for

profit.

The equal protection clause under the Constitution means that no person

or class of persons shall be deprived of the same protection of laws which is

enjoyed by other persons or other classes in the same place and in like

circumstances.[83]

The power of the State to make reasonable and natural classifications for

the purposes of taxation has long been established. Whether it relates to the

subject of taxation, the kind of property, the rates to be levied, or the amounts
to be raised, the methods of assessment, valuation and collection, the States

power is entitled to presumption of validity. As a rule, the judiciary will not

interfere with such power absent a clear showing of unreasonableness,

discrimination, or arbitrariness.[84]

Petitioners point out that the limitation on the creditable input tax if the

entity has a high ratio of input tax, or invests in capital equipment, or has several

transactions with the government, is not based on real and substantial

differences to meet a valid classification.

The argument is pedantic, if not outright baseless. The law does not make

any classification in the subject of taxation, the kind of property, the rates to be

levied or the amounts to be raised, the methods of assessment, valuation and

collection. Petitioners alleged distinctions are based on variables that bear

different consequences. While the implementation of the law may yield varying

end results depending on ones profit margin and value-added, the Court cannot

go beyond what the legislature has laid down and interfere with the affairs of

business.

The equal protection clause does not require the universal application of

the laws on all persons or things without distinction. This might in fact
sometimes result in unequal protection. What the clause requires is equality

among equals as determined according to a valid classification. By classification

is meant the grouping of persons or things similar to each other in certain

particulars and different from all others in these same particulars.[85]

Petitioners brought to the Courts attention the introduction of Senate Bill No. 2038 by Sens. S.R. Osmea III and Ma. Ana Consuelo A.S.
Madrigal on June 6, 2005, and House Bill No. 4493 by Rep. Eric D. Singson. The proposed legislation seeks to amend the 70% limitation
by increasing the same to 90%. This, according to petitioners, supports their stance that the 70% limitation is arbitrary and
confiscatory. On this score, suffice it to say that these are still proposed legislations. Until Congress amends the law, and absent any
unequivocal basis for its unconstitutionality, the 70% limitation stays.

B. Uniformity and Equitability of Taxation

Article VI, Section 28(1) of the Constitution reads:

The rule of taxation shall be uniform and equitable. The Congress shall
evolve a progressive system of taxation.

Uniformity in taxation means that all taxable articles or kinds of property

of the same class shall be taxed at the same rate. Different articles may be taxed

at different amounts provided that the rate is uniform on the same class

everywhere with all people at all times.[86]

 In this case, the tax law is uniform as it provides a standard rate of 0% or

10% (or 12%) on all goods and services. Sections 4, 5 and 6 of R.A. No. 9337,

amending Sections 106, 107 and 108, respectively, of the NIRC, provide for a

rate of 10% (or 12%) on sale of goods and properties, importation of goods, and

sale of services and use or lease of properties. These same sections also provide

for a 0% rate on certain sales and transaction.

Neither does the law make any distinction as to the type of industry or

trade that will bear the 70% limitation on the creditable input tax, 5-year

amortization of input tax paid on purchase of capital goods or the 5% final

withholding tax by the government. It must be stressed that the rule of uniform

taxation does not deprive Congress of the power to classify subjects of taxation,

and only demands uniformity within the particular class.[87]

R.A. No. 9337 is also equitable. The law is equipped with a threshold

margin. The VAT rate of 0% or 10% (or 12%) does not apply to sales of goods or

services with gross annual sales or receipts not exceeding P1,500,000.00.[88]

Also, basic marine and agricultural food products in their original state are still

not subject to the tax,[89] thus ensuring that prices at the grassroots level will
remain accessible. As was stated in Kapatiran ng mga Naglilingkod sa

Pamahalaan ng Pilipinas, Inc. vs. Tan:[90]

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.

It is admitted that R.A. No. 9337 puts a premium on businesses with low

profit margins, and unduly favors those with high profit margins. Congress was

not oblivious to this. Thus, to equalize the weighty burden the law entails, the

law, under Section 116, imposed a 3% percentage tax on VAT-exempt persons

under Section 109(v), i.e., transactions with gross annual sales and/or receipts

not exceeding P1.5 Million. This acts as a equalizer because in effect, bigger

businesses that qualify for VAT coverage and VAT-exempt taxpayers stand on

equal-footing.

Moreover, Congress provided mitigating measures to cushion the impact

of the imposition of the tax on those previously exempt. Excise taxes on

petroleum products[91] and natural gas[92] were reduced. Percentage tax on

domestic carriers was removed.[93] Power producers are now exempt from

paying franchise tax.[94]

Aside from these, Congress also increased the income tax rates of

corporations, in order to distribute the burden of taxation. Domestic, foreign,

and non-resident corporations are now subject to a 35% income tax rate, from

a previous 32%.[95] Intercorporate dividends of non-resident foreign

corporations are still subject to 15% final withholding tax but the tax credit

allowed on the corporations domicile was increased to 20%.[96] The Philippine

Amusement and Gaming Corporation (PAGCOR) is not exempt from income

taxes anymore.[97] Even the sale by an artist of his works or services performed

for the production of such works was not spared.

All these were designed to ease, as well as spread out, the burden of

taxation, which would otherwise rest largely on the consumers. It cannot

therefore be gainsaid that R.A. No. 9337 is equitable.

C. Progressivity of Taxation
 Lastly, petitioners contend that the limitation on the creditable input tax

is anything but regressive. It is the smaller business with higher input tax-output

tax ratio that will suffer the consequences.

Progressive taxation is built on the principle of the taxpayers ability to pay.

This principle was also lifted from Adam Smiths Canons of Taxation, and it states:

I. The subjects of every state ought to contribute towards the support of the
government, as nearly as possible, in proportion to their respective
abilities; that is, in proportion to the revenue which they respectively
enjoy under the protection of the state.

Taxation is progressive when its rate goes up depending on the resources

of the person affected.[98]

The VAT is an antithesis of progressive taxation. By its very nature, it is

regressive. The principle of progressive taxation has no relation with the VAT

system inasmuch as the VAT paid by the consumer or business for every goods

bought or services enjoyed is the same regardless of income. In

other words, the VAT paid eats the same portion of an income, whether big or

small. The disparity lies in the income earned by a person or profit margin

marked by a business, such that the higher the income or profit margin, the

smaller the portion of the income or profit that is eaten by VAT. A converso, the
lower the income or profit margin, the bigger the part that the VAT eats away.

At the end of the day, it is really the lower income group or businesses with low-

profit margins that is always hardest hit.

Nevertheless, the Constitution does not really prohibit the imposition of

indirect taxes, like the VAT. What it simply provides is that Congress shall "evolve

a progressive system of taxation." The Court stated in the Tolentino case, thus:

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)[99]

CONCLUSION
 It has been said that taxes are the lifeblood of the government. In this

case, it is just an enema, a first-aid measure to resuscitate an economy in

distress. The Court is neither blind nor is it turning a deaf ear on the plight of the

masses. But it does not have the panacea for the malady that the law seeks to

remedy. As in other cases, the Court cannot strike down a law as

unconstitutional simply because of its yokes.

Let us not be overly influenced by the plea that for every wrong there
is a remedy, and that the judiciary should stand ready to afford relief. There
are undoubtedly many wrongs the judicature may not correct, for instance,
those involving political questions. . . .

Let us likewise disabuse our minds from the notion that the judiciary is
the repository of remedies for all political or social ills; We should not forget
that the Constitution has judiciously allocated the powers of government to
three distinct and separate compartments; and that judicial interpretation has
tended to the preservation of the independence of the three, and a zealous
regard of the prerogatives of each, knowing full well that one is not the
guardian of the others and that, for official wrong-doing, each may be brought
to account, either by impeachment, trial or by the ballot box.[100]

The words of the Court in Vera vs. Avelino[101] holds true then, as it still

holds true now. All things considered, there is no raison d'tre for the

unconstitutionality of R.A. No. 9337.

 WHEREFORE, Republic Act No. 9337 not being unconstitutional, the

petitions in G.R. Nos. 168056, 168207, 168461, 168463, and 168730, are hereby

DISMISSED.

There being no constitutional impediment to the full enforcement and

implementation of R.A. No. 9337, the temporary restraining order issued by the

Court on July 1, 2005 is LIFTED upon finality of herein decision.

SO ORDERED.

MA. ALICIA AUSTRIA-MARTINEZ

Associate Justice

WE CONCUR:
 HILARIO G. DAVIDE, JR.
Chief Justice

REYNATO S. PUNO ARTEMIO V. PANGANIBAN

Associate Justice Associate Justice

LEONARDO A. QUISUMBING CONSUELO YNARES-SANTIAGO

Associate Justice Associate Justice

ANGELINA SANDOVAL-GUTIERREZ ANTONIO T. CARPIO

Associate Justice Associate Justice

RENATO C. CORONA CONCHITA CARPIO-MORALES

Associate Justice Associate Justice

ROMEO J. CALLEJO, SR. ADOLFO S. AZCUNA

Associate Justice Associate Justice

DANTE O. TINGA MINITA V. CHICO-NAZARIO

Associate Justice Associate Justice

CANCIO C. GARCIA
Associate Justice
 CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified that
the conclusions in the above Decision were reached in consultation before the
case was assigned to the writer of the opinion of the Court.

HILARIO G. DAVIDE, JR.

Chief Justice
 G.R. No. 181756, June 15, 2015

MACTAN-CEBU INTERNATIONAL AIRPORT AUTHORITY (MCIAA), Petitioner, v. CITY OF LAPU-

LAPU AND ELENA T. PACALDO, Respondents.

DECISION

LEONARDO-DE CASTRO, J.:

This is a clear opportunity for this Court to clarify the effects of our two previous decisions, issued a
decade apart, on the power of local government units to collect real property taxes from airport
authorities located within their area, and the nature or the juridical personality of said airport
authorities.

Before us is a Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Civil Procedure
seeking to reverse and set aside the October 8, 2007 Decision1 of the Court of Appeals (Cebu City) in
CA-G.R. SP No. 01360 and the February 12, 2008 Resolution2 denying petitioner’s motion for
reconsideration.

THE FACTS

Petitioner Mactan-Cebu International Airport Authority (MCIAA) was created by Congress on July 31,
1990 under Republic Act No. 69583 to “undertake the economical, efficient and effective control,
management and supervision of the Mactan International Airport in the Province of Cebu and the Lahug
Airport in Cebu City x x x and such other airports as may be established in the Province of Cebu.” It is
represented in this case by the Office of the Solicitor General.

Respondent City of Lapu-Lapu is a local government unit and political subdivision, created and existing
under its own charter with capacity to sue and be sued. Respondent Elena T. Pacaldo was impleaded in
her capacity as the City Treasurer of respondent City.

Upon its creation, petitioner enjoyed exemption from realty taxes under the following provision of
Republic Act No. 6958: chanRob lesvi rtua lLawl ibra ry

Section 14. Tax Exemptions. – The Authority shall be exempt from realty taxes imposed by the
National Government or any of its political subdivisions, agencies and instrumentalities: Provided, That
no tax exemption herein granted shall extend to any subsidiary which may be organized by the
Authority.chanroble svirtuallaw lib rary

On September 11, 1996, however, this Court rendered a decision in Mactan-Cebu International Airport
Authority v. Marcos4 (the 1996 MCIAA case) declaring that upon the effectivity of Republic Act No. 7160
(The Local Government Code of 1991), petitioner was no longer exempt from real estate taxes. The
Court held: chanRoble svirtual Lawlib ra ry

Since the last paragraph of Section 234 unequivocally withdrew, upon the effectivity of the LGC,
exemptions from payment of real property taxes granted to natural or juridical persons, including
government-owned or controlled corporations, except as provided in the said section, and the petitioner
is, undoubtedly, a government-owned corporation, it necessarily follows that its exemption from such
tax granted it in Section 14 of its Charter, R.A. No. 6958, has been withdrawn. x x x. chanroblesv irt uallawl ibra ry

On January 7, 1997, respondent City issued to petitioner a Statement of Real Estate Tax assessing the
lots comprising the Mactan International Airport in the amount of P162,058,959.52. Petitioner
complained that there were discrepancies in said Statement of Real Estate Tax as follows: chanRoble svirtual Lawlib ra ry

(a) [T]he statement included lots and buildings not found in the inventory of petitioner’s real properties;

(b) [S]ome of the lots were covered by two separate tax declarations which resulted in double
assessment;

(c) [There were] double entries pertaining to the same lots; and

(d) [T]he statement included lots utilized exclusively for governmental purposes.5
Respondent City amended its billing and sent a new Statement of Real Estate Tax to petitioner in the
amount of P151,376,134.66. Petitioner averred that this amount covered real estate taxes on the lots
utilized solely and exclusively for public or governmental purposes such as the airfield, runway and
taxiway, and the lots on which they are situated.6 chanrobles law

Petitioner paid respondent City the amount of four million pesos (P4,000,000.00) monthly, which was
later increased to six million pesos (P6,000,000.00) monthly. As of December 2003, petitioner had paid
respondent City a total of P275,728,313.36.7 chanrob leslaw

Upon request of petitioner’s General Manager, the Secretary of the Department of Justice (DOJ) issued
Opinion No. 50, Series of 1998,8 and we quote the pertinent portions of said Opinion below: cha nRoblesvi rt ualLaw lib rary

You further state that among the real properties deemed transferred to MCIAA are the airfield, runway,
taxiway and the lots on which the runway and taxiway are situated, the tax declarations of which were
transferred in the name of the MCIAA. In 1997, the City of Lapu-Lapu imposed real estate taxes on
these properties invoking the provisions of the Local Government Code.

It is your view that these properties are not subject to real property tax because they are exclusively
used for airport purposes. You said that the runway and taxiway are not only used by the commercial
airlines but also by the Philippine Air Force and other government agencies. As such and in conjunction
with the above interpretation of Section 15 of R.A. No. 6958, you believe that these properties are
considered owned by the Republic of the Philippines. Hence, this request for opinion.

The query is resolved in the affirmative. The properties used for airport purposes (i.e. airfield,
runway, taxiway and the lots on which the runway and taxiway are situated) are owned by
the Republic of the Philippines.

xxxx

Under the Law on Public Corporations, the legislature has complete control over the property which a
municipal corporation has acquired in its public or governmental capacity and which is devoted to public
or governmental use. The municipality in dealing with said property is subject to such restrictions and
limitations as the legislature may impose. On the other hand, property which a municipal corporation
acquired in its private or proprietary capacity, is held by it in the same character as a private individual.
Hence, the legislature in dealing with such property, is subject to the constitutional restrictions
concerning property (Martin, Public Corporations [1997], p. 30; see also Province of Zamboanga del
[Norte] v. City of Zamboanga [131 Phil. 446]). The same may be said of properties transferred to the
MCIAA and used for airport purposes, such as those involved herein. Since such properties are of public
dominion, they are deemed held by the MCIAA in trust for the Government and can be alienated only as
may be provided by law.

Based on the foregoing, it is our considered opinion that the properties used for airport
purposes, such as the airfield, runway and taxiway and the lots on which the runway and
taxiway are located, are owned by the State or by the Republic of the Philippines and are
merely held in trust by the MCIAA, notwithstanding that certificates of titles thereto may
have been issued in the name of the MCIAA. (Emphases added.)
Based on the above DOJ Opinion, the Department of Finance issued a 2nd Indorsement to the City
Treasurer of Lapu-Lapu dated August 3, 1998,9 which reads: chanRoblesv irt ual Lawlib rary

The distinction as to which among the MCIAA properties are still considered “owned by the State or by
the Republic of the Philippines,” such as the resolution in the above-cited DOJ Opinion No. 50, for
purposes of real property tax exemption is hereby deemed tenable considering that the subject “airfield,
runway, taxiway and the lots on which the runway and taxiway are situated” appears to be the subject
of real property tax assessment and collection of the city government of Lapu-Lapu, hence, the same
are definitely located within the jurisdiction of Lapu-Lapu City.

Moreover, then Undersecretary Antonio P. Belicena of the Department of Finance, in his 1st
Indorsement dated May 18, 1998, advanced that “this Department (DOF) interposes no
objection to the request of Mactan Cebu International Airport Authority for exemption from
payment of real property tax on the property used for airport purposes” mentioned above.

The City Assessor, therefore, is hereby instructed to transfer the assessment of the subject
airfield, runway, taxiway and the lots on which the runway and taxiway are situated, from the
“Taxable Roll” to the “Exempt Roll” of real properties.

The City Treasurer thereat should be informed on the action taken for his immediate appropriate action.
(Emphases added.)
Respondent City Treasurer Elena T. Pacaldo sent petitioner a Statement of Real Property Tax Balances
up to the year 2002 reflecting the amount of P246,395,477.20. Petitioner claimed that the statement
again included the lots utilized solely and exclusively for public purpose such as the airfield, runway, and
taxiway and the lots on which these are built. Respondent Pacaldo then issued Notices of Levy on 18
sets of real properties of petitioner.10
c han robles law

Petitioner filed a petition for prohibition11 with the Regional Trial Court (RTC) of Lapu-Lapu City with
prayer for the issuance of a temporary restraining order (TRO) and/or a writ of preliminary injunction,
docketed as SCA No. 6056-L. Branch 53 of RTC Lapu-Lapu City then issued a 72-hour TRO. The petition
for prohibition sought to enjoin respondent City from issuing a warrant of levy against petitioner’s
properties and from selling them at public auction for delinquency in realty tax obligations. The petition
likewise prayed for a declaration that the airport terminal building, the airfield, runway, taxiway and the
lots on which they are situated are exempted from real estate taxes after due hearing. Petitioner based
its claim of exemption on DOJ Opinion No. 50.

The RTC issued an Order denying the motion for extension of the TRO. Thus, on December 10, 2003,
respondent City auctioned 27 of petitioner’s properties. As there was no interested bidder who
participated in the auction sale, respondent City forfeited and purchased said properties. The
corresponding Certificates of Sale of Delinquent Property were issued to respondent City.12 chanrob leslaw

Petitioner claimed before the RTC that it had discovered that respondent City did not pass any ordinance
authorizing the collection of real property tax, a tax for the special education fund (SEF), and a penalty
interest for its nonpayment. Petitioner argued that without the corresponding tax ordinances,
respondent City could not impose and collect real property tax, an additional tax for the SEF, and
penalty interest from petitioner.13 chan roble slaw

The RTC issued an Order14 on December 28, 2004 granting petitioner’s application for a writ of
preliminary injunction. The pertinent portions of the Order are quoted below: chanRob lesvi rtua lLawl ibra ry

The supervening legal issue has rendered it imperative that the matter of the consolidation of the
ownership of the auctioned properties be placed on hold. Furthermore, it is the view of the Court that
great prejudice and damage will be suffered by petitioner if it were to lose its dominion over these
properties now when the most important legal issue has still to be resolved by the Court. Besides, the
respondents and the intervenor have not sufficiently shown cause why petitioner’s application should not
be granted.

WHEREFORE, the foregoing considered, petitioner’s application for a writ of preliminary injunction is
granted. Consequently, upon the approval of a bond in the amount of one million pesos
(P1,000,000.00), let a writ of preliminary injunction issue enjoining the respondents, the intervenor,
their agents or persons acting in [their] behalf, to desist from consolidating and exercising ownership
over the properties of the petitioner. c hanro blesvi rt uallawl ibra ry

However, upon motion of respondents, the RTC lifted the writ of preliminary injunction in an Order15
dated December 5, 2005. The RTC reasoned as follows: ch anRoblesvi rtua lLawl ibra ry

The respondent City, in the course of the hearing of its motion, presented to this Court a certified copy
of its Ordinance No. 44 (Omnibus Tax Ordinance of the City of Lapu-Lapu), Section 25 whereof
authorized the collection of a rate of one and one-half (1 ½) [per centum] from owners, executors or
administrators of any real estate lying within the jurisdiction of the City of Lapu-Lapu, based on the
assessed value as shown in the latest revision.

Though this ordinance was enacted prior to the effectivity of Republic Act No. 7160 (Local Government
Code of 1991), to the mind of the Court this ordinance is still a valid and effective ordinance in view of
Sec. 529 of RA 7160 x x x [and the] Implementing Rules and Regulations of RA 7160 x x x.

xxxx

The tax collected under Ordinance No. 44 is within the rates prescribed by RA 7160, though the 25%
penalty collected is higher than the 2% interest allowed under Sec. 255 of the said law which
provides:c hanRoble svirtual Lawli bra ry

In case of failure to pay the basic real property tax or any other tax levied under this Title upon the
expiration of the periods as provided in Section 250, or when due, as the case may be, shall subject the
taxpayer to the payment of interest at the rate of two percent (2%) per month on the unpaid amount or
a fraction thereof, until the delinquent tax shall have been fully paid: Provided, however, That in no case
shall the total interest on the unpaid tax or portion thereof exceed thirty-six (36) months. chanroble svirtuallaw lib rary

This difference does not however detract from the essential enforceability and effectivity of Ordinance
No. 44 pursuant to Section 529 of RA 7160 and Article 278 of the Implementing Rules and Regulations.
The outcome of this disparity is simply that respondent City can only collect an interest of 2% per month
on the unpaid tax. Consequently, respondent City [has] to recompute the petitioner’s tax liability.

It is also the Court’s perception that respondent City can still collect the additional 1% tax on real
property without an ordinance to this effect. It may be recalled that Republic Act No. 5447 has created
the Special Education Fund which is constituted from the proceeds of the additional tax on real property
imposed by the law. Respondent City has collected this tax as mandated by this law without any
ordinance for the purpose, as there is no need for it. Even when RA 5447 was amended by PD 464 (Real
Property Tax Code), respondent City had continued to collect the tax, as it used to.
It is true that RA 7160 has repealed RA 5447, but what has been repealed are only Section 3, a(3) and
b(2) which concern the allocation of the additional tax, considering that under RA 7160, the proceeds of
the additional 1% tax on real property accrue exclusively to the Special Education Fund. Nevertheless,
RA 5447 has not been totally repealed; there is only a partial repeal.

It may be observed that there is no requirement in RA 7160 that an ordinance be enacted to enable the
collection of the additional 1% tax. This is so since RA 5447 is still in force and effect, and the declared
policy of the government in enacting the law, which is to contribute to the financial support of the goals
of education as provided in the Constitution, necessitates the continued and uninterrupted collection of
the tax. Considering that this is a tax of far-reaching importance, to require the passage of an ordinance
in order that the tax may be collected would be to place the collection of the tax at the option of the
local legislature. This would run counter to the declared policy of the government when the SEF was
created and the tax imposed.

As regards the allegation of respondents that this Court has no jurisdiction to entertain the instant
petition, the Court deems it proper, at this stage of the proceedings, not to treat this issue, as it involves
facts which are yet to be established.

x x x [T]he Court’s issuance of a writ of preliminary injunction may appear to be a futile gesture in the
light of Section 263 of RA 7160. x x x.

xxxx

It would seem from the foregoing provisions, that once the taxpayer fails to redeem within the one-year
period, ownership fully vests on the local government unit concerned. Thus, when in the present case
petitioner failed to redeem the parcels of land acquired by respondent City, the ownership thereof
became fully vested on respondent City without the latter having to perform any other acts to perfect its
ownership. Corollary thereto, ownership on the part of respondent City has become a fait accompli.

WHEREFORE, in the light of the foregoing considerations, respondents’ motion for reconsideration is
granted, and the order of this Court dated December 28, 2004 is hereby reconsidered. Consequently,
the writ of preliminary injunction issued by this Court is hereby lifted. chan roble svirtuallaw lib rary

Aggrieved, petitioner filed a petition for certiorari with the Court of Appeals (Cebu City), with urgent
16

prayer for the issuance of a TRO and/or writ of preliminary injunction, docketed as CA-G.R. SP No.
01360. The Court of Appeals (Cebu City) issued a TRO17 on January 5, 2006 and shortly thereafter,
issued a writ of preliminary injunction18 on February 17, 2006.

RULING OF THE COURT OF APPEALS

The Court of Appeals (Cebu City) promulgated the questioned Decision on October 8, 2007, holding that
petitioner is a government-owned or controlled corporation and its properties are subject to realty tax.
The dispositive portion of the questioned Decision reads: chanRoble svirtual Lawli bra ry

WHEREFORE, in view of the foregoing, judgment is hereby rendered by us as follows:

a. We DECLARE the airport terminal building, the airfield, runway, taxiway and the lots on
which they are situated NOT EXEMPT from the real estate tax imposed by the
respondent City of Lapu-Lapu;

b. We DECLARE the imposition and collection of the real estate tax, the additional levy for
the Special Education Fund and the penalty interest as VALID and LEGAL. However,
pursuant to Section 255 of the Local Government Code, respondent city can only collect
an interest of 2% per month on the unpaid tax which total interest shall, in no case,
exceed thirty-six (36) months;

c. We DECLARE the sale in public auction of the aforesaid properties and the eventual
forfeiture and purchase of the subject property by the respondent City of Lapu-Lapu as
NULL and VOID. However, petitioner MCIAA’s property is encumbered only by a
limited lien possessed by the respondent City of Lapu-Lapu in accord with Section 257
of the Local Government Code.19

Petitioner filed a Motion for Partial Reconsideration20 of the questioned Decision covering only the portion
of said decision declaring that petitioner is a GOCC and, therefore, not exempt from the realty tax and
special education fund imposed by respondent City. Petitioner cited Manila International Airport
Authority v. Court of Appeals21 (the 2006 MIAA case) involving the City of Parañaque and the Manila
International Airport Authority. Petitioner claimed that it had been described by this Court as a
government instrumentality, and that it followed “as a logical consequence that petitioner is exempt
from the taxing powers of respondent City of Lapu-Lapu.”22 Petitioner alleged that the 1996 MCIAA case
had been overturned by the Court in the 2006 MIAA case. Petitioner thus prayed that it be declared
exempt from paying the realty tax, special education fund, and interest being collected by respondent
City.

On February 12, 2008, the Court of Appeals denied petitioner’s motion for partial reconsideration in the
questioned Resolution.

The Court of Appeals followed and applied the precedent established in the 1996 MCIAA case and
refused to apply the 2006 MIAA case. The Court of Appeals wrote in the questioned Decision: “We find
that our position is in line with the coherent and cohesive interpretation of the relevant provisions of the
Local Government Code on local taxation enunciated in the [1996 MCIAA] case which to our mind is
more elegant and rational and provides intellectual clarity than the one provided by the Supreme Court
in the [2006] MIAA case.”23 chanrob l eslaw

In the questioned Decision, the Court of Appeals held that petitioner’s airport terminal building, airfield,
runway, taxiway, and the lots on which they are situated are not exempt from real estate tax reasoning
as follows:chanRoble svirtual Lawli bra ry

Under the Local Government Code (LGC for brevity), enacted pursuant to the constitutional mandate of
local autonomy, all natural and juridical persons, including government-owned or controlled corporations
(GOCCs), instrumentalities and agencies, are no longer exempt from local taxes even if previously
granted an exemption. The only exemptions from local taxes are those specifically provided under the
Code itself, or those enacted through subsequent legislation.

Thus, the LGC, enacted pursuant to Section 3, Article X of the Constitution, provides for the exercise by
local government units of their power to tax, the scope thereof or its limitations, and the exemptions
from local taxation.

Section 133 of the LGC prescribes the common limitations on the taxing powers of local government
units. x x x.

xxxx

The above-stated provision, however, qualified the exemption of the National Government, its agencies
and instrumentalities from local taxation with the phrase “unless otherwise provided herein.”

Section 232 of the LGC provides for the power of the local government units (LGUs for brevity) to levy
real property tax. x x x.

xxxx

Section 234 of the LGC provides for the exemptions from payment of real property taxes and withdraws
previous exemptions granted to natural and juridical persons, including government-owned and
controlled corporations, except as provided therein. x x x.

xxxx

Section 193 of the LGC is the general provision on withdrawal of tax exemption privileges. x x x.24
(Citations omitted.)
The Court of Appeals went on to state that contrary to the ruling of the Supreme Court in the 2006 MIAA
case, it finds and rules that: chanRoblesvi rtua lLawl ibra ry

a) Section 133 of the LGC is not an absolute prohibition on the power of the LGUs to tax the National
Government, its agencies and instrumentalities as the same is qualified by Sections 193, 232 and 234
which “otherwise provided”; and

b) Petitioner MCIAA is a GOCC.25 (Emphasis ours.)

The Court of Appeals ratiocinated in the following manner: chanRo blesvi rtua lLaw lib rary

Pursuant to the explicit provision of Section 193 of the LGC, exemptions previously enjoyed by persons,
whether natural or juridical, like the petitioner MCIAA, are deemed withdrawn upon the effectivity of the
Code. Further, the last paragraph of Section 234 of the Code also unequivocally withdrew, upon the
Code’s effectivity, exemptions from payment of real property taxes previously granted to natural or
juridical persons, including government-owned or controlled corporations, except as provided in the said
section. Petitioner MCIAA, undoubtedly a juridical person, it follows that its exemption from such tax
granted under Section 14 of R.A. 6958 has been withdrawn.

xxxx
From the [1996 MCIAA] ruling, it is acknowledged that, under Section 133 of the LGC, instrumentalities
were generally exempt from all forms of local government taxation, unless otherwise provided in the
Code. On the other hand, Section 232 “otherwise provided” insofar as it allowed local government units
to levy an ad valorem real property tax, irrespective of who owned the property. At the same time, the
imposition of real property taxes under Section 232 is, in turn, qualified by the phrase “not hereinafter
specifically exempted.” The exemptions from real property taxes are enumerated in Section 234 of the
Code which specifically states that only real properties owned by the Republic of the Philippines or any of
its political subdivisions are exempted from the payment of the tax. Clearly, instrumentalities or GOCCs
do not fall within the exceptions under Section 234 of the LGC.

Thus, as ruled in the [1996 MCIAA] case, the prohibition on taxing the national government, its agencies
and instrumentalities under Section 133 is qualified by Sections 232 and 234, and accordingly, the only
relevant exemption now applicable to these bodies is what is now provided under Section 234(a) of the
Code. It may be noted that the express withdrawal of previously granted exemptions to persons from
the payment of real property tax by the LGC does not even make any distinction as to whether the
exempt person is a governmental entity or not. As Sections 193 and 234 of the Code both state, the
withdrawal applies to “all persons, including GOCCs,” thus encompassing the two classes of persons
recognized under our laws, natural persons and juridical persons.

xxxx

The question of whether or not petitioner MCIAA is an instrumentality or a GOCC has already been
lengthily but soundly, cogently and lucidly answered in the [1996 MCIAA] case x x x.

xxxx

Based on the foregoing, the claim of the majority of the Supreme Court in the [2006 MIAA] case that
MIAA (and also petitioner MCIAA) is not a government-owned or controlled corporation but an
instrumentality based on Section 2(10) of the Administrative Code of 1987 appears to be unsound. In
the [2006 MIAA] case, the majority justifies MIAA’s purported exemption on Section 133(o) of the Local
Government Code which places agencies and instrumentalities: as generally exempt from the taxation
powers of the LGUs. It further went on to hold that “By express mandate of the Local Government Code,
local governments cannot impose any kind of tax on national government instrumentalities like the
MIAA.” x x x.26 (Citations omitted.)
The Court of Appeals further cited Justice Tinga’s dissent in the 2006 MIAA case as well as provisions
from petitioner MCIAA’s charter to show that petitioner is a GOCC.27 The Court of Appeals wrote: cha nRoblesvi rtua lLaw lib rary

These cited provisions establish the fitness of the petitioner MCIAA to be the subject of legal relations.
Under its charter, it has the power to acquire, possess and incur obligations. It also has the power to
contract in its own name and to acquire title to movable or immovable property. More importantly, it
may likewise exercise powers of a corporation under the Corporation Code. Moreover, based on its own
allegation, it even recognized itself as a GOCC when it alleged in its petition for prohibition filed before
the lower court that it “is a body corporate organized and existing under Republic Act No. 6958 x x x.”

We also find to be not meritorious the assertion of petitioner MCIAA that the respondent city can no
longer challenge the tax-exempt character of the properties since it is estopped from doing so when
respondent City of Lapu-Lapu, through its former mayor, Ernest H. Weigel, Jr., had long ago conceded
that petitioner’s properties are exempt from real property tax.

It is not denied by the respondent city that it considered, through its former mayor, Ernest H. Weigel,
Jr., petitioner’s subject properties, specifically the runway and taxiway, as exempt from taxes. However,
as astutely pointed out by the respondent city it “can never be in estoppel, particularly in matters
involving taxes. It is a well-known rule that erroneous application and enforcement of the law by public
officers do not preclude subsequent correct application of the statute, and that the Government is never
estopped by mistake or error on the part of its agents.”28 (Citations omitted.)
The Court of Appeals established the following: c hanRoble svirtual Lawli bra ry

a) [R]espondent City was able to prove and establish that it has a valid and existing ordinance for the
imposition of realty tax against petitioner MCIAA;

b) [T]he imposition and collection of additional levy of 1% Special Education Fund (SEF) is authorized by
law, Republic Act No. 5447; and

c) [T]he collection of penalty interest for delinquent taxes is not only authorized by law but is likewise
[sanctioned] by respondent City’s ordinance.29
The Court of Appeals likewise held that respondent City has a valid and existing local tax ordinance,
Ordinance No. 44, or the Omnibus Tax Ordinance of Lapu-Lapu City, which provided for the imposition of
real property tax. The relevant provision reads: chanRoble svirtual Lawli bra ry

Chapter 5 – Tax on Real Property Ownership

Section 25. RATE OF TAX. - A rate of one and one-half (1 ½) percentum shall be collected from owners,
executors or administrators of any real estate lying within the territorial jurisdiction of the City of Lapu-
Lapu, based on the assessed value as shown in the latest revision.30
The Court of Appeals found that even if Ordinance No. 44 was enacted prior to the effectivity of the LGC,
it remained in force and effect, citing Section 529 of the LGC and Article 278 of the LGC’s Implementing
Rules and Regulations.31 chan roble slaw

As regards the Special Education Fund, the Court of Appeals held that respondent City can still collect
the additional 1% tax on real property even without an ordinance to this effect, as this is authorized by
Republic Act No. 5447, as amended by Presidential Decree No. 464 (the Real Property Tax Code), which
does not require an enabling tax ordinance. The Court of Appeals affirmed the RTC’s ruling that Republic
Act No. 5447 was still in force and effect notwithstanding the passing of the LGC, as the latter only
partially repealed the former law. What Section 534 of the LGC repealed was Section 3 a(3) and b(2) of
Republic Act No. 5447, and not the entire law that created the Special Education Fund.32 The repealed
provisions referred to allocation of taxes on Virginia type cigarettes and duties on imported leaf tobacco
and the percentage remittances to the taxing authority concerned. The Court of Appeals, citing The
Commission on Audit of the Province of Cebu v. Province of Cebu,33 held that “[t]he failure to add a
specific repealing clause particularly mentioning the statute to be repealed indicates that the intent was
not to repeal any existing law on the matter, unless an irreconcilable inconsistency and repugnancy
exists in the terms of the new and the old laws.”34 The Court of Appeals quoted the RTC’s discussion on
this issue, which we reproduce below: c hanRoblesv irtual Lawlib rary

It may be observed that there is no requirement in RA 7160 that an ordinance be enacted to enable the
collection of the additional 1% tax. This is so since R.A. 5447 is still in force and effect, and the declared
policy of the government in enacting the law, which is to contribute to the financial support of the goals
of education as provided in the Constitution, necessitates the continued and uninterrupted collection of
the tax. Considering that this is a tax of far-reaching importance, to require the passage of an ordinance
in order that the tax may be collected would be to place the collection of the tax at the option of the
local legislature. This would run counter to the declared policy of the government when the SEF was
created and the tax imposed.35
Regarding the penalty interest, the Court of Appeals found that Section 30 of Ordinance No. 44 of
respondent City provided for a penalty surcharge of 25% of the tax due for a given year. Said provision
reads:chanRoble svirtual Lawli bra ry

Section 30. – PENALTY FOR FAILURE TO PAY TAX. – Failure to pay the tax provided for under this
Chapter within the time fixed in Section 27, shall subject the taxpayer to a surcharge of twenty-five
percent (25%), without interest.36
The Court of Appeals however declared that after the effectivity of the Local Government Code, the
respondent City could only collect penalty surcharge up to the extent of 72%, covering a period of three
years or 36 months, for the entire delinquent property.37 This was lower than the 25% per annum
surcharge imposed by Ordinance No. 44.38 The Court of Appeals affirmed the findings of the RTC in the
decision quoted below: cha nRoblesv irt ual Lawlib rary

The tax collected under Ordinance No. 44 is within the rates prescribed by RA 7160, though the 25%
penalty collected is higher than the 2% allowed under Sec. 255 of the said law which provides: ChanRob les Virtualawl ibra ry

xxxx

This difference does not however detract from the essential enforceability and effectivity of Ordinance
No. 44 pursuant to Section 529 of RA No. 7160 and Article 278 of the Implementing Rules and
Regulations. The outcome of this disparity is simply that respondent City can only collect an interest of
2% per month on the unpaid tax. Consequently, respondent city will have to [recompute] the
petitioner’s tax liability.39
It is worthy to note that the Court of Appeals nevertheless held that even if it is clear that
respondent City has the power to impose real property taxes over petitioner, “it is also
evident and categorical that, under Republic Act No. 6958, the properties of petitioner MCIAA
may not be conveyed or transferred to any person or entity except to the national
government.”40 The relevant provisions of the said law are quoted below: cha nRoblesv irt ual Lawlib rary

Section 4. Functions, Powers and Duties. – The Authority shall have the following functions, powers
and duties: ChanRobles Vi rtualaw lib rary

xxxx
(e) To acquire, purchase, own, administer, lease, mortgage, sell or otherwise dispose of any land,
building, airport facility, or property of whatever kind and nature, whether movable or immovable, or
any interest therein: Provided, That any asset located in the Mactan International Airport important to
national security shall not be subject to alienation or mortgage by the Authority nor to transfer to any
entity other than the National Government[.]

Section 13. Borrowing Power. – The Authority may, in accordance with Section 21, Article XII of the
Constitution and other existing laws, rules and regulations on local or foreign borrowing, raise funds,
either from local or international sources, by way of loans, credit or securities, and other borrowing
instruments with the power to create pledges, mortgages and other voluntary liens or encumbrances on
any of its assets or properties, subject to the prior approval of the President of the Philippines.

All loans contracted by the Authority under this section, together with all interests and other sums
payable in respect thereof, shall constitute a charge upon all the revenues and assets of the Authority
and shall rank equally with one another, but shall have priority over any other claim or charge on the
revenue and assets of the Authority: Provided, That this provision shall not be construed as a prohibition
or restriction on the power of the Authority to create pledges, mortgages and other voluntary liens or
encumbrances on any asset or property of the Authority.

The payment of the loans or other indebtedness of the Authority may be guaranteed by the National
Government subject to the approval of the President of the Philippines. c han roblesv irt uallawl ibra ry

The Court of Appeals concluded that “it is clear that petitioner MCIAA is denied by its charter the
absolute right to dispose of its property to any person or entity except to the national government and it
is not empowered to obtain loans or encumber its property without the approval of the President.”41 The
questioned Decision contained the following conclusion: chanR oblesvi rtual Lawl ibra ry

With the advent of RA 7160, the Local Government Code, the power to tax is no longer vested
exclusively on Congress. LGUs, through its local legislative bodies, are now given direct authority to levy
taxes, fees and other charges pursuant to Article X, Section 5 of the 1987 Constitution. And one of the
most significant provisions of the LGC is the removal of the blanket inclusion of instrumentalities and
agencies of the national government from the coverage of local taxation. The express withdrawal by the
Code of previously granted exemptions from realty taxes applied to instrumentalities and government-
owned or controlled corporations (GOCCs) such as the petitioner Mactan-Cebu International Airport
Authority. Thus, petitioner MCIAA became a taxable person in view of the withdrawal of the realty tax
exemption that it previously enjoyed under Section 14 of RA No. 6958 of its charter. As expressed and
categorically held in the Mactan case, the removal and withdrawal of tax exemptions previously enjoyed
by persons, natural or juridical, are consistent with the State policy to ensure autonomy to local
governments and the objective of the Local Government Code 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.

However, in the case at bench, petitioner MCIAA’s charter expressly bars the alienation or mortgage of
its property to any person or entity except to the national government. Therefore, while petitioner
MCIAA is a taxable person for purposes of real property taxation, respondent City of Lapu-Lapu is
prohibited from seizing, selling and owning these properties by and through a public auction in order to
satisfy petitioner MCIAA’s tax liability.42 (Citations omitted.)
In the questioned Resolution that affirmed its questioned Decision, the Court of Appeals denied
petitioner’s motion for reconsideration based on the following grounds: chanRob lesvi rtua lLawl ibra ry

First, the MCIAA case remains the controlling law on the matter as the same is the
established precedent; not the MIAA case but the MCIAA case since the former, as keenly
pointed out by the respondent City of Lapu-Lapu, has not yet attained finality as there is still
yet a pending motion for reconsideration filed with the Supreme Court in the aforesaid case.

Second, and more importantly, the ruling of the Supreme Court in the MIAA case cannot be
similarly invoked in the case at bench. The said case cannot be considered as the “law of the
case.” The “law of the case” doctrine has been defined as that principle under which determinations of
questions of law will generally be held to govern a case throughout all its subsequent stages where such
determination has already been made on a prior appeal to a court of last resort. It is merely a rule of
procedure and does not go to the power of the court, and will not be adhered to where its application
will result in an unjust decision. It relates entirely to questions of law, and is confined in its operation to
subsequent proceedings in the same case. According to said doctrine, whatever has been irrevocably
established constitutes the law of the case only as to the same parties in the same case and not to
different parties in an entirely different case. Besides, pending resolution of the aforesaid motion for
reconsideration in the MIAA case, the latter case has not irrevocably established anything.

Thus, after a thorough and judicious review of the allegations in petitioner’s motion for reconsideration,
this Court resolves to deny the same as the matters raised therein had already been exhaustively
discussed in the decision sought to be reconsidered, and that no new matters were raised which would
warrant the modification, much less reversal, thereof.43 (Emphasis added, citations omitted.)
PETITIONER’S THEORY

Petitioner is before us now claiming that this Court, in the 2006 MIAA case, had expressly declared that
petitioner, while vested with corporate powers, is not considered a government-owned or controlled
corporation, but is a government instrumentality like the Manila International Airport Authority (MIAA),
Philippine Ports Authority (PPA), University of the Philippines, and Bangko Sentral ng Pilipinas (BSP).
Petitioner alleges that as a government instrumentality, all its airport lands and buildings are exempt
from real estate taxes imposed by respondent City.44 chan robles law

Petitioner alleges that Republic Act No. 6958 placed “a limitation on petitioner’s administration of its
assets and properties” as it provides under Section 4(e) that “any asset in the international airport
important to national security cannot be alienated or mortgaged by petitioner or transferred to any
entity other than the National Government.”45 chanroble slaw

Thus, petitioner claims that the Court of Appeals (Cebu City) gravely erred in disregarding the
following:chanRob lesvi rtual Lawl ibra ry

PETITIONER IS A GOVERNMENT INSTRUMENTALITY AS EXPRESSLY DECLARED BY THE HONORABLE

COURT IN THE MIAA CASE. AS SUCH, IT IS EXEMPT FROM PAYING REAL ESTATE TAXES IMPOSED BY
RESPONDENT CITY OF LAPU-LAPU.

II

THE PROPERTIES OF PETITIONER CONSISTING OF THE AIRPORT TERMINAL BUILDING, AIRFIELD,

RUNWAY, TAXIWAY, INCLUDING THE LOTS ON WHICH THEY ARE SITUATED, ARE EXEMPT FROM REAL
PROPERTY TAXES.

III

RESPONDENT CITY OF LAPU-LAPU CANNOT IMPOSE REAL PROPERTY TAX WITHOUT ANY APPROPRIATE
ORDINANCE.

IV

RESPONDENT CITY OF LAPU-LAPU CANNOT IMPOSE AN ADDITIONAL 1% TAX FOR THE SPECIAL
EDUCATION FUND IN THE ABSENCE OF ANY CORRESPONDING ORDINANCE.

RESPONDENT CITY OF LAPU-LAPU CANNOT IMPOSE ANY INTEREST SANS ANY ORDINANCE MANDATING
ITS IMPOSITION.46
Petitioner claims the following similarities with MIAA:

1. MCIAA belongs to the same class and performs identical functions as MIAA;

2. MCIAA is a public utility like MIAA;

3. MIAA was organized to operate the international and domestic airport in Paranaque City for
public use, while MCIAA was organized to operate the international and domestic airport in
Mactan for public use.

4. Both are attached agencies of the Department of Transportation and Communications.47

Petitioner compares its charter (Republic Act No. 6958) with that of MIAA (Executive Order No. 903).

Section 3 of Executive Order No. 903 provides: cha nRoblesvi rt ual Lawlib rary

Sec. 3. Creation of the Manila International Airport Authority. There is hereby established a body
corporate to be known as the Manila International Airport Authority which shall be attached to the
Ministry of Transportation and Communications. The principal office of the Authority shall be located at
the New Manila International Airport. The Authority may establish such offices, branches, agencies or
subsidiaries as it may deem proper and necessary; x x x. chanrob lesvi rtua llawli bra ry
Section 2 of Republic Act No. 6958 reads: chanRoblesv irt ual Lawlib rary

Section 2. Creation of the Mactan-Cebu International Airport Authority. – There is hereby

established a body corporate to be known as the Mactan-Cebu International Airport Authority which shall
be attached to the Department of Transportation and Communications. The principal office of the
Authority shall be located at the Mactan International Airport, Province of Cebu.

The Authority may have such branches, agencies or subsidiaries as it may deem proper and
necessary. chanroble svirtual lawlib rary

As to MIAA’s purposes and objectives, Section 4 of Executive Order No. 903 reads: chanRob lesvi rtualLaw lib rary

Sec. 4. Purposes and Objectives. The Authority shall have the following purposes and objectives: Cha nRobles Vi rtua lawlib rary

(a) To help encourage and promote international and domestic air traffic in the Philippines as a means of
making the Philippines a center of international trade and tourism and accelerating the development of
the means of transportation and communications in the country;

(b) To formulate and adopt for application in the Airport internationally acceptable standards of airport
accommodation and service; and

(c) To upgrade and provide safe, efficient, and reliable airport facilities for international and domestic air
travel.
chanroblesv irt uallawl ibra ry

Petitioner claims that the above purposes and objectives are analogous to those enumerated in its
charter, specifically Section 3 of Republic Act No. 6958, which reads: chanRoble svirtual Lawlib ra ry

Section 3. Primary Purposes and Objectives. – The Authority shall principally undertake the
economical, efficient and effective control, management and supervision of the Mactan International
Airport in the Province of Cebu and the Lahug Airport in Cebu City, hereinafter collectively referred to as
the airports, and such other airports as may be established in the Province of Cebu. In addition, it shall
have the following objectives: ChanRobles Vi rtualaw lib rary

(a) To encourage, promote and develop international and domestic air traffic in the central Visayas and
Mindanao regions as a means of making the regions centers of international trade and tourism, and
accelerating the development of the means of transportation and communications in the country; and

(b) To upgrade the services and facilities of the airports and to formulate internationally acceptable
standards of airport accommodation and service. chanrob lesvi rtua llawlib ra ry

The powers, functions and duties of MIAA under Section 5 of Executive Order No. 903 are: ChanRobles Vi rtualaw lib rary

Sec. 5. Functions, Powers and Duties. The Authority shall have the following functions, powers and
duties: chanRo blesvi rtua lLaw lib rary

(a) To formulate, in coordination with the Bureau of Air Transportation

and other appropriate government agencies, a comprehensive and
integrated policy and program for the Airport and to implement,
review and update such policy and program periodically;

(b) To control, supervise, construct, maintain, operate and provide such

facilities or services as shall be necessary for the efficient functioning
of the Airport;

(c) To promulgate rules and regulations governing the planning,

development, maintenance, operation and improvement of the
Airport, and to control and/or supervise as may be necessary the
construction of any structure or the rendition of any services within
the Airport;

(d) To sue and be sued in its corporate name;

(e) To adopt and use a corporate seal;

(f) To succeed by its corporate name;

(g) To adopt its by-laws, and to amend or repeal the same from time to
time;

(h) To execute or enter into contracts of any kind or nature;

(i) To acquire, purchase, own, administer, lease, mortgage, sell or

otherwise dispose of any land, building, airport facility, or property of
whatever kind and nature, whether movable or immovable, or any
interest therein;

(j) To exercise the power of eminent domain in the pursuit of its

purposes and objectives;

(k) To levy, and collect dues, charges, fees or assessments for the use of
the Airport premises, works, appliances, facilities or concessions or for
any service provided by the Authority, subject to the approval of the
Minister of Transportation and Communications in consultation with
the Minister of Finance, and subject further to the provisions of Batas
Pambansa Blg. 325 where applicable;

(l) To invest its idle funds, as it may deem proper, in government

securities and other evidences of indebtedness of the government;

(m)To provide services, whether on its own or otherwise, within the

Airport and the approaches thereof, which shall include but shall not
be limited to, the following:

(1) Aircraft movement and allocation of parking areas of aircraft on

the ground;

(2) Loading or unloading of aircrafts;

(3) Passenger handling and other services directed towards the care,
convenience and security of passengers, visitors and other airport
users; and

(4) Sorting, weighing, measuring, warehousing or handling of

baggage and goods.

(n) To perform such other acts and transact such other business, directly
or indirectly necessary, incidental or conducive to the attainment of
the purposes and objectives of the Authority, including the adoption of
necessary measures to remedy congestion in the Airport; and
(o) To exercise all the powers of a corporation under the Corporation Law,
insofar as these powers are not inconsistent with the provisions of this
Executive Order.
Petitioner claims that MCIAA has related functions, powers and duties under Section 4 of Republic Act
No. 6958, as shown in the provision quoted below: cha nRoblesvi rt ualLaw lib rary

Section 4. Functions, Powers and Duties. – The Authority shall have the following functions, powers
and duties: ChanRobles Vi rtualaw lib rary

(a) To formulate a comprehensive and integrated development policy and program for the airports and
to implement, review and update such policy and program periodically;

(b) To control, supervise, construct, maintain, operate and provide such facilities or services as shall be
necessary for the efficient functioning of the airports;

(c) To promulgate rules and regulations governing the planning, development, maintenance, operation
and improvement of the airports, and to control and supervise the construction of any structure or the
rendition of any service within the airports;

(d) To exercise all the powers of a corporation under the Corporation Code of the Philippines, insofar as
those powers are not inconsistent with the provisions of this Act;

(e) To acquire, purchase, own, administer, lease, mortgage, sell or otherwise dispose of any land,
building, airport facility, or property of whatever kind and nature, whether movable or immovable, or
any interest therein: Provided, That any asset located in the Mactan International Airport important to
national security shall not be subject to alienation or mortgage by the Authority nor to transfer to any
entity other than the National Government;

(f) To exercise the power of eminent domain in the pursuit of its purposes and objectives;

(g) To levy and collect dues, charges, fees or assessments for the use of airport premises, works,
appliances, facilities or concessions, or for any service provided by the Authority;

(h) To retain and appropriate dues, fees and charges collected by the Authority relative to the use of
airport premises for such measures as may be necessary to make the Authority more effective and
efficient in the discharge of its assigned tasks;

(i) To invest its idle funds, as it may deem proper, in government securities and other evidences of
indebtedness; and

(j) To provide services, whether on its own or otherwise, within the airports and the approaches thereof
as may be necessary or in connection with the maintenance and operation of the airports and their
facilities.
c hanro blesvi rt uallawl ibra ry

Petitioner claims that like MIAA, it has police authority within its premises, as shown in their respective
charters quoted below: cha nRoblesvi rt ualLaw lib rary

EO 903, Sec. 6. Police Authority. — The Authority shall have the power to exercise such police
authority as may be necessary within its premises to carry out its functions and attain its purposes and
objectives, without prejudice to the exercise of functions within the same premises by the Ministry of
National Defense through the Aviation Security Command (AVSECOM) as provided in LOI 961: Provided,
That the Authority may request the assistance of law enforcement agencies, including request for
deputization as may be required. x x x.

R.A. No. 6958, Section 5. Police Authority. – The Authority shall have the power to exercise such
police authority as may be necessary within its premises or areas of operation to carry out its functions
and attain its purposes and objectives: Provided, That the Authority may request the assistance of law
enforcement agencies, including request for deputization as may be required. x x x. ch anroble svirtual lawlib rary

Petitioner pointed out other similarities in the two charters, such as: ChanRoblesVirtualawl ibra ry

1. Both MCIAA and MIAA are covered by the Civil Service Law, rules and regulations (Section 15,
Executive Order No. 903; Section 12, Republic Act No. 6958);

2. Both charters contain a proviso on tax exemptions (Section 21, Executive Order No. 903; Section 14,
Republic Act No. 6958);

3. Both MCIAA and MIAA are required to submit to the President an annual report generally dealing with
their activities and operations (Section 14, Executive Order No. 903; Section 11, Republic Act No.
6958); and

4. Both have borrowing power subject to the approval of the President (Section 16, Executive Order No.
903; Section 13, Republic Act No. 6958).48 chanrob leslaw

Petitioner suggests that it is because of its similarity with MIAA that this Court, in the 2006 MIAA case,
placed it in the same class as MIAA and considered it as a government instrumentality.

Petitioner submits that since it is also a government instrumentality like MIAA, the following conclusion
arrived by the Court in the 2006 MIAA case is also applicable to petitioner: chanRob lesvi rtua lLawl ibra ry

Under Section 2(10) and (13) of the Introductory Provisions of the Administrative Code,
which governs the legal relation and status of government units, agencies and offices within
the entire government machinery, MIAA is a government instrumentality and not a
government-owned or controlled corporation. Under Section 133(o) of the Local Government
Code, MIAA as a government instrumentality is not a taxable person because it is not subject
to “[t]axes, fees or charges of any kind” by local governments. The only exception is when
MIAA leases its real property to a “taxable person” as provided in Section 234(a) of the Local
Government Code, in which case the specific real property leased becomes subject to real
estate tax. Thus, only portions of the Airport Lands and Buildings leased to taxable persons
like private parties are subject to real estate tax by the City of Parañaque.

Under Article 420 of the Civil Code, the Airport Lands and Buildings of MIAA, being devoted to
public use, are properties of public dominion and thus owned by the State or the Republic of
the Philippines. Article 420 specifically mentions “ports x x x constructed by the State,” which includes
public airports and seaports, as properties of public dominion and owned by the Republic. As properties
of public dominion owned by the Republic, there is no doubt whatsoever that the Airport
Lands and Buildings are expressly exempt from real estate tax under Section 234(a) of the
Local Government Code. This Court has also repeatedly ruled that properties of public
dominion are not subject to execution or foreclosure sale.49 (Emphases added.)
Petitioner insists that its properties consisting of the airport terminal building, airfield, runway, taxiway
and the lots on which they are situated are not subject to real property tax because they are actually,
solely and exclusively used for public purposes.50 They are indispensable to the operation of the Mactan
International Airport and by their very nature, these properties are exempt from tax. Said properties
belong to the State and are merely held by petitioner in trust. As earlier mentioned, petitioner claims
that these properties are important to national security and cannot be alienated, mortgaged, or
transferred to any entity except the National Government.

Petitioner prays that judgment be rendered: chanRoble svi rtual Lawli bra ry

a) Declaring petitioner exempt from paying real property taxes as it is a

government instrumentality;

b) Declaring respondent City of Lapu-Lapu as bereft of any authority to

levy and collect the basic real property tax, the additional tax for the
SEF and the penalty interest for its failure to pass the corresponding
tax ordinances; and

c) Declaring, in the alternative, the airport lands and buildings of

petitioner as exempt from real property taxes as they are used solely
and exclusively for public purpose.51
In its Consolidated Reply filed through the OSG, petitioner claims that the 2006 MIAA ruling has
overturned the 1996 MCIAA ruling. Petitioner cites Justice Dante O. Tinga’s dissent in the MIAA ruling,
as follows:chanRoble svirtual Lawli bra ry

[The] ineluctable conclusion is that the majority rejects the rationale and ruling in Mactan. The majority
provides for a wildly different interpretation of Section 133, 193 and 234 of the Local Government Code
than that employed by the Court in Mactan. Moreover, the parties in Mactan and in this case are
similarly situated, as can be obviously deducted from the fact that both petitioners are airport
authorities operating under similarly worded charters. And the fact that the majority cites doctrines
contrapuntal to the Local Government Code as in Basco and Maceda evinces an intent to go against the
Court’s jurisprudential trend adopting the philosophy of expanded local government rule under the Local
Government Code.

x x x The majority is obviously inconsistent with Mactan and there is no way these two rulings can stand
together. Following basic principles in statutory construction, Mactan will be deemed as giving way to
this new ruling.

xxxx

There is no way the majority can be justified unless Mactan is overturned. The MCIAA and the MIAA are
similarly situated. They are both, as will be demonstrated, GOCCs, commonly engaged in the business of
operating an airport. They are the owners of airport properties they respectively maintain and hold title
over these properties in their name. These entities are both owned by the State, and denied by their
respective charters the absolute right to dispose of their properties without prior approval elsewhere.
Both of them are not empowered to obtain loans or encumber their properties without prior approval the
prior approval of the President.52 (Citations omitted.)
Petitioner likewise claims that the enactment of Ordinance No. 070-2007 is an admission on respondent
City’s part that it must have a tax measure to be able to impose a tax or special assessment. Petitioner
avers that assuming that it is a non-exempt entity or that its airport lands and buildings are not exempt,
it was only upon the effectivity of Ordinance No. 070-2007 on January 1, 2008 that respondent City
could properly impose the basic real property tax, the additional tax for the SEF, and the interest in case
of nonpayment.53 chanrobles law

Petitioner filed its Memorandum54 on June 17, 2009.

RESPONDENTS’ THEORY

In their Comment,55 respondents point out that petitioner partially moved for a reconsideration of the
questioned Decision only as to the issue of whether petitioner is a GOCC or not. Thus, respondents
declare that the other portions of the questioned decision had already attained finality and ought not to
be placed in issue in this petition for certiorari. Thus, respondents discussed the other issues raised by
petitioner with reservation as to this objection.

Respondents summarized the issues and the grounds relied upon as follows: chanRob lesvi rtua lLawl ibra ry

STATEMENT OF THE ISSUES

WHETHER OR NOT PETITIONER IS A GOVERNMENT INSTRUMENTALITY EXEMPT FROM PAYING REAL

PROPERTY TAXES

WHETHER OR NOT RESPONDENT CITY CAN [IMPOSE] REALTY TAX, SPECIAL EDUCATION FUND AND
PENALTY INTEREST

WHETHER OR NOT THE AIRPORT TERMINAL BUILDING, AIRFIELD, RUNWAY, TAXIWAY INCLUDING THE
LOTS ON WHICH THEY ARE SITUATED ARE EXEMPT FROM REALTY TAXES

GROUNDS RELIED UPON

1. PETITIONER IS A GOCC HENCE NOT EXEMPT FROM REALTY TAXES

2. TERMINAL BUILDING, RUNWAY, TAXIWAY ARE NOT EXEMPT FROM REALTY TAXES

3. ESTOPPEL DOES NOT LIE AGAINST GOVERNMENT

4. CITY CAN COLLECT REALTY TAX AND INTEREST

5. CITY CAN COLLECT SEF

6. MCIAA HAS NOT SHOWN ANY IRREPARABLE INJURY WARRANTING INJUNCTIVE RELIEF

7. MCIAA HAS NOT COMPLIED WITH PROVISION OF THE LGC56

Respondents claim that “the mere mention of MCIAA in the MIAA v. [Court of Appeals] case does not
make it the controlling case on the matter.”57 Respondents further claim that the 1996 MCIAA case
where this Court held that petitioner is a GOCC is the controlling jurisprudence. Respondents point out
that petitioner and MIAA are two very different entities. Respondents argue that petitioner is a GOCC
contrary to its assertions, based on its Charter and on DOJ Opinion No. 50.

Respondents contend that if petitioner is not a GOCC but an instrumentality of the government, still the
following statement in the 1996 MCIAA case applies: chanRoble svirtual Lawlib ra ry
Besides, nothing can prevent Congress from decreeing that even instrumentalities or agencies of the
Government performing governmental functions may be subject to tax. Where it is done precisely to
fulfill a constitutional mandate and national policy, no one can doubt its wisdom.58
Respondents argue that MCIAA properties such as the terminal building, taxiway and runway are not
exempt from real property taxation. As discussed in the 1996 MCIAA case, Section 234 of the LGC
omitted GOCCs such as MCIAA from entities enjoying tax exemptions. Said decision also provides that
the transfer of ownership of the land to petitioner was absolute and petitioner cannot evade payment of
taxes.59 chanrob leslaw

Even if the following issues were not raised by petitioner in its motion for reconsideration of the
questioned Decision, and thus the ruling pertaining to these issues in the questioned decision had
become final, respondents still discussed its side over its objections as to the propriety of bringing these
up before this Court.

1. Estoppel does not lie against the government.

2. Respondent City can collect realty taxes and interest.

a. Based on the Local Government Code (Sections 232, 233, 255) and its IRR (Sections 241, 247).

b. The City of Lapu-Lapu passed in 1980 Ordinance No. 44, or the Omnibus Tax Ordinance,
wherein the imposition of real property tax was made. This Ordinance was in force and effect by
virtue of Article 278 of the IRR of Republic Act No. 7160.60 chan robles law

c. Ordinance No. 070-2007, known as the Revised Lapu-Lapu City Revenue Code, imposed real
property taxes, special education fund and further provided for the payment of interest and
surcharges. Thus, the issue is passé and is moot and academic.

3. Respondent City can collect Special Education Fund.

a. The LGC does not require the enactment of an ordinance for the collection of the SEF.

b. Congress did not entirely repeal the SEF law, hence, its levy, imposition and collection need not
be covered by ordinance. Besides, the City has enacted the Revenue Code containing provisions
for the levy and collection of the SEF.61

Furthermore, respondents aver that: ChanRoblesVirt ualawli bra ry

1. Collection of taxes is beyond the ambit of injunction.

a. Respondents contend that the petition only questions the denial of the writ of preliminary
injunction by the RTC and the Court of Appeals. Petitioner failed to show irreparable injury.

b. Comparing the alleged damage that may be caused petitioner and the direct affront and
challenge against the power to tax, which is an attribute of sovereignty, it is but appropriate
that injunctive relief should be denied.

2. Petitioner did not comply with LGC provisions on payment under protest.

a. Petitioner should have protested the tax imposition as provided in Article 285 of the IRR of
Republic Act No. 7160. Section 252 of Republic Act No. 716062 requires that the taxpayer’s
protest can only be entertained if the tax is first paid under protest.63

Respondents submitted their Memorandum64 on June 30, 2009, wherein they allege that the 1996
MCIAA case is still good law, as shown by the following cases wherein it was quoted:

1. National Power Corporation v. Local Board of Assessment Appeals of Batangas [545 Phil. 92
(2007)];

2. Mactan-Cebu International Airport Authority v. Urgello [549 Phil. 302 (2007)];

3. Quezon City v. ABS-CBN Broadcasting Corporation [588 Phil. 785 (2008)]; and
 4. The City of Iloilo v. Smart Communications, Inc. [599 Phil. 492 (2009)].

Respondents assert that the constant reference to the 1996 MCIAA case “could hardly mean that the
doctrine has breathed its last” and that the 1996 MCIAA case stands as precedent and is controlling on
petitioner MCIAA.65 chanrobles law

Respondents allege that the issue for consideration is whether it is proper for petitioner to raise the
issue of whether it is not liable to pay real property taxes, special education fund (SEF), interests and/or
surcharges.66 Respondents argue that the Court of Appeals was correct in declaring petitioner liable for
realty taxes, etc., on the terminal building, taxiway, and runway. Respondent City relies on the following
grounds: chanRoble svi rtual Lawli bra ry

1. The case of MCIAA v. Marcos, et al., is controlling on petitioner MCIAA;

2. MCIAA is a corporation;

3. Section 133 in relation to Sections 232 and 234 of the Local Government Code of 1991
authorizes the collection of real property taxes (etc.) from MCIAA;

4. Terminal Building, Runway & Taxiway are not of the Public Dominion and are not
exempt from realty taxes, special education fund and interest;

5. Respondent City can collect realty tax, interest/surcharge, and Special Education Fund
from MCIAA; [and]

6. Estoppel does not lie against the government.67

THIS COURT’S RULING

The petition has merit. The petitioner is an instrumentality of the government; thus, its properties
actually, solely and exclusively used for public purposes, consisting of the airport terminal building,
airfield, runway, taxiway and the lots on which they are situated, are not subject to real property tax
and respondent City is not justified in collecting taxes from petitioner over said properties.

DISCUSSION

The Court of Appeals (Cebu City) erred in declaring that the 1996 MCIAA case still controls and that
petitioner is a GOCC. The 2006 MIAA case governs.

The Court of Appeals’ reliance on the 1996 MCIAA case is misplaced and its staunch refusal to apply the
2006 MIAA case is patently erroneous. The Court of Appeals, finding for respondents, refused to apply
the ruling in the 2006 MIAA case on the premise that the same had not yet reached finality, and that as
far as MCIAA is concerned, the 1996 MCIAA case is still good law.68 chan robles law

While it is true, as respondents allege, that the 1996 MCIAA case was cited in a long line of cases,69 still,
in 2006, the Court en banc decided a case that in effect reversed the 1996 Mactan ruling. The 2006
MIAA case had, since the promulgation of the questioned Decision and Resolution, reached finality and
had in fact been either affirmed or cited in numerous cases by the Court.70 The decision became final
and executory on November 3, 2006.71 Furthermore, the 2006 MIAA case was decided by the Court en
banc while the 1996 MCIAA case was decided by a Division. Hence, the 1996 MCIAA case should be read
in light of the subsequent and unequivocal ruling in the 2006 MIAA case.

To recall, in the 2006 MIAA case, we held that MIAA’s airport lands and buildings are exempt from real
estate tax imposed by local governments; that it is not a GOCC but an instrumentality of the national
government, with its real properties being owned by the Republic of the Philippines, and these are
exempt from real estate tax. Specifically referring to petitioner, we stated as follows: chanRoble svirtual Lawli bra ry

Many government instrumentalities are vested with corporate powers but they do not become
stock or non-stock corporations, which is a necessary condition before an agency or
instrumentality is deemed a government-owned or controlled corporation. Examples are the
Mactan International Airport Authority, the Philippine Ports Authority, the University of the
Philippines and Bangko Sentral ng Pilipinas. All these government instrumentalities exercise corporate
powers but they are not organized as stock or non-stock corporations as required by Section 2(13) of
the Introductory Provisions of the Administrative Code. These government instrumentalities are
sometimes loosely called government corporate entities. However, they are not government-owned
or controlled corporations in the strict sense as understood under the Administrative Code, which is the
governing law defining the legal relationship and status of government entities.72 (Emphases ours.)
In the 2006 MIAA case, the issue before the Court was “whether the Airport Lands and Buildings of MIAA
are exempt from real estate tax under existing laws.”73 We quote the extensive discussion of the Court
that led to its finding that MIAA’s lands and buildings were exempt from real estate tax imposed by local
governments: chanRoble svi rtual Lawli bra ry

First, MIAA is not a government-owned or controlled corporation but an instrumentality of the National
Government and thus exempt from local taxation. Second, the real properties of MIAA are owned by the
Republic of the Philippines and thus exempt from real estate tax.

1. MIAA is Not a Government-Owned or Controlled Corporation

xxxx

There is no dispute that a government-owned or controlled corporation is not exempt from real estate
tax. However, MIAA is not a government-owned or controlled corporation. Section 2(13) of the
Introductory Provisions of the Administrative Code of 1987 defines a government-owned or controlled
corporation as follows: chanRob lesvi rtual Lawli bra ry

SEC. 2. General Terms Defined. - x x x

(13) Government-owned or controlled corporation refers to any agency organized as a stock or non-
stock corporation, vested with functions relating to public needs whether governmental or proprietary in
nature, and owned by the Government directly or through its instrumentalities either wholly, or, where
applicable as in the case of stock corporations, to the extent of at least fifty-one (51) percent of its
capital stock: x x x. chanroblesvi rt uallawli bra ry

A government-owned or controlled corporation must be “organized as a stock or non-stock corporation.”

MIAA is not organized as a stock or non-stock corporation. MIAA is not a stock corporation because it
has no capital stock divided into shares. MIAA has no stockholders or voting shares. x x x

xxxx

Clearly, under its Charter, MIAA does not have capital stock that is divided into shares.

Section 3 of the Corporation Code defines a stock corporation as one whose “capital stock is divided into
shares and x x x authorized to distribute to the holders of such shares dividends x x x.” MIAA has capital
but it is not divided into shares of stock. MIAA has no stockholders or voting shares. Hence, MIAA is not
a stock corporation.

MIAA is also not a non-stock corporation because it has no members. Section 87 of the Corporation
Code defines a non-stock corporation as “one where no part of its income is distributable as dividends to
its members, trustees or officers.” A non-stock corporation must have members. Even if we assume that
the Government is considered as the sole member of MIAA, this will not make MIAA a non-stock
corporation. Non-stock corporations cannot distribute any part of their income to their members. Section
11 of the MIAA Charter mandates MIAA to remit 20% of its annual gross operating income to the
National Treasury. This prevents MIAA from qualifying as a non-stock corporation.

Section 88 of the Corporation Code provides that non-stock corporations are “organized for charitable,
religious, educational, professional, cultural, recreational, fraternal, literary, scientific, social, civil
service, or similar purposes, like trade, industry, agriculture and like chambers.” MIAA is not organized
for any of these purposes. MIAA, a public utility, is organized to operate an international and domestic
airport for public use.

Since MIAA is neither a stock nor a non-stock corporation, MIAA does not qualify as a
government-owned or controlled corporation. What then is the legal status of MIAA within
the National Government?

MIAA is a government instrumentality vested with corporate powers to perform efficiently its
governmental functions. MIAA is like any other government instrumentality, the only
difference is that MIAA is vested with corporate powers. Section 2(10) of the Introductory
Provisions of the Administrative Code defines a government “instrumentality” as follows: chanRoble svirtual Lawlib ra ry

SEC. 2. General Terms Defined. - x x x

(10) Instrumentality refers to any agency of the National Government, not integrated within the
department framework, vested with special functions or jurisdiction by law, endowed with some if not all
corporate powers, administering special funds, and enjoying operational autonomy, usually through a
charter. x x x. chanroblesvi rt uallawli bra ry
When the law vests in a government instrumentality corporate powers, the instrumentality
does not become a corporation. Unless the government instrumentality is organized as a
stock or non-stock corporation, it remains a government instrumentality exercising not only
governmental but also corporate powers. Thus, MIAA exercises the governmental powers of
eminent domain, police authority and the levying of fees and charges. At the same time, MIAA
exercises “all the powers of a corporation under the Corporation Law, insofar as these powers
are not inconsistent with the provisions of this Executive Order.”

Likewise, when the law makes a government instrumentality operationally autonomous, the
instrumentality remains part of the National Government machinery although not integrated with the
department framework. The MIAA Charter expressly states that transforming MIAA into a “separate and
autonomous body” will make its operation more “financially viable.”

Many government instrumentalities are vested with corporate powers but they do not become
stock or non-stock corporations, which is a necessary condition before an agency or
instrumentality is deemed a government-owned or controlled corporation. Examples are the
Mactan International Airport Authority, the Philippine Ports Authority, the University of the
Philippines and Bangko Sentral ng Pilipinas. All these government instrumentalities exercise
corporate powers but they are not organized as stock or non-stock corporations as required
by Section 2(13) of the Introductory Provisions of the Administrative Code. These
government instrumentalities are sometimes loosely called government corporate entities.
However, they are not government-owned or controlled corporations in the strict sense as
understood under the Administrative Code, which is the governing law defining the legal
relationship and status of government entities.74 (Emphases ours, citations omitted.)
The Court in the 2006 MIAA case went on to discuss the limitation on the taxing power of the local
governments as against the national government or its instrumentality: chanRoble svirtual Lawlib rary

A government instrumentality like MIAA falls under Section 133(o) of the Local Government Code, which
states:chanRoblesvi rtua lLawl ibrary

SEC. 133. Common Limitations on the Taxing Powers of Local Government Units. - Unless otherwise
provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and barangays
shall not extend to the levy of the following: ChanRob les Vi rtualawl ib rary

xxxx

(o) Taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities
and local government units. x x x. chanroble svirtual lawlib rary

Section 133(o) recognizes the basic principle that local governments cannot tax the national
government, which historically merely delegated to local governments the power to tax. While the 1987
Constitution now includes taxation as one of the powers of local governments, local governments may
only exercise such power “subject to such guidelines and limitations as the Congress may provide.”

When local governments invoke the power to tax on national government instrumentalities,
such power is construed strictly against local governments. The rule is that a tax is never
presumed and there must be clear language in the law imposing the tax. Any doubt whether a person,
article or activity is taxable is resolved against taxation. This rule applies with greater force when local
governments seek to tax national government instrumentalities.

Another rule is that a tax exemption is strictly construed against the taxpayer claiming the exemption.
However, when Congress grants an exemption to a national government instrumentality from local
taxation, such exemption is construed liberally in favor of the national government instrumentality. x x
x.

xxxx

There is, moreover, no point in national and local governments taxing each other, unless a
sound and compelling policy requires such transfer of public funds from one government
pocket to another.

There is also no reason for local governments to tax national government instrumentalities
for rendering essential public services to inhabitants of local governments. The only exception
is when the legislature clearly intended to tax government instrumentalities for the delivery of essential
public services for sound and compelling policy considerations. There must be express language in the
law empowering local governments to tax national government instrumentalities. Any doubt whether
such power exists is resolved against local governments.

Thus, Section 133 of the Local Government Code states that “unless otherwise provided” in the Code,
local governments cannot tax national government instrumentalities. x x x.75 (Emphases ours, citations
omitted.)
The Court emphasized that the airport lands and buildings of MIAA are owned by the Republic and
belong to the public domain. The Court said: chanRoble svirtual Lawlib ra ry

The Airport Lands and Buildings of MIAA are property of public dominion and therefore owned by the
State or the Republic of the Philippines. x x x.

xxxx

No one can dispute that properties of public dominion mentioned in Article 420 of the Civil Code, like
“roads, canals, rivers, torrents, ports and bridges constructed by the State,” are owned by the State.
The term “ports” includes seaports and airports. The MIAA Airport Lands and Buildings constitute a
“port” constructed by the State. Under Article 420 of the Civil Code, the MIAA Airport Lands and
Buildings are properties of public dominion and thus owned by the State or the Republic of the
Philippines.

The Airport Lands and Buildings are devoted to public use because they are used by the public
for international and domestic travel and transportation. The fact that the MIAA collects
terminal fees and other charges from the public does not remove the character of the Airport
Lands and Buildings as properties for public use. x x x.

xxxx

The terminal fees MIAA charges to passengers, as well as the landing fees MIAA charges to airlines,
constitute the bulk of the income that maintains the operations of MIAA. The collection of such fees does
not change the character of MIAA as an airport for public use. Such fees are often termed user’s tax.
This means taxing those among the public who actually use a public facility instead of taxing all the
public including those who never use the particular public facility. A user’s tax is more equitable - a
principle of taxation mandated in the 1987 Constitution.

The Airport Lands and Buildings of MIAA x x x are properties of public dominion because they
are intended for public use. As properties of public dominion, they indisputably belong to the
State or the Republic of the Philippines.76 (Emphases supplied, citations omitted.)
The Court also held in the 2006 MIAA case that airport lands and buildings are outside the commerce of
man.
As properties of public dominion, the Airport Lands and Buildings are outside the commerce of man. The
Court has ruled repeatedly that properties of public dominion are outside the commerce of man. As early
as 1915, this Court already ruled in Municipality of Cavite v. Rojas that properties devoted to public use
are outside the commerce of man, thus: ChanRoblesVi rt ualawlib ra ry

xxxx

The Civil Code, Article 1271, prescribes that everything which is not outside the commerce of man may
be the object of a contract, x x x.

xxxx

The Court has also ruled that property of public dominion, being outside the commerce of man, cannot
be the subject of an auction sale.

Properties of public dominion, being for public use, are not subject to levy, encumbrance or
disposition through public or private sale. Any encumbrance, levy on execution or auction
sale of any property of public dominion is void for being contrary to public policy. Essential
public services will stop if properties of public dominion are subject to encumbrances,
foreclosures and auction sale. This will happen if the City of Parañaque can foreclose and compel the
auction sale of the 600-hectare runway of the MIAA for non-payment of real estate tax.

Before MIAA can encumber the Airport Lands and Buildings, the President must first withdraw from
public use the Airport Lands and Buildings. x x x.

xxxx

Thus, unless the President issues a proclamation withdrawing the Airport Lands and Buildings
from public use, these properties remain properties of public dominion and are inalienable.
Since the Airport Lands and Buildings are inalienable in their present status as properties of
public dominion, they are not subject to levy on execution or foreclosure sale. As long as the
Airport Lands and Buildings are reserved for public use, their ownership remains with the
State or the Republic of the Philippines.

The authority of the President to reserve lands of the public domain for public use, and to withdraw such
public use, is reiterated in Section 14, Chapter 4, Title I, Book III of the Administrative Code of 1987,
which states:chanRoblesvi rtua lLawl ibra ry

SEC. 14. Power to Reserve Lands of the Public and Private Domain of the Government. - (1) The
President shall have the power to reserve for settlement or public use, and for specific public purposes,
any of the lands of the public domain, the use of which is not otherwise directed by law. The reserved
land shall thereafter remain subject to the specific public purpose indicated until otherwise provided by
law or proclamation;
xxxx

There is no question, therefore, that unless the Airport Lands and Buildings are withdrawn by law or
presidential proclamation from public use, they are properties of public dominion, owned by the Republic
and outside the commerce of man.77
Thus, the Court held that MIAA is “merely holding title to the Airport Lands and Buildings in trust for the
Republic. [Under] Section 48, Chapter 12, Book I of the Administrative Code [which] allows
instrumentalities like MIAA to hold title to real properties owned by the Republic.”78 cha nrob leslaw

The Court in the 2006 MIAA case cited Section 234(a) of the Local Government Code and held that said
provision exempts from real estate tax any “[r]eal property owned by the Republic of the Philippines.”79
The Court emphasized, however, that “portions of the Airport Lands and Buildings that MIAA leases to
private entities are not exempt from real estate tax.” The Court further held: chanRoble svirtual Lawlib ra ry

This exemption should be read in relation with Section 133(o) of the same Code, which prohibits local
governments from imposing “[t]axes, fees or charges of any kind on the National Government, its
agencies and instrumentalities x x x.” The real properties owned by the Republic are titled either in the
name of the Republic itself or in the name of agencies or instrumentalities of the National Government.
The Administrative Code allows real property owned by the Republic to be titled in the name of agencies
or instrumentalities of the national government. Such real properties remain owned by the Republic and
continue to be exempt from real estate tax.

The Republic may grant the beneficial use of its real property to an agency or instrumentality of the
national government. This happens when title of the real property is transferred to an agency or
instrumentality even as the Republic remains the owner of the real property. Such arrangement does
not result in the loss of the tax exemption. Section 234(a) of the Local Government Code states that real
property owned by the Republic loses its tax exemption only if the “beneficial use thereof has been
granted, for consideration or otherwise, to a taxable person.” MIAA, as a government instrumentality, is
not a taxable person under Section 133(o) of the Local Government Code. Thus, even if we assume that
the Republic has granted to MIAA the beneficial use of the Airport Lands and Buildings, such fact does
not make these real properties subject to real estate tax.

However, portions of the Airport Lands and Buildings that MIAA leases to private entities are not exempt
from real estate tax. For example, the land area occupied by hangars that MIAA leases to private
corporations is subject to real estate tax. In such a case, MIAA has granted the beneficial use of such
land area for a consideration to a taxable person and therefore such land area is subject to real estate
tax. x x x.80
Significantly, the Court reiterated the above ruling and applied the same reasoning in Manila
International Airport Authority v. City of Pasay,81 thus:
chanRoblesvirt ual Lawlib rary

The only difference between the 2006 MIAA case and this case is that the 2006 MIAA case
involved airport lands and buildings located in Parañaque City while this case involved airport
lands and buildings located in Pasay City. The 2006 MIAA case and this case raised the same
threshold issue: whether the local government can impose real property tax on the airport lands,
consisting mostly of the runways, as well as the airport buildings, of MIAA. x x x.

xxxx

The definition of “instrumentality” under Section 2(10) of the Introductory Provisions of the
Administrative Code of 1987 uses the phrase “includes x x x government-owned or controlled
corporations” which means that a government “instrumentality” may or may not be a “government-
owned or controlled corporation.” Obviously, the term government “instrumentality” is broader than the
term “government-owned or controlled corporation.” x x x.

xxxx

The fact that two terms have separate definitions means that while a government “instrumentality” may
include a “government-owned or controlled corporation,” there may be a government “instrumentality”
that will not qualify as a “government-owned or controlled corporation.”

A close scrutiny of the definition of “government-owned or controlled corporation” in Section 2(13) will
show that MIAA would not fall under such definition. MIAA is a government “instrumentality” that
does not qualify as a “government-owned or controlled corporation.” x x x.

xxxx

Thus, MIAA is not a government-owned or controlled corporation but a government instrumentality

which is exempt from any kind of tax from the local governments. Indeed, the exercise of the taxing
power of local government units is subject to the limitations enumerated in Section 133 of the Local
Government Code. Under Section 133(o) of the Local Government Code, local government units have no
power to tax instrumentalities of the national government like the MIAA. Hence, MIAA is not liable to pay
real property tax for the NAIA Pasay properties.

Furthermore, the airport lands and buildings of MIAA are properties of public dominion intended for
public use, and as such are exempt from real property tax under Section 234(a) of the Local
Government Code. However, under the same provision, if MIAA leases its real property to a taxable
person, the specific property leased becomes subject to real property tax. In this case, only those
portions of the NAIA Pasay properties which are leased to taxable persons like private parties are subject
to real property tax by the City of Pasay. (Emphases added, citations omitted.)
The Court not only mentioned petitioner MCIAA as similarly situated as MIAA. It also mentioned several
other government instrumentalities, among which was the Philippine Fisheries Development Authority.
Thus, applying the 2006 MIAA ruling, the Court, in Philippine Fisheries Development Authority v. Court
of Appeals,82 held:chanRoble svi rtual Lawli bra ry

On the basis of the parameters set in the MIAA case, the Authority should be classified as an
instrumentality of the national government. As such, it is generally exempt from payment of real
property tax, except those portions which have been leased to private entities.

In the MIAA case, petitioner Philippine Fisheries Development Authority was cited as among the
instrumentalities of the national government. x x x.

xxxx

Indeed, the Authority is not a GOCC but an instrumentality of the government. The Authority has a
capital stock but it is not divided into shares of stocks. Also, it has no stockholders or voting shares.
Hence, it is not a stock corporation. Neither [is it] a non-stock corporation because it has no members.

The Authority is actually a national government instrumentality which is defined as an agency of the
national government, not integrated within the department framework, vested with special functions or
jurisdiction by law, endowed with some if not all corporate powers, administering special funds, and
enjoying operational autonomy, usually through a charter. When the law vests in a government
instrumentality corporate powers, the instrumentality does not become a corporation. Unless the
government instrumentality is organized as a stock or non-stock corporation, it remains a government
instrumentality exercising not only governmental but also corporate powers.

Thus, the Authority which is tasked with the special public function to carry out the government’s policy
“to promote the development of the country’s fishing industry and improve the efficiency in handling,
preserving, marketing, and distribution of fish and other aquatic products,” exercises the governmental
powers of eminent domain, and the power to levy fees and charges. At the same time, the Authority
exercises “the general corporate powers conferred by laws upon private and government-owned or
controlled corporations.”

xxxx

In light of the foregoing, the Authority should be classified as an instrumentality of the national
government which is liable to pay taxes only with respect to the portions of the property, the beneficial
use of which were vested in private entities. When local governments invoke the power to tax on
national government instrumentalities, such power is construed strictly against local governments. The
rule is that a tax is never presumed and there must be clear language in the law imposing the tax. Any
doubt whether a person, article or activity is taxable is resolved against taxation. This rule applies with
greater force when local governments seek to tax national government instrumentalities.

Thus, the real property tax assessments issued by the City of Iloilo should be upheld only with respect to
the portions leased to private persons. In case the Authority fails to pay the real property taxes due
thereon, said portions cannot be sold at public auction to satisfy the tax delinquency. x x x.
xxxx

In sum, the Court finds that the Authority is an instrumentality of the national government, hence, it is
liable to pay real property taxes assessed by the City of Iloilo on the IFPC only with respect to those
portions which are leased to private entities. Notwithstanding said tax delinquency on the leased
portions of the IFPC, the latter or any part thereof, being a property of public domain, cannot be sold at
public auction. This means that the City of Iloilo has to satisfy the tax delinquency through means other
than the sale at public auction of the IFPC. (Citations omitted.)
Another government instrumentality specifically mentioned in the 2006 MIAA case was the Philippine
Ports Authority (PPA). Hence, in Curata v. Philippine Ports Authority,83 the Court held that the PPA is
similarly situated as MIAA, and ruled in this wise: chanRob lesvi rtua lLawl ibra ry

This Court’s disquisition in Manila International Airport Authority v. Court of Appeals – ruling that MIAA
is not a government-owned and/or controlled corporation (GOCC), but an instrumentality of the National
Government and thus exempt from local taxation, and that its real properties are owned by the Republic
of the Philippines –– is instructive. x x x. These findings are squarely applicable to PPA, as it is similarly
situated as MIAA. First, PPA is likewise not a GOCC for not having shares of stocks or members. Second,
the docks, piers and buildings it administers are likewise owned by the Republic and, thus, outside the
commerce of man. Third, PPA is a mere trustee of these properties. Hence, like MIAA, PPA is clearly a
government instrumentality, an agency of the government vested with corporate powers to perform
efficiently its governmental functions.

Therefore, an undeniable conclusion is that the funds of PPA partake of government funds, and such
may not be garnished absent an allocation by its Board or by statutory grant. If the PPA funds cannot be
garnished and its properties, being government properties, cannot be levied via a writ of execution
pursuant to a final judgment, then the trial court likewise cannot grant discretionary execution pending
appeal, as it would run afoul of the established jurisprudence that government properties are exempt
from execution. What cannot be done directly cannot be done indirectly. (Citations omitted.)
In Government Service Insurance System v. City Treasurer and City Assessor of the City of Manila84 the
Court found that the GSIS was also a government instrumentality and not a GOCC, applying the 2006
MIAA case even though the GSIS was not among those specifically mentioned by the Court as similarly
situated as MIAA. The Court said: chanRoble svirtual Lawlib ra ry

GSIS an instrumentality of the National Government

Apart from the foregoing consideration, the Court’s fairly recent ruling in Manila International Airport
Authority v. Court of Appeals, a case likewise involving real estate tax assessments by a Metro Manila
city on the real properties administered by MIAA, argues for the non-tax liability of GSIS for real estate
taxes. x x x.

xxxx

While perhaps not of governing sway in all fours inasmuch as what were involved in Manila
International Airport Authority, e.g., airfields and runways, are properties of the public
dominion and, hence, outside the commerce of man, the rationale underpinning the
disposition in that case is squarely applicable to GSIS, both MIAA and GSIS being similarly
situated. First, while created under CA 186 as a non-stock corporation, a status that has remained
unchanged even when it operated under PD 1146 and RA 8291, GSIS is not, in the context of the
aforequoted Sec. 193 of the LGC, a GOCC following the teaching of Manila International Airport
Authority, for, like MIAA, GSIS’s capital is not divided into unit shares. Also, GSIS has no members to
speak of. And by members, the reference is to those who, under Sec. 87 of the Corporation Code, make
up the non-stock corporation, and not to the compulsory members of the system who are government
employees. Its management is entrusted to a Board of Trustees whose members are appointed by the
President.

Second, the subject properties under GSIS’s name are likewise owned by the Republic. The GSIS is but
a mere trustee of the subject properties which have either been ceded to it by the Government or
acquired for the enhancement of the system. This particular property arrangement is clearly shown by
the fact that the disposal or conveyance of said subject properties are either done by or through the
authority of the President of the Philippines. x x x. (Emphasis added, citations omitted.)
All the more do we find that petitioner MCIAA, with its many similarities to the MIAA, should be classified
as a government instrumentality, as its properties are being used for public purposes, and should be
exempt from real estate taxes. This is not to derogate in any way the delegated authority of local
government units to collect realty taxes, but to uphold the fundamental doctrines of uniformity in
taxation and equal protection of the laws, by applying all the jurisprudence that have exempted from
said taxes similar authorities, agencies, and instrumentalities, whether covered by the 2006 MIAA ruling
or not.
To reiterate, petitioner MCIAA is vested with corporate powers but it is not a stock or non-stock
corporation, which is a necessary condition before an agency or instrumentality is deemed a
government-owned or controlled corporation. Like MIAA, petitioner MCIAA has capital under its charter
but it is not divided into shares of stock. It also has no stockholders or voting shares. Republic Act No.
6958 provides: chanRoble svirtual Lawli bra ry

Section 9. Capital. – The [Mactan-Cebu International Airport] Authority shall have an authorized
capital stock equal to and consisting of: ChanRobles Vi rtua lawlib rary

(a) The value of fixed assets (including airport facilities, runways and equipment) and such other
properties, movable and immovable, currently administered by or belonging to the airports as valued on
the date of the effectivity of this Act;

(b) The value of such real estate owned and/or administered by the airports; and

(c) Government contribution in such amount as may be deemed an appropriate initial balance. Such
initial amount, as approved by the President of the Philippines, which shall be more or less equivalent to
six (6) months working capital requirement of the Authority, is hereby authorized to be appropriated in
the General Appropriations Act of the year following its enactment into law. chanroblesvi rt uallawl ibra ry

Thereafter, the government contribution to the capital of the Authority shall be provided for in the
General Appropriations Act.

Like in MIAA, the airport lands and buildings of MCIAA are properties of public dominion because they
are intended for public use. As properties of public dominion, they indisputably belong to the State or
the Republic of the Philippines, and are outside the commerce of man. This, unless petitioner leases its
real property to a taxable person, the specific property leased becomes subject to real property tax; in
which case, only those portions of petitioner’s properties which are leased to taxable persons like private
parties are subject to real property tax by the City of Lapu-Lapu.

We hereby adopt and apply to petitioner MCIAA the findings and conclusions of the Court in the 2006
MIAA case, and we quote: chanRoblesvirtual La wlibra ry

To summarize, MIAA is not a government-owned or controlled corporation under Section 2(13) of the
Introductory Provisions of the Administrative Code because it is not organized as a stock or non-stock
corporation. Neither is MIAA a government-owned or controlled corporation under Section 16, Article XII
of the 1987 Constitution because MIAA is not required to meet the test of economic viability. MIAA is a
government instrumentality vested with corporate powers and performing essential public services
pursuant to Section 2(10) of the Introductory Provisions of the Administrative Code. As a government
instrumentality, MIAA is not subject to any kind of tax by local governments under Section 133(o) of the
Local Government Code. The exception to the exemption in Section 234(a) does not apply to MIAA
because MIAA is not a taxable entity under the Local Government Code. Such exception applies only if
the beneficial use of real property owned by the Republic is given to a taxable entity.

Finally, the Airport Lands and Buildings of MIAA are properties devoted to public use and thus are
properties of public dominion. Properties of public dominion are owned by the State or the Republic. x x
x.

xxxx

The term “ports x x x constructed by the State” includes airports and seaports. The Airport Lands and
Buildings of MIAA are intended for public use, and at the very least intended for public
service. Whether intended for public use or public service, the Airport Lands and Buildings are
properties of public dominion. As properties of public dominion, the Airport Lands and
Buildings are owned by the Republic and thus exempt from real estate tax under Section
234(a) of the Local Government Code.

4. Conclusion

Under Section 2(10) and (13) of the Introductory Provisions of the Administrative Code, which governs
the legal relation and status of government units, agencies and offices within the entire government
machinery, MIAA is a government instrumentality and not a government-owned or controlled
corporation. Under Section 133(o) of the Local Government Code, MIAA as a government instrumentality
is not a taxable person because it is not subject to “[t]axes, fees or charges of any kind” by local
governments. The only exception is when MIAA leases its real property to a “taxable person” as provided
in Section 234(a) of the Local Government Code, in which case the specific real property leased becomes
subject to real estate tax. Thus, only portions of the Airport Lands and Buildings leased to
taxable persons like private parties are subject to real estate tax by the City of Parañaque.
Under Article 420 of the Civil Code, the Airport Lands and Buildings of MIAA, being devoted to public
use, are properties of public dominion and thus owned by the State or the Republic of the Philippines.
Article 420 specifically mentions “ports x x x constructed by the State,” which includes public airports
and seaports, as properties of public dominion and owned by the Republic. As properties of public
dominion owned by the Republic, there is no doubt whatsoever that the Airport Lands and Buildings are
expressly exempt from real estate tax under Section 234(a) of the Local Government Code. This Court
has also repeatedly ruled that properties of public dominion are not subject to execution or
foreclosure sale.85 (Emphases added.)
WHEREFORE, we hereby GRANT the petition. We REVERSE and SET ASIDE the Decision dated
October 8, 2007 and the Resolution dated February 12, 2008 of the Court of Appeals (Cebu
City) in CA-G.R. SP No. 01360. Accordingly, we DECLARE:

1. Petitioner’s properties that are actually, solely and exclusively used for public purpose,
consisting of the airport terminal building, airfield, runway, taxiway and the lots on which they
are situated, EXEMPT from real property tax imposed by the City of Lapu-Lapu.

2. VOID all the real property tax assessments, including the additional tax for the special
education fund and the penalty interest, as well as the final notices of real property tax
delinquencies, issued by the City of Lapu-Lapu on petitioner’s properties, except the assessment
covering the portions that petitioner has leased to private parties.

3. NULL and VOID the sale in public auction of 27 of petitioner’s properties and the eventual
forfeiture and purchase of the said properties by respondent City of Lapu-Lapu. We likewise
declare VOID the corresponding Certificates of Sale of Delinquent Property issued to respondent
City of Lapu-Lapu.

SO ORDERED. cralawlawlibra ry

Sereno, C. J., (Chairperson), Bersamin, Perez, and Perlas-Bernabe, JJ., concur.