P36,548,000.
00, and 53,005,045 PREFERRED SHARES (A, B & C) WITH A TOTAL PAR
EN BANC
[ GR No. 77194, Mar 15, 1988 ]
VIRGILIO GASTON v. REPUBLIC PLANTERS BANK +
DECISION
242 Phil. 377
MELENCIO-HERRERA, J.:
Petitioners are sugar producers, sugarcane planters and millers, who have come to
this Court in their individual capacities and in representation of other sugar
producers, planters and millers, said to be so numerous that it is impracticable to
bring them all before the Court although the subject matter of the present
controversy is of common interest to all sugar producers, whether parties in this
action or not.
Respondent Philippine Sugar Commission (PHILSUCOM, for short) was formerly the
government office tasked with the function of regulating and supervising the sugar
industry until it was superseded by its co-respondent Sugar Regulatory
Administration (SRA, for brevity) under Executive Order No. 18 on May 28, 1986.
Although said Executive Order abolished the PHILSUCOM, its existence as a juridical
entity was mandated to continue for three (3) more years "for the purpose of
prosecuting and defending suits by or against it and enabling it to settle and close
its affairs, to dispose of and convey its property and to distribute its assets".
Respondent Republic Planters Bank (briefly, the Bank) is a commercial banking
corporation.
Angel H. Severino, Jr., et al., who are sugarcane planters planting and milling their
sugarcane in different mill districts of Negros Occidental, were allowed to intervene
by the Court, since they have common cause with petitioners and respondents
having interposed no objection to their intervention. Subsequently, on January 14,
1988, the National Federation of Sugar Planters (NFSP) also moved to intervene,
which the Court allowed on February 16, 1988.
Petitioners and Intervenors have come to this Court praying for a Writ
of Mandamus commanding respondents:
"TO IMPLEMENT AND ACCOMPLISH THE PRIVATIZATION OF REPUBLIC PLANTERS
BANK BY THE TRANSFER AND DISTRIBUTION OF THE SHARES OF STOCK IN THE SAID
BANK, NOW HELD BY AND STILL CARRIED IN THE NAME OF THE PHILIPPINE SUGAR
COMMISSION, TO THE SUGAR PRODUCERS, PLANTERS AND MILLERS, WHO ARE THE
TRUE BENEFICIAL OWNERS OF THE 761,416 COMMON SHARES VALUED AT
VALUE OF P254,424,224.72, OR A TOTAL INVESTMENT OF P290,972,224.72, THE
SAID INVESTMENT HAVING BEEN FUNDED BY THE DEDUCTION OF P1.00 PER PICUL
FROM SUGAR PROCEEDS OF THE SUGAR PRODUCERS COMMENCING THE YEAR
1978-79 UNTIL THE PRESENT AS STABILIZATION FUND PURSUANT TO P.D. # 388".
Respondent Bank does not take issue with either petitioners or its co-respondents
as it has no beneficial or equitable interest that may be affected by the ruling in this
Petition, but welcomes the filing of the Petition since it will settle finally the issue of
legal ownership of the questioned shares of stock.
Respondents PHILSUCOM and SRA, for their part, squarely traverse the petition
arguing that no trust results from Section 7 of P.D. No. 388; that the stabilization
fees collected are considered government funds under the Government Auditing
Code; that the transfer of shares of stock from PHILSUCOM to the sugar producers
would be irregular, if not illegal; and that this suit is barred by laches.
The Solicitor General aptly summarizes the basic issues thus: (1) whether the
stabilization fees collected from sugar planters and millers pursuant to Section 7 of
P.D. No. 388 are funds in trust for them, or public funds; and (2) whether shares of
stock in respondent Bank paid for with said stabilization fees belong to the
PHILSUCOM or to the different sugar planters and millers from whom the fees were
collected or levied.
P.D. No. 388, promulgated on February 2, 1974, which created the PHILSUCOM,
provided for the collection of a Stabilization Fund as follows:
"SEC. 7. Capitalization, Special Fund of the Commission, Development and
Stabilization Fund. There is hereby established a fund for the Commission for the
purpose of financing the growth and development of the sugar industry and all its
components, stabilization of the domestic market including the foreign market to
be administered in trust by the Commission and deposited in the Philippine
National Bank derived in the manner herein below cited from the following sources:
a. Stabilization fund shall be collected as provided for in the various
provisions of this Decree.
b. Stabilization fees shall be collected from planters and millers in the amount
of Two (P2.00) Pesos for every picul produced and milled for a period of
five years from the approval of this Decree and One (P1.00) Peso for every
picul produced and milled every year thereafter,
Provided: That fifty (P0.50) centavos per picul of the amount levied on planters,
millers and traders under Section 4(c) of this Decree will be used for the payment of
salaries and wages of personnel, fringe benefits and allowances of officers and
employees for the purpose of accomplishing the efficient performance of the duties
of the Commission,
Provided, further: That said amount shall constitute a lien on the sugar quedan
and/or warehouse receipts and shall be paid immediately by the planters and mill
companies, sugar centrals and refineries to the Commission." (paragraphing and
bold supplied).
Section 7 of P.D. No. 388 does provide that the stabilization fees collected "shall be
administered in trust by the Commission". However, while the element of an intent
to create a trust is present, a resulting trust in favor of the sugar producers, millers
and planters cannot be said to have ensued because the presumptive intention of
the parties is not reasonably ascertainable from the language of the statute itself.
"The doctrine of resulting trusts is founded on the presumed intention of the
parties; and as a general rule, it arises where, and only where such may be
reasonably presumed to be the intention of the parties, as determined from the
facts and circumstances existing at the time of the transaction out of which it is
sought to be established (89 C.J.S. 947)."
No implied trust in favor of the sugar producers either can be deduced from the
imposition of the levy. "The essential idea of an implied trust involves a certain
antagonism between the cestui que trust and the trustee even when the trust has
not arisen out of fraud nor out of any transaction of a fraudulent or immoral
character (65 CJ 222). It is not clearly shown from the statute itself that the
PHILSUCOM imposed on itself the obligation of holding the stabilization fund for
the benefit of the sugar producers. It must be categorically demonstrated that the
very administrative agency which is the source of such regulation would place a
burden on itself (Batchelder v. Central Bank of the Philippines, L-25071, July 29,
1972, 46 SCRA 102, citing People v. Que Po Lay, 94 Phil. 640 [1954]).
Neither can petitioners place reliance on the history of respondent Bank. They
recite that at the beginning, the Bank was owned by the Roman-Rojas Group.
Because it underwent difficulties early in the year 1978, Mr. Roberto S. Benedicto,
then Chairman of the PHILSUCOM, submitted a proposal to the Central Bank for the
rehabilitation of the Bank. The Central Bank acted favorably on the proposal at the
meeting of the Monetary Board on March 31, 1978 subject to the infusion of fresh
capital by the Benedicto Group. Petitioners maintain that this infusion of fresh
capital was accomplished, not by any capital investment by Mr. Benedicto, but by
PHILSUCOM, which set aside the proceeds of the P1.00 per picul stabilization fund
to pay for its subscription in shares of stock of respondent Bank. It is petitioners'
submission that all shares were placed in PHILSUCOM's name only out of
convenience and necessity and that they are the true and beneficial owners
thereof.
In point of fact, we cannot see our way clear to upholding petitioners' position that
the investment of the proceeds from the stabilization fund in subscriptions to the
capital stock of the Bank were being made for and on their behalf. That could have
been clarified by the Trust Agreement, dated May 28, 1986, entered into between
PHILSUCOM, as "Trustor" acting through Mr. Fred J. Elizalde as Officer-in-Charge,
and respondent RPB-Trust Department" as "Trustee", acknowledging that
PHILSUCOM "holds said shares for and in behalf of the sugar producers", the latter
"being the true and beneficial owners thereof". The Agreement, however, did not
get off the ground because it failed to receive the approval of the PHILSUCOM
Board of Commissioners as required in the Agreement itself.
The SRA, which succeeded PHILSUCOM, neither approved the Agreement because
of the adverse opinion of the SRA Resident Auditor, dated June 25, 1986, which was
affirmed by the Chairman of the Commission on Audit, on January 26, 1987.
On February 19, 1987, the SRA resolved to revoke the Trust Agreement "in the light
of the ruling of the Commission on Audit that the aforementioned Agreement is of
doubtful validity".
From the legal standpoint, we find basis for the opinion of the Commission on Audit
reading:
"That the government, PHILSUCOM or its successor-in-interest, Sugar Regulatory
Administration, in particular, owns the stocks. While it is true that the collected
stabilization fees were set aside by PHILSUCOM to pay its subscription to RPB, it did
not collect said fees for the account of the sugar producers. That stabilization fees
are charges/levies on sugar produced and milled which accrued to PHILSUCOM
under PD 338, as amended. x x x "
The stabilization fees collected are in the nature of a tax, which is within the power
of the State to impose for the promotion of the sugar industry (Lutz vs. Araneta, 98
Phil. 148). They constitute sugar liens (Sec. 7[b], P.D. No. 388). The collections made
accrue to a "Special Fund", a "Development and Stabilization Fund", almost
identical to the "Sugar Adjustment and Stabilization Fund" created under Section 6
of Commonwealth Act 567.[1] The tax collected is not in a pure exercise of the taxing
power. It is levied with a regulatory purpose, to provide means for the stabilization
of the sugar industry. The levy is primarily in the exercise of the police power of the
State (Lutz vs. Araneta, supra).
"The protection of a large industry constituting one of the great sources of the the entire sugar industry, "and all its components, stabilization of the domestic
state's wealth and therefore directly or indirectly affecting the welfare of so great a market including the foreign market", the industry being of vital importance to the
portion of the population of the State is affected to such an extent by public country's economy and to national interest.
interests as to be within the police power of the sovereign." (Johnson vs. State ex
rel. Marey, 128 So. 857, cited in Lutz vs. Araneta, supra). WHEREFORE, the Writ of Mandamus is denied and the Petition hereby dismissed.
No costs.
The stabilization fees in question are levied by the State upon sugar millers, planters
and producers for a special purpose - that of "financing the growth and This Decision is immediately executory.
development of the sugar industry and all its components, stabilization of the
domestic market including the foreign market". The fact that the State has taken SO ORDERED.
possession of moneys pursuant to law is sufficient to constitute them state funds,
even though they are held for a special purpose (Lawrence vs. American Surety Teehankee, C.J., Yap, Narvasa, Gutierrez, Jr., Cruz, Paras, Feliciano, Gancayco,
Co., 263 Mich 586, 249 ALR 535, cited in 42 Am. Jur. Sec. 2, p. 718). Having been Padilla, Bidin, Sarmiento, Cortes, and Griño-Aquino, JJ., concur.
levied for a special purpose, the revenues collected are to be treated as a special Fernan, J., no part, formerly the Counsel for the Bogo-Medellin Planters Association.
fund, to be, in the language of the statute, "administered in trust" for the purpose
intended. Once the purpose has been fulfilled or abandoned, the balance, if any, is
to be transferred to the general funds of the Government. That is the essence of
[1]
the trust intended (See 1987 Constitution, Article VI, Sec. 29(3), lifted from the 1935 "Sec. 6. All collections made under this Act shall accrue to a special fund in the
Constitution, Article VI, Sec. 23[1]).[2] 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
The character of the Stabilization Fund as a special fund is emphasized by the fact all of the following objectives, as may be provided by law.
that the funds are deposited in the Philippine National Bank and not in the
Philippine Treasury, moneys from which may be paid out only in pursuance of an
appropriation made by law (1987 Constitution, Article VI, Sec. 29[1], 1973 xxx "
Constitution, Article VIII, Sec. 18[1]).
[2]
"(5) All money collected on any tax levied for a special purpose shall be treated as
That the fees were collected from sugar producers, planters and millers, and that a special fund and paid out for such purpose only. If the purpose for which a special
the funds were channeled to the purchase of shares of stock in respondent Bank do fund was created has been fulfilled or abandoned, the balance, if any, shall be
not convert the funds into a trust fund for their benefit nor make them the transferred to the general funds of the Government". (1987 Constitution, Art. VI,
beneficial owners of the shares so purchased. It is but rational that the fees be Sec. 29[3]).
collected from them since it is also they who are to be benefited from the
expenditure of the funds derived from it. The investment in shares of respondent
Bank is not alien to the purpose intended because of the Bank's character as a
commodity bank for sugar conceived for the industry's growth and development.
Furthermore, of note is the fact that one-half, (1/2) or P0.50 per picul, of the
amount levied under P.D. No. 388 is to be utilized for the "payment of salaries and
wages of personnel, fringe benefits and allowances of officers and employees of
PHILSUCOM" thereby immediately negating the claim that the entire amount levied
is in trust for sugar, producers, planters and millers.

To rule in petitioners' favor would contravene the general principle that revenues
derived from taxes cannot be used for purely private purposes or for the exclusive
benefit of private persons. The Stabilization Fund is to be utilized for the benefit of
 Republic of the Philippines Petitioner PPI and private respondent Fertiphil are private corporations
Supreme Court incorporated under Philippine laws.[3] They are both engaged in the importation and
Manila distribution of fertilizers, pesticides and agricultural chemicals.

THIRD DIVISION 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
PLANTERS PRODUCTS, INC., G.R. No. 166006 the Philippines.[4] The LOI provides:
Petitioner,
Present: 3. The Administrator of the Fertilizer Pesticide Authority to include
YNARES-SANTIAGO, J., in its fertilizer pricing formula a capital contribution
Chai component of not less than P10 per bag. This capital
rperson, contribution shall be collected until adequate capital is raised
AUSTRIA-MARTINEZ, to make PPI viable. Such capital contribution shall be applied
- versus - CHICO-NAZARIO, by FPA to all domestic sales of fertilizers in
NACHURA, and the Philippines.[5] (Underscoring supplied)
REYES, JJ.
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
Promulgated: the amount collected to the Far East Bank and Trust Company, the depositary bank
FERTIPHIL CORPORATION, of PPI. Fertiphil paid P6,689,144 to FPA from July 8, 1985 to January 24, 1986.[6]
Respondent. March 14, 2008
After the 1986 Edsa Revolution, FPA voluntarily stopped the imposition of
x--------------------------------------------------x 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]
DECISION
Fertiphil filed a complaint for collection and damages[8] against FPA and PPI
with the RTC in Makati. It questioned the constitutionality of LOI No. 1465 for being
REYES, R.T., J.: 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 Regional Trial Courts (RTC) have the authority and jurisdiction to consider the the fertilizer industry.
constitutionality of statutes, executive orders, presidential decrees and other
issuances. The Constitution vests that power not only in the Supreme Court but in all In its Answer,[10] FPA, through the Solicitor General, countered that the
Regional Trial Courts. 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
The principle is relevant in this petition for review on certiorari of the Fertiphil did not sustain any damage from the LOI because the burden imposed by
Decision[1] of the Court of Appeals (CA) affirming with modification that of the levy fell on the ultimate consumer, not the seller.
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 RTC Disposition
of Instruction (LOI) No. 1465.
On November 20, 1991, the RTC rendered judgment in favor of Fertiphil, disposing as
The Facts follows:
 WHEREFORE, in view of the foregoing, the Court hereby
renders judgment in favor of the plaintiff and against the defendant
Planters Product, Inc., ordering the latter to pay the former:
1) the sum of P6,698,144.00 with interest at 12%
from the time of judicial demand;
2) the sum of P100,000 as attorneys fees;
3) the cost of suit.
SO ORDERED.[11]
Ruling that the imposition of the P10 CRC was an exercise of the States inherent
power of taxation, the RTC invalidated the levy for violating the basic principle that
taxes can only be levied for public purpose, viz.:
It is apparent that the imposition of P10 per fertilizer bag
sold in the country by LOI 1465 is purportedly in the exercise of the
power of taxation. It is a settled principle that the power of taxation
by the state is plenary. Comprehensive and supreme, the principal
check upon its abuse resting in the responsibility of the members
of the legislature to their constituents. However, there are two
kinds of limitations on the power of taxation: the inherent
limitations and the constitutional limitations.
One of the inherent limitations is that a tax may be levied only for
public purposes:
The power to tax can be resorted to only for a
constitutionally valid public purpose. By the
same token, taxes may not be levied for purely
private purposes, for building up of private
fortunes, or for the redress of private
wrongs. They cannot be levied for the
improvement of private property, or for the
benefit, and promotion of private enterprises,
except where the aid is incident to the public
benefit. It is well-settled principle of
constitutional law that no general tax can be
levied except for the purpose of raising money
which is to be expended for public use. Funds
cannot be exacted under the guise of taxation to
promote a purpose that is not of public
interest. Without such limitation, the power to
tax could be exercised or employed as an
authority to destroy the economy of the
people. A tax, however, is not held void on the
ground of want of public interest unless the want
of such interest is clear. (71 Am. Jur. pp. 371-372)
In the case at bar, the plaintiff paid the amount of P6,698,144.00
to the Fertilizer and Pesticide Authority pursuant to the P10 per bag
of fertilizer sold imposition under LOI 1465 which, in turn, remitted
the amount to the defendant Planters Products, Inc. thru the
latters depository bank, Far East Bank and Trust Co. Thus, by virtue
of LOI 1465 the plaintiff, Fertiphil Corporation, which is a private
domestic corporation, became poorer by the amount
of P6,698,144.00 and the defendant, Planters Product, Inc.,
another private domestic corporation, became richer by the
amount of P6,698,144.00.
Tested by the standards of constitutionality as set forth in the
afore-quoted jurisprudence, it is quite evident that LOI 1465 insofar
as it imposes the amount of P10 per fertilizer bag sold in the
country and orders that the said amount should go to the
defendant Planters Product, Inc. is unlawful because it violates the
mandate that a tax can be levied only for a public purpose and not
to benefit, aid and promote a private enterprise such as Planters
Product, Inc.[12]
PPI moved for reconsideration but its motion was denied.[13] PPI then filed a notice
of appeal with the RTC but it failed to pay the requisite appeal docket fee. In a
separate but related proceeding, this Court[14] allowed the appeal of PPI and
remanded the case to the CA for proper disposition.
CA Decision
On November 28, 2003, the CA handed down its decision affirming with modification
that of the RTC, with the following fallo:
IN VIEW OF ALL THE FOREGOING, the decision appealed
from is hereby AFFIRMED, subject to the MODIFICATIONthat the
award of attorneys fees is herebyDELETED.[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 motaof
the case (Integrated Bar of the Philippines v. Zamora, 338 SCRA 81
[2000]).
Indisputably, the present case was primarily instituted for
collection and damages.However, a perusal of the complaint also
reveals
that the instant action is founded on the claim that the levy
imposed was an unlawful and unconstitutional special
assessment.Consequently, the requisite that the constitutionality
of the law in question be the very lis mota of the case is present,
making it proper for the trial court to rule on the constitutionality
of LOI 1465.[16]
The CA held that even on the assumption that LOI No. 1465 was issued under the
police power of the state, it is still unconstitutional because it did not promote public
welfare. The CA explained:
In declaring LOI 1465 unconstitutional, the trial court held
that the levy imposed under the said law was an invalid exercise of
the States power of taxation inasmuch as it violated the inherent
and constitutional prescription that taxes be levied only for public
purposes. It reasoned out that the amount collected under the levy
was remitted to the depository bank of PPI, which the latter used
to advance its private interest.
On the other hand, appellant submits that the subject statutes
passage was a valid exercise of police power. In addition, it disputes
the court a quos findings arguing that the collections under LOI
1465 was for the benefit of Planters Foundation, Incorporated
(PFI), a foundation created by law to hold in trust for millions of
farmers, the stock ownership of PPI.
Of the three fundamental powers of the State, the exercise of
police power has been characterized as the most essential,
insistent and the least limitable of powers, extending as it does to
all the great public needs. It may be exercised as long as the activity
or the property sought to be regulated has some relevance to
public welfare (Constitutional Law, by Isagani A. Cruz, p. 38, 1995
Edition).
Vast as the power is, however, it must be exercised within the limits
set by the Constitution, which requires the concurrence of a lawful
subject and a lawful method.Thus, our courts have laid down the
test to determine the validity of a police measure as follows: (1) the
interests of the public generally, as distinguished from those of a
particular class, requires its exercise; and (2) the means employed
are reasonably necessary for the accomplishment of the purpose
and not unduly oppressive upon individuals (National Development
Company v. Philippine Veterans Bank, 192 SCRA 257 [1990]).
It is upon applying this established tests that We sustain the trial
courts holding LOI 1465 unconstitutional. To be sure, ensuring the
continued supply and distribution of fertilizer in the country is an
undertaking imbued with public interest. However, the method by
which LOI 1465 sought to achieve this is by no means a measure
that will promote the public welfare. The governments
commitment to support the successful rehabilitation and
continued viability of PPI, a private corporation, is an unmistakable
attempt to mask the subject statutes impartiality. There is no way
to treat the self-interest of a favored entity,
like PPI, as identical with the general interest of the countrys
farmers or even the Filipino people in general. Well to stress,
substantive due process exacts fairness and equal protection
disallows distinction where none is needed. When a statutes public
purpose is spoiled by private interest, the use of police power
becomes a travesty which must be struck down for being an
arbitrary exercise of government power. To rule in favor of
appellant would contravene the general principle that revenues
 derived from taxes cannot be used for purely private purposes or
for the exclusive benefit of private individuals.[17]
The CA did not accept PPIs claim that the levy imposed under LOI No. 1465 was for
the benefit of Planters Foundation, Inc., a foundation created to hold in trust the
stock ownership of PPI. The CA stated:
Appellant next claims that the collections under LOI 1465 was for
the benefit of Planters Foundation, Incorporated (PFI), a
foundation created by law to hold in trust for millions of farmers,
the stock ownership of PFI on the strength of Letter of Undertaking
(LOU) issued by then Prime Minister Cesar Virata on April 18,
1985 and affirmed by the Secretary of Justice in an Opinion
dated October 12, 1987, to wit:
2. Upon the effective date of this Letter of
Undertaking, the Republic shall cause FPA to
include in its fertilizer pricing formula a capital
recovery component, the proceeds of which will
be used initially for the purpose of funding the
unpaid portion of the outstanding capital stock of
Planters presently held in trust by Planters
Foundation, Inc. (Planters Foundation), which
unpaid capital is estimated at
approximately P206 million (subject to validation
by Planters and Planters Foundation) (such
unpaid portion of the outstanding capital stock of
Planters being hereafter referred to as the
Unpaid Capital), and subsequently for such
capital increases as may be required for the
continuing viability of Planters.
The capital recovery component shall be in the
minimum amount of P10 per bag, which will be
added to the price of all domestic sales of
fertilizer in the Philippines by any importer
and/or fertilizer mother company. In this
connection, the Republic hereby acknowledges
that the advances by Planters to Planters
Foundation which were applied to the payment
of the Planters shares now held in trust by
Planters Foundation, have been assigned to,
among others, the Creditors. Accordingly, the
Republic, through FPA, hereby agrees to deposit
the proceeds of the capital recovery component
in the special trust account designated in the
notice dated April 2, 1985, addressed by counsel
for the Creditors to Planters Foundation. Such
proceeds shall be deposited by FPA on or before
the 15th day of each month.
The capital recovery component shall continue to
be charged and collected until payment in full of
(a) the Unpaid Capital and/or (b) any shortfall in
the payment of the Subsidy Receivables, (c) any
carrying cost accruing from the date hereof on
the amounts which may be outstanding from
time to time of the Unpaid Capital and/or the
Subsidy Receivables and (d) the capital increases
contemplated in paragraph 2 hereof.For the
purpose of the foregoing clause (c), the carrying
cost shall be at such rate as will represent the full
and reasonable cost to Planters of servicing its
debts, taking into account both its peso and
foreign currency-denominated obligations.
(Records, pp. 42-43)
Appellants proposition is open to question, to say the least. The
LOU issued by then Prime Minister Virata taken together with the
Justice Secretarys Opinion does not preponderantly demonstrate
that the collections made were held in trust in favor of millions of
farmers. Unfortunately for appellant, in the absence of sufficient
evidence to establish its claims, this Court is constrained to rely on
what is explicitly provided in LOI 1465 that one of the primary aims
in imposing the levy is to support the successful rehabilitation and
continued viability of PPI.[18]
PPI moved for reconsideration but its motion was denied.[19] It then filed the
present petition with this Court.
Issues
Petitioner PPI raises four issues for Our consideration, viz.:
I
 THE CONSTITUTIONALITY OF LOI 1465 CANNOT BE COLLATERALLY Fertiphil did not suffer any damage from the CRC imposition because incidence of the
ATTACKED ANDBE DECREED VIA A DEFAULT JUDGMENT IN A CASE levy fell on the ultimate consumer or the farmers themselves, not on the seller
FILED FOR COLLECTION ANDDAMAGES WHERE THE ISSUE OF fertilizer company.[22]
CONSTITUTIONALITY IS NOT THE VERY LIS MOTA OF THE
CASE. NEITHER CAN LOI 1465 BE CHALLENGED BY ANY PERSON OR We cannot agree. The doctrine of locus standior the right of appearance in
ENTITY WHICH HAS NO STANDING TO DO SO. 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
II outcome of a case. In private suits, locus standi requires a litigant to be a real party
LOI 1465, BEING A LAW IMPLEMENTED FOR THE PURPOSE OF in interest, which is defined as the
ASSURING THE FERTILIZER SUPPLY AND DISTRIBUTION IN THE party who stands to be benefited or injured by the judgment in the suit or the party
COUNTRY, AND FOR BENEFITING A FOUNDATION CREATED BY LAW entitled to the avails of the suit.[23]
TO HOLD IN TRUST FOR MILLIONS OF FARMERS THEIR STOCK
OWNERSHIP IN PPI CONSTITUTES A VALID LEGISLATION PURSUANT In public suits, this Court recognizes the difficulty of applying the doctrine
TO THE EXERCISE OF TAXATION AND POLICE POWER FOR PUBLIC especially when plaintiff asserts a public right on behalf of the general public because
PURPOSES. 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
III illegal official action. At the other end, there is the public policy precluding excessive
THE AMOUNT COLLECTED UNDER THE CAPITAL RECOVERY judicial interference in official acts, which may unnecessarily hinder the delivery of
COMPONENT WAS REMITTED TO THE basic public services.
GOVERNMENT, ANDBECAME GOVERNMENT FUNDS PURSUANT TO
AN EFFECTIVE AND VALIDLY ENACTED LAW WHICH IMPOSED In this jurisdiction, We have adopted the direct injury test to
DUTIES ANDCONFERRED RIGHTS BY VIRTUE OF THE PRINCIPLE OF determine locus standi in public suits. In People v. Vera,[25] it was held that a person
OPERATIVE FACT PRIOR TO ANY DECLARATION OF who impugns the validity of a statute must have a personal and substantial interest
UNCONSTITUTIONALITY OF LOI 1465. 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
IV suits under Section 2, Rule 3 of the 1997 Rules of Civil Procedure.[26]
THE PRINCIPLE OF UNJUST VEXATION (SHOULD BE ENRICHMENT)
FINDS NO APPLICATION IN THE INSTANT CASE.[20](Underscoring Recognizing that a strict application of the direct injury test may hamper
supplied) public interest, this Court relaxed the requirement in cases of transcendental
importance or with far reaching implications. Being a mere procedural technicality, it
Our Ruling has also been held that locus standi may be waived in the public interest.[27]

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

Fertiphil has locus standi Whether or not the complaint for collection is characterized as a private or
because it suffered direct public suit, Fertiphil has locus standi to file it. Fertiphil suffered a direct injury from
injury; doctrine of standing is a the enforcement of LOI No. 1465. It was required, and it did pay, the P10 levy
mere procedural technicality imposed for every bag of fertilizer sold on the domestic market. It may be true that
which may be waived. 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
PPI argues that Fertiphil has no locus standi to question the constitutionality refund. As seller, it bore the ultimate burden of paying the levy. It faced the
of LOI No. 1465 because it does not have a personal and substantial interest in the possibility of severe sanctions for failure to pay the levy. The fact of payment is
case or will sustain direct injury as a result of its enforcement. [21] It asserts that 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 anytreaty,
international or executive agreement, law,
presidential decree, proclamation, order,
instruction, ordinance, or regulation is in
question. (Underscoring supplied)
In Mirasol v. Court of Appeals,[31] this Court recognized the power of
the RTC to resolve constitutional issues, thus:
On the first issue. It is settled that Regional Trial Courts
have the authority and jurisdiction to consider the constitutionality
of a statute, presidential decree, or executive order. The
Constitution vests the power of judicial review or the power to
declare a law, treaty, international or executive agreement,
presidential decree, order, instruction, ordinance, or regulation not
only in this Court, but in all Regional Trial Courts.[32]
In the recent case of Equi-Asia Placement, Inc. v. Department of Foreign
Affairs,[33] this Court reiterated:
There is no denying that regular courts have jurisdiction
over cases involving the validity or constitutionality of a rule or
regulation issued by administrative agencies.Such jurisdiction,
however, is not limited to the Court of Appeals or to this Court
alone for even the regional trial courts can take cognizance of
actions assailing a specific rule or set of rules promulgated by
administrative bodies. Indeed, the Constitution vests the power of
 judicial review or the power to declare a law, treaty, international
or executive agreement, presidential decree, order, instruction,
ordinance, or regulation in the courts, including the regional trial
courts.[34]
Judicial review of official acts on the ground of unconstitutionality may be
sought or availed of through any of the actions cognizable by courts of justice, not
necessarily in a suit for declaratory relief. Such review may be had in criminal actions,
as in People v. Ferrer[35]involving the constitutionality of the now defunct Anti-
Subversion law, or in ordinary actions, as in Krivenko v. Register of Deeds[36]involving
the constitutionality of laws prohibiting aliens from acquiring public lands. The
constitutional issue, however, (a) must be properly raised and presented in the
case, and (b) its resolution is necessary to a determination of the case, i.e., the issue
of constitutionality must be the very lis mota presented.[37]
Contrary to PPIs claim, the constitutionality of LOI No. 1465 was properly
and adequately raised in the complaint for collection filed with the RTC. The
pertinent portions of the complaint allege:
6. The CRC of P10 per bag levied under LOI 1465 on
domestic sales of all grades of fertilizer in the Philippines,
is unlawful, unjust, uncalled for, unreasonable, inequitable and
oppressive because:
xxxx
(c) It favors only one private domestic
corporation, i.e., defendant PPPI, and imposed at
the expense and disadvantage of the other
fertilizer importers/distributors who were
themselves in tight business situation and were
then exerting all efforts and maximizing
management and marketing skills to remain
viable;
xxxx
(e) It was a glaring example of crony
capitalism, a forced program through which the
PPI, having been presumptuously masqueraded
as the fertilizer industry itself, was the sole and
anointed beneficiary;
7. The CRC was an unlawful; and unconstitutional special
assessment and its imposition is tantamount to illegal exaction
amounting to a denial of due process since the persons of entities
which had to bear the burden of paying the CRC derived no benefit
therefrom; that on the contrary it was used by PPI in trying to
regain its former despicable monopoly of the fertilizer industry to
the detriment of other distributors and importers.[38](Underscoring
supplied)
The constitutionality of LOI No. 1465 is also the very lis mota of the
complaint for collection. Fertiphil filed the complaint to compel PPI to refund the
levies paid under the statute on the ground that the law imposing the levy is
unconstitutional. The thesis is that an unconstitutional law is void. It has no legal
effect. Being void, Fertiphil had no legal obligation to pay the levy. Necessarily, all
levies duly paid pursuant to an unconstitutional law should be refunded under the
civil code principle against unjust enrichment. The refund is a mere consequence of
the law being declared unconstitutional. The RTC surely cannot order PPI to refund
Fertiphil if it does not declare the LOI unconstitutional. It is the unconstitutionality of
the LOI which triggers the refund. The issue of constitutionality is the very lis mota of
the complaint with the RTC.
The P10 levy under LOI No.
1465 is an exercise of the
power of taxation.
At any rate, the Court holds that the RTC and the CA did not err in ruling against the
constitutionality of the LOI.
PPI insists that LOI No. 1465 is a valid exercise either of the police power or
the power of taxation. It claims that the LOI was implemented for the purpose of
assuring the fertilizer supply and distribution in the country and for benefiting a
foundation created by law to hold in trust for millions of farmers their stock
ownership in PPI.
Fertiphil counters that the LOI is unconstitutional because it was enacted to
give benefit to a private company. The levy was imposed to pay the corporate debt
of PPI. Fertiphil also argues that, even if the LOI is enacted under the police power, it
is still unconstitutional because it did not promote the general welfare of the people
or public interest.
Police power and the power of taxation are inherent powers of the
State. These powers are distinct and have different tests for validity. Police power is
the power of the State to enact legislation that may interfere with personal liberty or
property in order to promote the general welfare,[39] while the power of taxation is
the power to levy taxes to be used for public purpose. The main purpose of police
power is the regulation of a behavior or conduct, while taxation is revenue
generation. The lawful subjects and lawful means tests are used to determine the
validity of a law enacted under the police power. [40] The power of taxation, on the
other hand, is circumscribed by inherent and constitutional limitations.
We agree with the RTC that the imposition of the levy was an exercise by
the State of its taxation power. While it is true that the power of taxation can be used
as an implement of police power,[41] the primary purpose of the levy is revenue
generation. If the purpose is primarily revenue, or if revenue is, at least, one of the
real and substantial purposes, then the exaction is properly called a tax. [42]
In Philippine Airlines, Inc. v. Edu,[43] it was held that the imposition of a
vehicle registration fee is not an exercise by the State of its police power, but of its
taxation power, thus:
It is clear from the provisions of Section 73 of
Commonwealth Act 123 and Section 61 of the Land Transportation
and Traffic Code that the legislative intent and purpose behind the
law requiring owners of vehicles to pay for their registration
is mainly to raise funds for the construction and maintenance of
highways and to a much lesser degree, pay for the operating
expenses of the administering agency. x x x Fees may be properly
regarded as taxes even though they also serve as an instrument of
regulation.
Taxation may be made the implement of the state's police
power (Lutz v. Araneta, 98 Phil. 148). If the purpose is primarily
revenue, or if revenue is, at least, one of the real and substantial
purposes, then the exaction is properly called a tax. Such is the case
of motor vehicle registration fees. The same provision appears as
Section 59(b) in the Land Transportation Code. It is patent
therefrom that the legislators had in mind a regulatory tax as the
law refers to the imposition on the registration, operation or
ownership of a motor vehicle as a tax or fee.x x x Simply put, if the
exaction under Rep. Act 4136 were merely a regulatory fee, the
imposition in Rep. Act 5448 need not be an additional tax. Rep. Act
4136 also speaks of other fees such as the special permit fees for
certain types of motor vehicles (Sec. 10) and additional fees for
change of registration (Sec. 11). These are not to be understood as
taxes because such fees are very minimal to be revenue-
raising. Thus, they are not mentioned by Sec. 59(b) of the Code as
taxes like the motor vehicle registration fee and chauffeurs license
fee. Such fees are to go into the expenditures of the Land
Transportation Commission as provided for in the last proviso of
Sec. 61.[44](Underscoring supplied)
The P10 levy under LOI No. 1465 is too excessive to serve a mere regulatory
purpose. The levy, no doubt, was a big burden on the seller or the ultimate
consumer. It increased the price of a bag of fertilizer by as much as five percent.[45] A
plain reading of the LOI also supports the conclusion that the levy was for revenue
generation. The LOI expressly provided that the levy was imposed until adequate
capital is raised to make PPI viable.
Taxes are exacted only for a
public purpose. The P10 levy is
unconstitutional because it
was not for a public purpose.
The levy was imposed to give
undue benefit to PPI.
An inherent limitation on the power of taxation is public purpose. Taxes are
exacted only for a public purpose. They cannot be used for purely private purposes
or for the exclusive benefit of private persons.[46] The reason for this is simple. The
power to tax exists for the general welfare; hence, implicit in its power is the
limitation that it should be used only for a public purpose. It would be a robbery for
the State to tax its citizens and use the funds generated for a private purpose. As an
old United States case bluntly put it: To lay with one hand, the power of the
government on the property of the citizen, and with the other to bestow it upon
favored individuals to aid private enterprises and build up private fortunes, is
nonetheless a robbery because it is done under the forms of law and is called
taxation.[47]
The term public purpose is not defined. It is an elastic concept that can be
hammered to fit modern standards. Jurisprudence states that public purpose should
be given a broad interpretation. It does not only pertain to those purposes which are
traditionally viewed as essentially government functions, such as building roads and
delivery of basic services, but also includes those purposes designed to promote
social justice. Thus, public money may now be used for the relocation of illegal
settlers, low-cost housing and urban or agrarian reform.
While the categories of what may constitute a public purpose are
continually expanding in light of the expansion of government functions, the inherent
requirement that taxes can only be exacted for a public purpose still stands. Public
purpose is the heart of a tax law. When a tax law is only a mask to exact funds from
the public when its true intent is to give undue benefit and advantage to a private
enterprise, that law will not satisfy the requirement of public purpose.
 The purpose of a law is evident from its text or inferable from other
secondary sources. Here, We agree with the RTC and that CA that the levy imposed
under LOI No. 1465 was not for a public purpose.
First, the LOI expressly provided that the levy be imposed to benefit PPI, a
private company. The purpose is explicit from Clause 3 of the law, thus:
3. The Administrator of the Fertilizer Pesticide Authority to include
in its fertilizer pricing formula a capital contribution
component of not less thanP10 per bag. This capital
contribution shall be collected until adequate capital is raised
to make PPI viable. Such capital contribution shall be applied
by FPA to all domestic sales of fertilizers in
the Philippines.[48] (Underscoring supplied)
It is a basic rule of statutory construction that the text of a statute should be
given a literal meaning. In this case, the text of the LOI is plain that the levy was
imposed in order to raise capital for PPI. The framers of the LOI did not even hide the
insidious purpose of the law. They were cavalier enough to name PPI as the ultimate
beneficiary of the taxes levied under the LOI. We find it utterly repulsive that a tax
law would expressly name a private company as the ultimate beneficiary of the taxes
to be levied from the public. This is a clear case of crony capitalism.
Second, the LOI provides that the imposition of the P10 levy was conditional
and dependent upon PPI becoming financially viable. This suggests that the levy was
actually imposed to benefit PPI. The LOI notably does not fix a maximum amount
when PPI is deemed financially viable. Worse, the liability of Fertiphil and other
domestic sellers of fertilizer to pay the levy is made indefinite. They are required to
continuously pay the levy until adequate capital is raised for PPI.
Third, the RTC and the CA held that the levies paid under the LOI were
directly remitted and deposited by FPA to Far East Bank and Trust Company, the
depositary bank of PPI.[49] This proves that PPI benefited from the LOI. It is also proves
that the main purpose of the law was to give undue benefit and advantage to PPI.
Fourth, the levy was used to pay the corporate debts of PPI. A reading of the
Letter of Understanding[50] dated May 18, 1985 signed by then Prime Minister Cesar
Virata reveals that PPI was in deep financial problem because of its huge corporate
debts. There were pending petitions for rehabilitation against PPI before the
Securities and Exchange Commission. The government guaranteed payment of PPIs
debts to its foreign creditors. To fund the payment, President Marcos issued LOI No.
1465. The pertinent portions of the letter of understanding read:
Republic of the Philippines
Office of the Prime Minister
Manila
LETTER OF UNDERTAKING
May
18, 1985
TO: THE BANKING AND FINANCIAL INSTITUTIONS
LISTED IN ANNEX A HERETO WHICH ARE
CREDITORS (COLLECTIVELY, THE CREDITORS)
OF PLANTERS PRODUCTS, INC. (PLANTERS)
Gentlemen:
This has reference to Planters which is the principal importer and
distributor of fertilizer, pesticides and agricultural chemicals in the
Philippines. As regards Planters, the Philippine Government
confirms its awareness of the following: (1) that Planters has
outstanding obligations in foreign currency and/or pesos, to the
Creditors, (2) that Planters is currently experiencing financial
difficulties, and (3) that there are presently pending with the
Securities and Exchange Commission of the Philippines a petition
filed at Planters own behest for the suspension of payment of all its
obligations, and a separate petition filed by Manufacturers
Hanover Trust Company, Manila Offshore Branch for the
appointment of a rehabilitation receiver for Planters.
In connection with the foregoing, the Republic of the Philippines
(the Republic) confirms that it considers and continues to consider
Planters as a major fertilizer distributor. Accordingly, for and in
consideration of your expressed willingness to consider and
participate in the effort to rehabilitate Planters, the Republic
hereby manifests its full and unqualified support of the successful
rehabilitation and continuing viability of Planters, and to that end,
hereby binds and obligates itself to the creditors and Planters, as
follows:
xxxx
2. Upon the effective date of this Letter of Undertaking,
the Republic shall cause FPA to include in its fertilizer pricing
 formula a capital recovery component, the proceeds of which will
be used initially for the purpose of funding the unpaid portion of
the outstanding capital stock of Planters presently held in trust by
Planters Foundation, Inc. (Planters Foundation), which unpaid
capital is estimated at approximately P206 million (subject to
validation by Planters and Planters Foundation) such unpaid
portion of the outstanding capital stock of Planters being hereafter
referred to as the Unpaid Capital), and subsequently for such
capital increases as may be required for the continuing viability of
Planters.
xxxx
The capital recovery component shall continue to be
charged and collected until payment in full of (a) the Unpaid Capital
and/or (b) any shortfall in the payment of the Subsidy Receivables,
(c) any carrying cost accruing from the date hereof on the amounts
which may be outstanding from time to time of the Unpaid Capital
and/or the Subsidy Receivables, and (d) the capital increases
contemplated in paragraph 2 hereof. For the purpose of the
foregoing clause (c), the carrying cost shall be at such rate as will
represent the full and reasonable cost to Planters of servicing its
debts, taking into account both its peso and foreign currency-
denominated obligations.
REPUBLIC OF THE PHILIPPINES
By:
(signed)
CESAR E. A. VIRATA
Prime Minister and Minister of Finance[51]
It is clear from the Letter of Understanding that the levy was imposed
precisely to pay the corporate debts of PPI. We cannot agree with PPI that the levy
was imposed to ensure the stability of the fertilizer industry in the country. The letter
of understanding and the plain text of the LOI clearly indicate that the levy was
exacted for the benefit of a private corporation.
All told, the RTC and the CA did not err in holding that the levy imposed
under LOI No. 1465 was not for a public purpose. LOI No. 1465 failed to comply with
the public purpose requirement for tax laws.
The LOI is still unconstitutional
even if enacted under the
police power; it did 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.
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.

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 RUBEN T. REYES
not been passed.[54] Being void, Fertiphil is not required to pay the levy. All levies paid Associate Justice
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:
WE CONCUR:
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 CONSUELO YNARES-SANTIAGO
Constitution, the former shall be void and the latter shall govern. Associate Justice
Chairperson
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 MA. ALICIA AUSTRIA-MARTINEZ MINITA V. CHICO-NAZARIO
declaration.[56] Associate Justice Associate Justice

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 ANTONIO EDUARDO B. NACHURA
in reliance upon a law creating it.[58] Associate Justice

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 ATTESTATION
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 I attest that the conclusions in the above Decision had been reached in consultation
performance by another comes into possession of something at the expense of the before the case was assigned to the writer of the opinion of the Courts Division.
 EN BANC
[G. R. No. 119775. October 24, 2003]
JOHN HAY PEOPLES ALTERNATIVE COALITION, MATEO CARIO FOUNDATION INC.,
CONSUELO YNARES-SANTIAGO CENTER FOR ALTERNATIVE SYSTEMS FOUNDATION INC., REGINA VICTORIA
Associate Justice A. BENAFIN REPRESENTED AND JOINED BY HER MOTHER MRS. ELISA
Chairperson BENAFIN, IZABEL M. LUYK REPRESENTED AND JOINED BY HER MOTHER
MRS. REBECCA MOLINA LUYK, KATHERINE PE REPRESENTED AND JOINED
BY HER MOTHER ROSEMARIE G. PE, SOLEDAD S. CAMILO, ALICIA C.
PACALSO ALIAS KEVAB, BETTY I. STRASSER, RUBY C. GIRON, URSULA C.
PEREZ ALIAS BA-YAY, EDILBERTO T. CLARAVALL, CARMEN CAROMINA,
CERTIFICATION LILIA G. YARANON, DIANE MONDOC, petitioners, vs. VICTOR LIM,
PRESIDENT, BASES CONVERSION DEVELOPMENT AUTHORITY; JOHN HAY
PORO POINT DEVELOPMENT CORPORATION, CITY OF BAGUIO, TUNTEX
Pursuant to Section 13, Article VIII of the Constitution and the Division (B.V.I.) CO. LTD., ASIAWORLD INTERNATIONALE GROUP, INC.,
Chairpersons Attestation, I certify that the conclusions in the above Decision had DEPARTMENT OF ENVIRONMENT AND NATURAL
been reached in consultation before the case was assigned to the writer of the RESOURCES, respondents.
opinion of the Courts Division. DECISION
CARPIO MORALES, J.:
By the present petition for prohibition, mandamusand declaratory relief with
prayer for a temporary restraining order (TRO) and/or writ of preliminary injunction,
REYNATO S. PUNO petitioners assail, in the main, the constitutionality of Presidential Proclamation No.
Chief Justice 420, Series of 1994, CREATING AND DESIGNATING A PORTION OF THE AREA
COVERED BY THE FORMER CAMP JOHN [HAY] AS THE JOHN HAY SPECIAL ECONOMIC
ZONE PURSUANT TO REPUBLIC ACT NO. 7227.
Republic Act No. 7227, AN ACT ACCELERATING THE CONVERSION OF MILITARY
RESERVATIONS INTO OTHER PRODUCTIVE USES, CREATING THE BASES CONVERSION
AND DEVELOPMENT AUTHORITY FOR THIS PURPOSE, PROVIDING FUNDS THEREFOR
AND FOR OTHER PURPOSES, otherwise known as the Bases Conversion and
Development Act of 1992, which was enacted on March 13, 1992, set out the policy
of the government to accelerate the sound and balanced conversion into alternative
productive uses of the former military bases under the 1947 Philippines-United
States of America Military Bases Agreement, namely, the Clark and Subic military
reservations as well as their extensions including the John Hay Station (Camp John
Hay or the camp) in the City of Baguio.[1]
As noted in its title, R.A. No. 7227 created public respondent Bases Conversion
and Development Authority[2] (BCDA), vesting it with powers pertaining to the
multifarious aspects of carrying out the ultimate objective of utilizing the base areas
in accordance with the declared government policy.
R.A. No. 7227 likewise created the Subic Special Economic [and Free Port] Zone
(Subic SEZ) the metes and bounds of which were to be delineated in a proclamation
to be issued by the President of the Philippines.[3]
R.A. No. 7227 granted the Subic SEZ incentives ranging from tax and duty-free
importations, exemption of businesses therein from local and national taxes, to other
hallmarks of a liberalized financial and business climate.[4]
 And R.A. No. 7227 expressly gave authority to the President to create through
executive proclamation, subject to the concurrence of the local government units
directly affected, other Special Economic Zones (SEZ) in the areas covered
respectively by the Clark military reservation, the Wallace Air Station in San
Fernando, La Union, and Camp John Hay.[5]
On August 16, 1993, BCDA entered into a Memorandum of Agreement and
Escrow Agreement with private respondents Tuntex (B.V.I.) Co., Ltd (TUNTEX) and
Asiaworld Internationale Group, Inc. (ASIAWORLD), private corporations registered
under the laws of the British Virgin Islands, preparatory to the formation of a joint
venture for the development of Poro Point in La Union and Camp John Hay as premier
tourist destinations and recreation centers. Four months later or on December 16,
1993, BCDA, TUNTEX and ASIAWORD executed a Joint Venture
Agreement[6] whereby they bound themselves to put up a joint venture company
known as the Baguio International Development and Management Corporation
which would lease areas within Camp John Hay and Poro Point for the purpose of
turning such places into principal tourist and recreation spots, as originally
envisioned by the parties under their Memorandum of Agreement.
The Baguio City government meanwhile passed a number of resolutions in
response to the actions taken by BCDA as owner and administrator of Camp John
Hay.
By Resolution[7] of September 29, 1993, the Sangguniang Panlungsod of Baguio
City (the sanggunian) officially asked BCDA to exclude all the barangays partly or
totally located within Camp John Hay from the reach or coverage of any plan or
program for its development.
By a subsequent Resolution[8] dated January 19, 1994, the sanggunian sought
from BCDA an abdication, waiver or quitclaim of its ownership over the home lots
being occupied by residents of nine (9) barangays surrounding the military
reservation.
Still by another resolution passed on February 21, 1994,
the sanggunian adopted and submitted to BCDA a 15-point concept for the
development of Camp John Hay.[9] The sanggunians vision expressed, among other
things, a kind of development that affords protection to the environment, the making
of a family-oriented type of tourist destination, priority in employment opportunities
for Baguio residents and free access to the base area, guaranteed participation of the
city government in the management and operation of the camp, exclusion of the
previously named nine barangays from the area for development, and liability for
local taxes of businesses to be established within the camp. [10]
BCDA, TUNTEX and ASIAWORLD agreed to some, but rejected or modified the
other proposals of the sanggunian.[11] They stressed the need to declare Camp John
Hay a SEZ as a condition precedent to its full development in accordance with the
mandate of R.A. No. 7227.[12]
On May 11, 1994, the sanggunian passed a resolution requesting the Mayor to
order the determination of realty taxes which may otherwise be collected from real
properties of Camp John Hay.[13]The resolution was intended to intelligently guide
the sanggunian in determining its position on whether Camp John Hay be declared a
SEZ, it (the sanggunian)being of the view that such declaration would exempt the
camps property and the economic activity therein from local or national taxation.
More than a month later, however, the sanggunian passed Resolution No. 255,
(Series of 1994),[14]seeking and supporting, subject to its concurrence, the issuance
by then President Ramos of a presidential proclamation declaring an area of 288.1
hectares of the camp as a SEZ in accordance with the provisions of R.A. No. 7227.
Together with this resolution was submitted a draft of the proposed proclamation
for consideration by the President.[15]
On July 5, 1994 then President Ramos issued Proclamation No. 420,[16] the title
of which was earlier indicated, which established a SEZ on a portion of Camp John
Hay and which reads as follows:
xxx
Pursuant to the powers vested in me by the law and the resolution of concurrence
by the City Council of Baguio, I, FIDEL V. RAMOS, President of the Philippines, do
hereby create and designate a portion of the area covered by the former John Hay
reservation as embraced, covered, and defined by the 1947 Military Bases
Agreement between the Philippines and the United States of America, as amended,
as the John Hay Special Economic Zone, and accordingly order:
SECTION 1. Coverage of John Hay Special Economic Zone. The John Hay Special
Economic Zone shall cover the area consisting of Two Hundred Eighty Eight and
one/tenth (288.1) hectares, more or less, of the total of Six Hundred Seventy-Seven
(677) hectares of the John Hay Reservation, more or less, which have been surveyed
and verified by the Department of Environment and Natural Resources (DENR) as
defined by the following technical description:
A parcel of land, situated in the City of Baguio, Province of Benguet, Island of Luzon,
and particularly described in survey plans Psd-131102-002639 and Ccs-131102-
000030 as approved on 16 August 1993 and 26 August 1993, respectively, by the
Department of Environment and Natural Resources, in detail containing :
Lot 1, Lot 2, Lot 3, Lot 4, Lot 5, Lot 6, Lot 7, Lot 13, Lot 14, Lot 15, and Lot 20 of Ccs-
131102-000030
-and-
Lot 3, Lot 4, Lot 5, Lot 6, Lot 7, Lot 8, Lot 9, Lot 10, Lot 11, Lot 14, Lot 15, Lot 16, Lot
17, and Lot 18 of Psd-131102-002639 being portions of TCT No. T-3812, LRC Rec.
No. 87.
With a combined area of TWO HUNDRED EIGHTY EIGHT AND ONE/TENTH
HECTARES (288.1 hectares); Provided that the area consisting of approximately Six
and two/tenth (6.2) hectares, more or less, presently occupied by the VOA and the
residence of the Ambassador of the United States, shall be considered as part of the
SEZ only upon turnover of the properties to the government of the Republic of the
Philippines.
Sec. 2. Governing Body of the John Hay Special Economic Zone. Pursuant to Section
15 of Republic Act No. 7227, the Bases Conversion and Development Authority is
hereby established as the governing body of the John Hay Special Economic Zone
and, as such, authorized to determine the utilization and disposition of the lands
comprising it, subject to private rights, if any, and in consultation and coordination
with the City Government of Baguio after consultation with its inhabitants, and to
promulgate the necessary policies, rules, and regulations to govern and regulate the
zone thru the John Hay Poro Point Development Corporation, which is its
implementing arm for its economic development and optimum utilization.
Sec. 3. Investment Climate in John Hay Special Economic Zone. Pursuant to Section
5(m) and Section 15 of Republic Act No. 7227, the John Hay Poro Point
Development Corporation shall implement all necessary policies, rules, and
regulations governing the zone, including investment incentives, in consultation
with pertinent government departments. Among others, the zone shall have all the
applicable incentives of the Special Economic Zone under Section 12 of Republic Act
No. 7227 and those applicable incentives granted in the Export Processing Zones,
the Omnibus Investment Code of 1987, the Foreign Investment Act of 1991, and
new investment laws that may hereinafter be enacted.
Sec. 4. Role of Departments, Bureaus, Offices, Agencies and Instrumentalities. All
Heads of departments, bureaus, offices, agencies, and instrumentalities of the
government are hereby directed to give full support to Bases Conversion and
Development Authority and/or its implementing subsidiary or joint venture to
facilitate the necessary approvals to expedite the implementation of various
projects of the conversion program.
Sec. 5. Local Authority. Except as herein provided, the affected local government
units shall retain their basic autonomy and identity.
Sec. 6. Repealing Clause. All orders, rules, and regulations, or parts thereof, which
are inconsistent with the provisions of this Proclamation, are hereby repealed,
amended, or modified accordingly.
Sec. 7. Effectivity. This proclamation shall take effect immediately.
Done in the City of Manila, this 5th day of July, in the year of Our Lord, nineteen
hundred and ninety-four.
The issuance of Proclamation No. 420 spawned the present petition [17] for
prohibition, mandamus and declaratory relief which was filed on April 25, 1995
challenging, in the main, its constitutionality or validity as well as the legality of the
Memorandum of Agreement and Joint Venture Agreement between public
respondent BCDA and private respondents TUNTEX and ASIAWORLD.
Petitioners allege as grounds for the allowance of the petition the following:
I. PRESIDENTIAL PROCLAMATION NO. 420, SERIES OF 1990 (sic) IN SO FAR
AS IT GRANTS TAX EXEMPTIONS IS INVALID AND ILLEGAL AS IT IS AN
UNCONSTITUTIONAL EXERCISE BY THE PRESIDENT OF A POWER
GRANTED ONLY TO THE LEGISLATURE.
II. PRESIDENTIAL PROCLAMATION NO. 420, IN SO FAR AS IT LIMITS THE
POWERS AND INTERFERES WITH THE AUTONOMY OF THE CITY OF
BAGUIO IS INVALID, ILLEGAL AND UNCONSTITUTIONAL.
III. PRESIDENTIAL PROCLAMATION NO. 420, SERIES OF 1994 IS
UNCONSTITUTIONAL IN THAT IT VIOLATES THE RULE THAT ALL TAXES
SHOULD BE UNIFORM AND EQUITABLE.
IV. THE MEMORANDUM OF AGREEMENT ENTERED INTO BY AND
BETWEEN PRIVATE AND PUBLIC RESPONDENTS BASES CONVERSION
DEVELOPMENT AUTHORITY HAVING BEEN ENTERED INTO ONLY BY
DIRECT NEGOTIATION IS ILLEGAL.
V. THE TERMS AND CONDITIONS OF THE MEMORANDUM OF
AGREEMENT ENTERED INTO BY AND BETWEEN PRIVATE AND PUBLIC
RESPONDENT BASES CONVERSION DEVELOPMENT
AUTHORITY IS(sic) ILLEGAL.
VI. THE CONCEPTUAL DEVELOPMENT PLAN OF RESPONDENTS NOT
HAVING UNDERGONE ENVIRONMENTAL IMPACT ASSESSMENT IS
BEING ILLEGALLY CONSIDERED WITHOUT A VALID ENVIRONMENTAL
IMPACT ASSESSMENT.
A temporary restraining order and/or writ of preliminary injunction was prayed
for to enjoin BCDA, John Hay Poro Point Development Corporation and the city
government from implementing Proclamation No. 420,
and TUNTEX and ASIAWORLD from proceeding with their plan respecting Camp John
Hays development pursuant to their Joint Venture Agreement with BCDA. [18]
Public respondents, by their separate Comments, allege as moot and academic
the issues raised by the petition, the questioned Memorandum of Agreement and
Joint Venture Agreement having already been deemed abandoned by the inaction of
the parties thereto prior to the filing of the petition as in fact, by letter of November
21, 1995, BCDA formally notified TUNTEX and ASIAWORLD of the revocation of their
said agreements.[19]
In maintaining the validity of Proclamation No. 420, respondents contend that
by extending to the John Hay SEZ economic incentives similar to those enjoyed by
the Subic SEZ which was established under R.A. No. 7227, the proclamation is merely
implementing the legislative intent of said law to turn the US military bases into hubs
of business activity or investment. They underscore the point that the governments
policy of bases conversion can not be achieved without extending the same tax
exemptions granted by R.A. No. 7227 to Subic SEZ to other SEZs.
Denying that Proclamation No. 420 is in derogation of the local autonomy of
Baguio City or that it is violative of the constitutional guarantee of equal protection,
respondents assail petitioners lack of standing to bring the present suit even as
taxpayers and in the absence of any actual case or controversy to warrant this Courts
exercise of its power of judicial review over the proclamation.
Finally, respondents seek the outright dismissal of the petition for having been
filed in disregard of the hierarchy of courts and of the doctrine of exhaustion of
administrative remedies.
Replying,[20] petitioners aver that the doctrine of exhaustion of administrative
remedies finds no application herein since they are invoking the exclusive authority
of this Court under Section 21 of R.A. No. 7227 to enjoin or restrain implementation
of projects for conversion of the base areas; that the established exceptions to the
aforesaid doctrine obtain in the present petition; and that they possess the standing
to bring the petition which is a taxpayers suit.
Public respondents have filed their Rejoinder[21] and the parties have filed their
respective memoranda.
Before dwelling on the core issues, this Court shall first address the preliminary
procedural questions confronting the petition.
The judicial policy is and has always been that this Court will not entertain direct
resort to it except when the redress sought cannot be obtained in the proper courts,
or when exceptional and compelling circumstances warrant availment of a remedy
within and calling for the exercise of this Courts primary jurisdiction.[22] Neither will
it entertain an action for declaratory relief, which is partly the nature of this petition,
over which it has no original jurisdiction.
Nonetheless, as it is only this Court which has the power under Section 21[23] of
R.A. No. 7227 to enjoin implementation of projects for the development of the
former US military reservations, the issuance of which injunction petitioners pray for,
petitioners direct filing of the present petition with it is allowed. Over and above this
procedural objection to the present suit, this Court retains full discretionary power
to take cognizance of a petition filed directly to it if compelling reasons, or the nature
and importance of the issues raised, warrant.[24] Besides, remanding the case to the
lower courts now would just unduly prolong adjudication of the issues.
The transformation of a portion of the area covered by Camp John Hay into a
SEZ is not simply a re-classification of an area, a mere ascription of a status to a place.
It involves turning the former US military reservation into a focal point for
investments by both local and foreign entities. It is to be made a site of vigorous
business activity, ultimately serving as a spur to the countrys long awaited economic
growth. For, as R.A. No. 7227 unequivocally declares, it is the governments policy to
enhance the benefits to be derived from the base areas in order to promote the
economic and social development of Central Luzon in particular and the country in
general.[25] Like the Subic SEZ, the John Hay SEZ should also be turned into a self-
sustaining, industrial, commercial, financial and investment center.[26]
More than the economic interests at stake, the development of Camp John Hay
as well as of the other base areas unquestionably has critical links to a host of
environmental and social concerns. Whatever use to which these lands will be
devoted will set a chain of events that can affect one way or another the social and
economic way of life of the communities where the bases are located, and ultimately
the nation in general.
Underscoring the fragility of Baguio Citys ecology with its problem on the
scarcity of its water supply, petitioners point out that the local and national
government are faced with the challenge of how to provide for an ecologically
sustainable, environmentally sound, equitable transition for the city in the wake of
Camp John Hays reversion to the mass of government property. [27] But that is why
R.A. No. 7227 emphasizes the sound and balanced conversion of the Clark and Subic
military reservations and their extensions consistent with ecological
andenvironmental standards.[28] It cannot thus be gainsaid that the matter of
conversion of the US bases into SEZs, in this case Camp John Hay, assumes
importance of a national magnitude.
Convinced then that the present petition embodies crucial issues, this Court
assumes jurisdiction over the petition.
As far as the questioned agreements between BCDA
and TUNTEX and ASIAWORLD are concerned, the legal questions being raised
thereon by petitioners have indeed been rendered moot and academic by the
revocation of such agreements. There are, however, other issues posed by the
petition, those which center on the constitutionality of Proclamation No. 420, which
have not been mooted by the said supervening event upon application of the rules
for the judicial scrutiny of constitutional cases. The issues boil down to:
(1) Whether the present petition complies with the requirements for this
Courts exercise of jurisdiction over constitutional issues;
(2) Whether Proclamation No. 420 is constitutional by providing for
national and local tax exemption within and granting other
economic incentives to the John Hay Special Economic Zone; and
(3) Whether Proclamation No. 420 is constitutional for limiting or
interfering with the local autonomy of Baguio City;
It is settled that when questions of constitutional significance are raised, the
court can exercise its power of judicial review only if the following requisites are
present: (1) the existence of an actual and appropriate case; (2) a personal and
substantial interest of the party raising the constitutional question; (3) the exercise
of judicial review is pleaded at the earliest opportunity; and (4) the constitutional
question is the lis mota of the case.[29]
An actual case or controversy refers to an existing case or controversy that is
appropriate or ripe for determination, not conjectural or anticipatory.[30] The
controversy needs to be definite and concrete, bearing upon the legal relations of
parties who are pitted against each other due to their adverse legal
interests.[31] There is in the present case a real clash of interests and rights between
petitioners and respondents arising from the issuance of a presidential proclamation
that converts a portion of the area covered by Camp John Hay into a SEZ, the former
insisting that such proclamation contains unconstitutional provisions, the latter
claiming otherwise.
R.A. No. 7227 expressly requires the concurrence of the affected local
government units to the creation of SEZs out of all the base areas in the
country.[32] The grant by the law on local government units of the right of
concurrence on the bases conversion is equivalent to vesting a legal standing on
them, for it is in effect a recognition of the real interests that communities nearby or
surrounding a particular base area have in its utilization. Thus, the interest of
petitioners, being inhabitants of Baguio, in assailing the legality of Proclamation No.
420, is personal and substantial such that they have sustained or will sustain direct
injury as a result of the government act being challenged. [33] Theirs is a material
interest, an interest in issue affected by the proclamation and not merely an interest
in the question involved or an incidental interest, [34] for what is at stake in the
enforcement of Proclamation No. 420 is the very economic and social existence of
the people of Baguio City.
Petitioners locus standi parallels that of the petitioner and other residents of
Bataan, specially of the town of Limay, in Garcia v. Board of Investments[35]where this
Court characterized their interest in the establishment of a petrochemical plant in
their place as actual, real, vital and legal, for it would affect not only their economic
life but even the air they breathe.
Moreover, petitioners Edilberto T. Claravall and Lilia G. Yaranon were duly
elected councilors of Baguio at the time, engaged in the local governance of Baguio
City and whose duties included deciding for and on behalf of their constituents the
question of whether to concur with the declaration of a portion of the area covered
by Camp John Hay as a SEZ. Certainly then, petitioners Claravall and Yaranon, as city
officials who voted against[36] the sanggunian Resolution No. 255 (Series of 1994)
supporting the issuance of the now challenged Proclamation No. 420, have legal
standing to bring the present petition.
That there is herein a dispute on legal rights and interests is thus beyond doubt.
The mootness of the issues concerning the questioned agreements between public
and private respondents is of no moment.
By the mere enactment of the questioned law or the approval of the challenged act,
the dispute is deemed to have ripened into a judicial controversy even without any
other overt act. Indeed, even a singular violation of the Constitution and/or the law
is enough to awaken judicial duty.[37]
As to the third and fourth requisites of a judicial inquiry, there is likewise no
question that they have been complied with in the case at bar. This is an action filed
purposely to bring forth constitutional issues, ruling on which this Court must take
up. Besides, respondents never raised issues with respect to these requisites, hence,
they are deemed waived.
Having cleared the way for judicial review, the constitutionality of Proclamation
No. 420, as framed in the second and third issues above, must now be addressed
squarely.
The second issue refers to petitioners objection against the creation by
Proclamation No. 420 of a regime of tax exemption within the John Hay SEZ.
Petitioners argue that nowhere in R. A. No. 7227 is there a grant of tax exemption to
SEZs yet to be established in base areas, unlike the grant under Section 12 thereof of
tax exemption and investment incentives to the therein established Subic SEZ. The
grant of tax exemption to the John Hay SEZ, petitioners conclude, thus contravenes
Article VI, Section 28 (4) of the Constitution which provides that No law granting any
tax exemption shall be passed without the concurrence of a majority of all the
members of Congress.
Section 3 of Proclamation No. 420, the challenged provision, reads:
Sec. 3. Investment Climate in John Hay Special Economic Zone. Pursuant to Section
5(m) and Section 15 of Republic Act No. 7227, the John Hay Poro Point
Development Corporation shall implement all necessary policies, rules, and
regulations governing the zone, including investment incentives, in consultation
with pertinent government departments. Among others, the zone shall have all the
applicable incentives of the Special Economic Zone under Section 12 of Republic
Act No. 7227 and those applicable incentives granted in the Export Processing
Zones, the Omnibus Investment Code of 1987, the Foreign Investment Act of
1991, and new investment laws that may hereinafter be enacted. (Emphasis and
underscoring supplied)
Upon the other hand, Section 12 of R.A. No. 7227 provides:
xxx
(a) Within the framework and subject to the mandate and limitations of the
Constitution and the pertinent provisions of the Local Government Code, the Subic
Special Economic Zone shall be developed into a self-sustaining, industrial,
commercial, financial and investment center to generate employment
opportunities in and around the zone and to attract and promote productive
foreign investments;
b) The Subic Special Economic Zone shall be operated and managed as a separate
customs territory ensuring free flow or movement of goods and capital within, into
and exported out of the Subic Special Economic Zone, as well as provide incentives
such as tax and duty free importations of raw materials, capital and equipment.
However, exportation or removal of goods from the territory of the Subic Special
Economic Zone to the other parts of the Philippine territory shall be subject to
customs duties and taxes under the Customs and Tariff Code and other relevant tax
laws of the Philippines;
(c) The provisions of existing laws, rules and regulations to the contrary
notwithstanding, no taxes, local and national, shall be imposed within the Subic
Special Economic Zone. In lieu of paying taxes, three percent (3%) of the gross
income earned by all businesses and enterprises within the Subic Special Economic
Zone shall be remitted to the National Government, one percent (1%) each to the
local government units affected by the declaration of the zone in proportion to
their population area, and other factors. In addition, there is hereby established a
development fund of one percent (1%) of the gross income earned by all businesses
and enterprises within the Subic Special Economic Zone to be utilized for the
Municipality of Subic, and other municipalities contiguous to be base areas. In case
of conflict between national and local laws with respect to tax exemption privileges
in the Subic Special Economic Zone, the same shall be resolved in favor of the latter;
(d) No exchange control policy shall be applied and free markets for foreign
exchange, gold, securities and futures shall be allowed and maintained in the Subic
Special Economic Zone;
(e) The Central Bank, through the Monetary Board, shall supervise and regulate the
operations of banks and other financial institutions within the Subic Special
Economic Zone;
(f) Banking and Finance shall be liberalized with the establishment of foreign
currency depository units of local commercial banks and offshore banking units of
foreign banks with minimum Central Bank regulation;
(g) Any investor within the Subic Special Economic Zone whose continuing
investment shall not be less than Two Hundred fifty thousand dollars ($250,000),
his/her spouse and dependent children under twenty-one (21) years of age, shall be
granted permanent resident status within the Subic Special Economic Zone. They
shall have freedom of ingress and egress to and from the Subic Special Economic
Zone without any need of special authorization from the Bureau of Immigration and
Deportation. The Subic Bay Metropolitan Authority referred to in Section 13 of this
Act may also issue working visas renewable every two (2) years to foreign
executives and other aliens possessing highly-technical skills which no Filipino
within the Subic Special Economic Zone possesses, as certified by the Department
of Labor and Employment. The names of aliens granted permanent residence status
and working visas by the Subic Bay Metropolitan Authority shall be reported to the
Bureau of Immigration and Deportation within thirty (30) days after issuance
thereof;
x x x (Emphasis supplied)
It is clear that under Section 12 of R.A. No. 7227 it is only the Subic SEZ which
was granted by Congress with tax exemption, investment incentives and the like.
There is no express extension of the aforesaid benefits to other SEZs still to be
created at the time via presidential proclamation.
The deliberations of the Senate confirm the exclusivity to Subic SEZ of the tax
and investment privileges accorded it under the law, as the following exchanges
between our lawmakers show during the second reading of the precursor bill of R.A.
No. 7227 with respect to the investment policies that would govern Subic SEZ which
are now embodied in the aforesaid Section 12 thereof:
xxx
Senator Maceda: This is what I was talking about. We get into problems here
because all of these following policies are centered around the concept of free port.
And in the main paragraph above, we have declared both Clark and Subic as special
economic zones, subject to these policies which are, in effect, a free-port
arrangement.
Senator Angara: The Gentleman is absolutely correct, Mr. President. So we must
confine these policies only to Subic.
May I withdraw then my amendment, and instead provide that THE SPECIAL
ECONOMIC ZONE OF SUBIC SHALL BE ESTABLISHED IN ACCORDANCE WITH THE
FOLLOWING POLICIES. Subject to style, Mr. President.
Thus, it is very clear that these principles and policies are applicable only to Subic as
a free port.
Senator Paterno: Mr. President.
The President: Senator Paterno is recognized.
Senator Paterno: I take it that the amendment suggested by Senator Angara would
then prevent the establishment of other special economic zones observing these
policies.
Senator Angara: No, Mr. President, because during our short caucus, Senator Laurel
raised the point that if we give this delegation to the President to establish other
economic zones, that may be an unwarranted delegation.
So we agreed that we will simply limit the definition of powers and description of
the zone to Subic, but that does not exclude the possibility of creating other
economic zones within the baselands.
Senator Paterno: But if that amendment is followed, no other special economic
zone may be created under authority of this particular bill. Is that correct, Mr.
President?
Senator Angara: Under this specific provision, yes, Mr. President. This provision
now will be confined only to Subic.[38]
x x x (Underscoring supplied).
As gathered from the earlier-quoted Section 12 of R.A. No. 7227, the privileges
given to Subic SEZ consist principally of exemption from tariff or customs duties,
national and local taxes of business entities therein (paragraphs (b) and (c)), free
market and trade of specified goods or properties (paragraph d), liberalized banking
and finance (paragraph f), and relaxed immigration rules for foreign investors
(paragraph g). Yet, apart from these, Proclamation No. 420 also makes available to
the John Hay SEZ benefits existing in other laws such as the privilege of export
processing zone-based businesses of importing capital equipment and raw materials
free from taxes, duties and other restrictions;[39] tax and duty exemptions, tax
holiday, tax credit, and other incentives under the Omnibus Investments Code of
1987;[40] and the applicability to the subject zone of rules governing foreign
investments in the Philippines.[41]
While the grant of economic incentives may be essential to the creation and
success of SEZs, free trade zones and the like, the grant thereof to the John Hay SEZ
cannot be sustained. The incentives under R.A. No. 7227 are exclusive only to the
Subic SEZ, hence, the extension of the same to the John Hay SEZ finds no support
therein. Neither does the same grant of privileges to the John Hay SEZ find support
in the other laws specified under Section 3 of Proclamation No. 420, which laws were
already extant before the issuance of the proclamation or the enactment of R.A. No.
7227.
More importantly, the nature of most of the assailed privileges is one of tax
exemption. It is the legislature, unless limited by a provision of the state constitution,
that has full power to exempt any person or corporation or class of property from
taxation, its power to exempt being as broad as its power to tax. [42]Other than
Congress, the Constitution may itself provide for specific tax exemptions, [43] or local
governments may pass ordinances on exemption only from local taxes.[44]
The challenged grant of tax exemption would circumvent the Constitutions
imposition that a law granting any tax exemption must have the concurrence of a
majority of all the members of Congress.[45] In the same vein, the other kinds of
privileges extended to the John Hay SEZ are by tradition and usage for Congress to
legislate upon.
 Contrary to public respondents suggestions, the claimed statutory exemption enacted resolution by the sanggunian. The other provisions of the proclamation had
of the John Hay SEZ from taxation should be manifest and unmistakable from the been proven to be consistent with R.A. No. 7227.
language of the law on which it is based; it must be expressly granted in a statute Where part of a statute is void as contrary to the Constitution, while another
stated in a language too clear to be mistaken.[46] Tax exemption cannot be implied as part is valid, the valid portion, if separable from the invalid, may stand and be
it must be categorically and unmistakably expressed.[47] enforced.[52] This Court finds that the other provisions in Proclamation No. 420
If it were the intent of the legislature to grant to the John Hay SEZ the same tax converting a delineated portion of Camp John Hay into the John Hay SEZ are
exemption and incentives given to the Subic SEZ, it would have so expressly provided separable from the invalid second sentence of Section 3 thereof, hence they stand.
in the R.A. No. 7227. WHEREFORE, the second sentence of Section 3 of Proclamation No. 420 is
This Court no doubt can void an act or policy of the political departments of the hereby declared NULL AND VOID and is accordingly declared of no legal force and
government on either of two groundsinfringement of the Constitution or grave abuse effect. Public respondents are hereby enjoined from implementing the aforesaid void
of discretion.[48] provision.
This Court then declares that the grant by Proclamation No. 420 of tax Proclamation No. 420, without the invalidated portion, remains valid and
exemption and other privileges to the John Hay SEZ is void for being violative of the effective.
Constitution. This renders it unnecessary to still dwell on petitioners claim that the SO ORDERED.
same grant violates the equal protection guarantee. Davide, Jr., C.J., Bellosillo, Vitug, Panganiban, Sandoval-Gutierrez, Carpio,
With respect to the final issue raised by petitioners that Proclamation No. 420 Austria-Martinez, Callejo, Sr., Azcuna, and Tinga, JJ., concur.
is unconstitutional for being in derogation of Baguio Citys local autonomy, objection Puno, J., no part, due to relationship.
is specifically mounted against Section 2 thereof in which BCDA is set up as the Quisumbing, J., due prior action, no part.
governing body of the John Hay SEZ.[49] Ynares-Santiago, and Corona, JJ., on leave.
Petitioners argue that there is no authority of the President to subject the John
Hay SEZ to the governance of BCDA which has just oversight functions over SEZ; and
that to do so is to diminish the city governments power over an area within its
jurisdiction, hence, Proclamation No. 420 unlawfully gives the President power of
control over the local government instead of just mere supervision.
Petitioners arguments are bereft of merit. Under R.A. No. 7227, the BCDA is
entrusted with, among other things, the following purpose:[50]
xxx
(a) To own, hold and/or administer the military reservations of John Hay Air Station,
Wallace Air Station, ODonnell Transmitter Station, San Miguel Naval
Communications Station, Mt. Sta. Rita Station (Hermosa, Bataan) and those
portions of Metro Manila Camps which may be transferred to it by the President;
x x x (Underscoring supplied)
With such broad rights of ownership and administration vested in BCDA over Camp
John Hay, BCDA virtually has control over it, subject to certain limitations provided
for by law. By designating BCDA as the governing agency of the John Hay SEZ, the law
merely emphasizes or reiterates the statutory role or functions it has been granted.
The unconstitutionality of the grant of tax immunity and financial incentives as
contained in the second sentence of Section 3 of Proclamation No. 420
notwithstanding, the entire assailed proclamation cannot be declared
unconstitutional, the other parts thereof not being repugnant to law or the
Constitution. The delineation and declaration of a portion of the area covered by
Camp John Hay as a SEZ was well within the powers of the President to do so by
means of a proclamation.[51] The requisite prior concurrence by the Baguio City
government to such proclamation appears to have been given in the form of a duly
69 SCRA 460 – Taxation – Delegation to Local Governments – Double Taxation
Pepsi Cola has a bottling plant the Municipalt of Tanauan, Leyte. In September 1962,
the Municipality approved Ordinance No. 23 which levies and collects “from soft
drinks producers and manufacturers a tai of one-sixteenth (1/16) of a centavo for
every bottle of soft drink corked.”
In December 1962, the Municipality also approved Ordinance No. 27 which levies and
collects “on soft drinks produced or manufactured within the territorial jurisdiction
of this municipality a tax of one centavo P0.01) on each gallon of volume capacity.”
Pepsi Cola assailed the validity of the ordinances as it alleged that they constitute
double taxation in two instances: a) double taxation because Ordinance No. 27 covers
the same subject matter and impose practically the same tax rate as with Ordinance
No. 23, b) double taxation because the two ordinances impose percentage or specific
taxes.
Pepsi Cola also questions the constitutionality of Republic Act 2264 which allows for
the delegation of taxing powers to local government units; that allowing local
governments to tax companies like Pepsi Cola is confiscatory and oppressive.
The Municipality assailed the arguments presented by Pepsi Cola. It argued, among
others, that only Ordinance No. 27 is being enforced and that the latter law is an
amendment of Ordinance No. 23, hence there is no double taxation.
ISSUE: Whether or not there is undue delegation of taxing powers. Whether or not
there is double taxation.
HELD: No. There is no undue delegation. The Constitution even allows such
delegation. Legislative powers may be delegated to local governments in respect of
matters of local concern. By necessary implication, the legislative power to create
political corporations for purposes of local self-government carries with it the power
to confer on such local governmental agencies the power to tax. Under the New
Constitution, local governments are granted the autonomous authority to create
their own sources of revenue and to levy taxes. Section 5, Article XI provides: “Each
local government unit shall have the power to create its sources of revenue and to
levy taxes, subject to such limitations as may be provided by law.” Withal, it cannot
be said that Section 2 of Republic Act No. 2264 emanated from beyond the sphere of
the legislative power to enact and vest in local governments the power of local
taxation.
There is no double taxation. The argument of the Municipality is well taken. Further,
Pepsi Cola’s assertion that the delegation of taxing power in itself constitutes double
taxation cannot be merited. It must be observed that the delegating authority
specifies the limitations and enumerates the taxes over which local taxation may not
be exercised. The reason is that the State has exclusively reserved the same for its
own prerogative. Moreover, double taxation, in general, is not forbidden by our
fundamental law unlike in other jurisdictions. Double taxation becomes obnoxious
only where the taxpayer is taxed twice for the benefit of the same governmental
entity or by the same jurisdiction for the same purpose, but not in a case where one
tax is imposed by the State and the other by the city or municipality.
Pepsi-Cola Bottling Co. of the Philippines, Inc. vs City of Butuan
24 SCRA 789 – Political Law – Uniformity in Taxation
In 1960, Ordinance No. 110 was passed in Butuan. It was later amended by Ordinance
122. This Ordinance imposes a tax on any person, association, etc., of P0.10 per case
of 24 bottles of Pepsi- Cola. Pepsi operates within Butuan and it paid under protest
the amount of P4.926.63 from August 16 to December 31, 1960 and the amount of
P9,250.40 from January 1 to July 30, 1961 pursuant to said ordinance. Pepsi filed a
complaint for the recovery of the total amount of P14,177.03 paid under protest and
those that it may later on pay until the termination of this case on the ground that
Ordinance No. 110 as amended of the City of Butuan is illegal, that the tax imposed
is excessive and that it is unconstitutional. Pepsi averred it is unconstitutional
because of the following reasons:
1. it partakes of the nature of an import tax because the tax “shall be based and
computed from the cargo manifest or bill of lading . . . showing the number of cases”
— not sold;
2. it is highly unjust and discriminatory because some dealers engaged in selling of
carbonated drinks are exempt while others are covered and such exemption is not
justified in the ordinance.
ISSUE: Whether or not the Ordinance is valid.
HELD: No, it is invalid. The tax prescribed in said Ordinance, as originally approved,
was imposed upon dealers “engaged in selling” soft drinks or carbonated drinks.
Thus, it would seem that the intent was then to levy a tax upon the sale of said
merchandise. As amended by Ord No. 122, the tax is, however, imposed only upon
“any agent and/or consignee of any person, association, partnership, company or
corporation engaged in selling . . . soft drinks or carbonated drinks.” As a
consequence, merchants engaged in the sale of soft drinks or carbonated drinks, are
not subject to the tax, unless they are agents and/or consignees of another dealer,
who, in the very nature of things, must be one engaged in business outside the City.
Besides, the tax would not be applicable to such agent and/or consignee, if less than
1,000 cases of soft drinks are consigned or shipped to him every month.
When we consider, also, that the tax “shall be based and computed from the cargo
manifest or bill of lading . . . showing the number of cases” — not sold — but
“received” by the taxpayer, the intention to limit the application of the ordinance to
soft drinks and carbonated drinks brought into the City from outside thereof
becomes apparent. Viewed from this angle, the tax partakes of the nature of an
import duty, which is beyond defendant’s authority to impose by express provision
of law. It is true that the uniformity essential to the valid exercise of the power of
taxation does not require identity or equality under all circumstances, or negate the
authority to classify the objects of taxation.
The classification made in the exercise of this authority, to be valid, must, however,
be reasonable and this requirement is not deemed satisfied unless: (1) it is based
upon substantial distinctions which make real differences; (2) these are germane to
the purpose of the legislation or ordinance; (3) the classification applies, not only to
present conditions, but, also, to future conditions substantially identical to those of
the present; and (4) the classification applies equally to all those who belong to the
same class. These conditions are not fully met by the ordinance in question.
Indeed, if its purpose were merely to levy a burden upon the sale of soft drinks or
carbonated beverages, there is no reason why sales thereof by dealers other than
agents or consignees of producers or merchants established outside the City of
Butuan should be exempt from the tax.
Villanueva v City of Iloilo (1968)
Villanueva v City v Iloilo
GR No L-26521, December 28, 1968
FACTS:
On September 30, 1946, the Municipal Board of Iloilo City enacted Ordinance 86
imposing license tax fees upon
tenement houses. The validity of such ordinance was challenged by Eusebio and
Remedios Villanueva, owners of four tenement houses containing 34 apartments.
The Supreme Court held the ordinance to be ultra views. On January 15, 1960,
however, the municipal board, believing that it acquired authority to enact an
ordinance of the same nature pursuant to the Local Autonomy Act, enacted
Ordinance 11, Eusebio and Remedios Villanueva assailed the ordinance anew.
ISSUE:
Does Ordinance 11 violate the rule of uniformity of taxation?
RULING:
No. The Court has ruled the tenement houses constitute a distinct class of property
and that taxes are uniform and equal when imposed upon all property of the same
class or character within the taxing authority.
The fact that the owners of the other classes of buildings in Iloilo are not imposed
upon by the ordinance, or that tenement taxes are imposed in other cities do not
violate the rule of equality and uniformity. The rule does not require that taxes for
the same purpose should be imposed in different territorial subdivisions at the
same time. So long as the burden of tax falls equally and impartially on all owners
or operators of tenement houses similarly classified or situated, equality and
uniformity is accomplished. The presumption that tax statutes are intended to
operate uniformly and equally was not overthrown therein.
American Bible Society vs. City of Manila 101 Phil. 386 (1957) G.R. No. L-9637, April
30, 1957
Fact:
In the course of its ministry, Petitioner’s Philippine agency has been distributing and
selling bibles and/or gospel portions thereof (except during the Japanese occupation)
throughout the Philippines and translating the same into several Philippine dialects.
Respondent informed Petitioner that it was conducting the business of general
merchandise since November, 1945, without providing itself with the necessary
Mayor’s permit and municipal license, in violation of the City Ordinances, and
required plaintiff to secure, within three days, the corresponding permit and license
fees. Plaintiff protested against this requirement, but the City Treasurer demanded
that plaintiff deposit and pay under protest. To avoid the closing of its, paid the
defendant under protest the said permit and license fees. In its complaint plaintiff
prays that judgment be rendered declaring the said Municipal Ordinances illegal and
unconstitutional, and that the defendant be ordered to refund to the plaintiff paid
under protest, together with legal interest thereon, and the costs, plaintiff further
praying for such other relief and remedy as the court may deem just equitable. CFI
Dismissed the Petition for lack of merit, which the petitioner raised the issue to the
CA which certified the case to SC for the reason that the errors assigned to the lower
Court involved only questions of law. Adrian Avilado Antazo
Issues:
1. Whether the Selling activity of the Petitioner is exempted from Taxation?
2. Whether the Mayor’s Permit requirement impair Petitioner’s right to the free
exercise and enjoyment of its religious profession and worship, as well as its rights
of dissemination of religious beliefs?
Held:
1. Yes, It may be true that in this said case, the price asked for the bibles and other
religious pamphlets was in some instances a little bit higher than the actual cost
of the same but this cannot mean that appellant was engaged in the business or
occupation of selling said “merchandise” for profit. For the reason that the
provisions of City of Manila Ordinance No. 2529, as amended, cannot be applied
to appellant, for in doing so it would impair its free exercise and enjoyment of its
religious profession and worship as well as its rights of dissemination of religious
beliefs.
2. No, the Mandatory obtention of the Mayor’s permit before any person can engage
in any of the businesses, trades or occupations enumerated therein do not
imposes any charge upon the enjoyment of a right granted by the Constitution,
nor tax the exercise of religious practices. That Ordinance No. 3000 cannot be
considered unconstitutional, even if applied to plaintiff Society.

COMMISSIONER OF INTERNAL REVENUE vs. ST. LUKE’S MEDICAL CENTER, INC.
G.R. No. 195909, September 26, 2012
Facts:
1. Luke’s Medical Center, Inc. is a hospital organized as a non-stock and non-profit
corporation.
2. The BIR assessed St. Luke’s deficiency taxes amounting to P76,063,116.06 for
1998, comprised of deficiency income tax, VAT, withholding tax on
compensation and expanded withholding tax.
3. Luke’s filed an administrative protest with the BIR against the deficiency tax
assessments.
4. The BIR argued before the CTA that Section 27(B) of the NIRC, which imposes a
10% preferential tax rate on the income of proprietary non-profit hospitals,
should be applicable to St. Luke’
5. The BIR claimed that St. Luke’s was actually operating for profit in 1998
because only 13% of its revenues came from charitable purposes. Moreover,
the hospital’s board of trustees, officers and employees directly benefit from
its profits and assets. St. Luke’s had total revenues of P1,730,367,965 or
approximately P1.73 billion from patient services in 1998.
6. Luke’s contended that the BIR should not consider its total revenues, because
its free services to patients was P218,187,498 or 65.20% of its 1998 operating
income of P334,642,615. St. Luke’s also claimed that its income does not inure
to the benefit of any individual.
7. Luke’s maintained that it is a non-stock and non-profit institution for charitable
and social welfare purposes under Section 30(E) and (G) of the NIRC. It argued
that the making of profit per se does not destroy its income tax exemption.
Issue: Whether St. Luke’s is liable for deficiency income tax in 1998 under Section
27(B) of the NIRC, which imposes a preferential tax rate of 10% on the income of
proprietary non-profit hospitals.
Ruling:
The issue raised by the BIR is a purely legal one. It involves the effect of the
introduction of Section 27(B) in the NIRC of 1997 vis-à-vis Section 30(E) and (G) on
the income tax exemption of charitable and social welfare institutions. The 10%
income tax rate under Section 27(B) specifically pertains to proprietary educational
institutions and proprietary non-profit hospitals.
Section 27(B) of the NIRC does not remove the income tax exemption of proprietary
non-profit hospitals under Section 30(E) and (G). Section 27(B) on one hand, and
Section 30(E) and (G) on the other hand, can be construed together without the
removal of such tax exemption.
The effect of the introduction of Section 27(B) is to subject the taxable income of
two specific institutions, namely, proprietary non-profit educational institutions and
proprietary non-profit hospitals, among the institutions covered by Section 30, to
the 10% preferential rate under Section 27(B) instead of the ordinary 30%
corporate rate under the last paragraph of Section 30 in relation to Section
27(A)(1).
The only qualifications for hospitals are that they must be proprietary and non-
profit. “Proprietary” means private, following the definition of a “proprietary
educational institution” as “any private school maintained and administered by
private individuals or groups” with a government permit. “Non-profit” means no
net income or asset accrues to or benefits any member or specific person, with all
the net income or asset devoted to the institution’s purposes and all its activities
conducted not for profit.
“Non-profit” does not necessarily mean “charitable.”
The Court defined “charity” in Lung Center of the Philippines v. Quezon City as “a
gift, to be applied consistently with existing laws, for the benefit of an indefinite
number of persons, either by bringing their minds and hearts under the influence of
education or religion, by assisting them to establish themselves in life or by
otherwise lessening the burden of government.”
To be a charitable institution, however, an organization must meet the substantive
test of charity in Lung Center. The issue in Lung Center concerns exemption from
real property tax and not income tax. However, it provides for the test of charity in
our jurisdiction.
In other words, charitable institutions provide for free goods and services to the
public which would otherwise fall on the shoulders of government. Thus, as a
matter of efficiency, the government forgoes taxes which should have been spent
to address public needs, because certain private entities already assume a part of
the burden. This is the rationale for the tax exemption of charitable institutions.
Charitable institutions, however, are not ipso facto entitled to a tax exemption. The
requirements for a tax exemption are specified by the law granting it. The
requirements for a tax exemption are strictly construed against the taxpayer
because an exemption restricts the collection of taxes necessary for the existence
of the government.

The Court in Lung Center declared that the Lung Center of the Philippines is a
charitable institution for the purpose of exemption from real property taxes. This
ruling uses the same premise as Hospital de San Juan and Jesus Sacred Heart
College which says that receiving income from paying patients does not destroy the
charitable nature of a hospital.
For real property taxes, the incidental generation of income is permissible because
the test of exemption is the use of the property. The test of exemption is not strictly
a requirement on the intrinsic nature or character of the institution. The test
requires that the institution use the property in a certain way, i.e. for a charitable
purpose. Thus, the Court held that the Lung Center of the Philippines did not lose its
charitable character when it used a portion of its lot for commercial purposes. The
effect of failing to meet the use requirement is simply to remove from the tax
exemption that portion of the property not devoted to charity.
In the NIRC, Congress decided to extend the exemption to income taxes. However,
the way Congress crafted Section 30(E) of the NIRC is materially different from
Section 28(3), Article VI of the Constitution. Section 30(E) of the NIRC defines the
corporation or association that is exempt from income tax. On the other hand,
Section 28(3), Article VI of the Constitution does not define a charitable institution,
but requires that the institution “actually, directly and exclusively” use the property
for a charitable purpose.
Section 30(E) of the NIRC provides that a charitable institution must be:
 A non-stock corporation or association;
 Organized exclusively for charitable purposes;
 Operated exclusively for charitable purposes;
 No part of its net income or asset shall belong to or inure to the benefit of any
member, organizer, officer or any specific person.
Thus, both the organization and operations of the charitable institution must be
devoted “exclusively” for charitable purposes. The organization of the institution
refers to its corporate form, as shown by its articles of incorporation, by-laws and
other constitutive documents.
Section 30(E) of the NIRC specifically requires that the corporation or association
be non-stock, which is defined by the Corporation Code as “one where no part of its
income is distributable as dividends to its members, trustees, or officers” and that
any profit “obtained as an incident to its operations shall, whenever necessary or
proper, be used for the furtherance of the purpose or purposes for which the
corporation was organized.”
However, the last paragraph of Section 30of the NIRC qualifies the words
“organized and operated exclusively” by providing that: Notwithstanding the
provisions in the preceding paragraphs, the income of whatever kind and
character of the foregoing organizations from any of their properties, real or
personal, or from any of their activities conducted for profit regardless of the
disposition made of such income, shall be subject to tax imposed under this Code.
In 1998, St. Luke’s had total revenues of P1,730,367,965 from services to paying
patients. It cannot be disputed that a hospital which receives approximately P1.73
billion from paying patients is not an institution “operated exclusively” for
charitable purposes. Clearly, revenues from paying patients are income received
from “activities conducted for profit.” Indeed, St. Luke’s admits that it derived
profits from its paying patients. St. Luke’s declared P1,730,367,965 as “Revenues
from Services to Patients” in contrast to its “Free Services” expenditure of
P218,187,498.
Services to paying patients are activities conducted for profit. They cannot be
considered any other way. There is a “purpose to make profit over and above the
cost” of services. The P1.73 billion total revenues from paying patients is not even
incidental to St. Luke’s charity expenditure of P218,187,498 for non-paying patients.
The Court finds that St. Luke’s is a corporation that is not “operated exclusively” for
charitable or social welfare purposes insofar as its revenues from paying patients
are concerned. This ruling is based not only on a strict interpretation of a provision
granting tax exemption, but also on the clear and plain text of Section 30(E) and (G).
Section 30(E) and (G) of the NIRC requires that an institution be “operated
exclusively” for charitable or social welfare purposes to be completely exempt from
income tax.