G.R. No.

L-28896 February 17, 1988

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.
CRUZ, J.:
Taxes are the lifeblood of the government and so should be collected without unnecessary
hindrance On the other hand, such collection should be made in accordance with law as
any arbitrariness will negate the very reason for government itself. It is therefore
necessary to reconcile the apparently conflicting interests of the authorities and the
taxpayers so that the real purpose of taxation, which is the promotion of the common
good, may be achieved.
The main issue in this case is whether or not the Collector of Internal Revenue correctly
disallowed the P75,000.00 deduction claimed by private respondent Algue as legitimate
business expenses in its income tax returns. The corollary issue is whether or not the
appeal of the private respondent from the decision of the Collector of Internal Revenue
was made on time and in accordance with law.
We deal first with the procedural question.
The record shows that on January 14, 1965, the private respondent, a domestic
corporation engaged in engineering, construction and other allied activities, received a
letter from the petitioner assessing it in the total amount of P83,183.85 as delinquency
income taxes for the years 1958 and 1959. 1 On January 18, 1965, Algue flied a letter of
protest or request for reconsideration, which letter was stamp received on the same day in
the office of the petitioner. 2 On March 12, 1965, a warrant of distraint and levy was
presented to the private respondent, through its counsel, Atty. Alberto Guevara, Jr., who
refused to receive it on the ground of the pending protest. 3 A search of the protest in the
dockets of the case proved fruitless. Atty. Guevara produced his file copy and gave a
photostat to BIR agent Ramon Reyes, who deferred service of the warrant. 4 On April 7,
1965, Atty. Guevara was finally informed that the BIR was not taking any action on the
protest and it was only then that he accepted the warrant of distraint and levy earlier
sought to be served. 5Sixteen days later, on April 23, 1965, Algue filed a petition for review
of the decision of the Commissioner of Internal Revenue with the Court of Tax Appeals. 6
The above chronology shows that the petition was filed seasonably. According to Rep. Act
No. 1125, the appeal may be made within thirty days after receipt of the decision or ruling
challenged. 7 It is true that as a rule the warrant of distraint and levy is "proof of the
finality of the assessment" 8 and renders hopeless a request for reconsideration," 9 being
"tantamount to an outright denial thereof and makes the said request deemed
rejected." 10 But there is a special circumstance in the case at bar that prevents
application of this accepted doctrine.
The proven fact is that four days after the private respondent received the petitioner's
notice of assessment, it filed its letter of protest. This was apparently not taken into
account before the warrant of distraint and levy was issued; indeed, such protest could not

be located in the office of the petitioner. It was only after Atty. Guevara gave the BIR a
copy of the protest that it was, if at all, considered by the tax authorities. During the
intervening period, the warrant was premature and could therefore not be served.
As the Court of Tax Appeals correctly noted," 11 the protest filed by private respondent was
not pro forma and was based on strong legal considerations. It thus had the effect of
suspending on January 18, 1965, when it was filed, the reglementary period which started
on the date the assessment was received, viz., January 14, 1965. The period started
running again only on April 7, 1965, when the private respondent was definitely informed
of the implied rejection of the said protest and the warrant was finally served on it. Hence,
when the appeal was filed on April 23, 1965, only 20 days of the reglementary period had
been consumed.
Now for the substantive question.
The petitioner contends that the claimed deduction of P75,000.00 was properly disallowed
because it was not an ordinary reasonable or necessary business expense. The Court of
Tax Appeals had seen it differently. Agreeing with Algue, it held that the said amount had
been legitimately paid by the private respondent for actual services rendered. The
payment was in the form of promotional fees. These were collected by the Payees for their
work in the creation of the Vegetable Oil Investment Corporation of the Philippines and its
subsequent purchase of the properties of the Philippine Sugar Estate Development
Company.
Parenthetically, it may be observed that the petitioner had Originally claimed these
promotional fees to be personal holding company income 12 but later conformed to the
decision of the respondent court rejecting this assertion. 13 In fact, as the said court found,
the amount was earned through the joint efforts of the persons among whom it was
distributed It has been established that the Philippine Sugar Estate Development Company
had earlier appointed Algue as its agent, authorizing it to sell its land, factories and oil
manufacturing process. Pursuant to such authority, Alberto Guevara, Jr., Eduardo Guevara,
Isabel Guevara, Edith, O'Farell, and Pablo Sanchez, worked for the formation of the
Vegetable Oil Investment Corporation, inducing other persons to invest in it. 14 Ultimately,
after its incorporation largely through the promotion of the said persons, this new
corporation purchased the PSEDC properties. 15 For this sale, Algue received as agent a
commission of P126,000.00, and it was from this commission that the P75,000.00
promotional fees were paid to the aforenamed individuals. 16
There is no dispute that the payees duly reported their respective shares of the fees in
their income tax returns and paid the corresponding taxes thereon. 17 The Court of Tax
Appeals also found, after examining the evidence, that no distribution of dividends was
involved. 18
The petitioner claims that these payments are fictitious because most of the payees are
members of the same family in control of Algue. It is argued that no indication was made
as to how such payments were made, whether by check or in cash, and there is not
enough substantiation of such payments. In short, the petitioner suggests a tax dodge, an
attempt to evade a legitimate assessment by involving an imaginary deduction.

We find that these suspicions were adequately met by the private respondent when its
President, Alberto Guevara, and the accountant, Cecilia V. de Jesus, testified that the
payments were not made in one lump sum but periodically and in different amounts as
each payee's need arose. 19 It should be remembered that this was a family corporation
where strict business procedures were not applied and immediate issuance of receipts was
not required. Even so, at the end of the year, when the books were to be closed, each
payee made an accounting of all of the fees received by him or her, to make up the total
of P75,000.00. 20 Admittedly, everything seemed to be informal. This arrangement was
understandable, however, in view of the close relationship among the persons in the
family corporation.
We agree with the respondent court that the amount of the promotional fees was not
excessive. The total commission paid by the Philippine Sugar Estate Development Co. to
the private respondent was P125,000.00. 21After deducting the said fees, Algue still had a
balance of P50,000.00 as clear profit from the transaction. The amount of P75,000.00 was
60% of the total commission. This was a reasonable proportion, considering that it was the
payees who did practically everything, from the formation of the Vegetable Oil Investment
Corporation to the actual purchase by it of the Sugar Estate properties. This finding of the
respondent court is in accord with the following provision of the Tax Code:
SEC. 30. Deductions from gross income.--In computing net income there shall
be allowed as deductions
(a) Expenses:
(1) In general.--All the ordinary and necessary expenses paid or incurred
during the taxable year in carrying on any trade or business, including a
reasonable allowance for salaries or other compensation for personal services
actually rendered; ... 22
and Revenue Regulations No. 2, Section 70 (1), reading as follows:
SEC. 70. Compensation for personal services.--Among the ordinary and
necessary expenses paid or incurred in carrying on any trade or business may
be included a reasonable allowance for salaries or other compensation for
personal services actually rendered. The test of deductibility in the case of
compensation payments is whether they are reasonable and are, in fact,
payments purely for service. This test and deductibility in the case of
compensation payments is whether they are reasonable and are, in fact,
payments purely for service. This test and its practical application may be
further stated and illustrated as follows:
Any amount paid in the form of compensation, but not in fact as the purchase
price of services, is not deductible. (a) An ostensible salary paid by a
corporation may be a distribution of a dividend on stock. This is likely to occur
in the case of a corporation having few stockholders, Practically all of whom
draw salaries. If in such a case the salaries are in excess of those ordinarily
paid for similar services, and the excessive payment correspond or bear a
close relationship to the stockholdings of the officers of employees, it would

seem likely that the salaries are not paid wholly for services rendered, but the
excessive payments are a distribution of earnings upon the stock. . . .
(Promulgated Feb. 11, 1931, 30 O.G. No. 18, 325.)
It is worth noting at this point that most of the payees were not in the regular employ of
Algue nor were they its controlling stockholders. 23
The Solicitor General is correct when he says that the burden is on the taxpayer to prove
the validity of the claimed deduction. In the present case, however, we find that the onus
has been discharged satisfactorily. The private respondent has proved that the payment of
the fees was necessary and reasonable in the light of the efforts exerted by the payees in
inducing investors and prominent businessmen to venture in an experimental enterprise
and involve themselves in a new business requiring millions of pesos. This was no mean
feat and should be, as it was, sufficiently recompensed.
It is said that taxes are what we pay for civilization society. Without taxes, the government
would be paralyzed for lack of the motive power to activate and operate it. Hence, despite
the natural reluctance to surrender part of one's hard earned income to the taxing
authorities, every person who is able to must contribute his share in the running of the
government. The government for its part, is expected to respond in the form of tangible
and intangible benefits intended to improve the lives of the people and enhance their
moral and material values. This symbiotic relationship is the rationale of taxation and
should dispel the erroneous notion that it is an arbitrary method of exaction by those in
the seat of power.
But even as we concede the inevitability and indispensability of taxation, it is a
requirement in all democratic regimes that it be exercised reasonably and in accordance
with the prescribed procedure. If it is not, then the taxpayer has a right to complain and
the courts will then come to his succor. For all the awesome power of the tax collector, he
may still be stopped in his tracks if the taxpayer can demonstrate, as it has here, that the
law has not been observed.
We hold that the appeal of the private respondent from the decision of the petitioner was
filed on time with the respondent court in accordance with Rep. Act No. 1125. And we also
find that the claimed deduction by the private respondent was permitted under the
Internal Revenue Code and should therefore not have been disallowed by the petitioner.
ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED in
toto, without costs.
SO ORDERED.

G.R. No. L-68252 May 26, 1995

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
TOKYO SHIPPING CO. LTD., represented by SORIAMONT STEAMSHIP AGENCIES
INC., and COURT OF TAX APPEALS, respondents.

PUNO, J.:
For resolution is whether or not private respondent Tokyo Shipping Co. Ltd., is entitled to a
refund or tax credit for amounts representing pre-payment of income and common
carrier's taxes under the National Internal Revenue Code, section 24 (b) (2), as amended. 1
Private respondent is a foreign corporation represented in the Philippines by Soriamont
Steamship Agencies, Incorporated. It owns and operates tramper vessel M/V Gardenia. In
December 1980, NASUTRA 2 chartered M/V Gardenia to load 16,500 metric tons of raw
sugar in the Philippines. 3 On December 23, 1980, Mr. Edilberto Lising, the operations
supervisor of Soriamont Agency, 4 paid the required income and common carrier's taxes in
the respective sums of FIFTY-NINE THOUSAND FIVE HUNDRED TWENTY-THREE PESOS and
SEVENTY-FIVE CENTAVOS (P59,523.75) and FORTY-SEVEN THOUSAND SIX HUNDRED
NINETEEN PESOS (P47,619.00), or a total of ONE HUNDRED SEVEN THOUSAND ONE
HUNDRED FORTY-TWO PESOS and SEVENTY-FIVE CENTAVOS (P107,142.75) based on the
expected gross receipts of the vessel. 5 Upon arriving, however, at Guimaras Port of Iloilo,
the vessel found no sugar for loading. On January 10, 1981, NASUTRA and private
respondent's agent mutually agreed to have the vessel sail for Japan without any cargo.
Claiming the pre-payment of income and common carrier's taxes as erroneous since no
receipt was realized from the charter agreement, private respondent instituted a claim for
tax credit or refund of the sum ONE HUNDRED SEVEN THOUSAND ONE HUNDRED FORTYTWO PESOS and SEVENTY-FIVE CENTAVOS (P107,142.75) before petitioner Commissioner
of Internal Revenue on March 23, 1981. Petitioner failed to act promptly on the claim,
hence, on May 14, 1981, private respondent filed a petition for review 6 before public
respondent Court of Tax Appeals.
Petitioner contested the petition. As special and affirmative defenses, it alleged the
following: that taxes are presumed to have been collected in accordance with law; that in
an action for refund, the burden of proof is upon the taxpayer to show that taxes are
erroneously or illegally collected, and the taxpayer's failure to sustain said burden is fatal

to the action for refund; and that claims for refund are construed strictly against tax
claimants. 7
After trial, respondent tax court decided in favor of the private respondent. It held:
It has been shown in this case that 1) the petitioner has complied with the
mentioned statutory requirement by having filed a written claim for refund
within the two-year period from date of payment; 2) the respondent has not
issued any deficiency assessment nor disputed the correctness of the tax
returns and the corresponding amounts of prepaid income and percentage
taxes; and 3) the chartered vessel sailed out of the Philippine port with
absolutely no cargo laden on board as cleared and certified by the Customs
authorities; nonetheless 4) respondent's apparent bit of reluctance in
validating the legal merit of the claim, by and large, is tacked upon the
"examiner who is investigating petitioner's claim for refund which is the
subject matter of this case has not yet submitted his report. Whether or not
respondent will present his evidence will depend on the said report of the
examiner." (Respondent's Manifestation and Motion dated September 7,
1982). Be that as it may the case was submitted for decision by respondent
on the basis of the pleadings and records and by petitioner on the evidence
presented by counsel sans the respective memorandum.
An examination of the records satisfies us that the case presents no dispute
as to relatively simple material facts. The circumstances obtaining amply
justify petitioner's righteous indignation to a more expeditious action.
Respondent has offered no reason nor made effort to submit any
controverting documents to bash that patina of legitimacy over the claim. But
as might well be, towards the end of some two and a half years of seeming
impotent anguish over the pendency, the respondent Commissioner of
Internal Revenue would furnish the satisfaction of ultimate solution by
manifesting that "it is now his turn to present evidence, however, the
Appellate Division of the BIR has already recommended the approval of
petitioner's claim for refund subject matter of this petition. The examiner who
examined this case has also recommended the refund of petitioner's claim.
Without prejudice to withdrawing this case after the final approval of
petitioner's claim, the Court ordered the resetting to September 7, 1983."
(Minutes of June 9, 1983 Session of the Court) We need not fashion any
further issue into an apparently settled legal situation as far be it from a
comedy of errors it would be too much of a stretch to hold and deny the
refund of the amount of prepaid income and common carrier's taxes for which
petitioner could no longer be made accountable.
On August 3, 1984, respondent court denied petitioner's motion for reconsideration,
hence, this petition for review on certiorari.
Petitioner now contends: (1) private respondent has the burden of proof to support its
claim of refund; (2) it failed to prove that it did not realize any receipt from its charter
agreement; and (3) it suppressed evidence when it did not present its charter agreement.

We find no merit in the petition.

There is no dispute about the applicable law. It is section 24 (b) (2) of the National Internal
Revenue Code which at that time provides as follows:
A corporation organized, authorized, or existing under the laws of any foreign
country, engaged in trade or business within the Philippines, shall be taxable
as provided in subsection (a) of this section upon the total net income
derived in the preceding taxable year from all sources within the
Philippines: Provided, however, That international carriers shall pay a tax of
two and one-half per cent (2 1/2%) on their gross Philippine billings: "Gross
Philippine Billings" include gross revenue realized from uplifts anywhere in
the world by any international carrier doing business in the Philippines of
passage documents sold therein, whether for passenger, excess baggage or
mail, provided the cargo or mail originates from the Philippines. The gross
revenue realized from the said cargo or mail include the gross freight charge
up to final destination. Gross revenue from chartered flights originating from
the Philippines shall likewise form part of "Gross Philippine Billings" regardless
of the place or payment of the passage documents . . . . .
Pursuant to this provision, a resident foreign corporation engaged in the transport of cargo
is liable for taxes depending on the amount of income it derives from sources within the
Philippines. Thus, before such a tax liability can be enforced the taxpayer must be shown
to have earned income sourced from the Philippines.
We agree with petitioner that a claim for refund is in the nature of a claim for
exemption 8 and should be construed instrictissimi juris against the taxpayer. 9 Likewise,
there can be no disagreement with petitioner's stance that private respondent has the
burden of proof to establish the factual basis of its claim for tax refund.
The pivotal issue involves a question of fact whether or not the private respondent was
able to prove that it derived no receipts from its charter agreement, and hence is entitled
to a refund of the taxes it pre-paid to the government.
The respondent court held that sufficient evidence has been adduced by the private
respondent proving that it derived no receipt from its charter agreement with NASUTRA.
This finding of fact rests on a rational basis, and hence must be sustained. Exhibits "E",
"F," and "G" positively show that the tramper vessel M/V "Gardenia" arrived in Iloilo on
January 10, 1981 but found no raw sugar to load and returned to Japan without any cargo
laden on board. Exhibit "E" is the Clearance Vessel to a Foreign Port issued by the District
Collector of Customs, Port of Iloilo while Exhibit "F" is the Certification by the Officer-inCharge, Export Division of the Bureau of Customs Iloilo. The correctness of the contents of
these documents regularly issued by officials of the Bureau of Customs cannot be doubted
as indeed, they have not been contested by the petitioner. The records also reveal that in
the course of the proceedings in the court a quo, petitioner hedged and hawed when its
turn came to present evidence. At one point, its counsel manifested that the BIR examiner
and the appellate division of the BIR have both recommended the approval of private
respondent's claim for refund. The same counsel even represented that the government
would withdraw its opposition to the petition after final approval of private respondents'

claim. The case dragged on but petitioner never withdrew its opposition to the petition
even if it did not present evidence at all. The insincerity of petitioner's stance drew the
sharp rebuke of respondent court in its Decision and for good reason. Taxpayers owe
honesty to government just as government owes fairness to taxpayers.
In its last effort to retain the money erroneously prepaid by the private respondent,
petitioner contends that private respondent suppressed evidence when it did not present
its charter agreement with NASUTRA. The contention cannot succeed. It presupposes
without any basis that the charter agreement is prejudicial evidence against the private
respondent. 10 Allegedly, it will show that private respondent earned a charter fee with or
without transporting its supposed cargo from Iloilo to Japan. The allegation simply
remained an allegation and no court of justice will regard it as truth. Moreover, the charter
agreement could have been presented by petitioner itself thru the proper use of
a subpoena duces tecum. It never did either because of neglect or because it knew it
would be of no help to bolster its position. 11 For whatever reason, the petitioner cannot
take to task the private respondent for not presenting what it mistakenly calls "suppressed
evidence."
We cannot but bewail the unyielding stance taken by the government in refusing to refund
the sum of ONE HUNDRED SEVEN THOUSAND ONE HUNDRED FORTY TWO PESOS AND
SEVENTY FIVE CENTAVOS (P107,142.75) erroneously prepaid by private respondent. The
tax was paid way back in 1980 and despite the clear showing that it was erroneously paid,
the government succeeded in delaying its refund for fifteen (15) years. After fifteen (15)
long years and the expenses of litigation, the money that will be finally refunded to the
private respondent is just worth a damaged nickel. This is not, however, the kind of
success the government, especially the BIR, needs to increase its collection of taxes. Fair
deal is expected by our taxpayers from the BIR and the duty demands that BIR should
refund without any unreasonable delay what it has erroneously collected. Our ruling
inRoxas v. Court of Tax Appeals 12 is apropos to recall:
The power of taxation is sometimes called also the power to destroy.
Therefore it should be exercised with caution to minimize injury to the
proprietary rights of a taxpayer. It must be exercised fairly, equally and
uniformly, lest the tax collector kill the "hen that lays the golden egg." And, in
order to maintain the general public's trust and confidence in the
Government this power must be used justly and not treacherously.
IN VIEW HEREOF, the assailed decision of respondent Court of Tax Appeals, dated
September 15, 1983, is AFFIRMED in toto. No costs.
SO ORDERED.

G.R. No. 122480

April 12, 2000

BPI-FAMILY SAVINGS BANK, Inc., petitioner,

vs.
COURT OF APPEALS, COURT OF TAX APPEALS and the COMMISSIONER OF
INTERNAL REVENUE,respondents.

PANGANIBAN, J.:
If the State expects its taxpayers to observe fairness and honesty in paying their taxes, so
must it apply the same standard against itself in refunding excess payments. When it is
undisputed that a taxpayer is entitled to a refund, the State should not invoke
technicalities to keep money not belonging to it. No one, not even the State, should enrich
oneself at the expense of another.
The Case
Before us is a Petition for Review assailing the March 31, 1995 Decision of the Court of
Appeals1 (CA) in CA-GR SP No. 34240, which affirmed the December 24, 1993 Decision 2 of
the Court of Tax Appeals (CTA). The CA disposed as follows:
WHEREFORE, foregoing premises considered, the petition is hereby DISMISSED for
lack of merit.3
On the other hand, the dispositive portion of the CTA Decision affirmed by the CA reads as
follows:
WHEREFORE, in [view of] all the foregoing, Petitioner's claim for refund is hereby
DENIED and this Petition for Review is DISMISSED for lack of merit. 4
Also assailed is the November 8, 1995 CA Resolution 5 denying reconsideration.
The Facts

The facts of this case were summarized by the CA in this wise:

This case involves a claim for tax refund in the amount of P112,491.00 representing
petitioner's tax withheld for the year 1989.
In its Corporate Annual Income Tax Return for the year 1989, the following items are
reflected:
Income P1,017,931,831.00
Deductions P1,026,218,791.00
Net Income (Loss) (P8,286,960.00)
Taxable Income (Loss) (P8,286,960.00)
Less:
1988 Tax Credit P185,001.00
1989 Tax Credit P112,491.00
TOTAL AMOUNT P297,492.00
REFUNDABLE
It appears from the foregoing 1989 Income Tax Return that petitioner had a
total refundable amount of P297,492 inclusive of the P112,491.00 being
claimed as tax refund in the present case. However, petitioner declared in the
same 1989 Income Tax Return that the said total refundable amount of
P297,492.00 will be applied as tax credit to the succeeding taxable year.
On October 11, 1990, petitioner filed a written claim for refund in the amount
of P112,491.00 with the respondent Commissioner of Internal Revenue
alleging that it did not apply the 1989 refundable amount of P297,492.00
(including P112,491.00) to its 1990 Annual Income Tax Return or other tax
liabilities due to the alleged business losses it incurred for the same year.
Without waiting for respondent Commissioner of Internal Revenue to act on
the claim for refund, petitioner filed a petition for review with respondent
Court of Tax Appeals, seeking the refund of the amount of P112,491.00.
The respondent Court of Tax Appeals dismissed petitioner's petition on the
ground that petitioner failed to present as evidence its corporate Annual
Income Tax Return for 1990 to establish the fact that petitioner had not yet
credited the amount of P297,492.00 (inclusive of the amount P112,491.00
which is the subject of the present controversy) to its 1990 income tax
liability.
Petitioner filed a motion for reconsideration, however, the same was denied
by respondent court in its Resolution dated May 6, 1994. 6
As earlier noted, the CA affirmed the CTA. Hence, this Petition. 7

Ruling of the Court of Appeals

In affirming the CTA, the Court of Appeals ruled as follows:
It is incumbent upon the petitioner to show proof that it has not credited to its
1990 Annual income Tax Return, the amount of P297,492.00 (including
P112,491.00), so as to refute its previous declaration in the 1989 Income Tax
Return that the said amount will be applied as a tax credit in the succeeding
year of 1990. Having failed to submit such requirement, there is no basis to
grant the claim for refund. . . .
Tax refunds are in the nature of tax exemptions. As such, they are regarded
as in derogation of sovereign authority and to be construed strictissimi
juris against the person or entity claiming the exemption. In other words, the
burden of proof rests upon the taxpayer to establish by sufficient and
competent evidence its entitlement to the claim for refund. 8
Issue
In their Memorandum, respondents identify the issue in this wise:
The sole issue to be resolved is whether or not petitioner is entitled to the refund of
P112,491.90, representing excess creditable withholding tax paid for the taxable
year 1989.9
The Court's Ruling
The Petition is meritorious.
Main Issue:
Petitioner Entitled to Refund
It is undisputed that petitioner had excess withholding taxes for the year 1989 and was
thus entitled to a refund amounting to P112,491. Pursuant to Section 69 10 of the 1986 Tax
Code which states that a corporation entitled to a refund may opt either (1) to obtain such
refund or (2) to credit said amount for the succeeding taxable year, petitioner indicated in
its 1989 Income Tax Return that it would apply the said amount as a tax credit for the
succeeding taxable year, 1990. Subsequently, petitioner informed the Bureau of Internal
Revenue (BIR) that it would claim the amount as a tax refund, instead of applying it as a
tax credit. When no action from the BIR was forthcoming, petitioner filed its claim with the
Court of Tax Appeals.
The CTA and the CA, however, denied the claim for tax refund. Since petitioner declared in
its 1989 Income Tax Return that it would apply the excess withholding tax as a tax credit
for the following year, the Tax Court held that petitioner was presumed to have done so.
The CTA and the CA ruled that petitioner failed to overcome this presumption because it
did not present its 1990 Return, which would have shown that the amount in dispute was
not applied as a tax credit. Hence, the CA concluded that petitioner was not entitled to a
tax refund.
We disagree with the Court of Appeals. As a rule, the factual findings of the appellate court
are binding on this Court. This rule, however, does not apply where, inter alia, the
judgment is premised on a misapprehension of facts, or when the appellate court failed to

notice certain relevant facts which if considered would justify a different conclusion.
case is one such exception.

11

This

In the first place, petitioner presented evidence to prove its claim that it did not apply the
amount as a tax credit. During the trial before the CTA, Ms. Yolanda Esmundo, the
manager of petitioner's accounting department, testified to this fact. It likewise presented
its claim for refund and a certification issued by Mr. Gil Lopez, petitioner's vice-president,
stating that the amount of P112,491 "has not been and/or will not be automatically
credited/offset against any succeeding quarters' income tax liabilities for the rest of the
calendar year ending December 31, 1990." Also presented were the quarterly returns for
the first two quarters of 1990.
The Bureau of Internal Revenue, for its part, failed to controvert petitioner's claim. In fact,
it presented no evidence at all. Because it ought to know the tax records of all taxpayers,
the CIR could have easily disproved petitioner's claim. To repeat, it did not do so.
More important, a copy of the Final Adjustment Return for 1990 was attached to
petitioner's Motion for Reconsideration filed before the CTA. 12 A final adjustment return
shows whether a corporation incurred a loss or gained a profit during the taxable year. In
this case, that Return clearly showed that petitioner incurred P52,480,173 as net loss in
1990. Clearly, it could not have applied the amount in dispute as a tax credit.
Again, the BIR did not controvert the veracity of the said return. It did not even file an
opposition to petitioner's Motion and the 1990 Final Adjustment Return attached thereto.
In denying the Motion for Reconsideration, however, the CTA ignored the said Return. In
the same vein, the CA did not pass upon that significant document.
True, strict procedural rules generally frown upon the submission of the Return after the
trial.1wphi1 The law creating the Court of Tax Appeals, however, specifically provides that
proceedings before it "shall not be governed strictly by the technical rules of
evidence." 13 The paramount consideration remains the ascertainment of truth. Verily, the
quest for orderly presentation of issues is not an absolute. It should not bar courts from
considering undisputed facts to arrive at a just determination of a controversy.
In the present case, the Return attached to the Motion for Reconsideration clearly showed
that petitioner suffered a net loss in 1990. Contrary to the holding of the CA and the CTA,
petitioner could not have applied the amount as a tax credit. In failing to consider the said
Return, as well as the other documentary evidence presented during the trial, the
appellate court committed a reversible error.
It should be stressed that the rationale of the rules of procedure is to secure a just
determination of every action. They are tools designed to facilitate the attainment of
justice. 14 But there can be no just determination of the present action if we ignore, on
grounds of strict technicality, the Return submitted before the CTA and even before this
Court. 15 To repeat, the undisputed fact is that petitioner suffered a net loss in 1990;
accordingly, it incurred no tax liability to which the tax credit could be applied.
Consequently, there is no reason for the BIR and this Court to withhold the tax refund
which rightfully belongs to the petitioner.
Public respondents maintain that what was attached to petitioner's Motion for
Reconsideration was not the final adjustment Return, but petitioner's first two quarterly
returns for 1990. 16 This allegation is wrong. An examination of the records shows that the
1990 Final Adjustment Return was attached to the Motion for Reconsideration. On the
other hand, the two quarterly returns for 1990 mentioned by respondent were in fact
attached to the Petition for Review filed before the CTA. Indeed, to rebut respondents'

specific contention, petitioner submitted before us its Surrejoinder, to which was attached
the Motion for Reconsideration and Exhibit "A" thereof, the Final Adjustment Return for
1990. 17
CTA Case No. 4897
Petitioner also calls the attention of this Court, as it had done before the CTA, to a Decision
rendered by the Tax Court in CTA Case No. 4897, involving its claim for refund for the year
1990. In that case, the Tax Court held that "petitioner suffered a net loss for the taxable
year 1990 . . . ." 18 Respondent, however, urges this Court not to take judicial notice of the
said case. 19
As a rule, "courts are not authorized to take judicial notice of the contents of the records of
other cases, even when such cases have been tried or are pending in the same court, and
notwithstanding the fact that both cases may have been heard or are actually pending
before the same judge." 20
Be that as it may, Section 2, Rule 129 provides that courts may take judicial notice of
matters ought to be known to judges because of their judicial functions. In this case, the
Court notes that a copy of the Decision in CTA Case No. 4897 was attached to the Petition
for Review filed before this Court. Significantly, respondents do not claim at all that the
said Decision was fraudulent or nonexistent. Indeed, they do not even dispute the
contents of the said Decision, claiming merely that the Court cannot take judicial notice
thereof.
To our mind, respondents' reasoning underscores the weakness of their case. For if they
had really believed that petitioner is not entitled to a tax refund, they could have easily
proved that it did not suffer any loss in 1990. Indeed, it is noteworthy that respondents
opted not to assail the fact appearing therein that petitioner suffered a net loss in 1990
in the same way that it refused to controvert the same fact established by petitioner's
other documentary exhibits.
In any event, the Decision in CTA Case No. 4897 is not the sole basis of petitioner's case. It
is merely one more bit of information showing the stark truth: petitioner did not use its
1989 refund to pay its taxes for 1990.
Finally, respondents argue that tax refunds are in the nature of tax exemptions and are to
be construed strictissimi juris against the claimant. Under the facts of this case, we hold
that petitioner has established its claim. Petitioner may have failed to strictly comply with
the rules of procedure; it may have even been negligent. These circumstances, however,
should not compel the Court to disregard this cold, undisputed fact: that petitioner
suffered a net loss in 1990, and that it could not have applied the amount claimed as tax
credits.
Substantial justice, equity and fair play are on the side of petitioner. Technicalities and
legalisms, however exalted, should not be misused by the government to keep money not
belonging to it and thereby enrich itself at the expense of its law-abiding citizens. If the
State expects its taxpayers to observe fairness and honesty in paying their taxes, so must
it apply the same standard against itself in refunding excess payments of such taxes.
Indeed, the State must lead by its own example of honor, dignity and uprightness.
WHEREFORE, the Petition is hereby GRANTED and the assailed Decision and Resolution of
the Court of Appeals REVERSED and SET ASIDE. The Commissioner of Internal Revenue is
ordered to refund to petitioner the amount of P112,491 as excess creditable taxes paid in
1989. No costs.1wphi1.nt

SO ORDERED.

G.R. No. 112024 January 28, 1999

PHILIPPINE BANK OF COMMUNICATIONS, petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, COURT OF TAX APPEALS and COURT OF
APPEALS, respondent.

QUISUMBING, J.:
This petition for review assails the Resolution 1 of the Court of Appeals dated September
22, 1993 affirming the Decision2 and a Resolution 3 of the Court Of Tax Appeals which
denied the claims of the petitioner for tax refund and tax credits, anddisposing as follows:
IN VIEW OF ALL, THE FOREGOING, the instant petition for review, is DENIED
due course. The Decision of the Court of Tax Appeals dated May 20, 1993 and
its resolution dated July 20, 1993, are hereby AFFIRMED in toto.
SO ORDERED. 4
The Court of Tax Appeals earlier ruled as follows:
WHEREFORE, Petitioner's claim for refund/tax credits of overpaid income tax
for 1985 in the amount of P5,299,749.95 is hereby denied for having been
filed beyond the reglementary period. The 1986 claim for refund amounting
to P234,077.69 is likewise denied since petitioner has opted and in all
likelihood automatically credited the same to the succeeding year. The
petition for review is dismissed for lack of merit.
SO ORDERED. 5
The facts on record show the antecedent circumstances pertinent to this case.
Petitioner, Philippine Bank of Communications (PBCom), a commercial banking corporation
duly organized under Philippine laws, filed its quarterly income tax returns for the first and
second quarters of 1985, reported profits, and paid the total income tax of P5,016,954.00.
The taxes due were settled by applying PBCom's tax credit memos and accordingly, the

Bureau of Internal Revenue (BIR) issued Tax Debit Memo Nos. 0746-85 and 0747-85 for
P3,401,701.00 and P1,615,253.00, respectively.
Subsequently, however, PBCom suffered losses so that when it filed its Annual Income Tax
Returns for the year-ended December 31, 1986, the petitioner likewise reported a net loss
of P14,129,602.00, and thus declared no tax payable for the year.
But during these two years, PBCom earned rental income from leased properties. The
lessees withheld and remitted to the BIR withholding creditable taxes of P282,795.50 in
1985 and P234,077.69 in 1986.
On August 7, 1987, petitioner requested the Commissioner of Internal Revenue, among
others, for a tax credit of P5,016,954.00 representing the overpayment of taxes in the first
and second quarters of 1985.
Thereafter, on July 25, 1988, petitioner filed a claim for refund of creditable taxes withheld
by their lessees from property rentals in 1985 for P282,795.50 and in 1986 for
P234,077.69.
Pending the investigation of the respondent Commissioner of Internal Revenue, petitioner
instituted a Petition for Review on November 18, 1988 before the Court of Tax Appeals
(CTA). The petition was docketed as CTA Case No. 4309 entitled: "Philippine Bank of
Communications vs. Commissioner of Internal Revenue."
The losses petitioner incurred as per the summary of petitioner's claims for refund and tax
credit for 1985 and 1986, filed before the Court of Tax Appeals, are as follows:
1985 1986

Net Income (Loss) (P25,317,288.00) (P14,129,602.00)
Tax Due NIL NIL
Quarterly tax.
Payments Made 5,016,954.00
Tax Withheld at Source 282,795.50 234,077.69

Excess Tax Payments P5,299,749.50* P234,077.69
=============== =============
* CTA's decision reflects PBCom's 1985 tax claim
P5,299,749.95. A forty five centavo difference was noted.

as

On May 20, 1993, the CTA rendered a decision which, as stated on the outset, denied the
request of petitioner for a tax refund or credit in the sum amount of P5,299,749.95, on the
ground that it was filed beyond the two-year reglementary period provided for by law. The
petitioner's claim for refund in 1986 amounting to P234,077.69 was likewise denied on the
assumption that it was automatically credited by PBCom against its tax payment in the
succeeding year.
On June 22, 1993, petitioner filed a Motion for Reconsideration of the CTA's decision but
the same was denied due course for lack of merit. 6
Thereafter, PBCom filed a petition for review of said decision and resolution of the CTA with
the Court of Appeals. However on September 22, 1993, the Court of Appeals affirmed in
toto the CTA's resolution dated July 20, 1993. Hence this petition now before us.
The issues raised by the petitioner are:
I. Whether taxpayer PBCom which relied in good faith on the
formal assurances of BIR in RMC No. 7-85 and did not
immediately file with the CTA a petition for review asking for the
refund/tax credit of its 1985-86 excess quarterly income tax
payments can be prejudiced by the subsequent BIR rejection,
applied retroactivity, of its assurances in RMC No. 7-85 that the
prescriptive period for the refund/tax credit of excess quarterly
income tax payments is not two years but ten (10). 7
II. Whether the Court of Appeals seriously erred in affirming the
CTA decision which denied PBCom's claim for the refund of
P234,077.69 income tax overpaid in 1986 on the mere
speculation, without proof, that there were taxes due in 1987
and that PBCom availed of tax-crediting that year. 8
Simply stated, the main question is: Whether or not the Court of Appeals erred in denying
the plea for tax refund or tax credits on the ground of prescription, despite petitioner's
reliance on RMC No. 7-85, changing the prescriptive period of two years to ten years?
Petitioner argues that its claims for refund and tax credits are not yet barred by
prescription relying on the applicability of Revenue Memorandum Circular No. 7-85 issued
on April 1, 1985. The circular states that overpaid income taxes are not covered by the
two-year prescriptive period under the tax Code and that taxpayers may claim refund or
tax credits for the excess quarterly income tax with the BIR within ten (10) years under
Article 1144 of the Civil Code. The pertinent portions of the circular reads:
REVENUE MEMORANDUM CIRCULAR NO. 7-85
SUBJECT: PROCESSING OF REFUND OR TAX CREDIT
OF EXCESS CORPORATE INCOME TAX RESULTING
FROM THE FILING OF THE FINAL ADJUSTMENT
RETURN.

TO: All Internal Revenue Officers and Others Concerned.

Sec. 85 And 86 Of the National Internal Revenue Code provide:
xxx xxx xxx
The foregoing provisions are implemented by Section 7 of Revenue
Regulations Nos. 10-77 which provide;
xxx xxx xxx
It has been observed, however, that because of the excess tax payments,
corporations file claims for recovery of overpaid income tax with the Court of
Tax Appeals within the two-year period from the date of payment, in
accordance with sections 292 and 295 of the National Internal Revenue Code.
It is obvious that the filing of the case in court is to preserve the judicial right
of the corporation to claim the refund or tax credit.
It should he noted, however, that this is not a case of erroneously or illegally
paid tax under the provisions of Sections 292 and 295 of the Tax Code.
In the above provision of the Regulations the corporation may request for the
refund of the overpaid income tax or claim for automatic tax credit. To insure
prompt action on corporate annual income tax returns showing refundable
amounts arising from overpaid quarterly income taxes, this Office has
promulgated Revenue Memorandum Order No. 32-76 dated June 11, 1976,
containing the procedure in processing said returns. Under these procedures,
the returns are merely pre-audited which consist mainly of checking
mathematical accuracy of the figures of the return. After which, the refund or
tax credit is granted, and, this procedure was adopted to facilitate immediate
action on cases like this.
In this regard, therefore, there is no need to file petitions for review in the
Court of Tax Appeals in order to preserve the right to claim refund or tax
credit the two year period. As already stated, actions hereon by the Bureau
are immediate after only a cursory pre-audit of the income tax returns.
Moreover, a taxpayer may recover from the Bureau of Internal Revenue
excess income tax paid under the provisions of Section 86 of the Tax Code
within 10 years from the date of payment considering that it is an obligation
created by law (Article 1144 of the Civil Code). 9 (Emphasis supplied.)
Petitioner argues that the government is barred from asserting a position contrary to its
declared circular if it would result to injustice to taxpayers. Citing ABS CBN Broadcasting
Corporation vs. Court of Tax Appeals 10 petitioner claims that rulings or circulars
promulgated by the Commissioner of Internal Revenue have no retroactive effect if it
would be prejudicial to taxpayers, In ABS-CBN case, the Court held that the government is
precluded from adopting a position inconsistent with one previously taken where injustice
would result therefrom or where there has been a misrepresentation to the taxpayer.

Petitioner contends that Sec. 246 of the National Internal Revenue Code explicitly provides
for this rules as follows:
Sec. 246 Non-retroactivity of rulings Any revocation, modification or
reversal of any of the rules and regulations promulgated in accordance with
the preceding section or any of the rulings or circulars promulgated by the
Commissioner shall not be given retroactive application if the revocation,
modification or reversal will be prejudicial to the taxpayers except in the
following cases:
a). where the taxpayer deliberately misstates or
omits material facts from his return or in any
document required of him by the Bureau of Internal
Revenue;
b). where the facts subsequently gathered by the
Bureau of Internal Revenue are materially different
from the facts on which the ruling is based;
c). where the taxpayer acted in bad faith.
Respondent Commissioner of Internal Revenue, through Solicitor General, argues that the
two-year prescriptive period for filing tax cases in court concerning income tax payments
of Corporations is reckoned from the date of filing the Final Adjusted Income Tax Return,
which is generally done on April 15 following the close of the calendar year. As precedents,
respondent Commissioner cited cases which adhered to this principle, to wit ACCRA
Investments Corp. vs. Court of Appeals, et al., 11 and Commissioner of Internal
Revenue vs. TMX Sales, Inc., et al.. 12Respondent Commissioner also states that since the
Final Adjusted Income Tax Return of the petitioner for the taxable year 1985 was supposed
to be filed on April 15, 1986, the latter had only until April 15, 1988 to seek relief from the
court. Further, respondent Commissioner stresses that when the petitioner filed the case
before the CTA on November 18, 1988, the same was filed beyond the time fixed by law,
and such failure is fatal to petitioner's cause of action.
After a careful study of the records and applicable jurisprudence on the matter, we find
that, contrary to the petitioner's contention, the relaxation of revenue regulations by RMC
7-85 is not warranted as it disregards the two-year prescriptive period set by law.
Basic is the principle that "taxes are the lifeblood of the nation." The primary purpose is to
generate funds for the State to finance the needs of the citizenry and to advance the
common weal. 13 Due process of law under the Constitution does not require judicial
proceedings in tax cases. This must necessarily be so because it is upon taxation that the
government chiefly relies to obtain the means to carry on its operations and it is of utmost
importance that the modes adopted to enforce the collection of taxes levied should be
summary and interfered with as little as possible. 14
From the same perspective, claims for refund or tax credit should be exercised within the
time fixed by law because the BIR being an administrative body enforced to collect taxes,
its functions should not be unduly delayed or hampered by incidental matters.

Sec. 230 of the National Internal Revenue Code (NIRC) of 1977 (now Sec. 229, NIRC of
1997) provides for the prescriptive period for filing a court proceeding for the recovery of
tax erroneously or illegally collected, viz.:
Sec. 230. Recovery of tax erroneously or illegally collected. No suit or
proceeding shall be maintained in any court for the recovery of any national
internal revenue tax hereafter alleged to have been erroneously or illegally
assessed or collected, or of any penalty claimed to have been collected
without authority, or of any sum alleged to have been excessive or in any
manner wrongfully collected, until a claim for refund or credit has been duly
filed with the Commissioner; but such suit or proceeding may be maintained,
whether or not such tax, penalty, or sum has been paid under protest or
duress.
In any case, no such suit or proceedings shall begun after the expiration of
two years from the date of payment of the tax or penalty regardless of any
supervening cause that may arise after payment;Provided however, That the
Commissioner may, even without a written claim therefor, refund or credit
any tax, where on the face of the return upon which payment was made,
such payment appears clearly to have been erroneously paid. (Emphasis
supplied)
The rule states that the taxpayer may file a claim for refund or credit with the
Commissioner of Internal Revenue, within two (2) years after payment of tax, before any
suit in CTA is commenced. The two-year prescriptive period provided, should be computed
from the time of filing the Adjustment Return and final payment of the tax for the year.
In Commissioner of Internal Revenue vs. Philippine American Life Insurance Co.,
Court explained the application of Sec. 230 of 1977 NIRC, as follows:

15

this

Clearly, the prescriptive period of two years should commence to run only
from the time that the refund is ascertained, which can only be determined
after a final adjustment return is accomplished. In the present case, this date
is April 16, 1984, and two years from this date would be April 16, 1986. . . . As
we have earlier said in the TMX Sales case, Sections 68. 16 69, 17 and 70 18 on
Quarterly Corporate Income Tax Payment and Section 321 should be
considered in conjunction with it 19
When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the
prescriptive period of two years to ten years on claims of excess quarterly income tax
payments, such circular created a clear inconsistency with the provision of Sec. 230 of
1977 NIRC. In so doing, the BIR did not simply interpret the law; rather it legislated
guidelines contrary to the statute passed by Congress.
It bears repeating that Revenue memorandum-circulars are considered administrative
rulings (in the sense of more specific and less general interpretations of tax laws) which
are issued from time to time by the Commissioner of Internal Revenue. It is widely
accepted that the interpretation placed upon a statute by the executive officers, whose
duty is to enforce it, is entitled to great respect by the courts. Nevertheless, such

interpretation is not conclusive and will be ignored if judicially found to be

erroneous. 20 Thus, courts will not countenance administrative issuances that override,
instead of remaining consistent and in harmony with the law they seek to apply and
implement. 21
In the case of People vs. Lim, 22 it was held that rules and regulations issued by
administrative officials to implement a law cannot go beyond the terms and provisions of
the latter.
Appellant contends that Section 2 of FAO No. 37-1 is void because it is not
only inconsistent with but is contrary to the provisions and spirit of Act. No
4003 as amended, because whereas the prohibition prescribed in said
Fisheries Act was for any single period of time not exceeding five years
duration, FAO No 37-1 fixed no period, that is to say, it establishes an
absolute ban for all time. This discrepancy between Act No. 4003 and FAO No.
37-1 was probably due to an oversight on the part of Secretary of Agriculture
and Natural Resources. Of course, in case of discrepancy, the basic Act
prevails, for the reason that the regulation or rule issued to implement a law
cannot
go
beyond the
terms
and
provisions
of
the
latter. . . . In this connection, the attention of the technical men in the offices
of Department Heads who draft rules and regulation is called to the
importance and necessity of closely following the terms and provisions of the
law which they intended to implement, this to avoid any possible
misunderstanding or confusion as in the present case. 23
Further, fundamental is the rule that the State cannot be put in estoppel by the mistakes
or errors of its officials or agents. 24 As pointed out by the respondent courts, the
nullification of RMC No. 7-85 issued by the Acting Commissioner of Internal Revenue is an
administrative interpretation which is not in harmony with Sec. 230 of 1977 NIRC. for
being contrary to the express provision of a statute. Hence, his interpretation could not be
given weight for to do so would, in effect, amend the statute.
It is likewise argued that the Commissioner of Internal Revenue, after
promulgating RMC No. 7-85, is estopped by the principle of non-retroactively
of BIR rulings. Again We do not agree. The Memorandum Circular, stating that
a taxpayer may recover the excess income tax paid within 10 years from date
of payment because this is an obligation created by law, was issued by the
Acting Commissioner of Internal Revenue. On the other hand, the decision,
stating that the taxpayer should still file a claim for a refund or tax credit and
corresponding
petition
fro
review
within
the
two-year prescription period, and that the lengthening of the period of
limitation on refund from two to ten years would be adverse to public policy
and run counter to the positive mandate of Sec. 230, NIRC, - was the ruling
and judicial interpretation of the Court of Tax Appeals. Estoppel has no
application in the case at bar because it was not the Commissioner of Internal
Revenue who denied petitioner's claim of refund or tax credit. Rather, it was
the Court of Tax Appeals who denied (albeit correctly) the claim and in effect,
ruled that the RMC No. 7-85 issued by the Commissioner of Internal Revenue
is an administrative interpretation which is out of harmony with or contrary to

the express provision of a statute (specifically Sec. 230, NIRC), hence, cannot
be given weight for to do so would in effect amend the statute. 25
Art. 8 of the Civil Code 26 recognizes judicial decisions, applying or interpreting statutes as
part of the legal system of the country. But administrative decisions do not enjoy that level
of recognition. A memorandum-circular of a bureau head could not operate to vest a
taxpayer with shield against judicial action. For there are no vested rights to speak of
respecting a wrong construction of the law by the administrative officials and such wrong
interpretation could not place the Government in estoppel to correct or overrule the
same. 27 Moreover, the non-retroactivity of rulings by the Commissioner of Internal
Revenue is not applicable in this case because the nullity of RMC No. 7-85 was declared by
respondent courts and not by the Commissioner of Internal Revenue. Lastly, it must be
noted that, as repeatedly held by this Court, a claim for refund is in the nature of a claim
for exemption and should be construed in strictissimi juris against the taxpayer. 28
On the second issue, the petitioner alleges that the Court of Appeals seriously erred in
affirming CTA's decision denying its claim for refund of P234,077.69 (tax overpaid in
1986), based on mere speculation, without proof, that PBCom availed of the automatic tax
credit in 1987.
Sec. 69 of the 1977 NIRC 29 (now Sec. 76 of the 1997 NIRC) provides that any excess of the
total quarterly payments over the actual income tax computed in the adjustment or final
corporate income tax return, shall either (a) be refunded to the corporation, or (b) may be
credited against the estimated quarterly income tax liabilities for the quarters of the
succeeding taxable year.
The corporation must signify in its annual corporate adjustment return (by marking the
option box provided in the BIR form) its intention, whether to request for a refund or claim
for an automatic tax credit for the succeeding taxable year. To ease the administration of
tax collection, these remedies are in the alternative, and the choice of one precludes the
other.
As stated by respondent Court of Appeals:
Finally, as to the claimed refund of income tax over-paid in 1986 the Court
of Tax Appeals, after examining the adjusted final corporate annual income
tax return for taxable year 1986, found out that petitioner opted to apply for
automatic tax credit. This was the basis used (vis-avis the fact that the 1987
annual corporate tax return was not offered by the petitioner as evidence) by
the CTA in concluding that petitioner had indeed availed of and applied the
automatic tax credit to the succeeding year, hence it can no longer ask for
refund, as to [sic] the two remedies of refund and tax credit are alternative. 30
That the petitioner opted for an automatic tax credit in accordance with Sec. 69 of the
1977 NIRC, as specified in its 1986 Final Adjusted Income Tax Return, is a finding of fact
which we must respect. Moreover, the 1987 annual corporate tax return of the petitioner
was not offered as evidence to contovert said fact. Thus, we are bound by the findings of
fact by respondent courts, there being no showing of gross error or abuse on their part to
disturb our reliance thereon. 31

WHEREFORE, the, petition is hereby DENIED, The decision of the Court of Appeals
appealed from is AFFIRMED, with COSTS against the petitioner.1wphi1.nt
SO ORDERED.

FRANCISCO I. CHAVEZ, petitioner, vs. JAIME B. ONGPIN, in his capacity as

Minister of Finance and FIDELINA CRUZ, in her capacity as Acting Municipal
Treasurer of the Municipality of Las Pi?as, respondents, REALTY OWNERS
ASSOCIATION OF THE PHILIPPINES, INC., petitioner-intervenor.
G.R. No. 76778 | 1990-06-06

Tagged under keywords

DECISION

MEDIALDEA, J.:
The petition seeks to declare unconstitutional Executive Order No. 73 dated November 25,
1986, which We quote in full, as follows (78 O.G. 5861):
"EXECUTIVE ORDER No. 73
"PROVIDING FOR THE COLLECTION OF REAL PROPERTY TAXES BASED ON THE 1984 REAL
PROPERTY VALUES, AS PROVIDED FOR UNDER SECTION 21 OF THE REAL PROPERTY TAX CODE,
AS AMENDED.
"WHEREAS, the collection of real property taxes is still based on the 1978 revision of property
values;
"WHEREAS, the latest general revision of real property assessments completed in 1984 has
rendered the 1978 revised values obsolete;
"WHEREAS, the collection of real property taxes based on the 1984 real property values was
deferred to take effect on January 1, 1988 instead of January 1, 1986, thus depriving the local
government units of an additional source of revenue;
"WHEREAS, there is an urgent need for local governments to augment their financial resources
to meet the rising cost of rendering effective services to the people;
"NOW, THEREFORE, I, CORAZON C. AQUINO, President of the Philippines, do hereby order:

"SECTION 1. Real property values as of December 31, 1984 as determined by the local
assessors during the latest general revision of assessments shall take effect beginning January
1, 1987 for purposes of real property tax collection.
"SEC. 2. The Minister of Finance shall promulgate the necessary rules and regulations to
implement this Executive Order.
"SEC. 3. Executive Order No. 1019, dated April 18, 1985, is hereby repealed.
"SEC. 4. All laws, orders, issuances, and rules and regulations or parts thereof inconsistent with
this Executive Order are hereby repealed or modified accordingly.
"SEC. 5. This Executive Order shall take effect immediately."
On March 31, 1987, Memorandum Order No. 77 was issued suspending the implementation of
Executive Order No. 73 until June 30, 1987.
The petitioner, Francisco I. Chavez, 1 is a taxpayer and an owner of three parcels of land. He
alleges the following: that Executive Order No. 73 accelerated the application of the general
revision of assessments to January 1, 1987 thereby mandating an excessive increase in real
property taxes by 100% to 400% on improvements, and up to 100% on land; that any increase
in the value of real property brought about by the revision of real property values and
assessments would necessarily lead to a proportionate increase in real property taxes; that
sheer oppression is the result of increasing real property taxes at a period of time when harsh
economic conditions prevail;
and that the increase in the market values of real property as reflected in the schedule of
values was brought about only by inflation and economic
recession.
The intervenor Realty Owners Association of the Philippines, Inc. (ROAP), which is the national
association of owners-lessors, joins Chavez in his petition to declare unconstitutional Executive
Order No. 73, but additionally alleges the following: that Presidential Decree No. 464 is
unconstitutional insofar as it imposes an additional one percent (1%) tax on all property
owners to raise funds for education, as real property tax is admittedly a local tax for local
governments; that the General Revision of Assessments does not meet the requirements of
due process as regards publication, notice of hearing, opportunity to be heard and insofar as it
authorizes "replacement cost" of buildings (improvements) which is not provided in
Presidential Decree No. 464, but only in an administrative regulation of the Department of
Finance; and that the Joint Local Assessment/Treasury Regulations No. 2-86 2 is even more
oppressive and unconstitutional as it imposes successive increase of 150% over the 1986 tax.
The Office of the Solicitor General argues against the petition.
The petition is not impressed with merit.
Petitioner Chavez and intervenor ROAP question the constitutionality of Executive Order No. 73
insofar as the revision of the assessments and the effectivity thereof are concerned. It should

be emphasized that Executive Order No. 73 merely directs, in Section 1 thereof, that:
"SECTION 1. Real property values as of December 31, 1984 as determined by the local
assessors during the latest general revision of assessments shall take effect beginning January
1, 1987 for purposes of real property tax collection."
The general revision of assessments completed in 1984 is based on Section 21 of Presidential
Decree No. 464 which provides, as follows:
"SEC. 21. General Revision of Assessments. Beginning with the calendar year 1978, the
provincial or city assessor shall make a general revision of real property assessments in the
province or city to take effect January 1, 1979, and once every five years thereafter: Provided;
however, That if property values in a province or city, or in any municipality, have greatly
changed since the last general revision, the provincial or city assessor may, with the approval
of the Secretary of Finance or upon his direction, undertake a general revision of assessments
in the province or city, or in any municipality before the fifth year from the effectivity of the
last general revision."
Thus, We agree with the Office of the Solicitor General that the attack on Executive Order No.
73 has no legal basis as the general revision of assessments is a continuing process mandated
by Section 21 of Presidential Decree No. 464. If at all, it is Presidential Decree No. 464 which
should be challenged as constitutionally infirm. However, Chavez failed to raise any objection
against said decree. It was ROAP which questioned the constitutionality thereof. Furthermore,
Presidential Decree No. 464 furnishes the procedure by which a tax assessment may be
questioned:
"SEC. 30. Local Board of Assessment Appeals. Any owner who is not satisfied with the action of
the provincial or city assessor in the assessment of his property may, within sixty days from
the date of receipt by him of the written notice of assessment as provided in this Code, appeal
to the Board of Assessment Appeals of the province or city, by filing with it a petition under
oath using the form prescribed for the purpose, together with copies of the tax declarations
and such affidavit or documents submitted in support of the appeal."
xxx xxx xxx
"SEC. 34. Section by the Local of Assessment Appeals. The Local Board of Assessment Appeals
shall decide the appeal within one hundred and twenty days from the date of receipt of such
appeal. The decision rendered must be based on substantial evidence presented at the hearing
or at least contained in the record and disclosed to the parties or such relevant evidence as a
reasonable mind might accept as adequate to support the conclusion.
"In the exercise of its appellate jurisdiction, the Board shall have the power to summon
witnesses, administer oaths, conduct ocular inspection, take depositions, and issue subpoena
and subpoena duces tecum. The proceedings of the Board shall be conducted solely for the
purpose of ascertaining the truth without necessarily adhering to technical rules applicable in
judicial proceedings.
"The Secretary of the Board shall furnish the property owner and the Provincial or City Assessor

with a copy each of the decision of the Board. In case the provincial or city assessor concurs in
the revision or the assessment, it shall be his duty to notify the property owner of such fact
using the form prescribed for the purpose. The owner or administrator of the property or the
assessor who is not satisfied with the decision of the Board of Assessment Appeals, may,
within thirty days after receipt of the decision of the local Board, appeal to the Central Board of
Assessment Appeals by filing his appeal under oath with the Secretary of the proper provincial
or city Board of Assessment Appeals using the prescribed form stating therein the grounds and
the reasons for the appeal, and attaching thereto any evidence pertinent to the case. A copy of
the appeal should be also furnished the Central Board of Assessment Appeals, through its
Chairman, by the appellant.
"Within ten (10) days from receipt of the appeal, the Secretary of the Board of Assessment
Appeals concerned shall forward the same and all papers related thereto, to the Central Board
of Assessment Appeals through the Chairman thereof."
xxx xxx xxx
"SEC. 36. Scope of Powers and Functions. The Central Board of Assessment Appeals shall have
jurisdiction over appealed assessment cases decided by the Local Board of Assessment
Appeals. The said Board shall decide cases brought on appeal within twelve (12) months from
the date of receipt, which decision shall become final and executory after the lapse of fifteen
(15) days from the date of receipt of a copy of the decision by the appellant.
"In the exercise of its appellate jurisdiction, the Central Board of Assessment Appeals, or upon
express authority, the Hearing Commissioner, shall have the power to summon witnesses,
administer oaths, take depositions, and issue subpoenas and subpoenas duces tecum.
"The Central Board of Assessment Appeals shall adopt and promulgate rules of procedure
relative to the conduct of its business."
Simply stated, within sixty days from the date of receipt of the written notice of assessment,
any owner who doubts the assessment of his property, may appeal to the Local Board of
Assessment Appeals. In case the owner or administrator of the property or the assessor is not
satisfied with the decision of the Local Board of Assessment Appeals, he may, within thirty
days from the receipt of the decision, appeal to the Central Board of Assessment Appeals. The
decision of the Central Board of Assessment Appeals shall become final and executory after
the lapse of fifteen days from the date of receipt of the decision.
Chavez argues further that the unreasonable increase in real property taxes brought about by
Executive Order No. 73 amounts to a confiscation of property repugnant to the constitutional
guarantee of due process, invoking the cases of Ermita-Malate Hotel, et al. v. Mayor of Manila
(G.R. No. L-24693, July 31, 1967, 20 SCRA 849) and Sison v. Ancheta, et al. (G.R. No. 59431,
July 25, 1984, 130 SCRA 654).
The reliance on these two cases is certainly misplaced because the due process requirement
called for therein applies to the "power to tax." Executive Order No. 73 does not impose new
taxes nor increase taxes.

Indeed, the government recognized the financial burden to the taxpayers that will result from
an increase in real property taxes. Hence, Executive Order No. 1019 was issued on April 18,
1985, deferring the implementation of the increase in real property taxes resulting from the
revised real property assessments, from January 1, 1985 to January 1, 1988. Section 5 thereof
is quoted herein as follows:
"SEC. 5. The increase in real property taxes resulting from the revised real property
assessments as provided for under Section 21 of Presidential Decree No. 464, as amended by
Presidential Decree No. 1 621, shall be collected beginning January 1, 1988 instead of January
1, 1985 in order to enable the Ministry of Finance and the Ministry of Local Government to
establish the new systems of tax collection and assessment provided herein and in order to
alleviate the condition of the people, including real property owners, as a result of temporary
economic difficulties."
The issuance of Executive Order No. 73 which changed the date of implementation of the
increase in real property taxes from January 1, 1988 to January 1, 1987 and therefore repealed
Executive Order No. 1019, also finds ample justification in its "whereas" clauses, as follows:
"WHEREAS, the collection of real property taxes based on the 1984 real property values was
deferred to take effect on January 1, 1988 instead of January 1, 1985, thus depriving the local
government units of an additional source of revenue;
"WHEREAS, there is an urgent need for local governments to augment their financial resources
to meet the rising cost of rendering effective services to the people;
xxx xxx xxx
The other allegation of ROAP that Presidential Decree No. 464 is unconstitutional, is not proper
to be resolved in the present petition. As stated at the outset, the issue here is limited to the
constitutionality of Executive Order No. 73. Intervention is not an independent proceeding, but
an ancillary and supplemental one which, in the nature of things, unless otherwise provided for
by legislation (or Rules of Court), must be in subordination to the main proceeding, and it may
be laid down as a general rule that an intervention is limited to the field of litigation open to
the original parties (59 Am. Jur. 950; Garcia, etc., et al. v. David, et al., 67 Phil. 279).
We agree with the observation of the Office of the Solicitor General that without Executive
Order No. 73, the basis for collection of real property taxes will still be the 1978 revision of
property values. Certainly, to continue collecting real property taxes based on valuations
arrived at several years ago, in disregard of the increases in the value of real properties that
have occurred since then, is not in consonance with a sound tax system. Fiscal adequacy,
which is one of the characteristics of a sound tax system, requires that sources of revenues
must be adequate to meet government expenditures and their variations.
ACCORDINGLY, the petition and the petition-in-intervention are hereby DISMISSED.
SO ORDERED.
Fernan (C.J.), Narvasa, Melencio-Herrera, Gutierrez, Jr., Cruz, Paras, Feliciano, Gancayco, Bidin,

Sarmiento, Cortes and Regalado, JJ., concur.

Padilla, J., No part; related to intervenor's counsel.
Grio-Aquino, J., On leave.
Footnotes
1. He filed the instant petition before he was appointed to his present position as Solicitor
General.
2. The Joint Local Assessment/Treasury Regulations No. 2-86 issued on December 12, 1986
implements Executive Order No. 73

G.R. No. 125704 August 28, 1998

PHILEX MINING CORPORATION, petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, COURT OF APPEALS, and THE COURT OF
TAX APPEALS,respondents.

ROMERO, J.:
Petitioner Philex Mining Corp. assails the decision of the Court of Appeals promulgated on
April 8, 1996 in CA-G.R. SP No. 36975 1 affirming the Court of Tax Appeals decision in CTA
Case No. 4872 dated March 16, 1995 2 ordering it to pay the amount of P110,677,668.52
as excise tax liability for the period from the 2nd quarter of 1991 to the 2nd quarter of
1992 plus 20% annual interest from August 6, 1994 until fully paid pursuant to Sections
248 and 249 of the Tax Code of 1977.
The facts show that on August 5, 1992, the BIR sent a letter to Philex asking it to settle its
tax liabilities for the 2nd, 3rd and 4th quarter of 1991 as well as the 1st and 2nd quarter of
1992 in the total amount of P123,821.982.52 computed as follows:
PERIOD COVERED BASIC TAX 25% SURCHARGE INTEREST TOTAL EXCISE
TAX DUE
2nd Qtr., 1991 12,911,124.60 3,227,781.15 3,378,116.16 19,517,021.91

3rd Qtr., 1991 14,994,749.21 3,748,687.30 2,978,409.09 21,721,845.60

4th Qtr., 1991 19,406,480.13 4,851,620.03 2,631,837.72 26,889,937.88

47,312,353.94 11,828,088.48 8,988,362.97 68,128,805.39

1st Qtr., 1992 23,341,849.94 5,835,462.49 1,710,669.82 30,887,982.25
2nd Qtr., 1992 19,671,691.76 4,917,922.94 215,580.18 24,805,194.88

43,013,541.70 10,753,385.43 1,926,250.00 55,693,177.13

90,325,895.64 22,581,473.91 10,914,612.97 123,821,982.52

========= ========= ========= =========

In a letter dated August 20, 1992, 4 Philex protested the demand for payment of the tax
liabilities stating that it has pending claims for VAT input credit/refund for the taxes it paid
for the years 1989 to 1991 in the amount of P119,977,037.02 plus interest. Therefore
these claims for tax credit/refund should be applied against the tax liabilities, citing our
ruling inCommissioner of Internal Revenue v. Itogon-Suyoc Mines, Inc. 5
In reply, the BIR, in a letter dated September 7, 1992, 6 found no merit in Philex's position.
Since these pending claims have not yet been established or determined with certainty, it
follows that no legal compensation can take place. Hence, the BIR reiterated its demand
that Philex settle the amount plus interest within 30 days from the receipt of the letter.
In view of the BIR's denial of the offsetting of Philex's claim for VAT input credit/refund
against its excise tax obligation, Philex raised the issue to the Court of Tax Appeals on
November 6, 1992. 7 In the course of the proceedings, the BIR issued Tax Credit Certificate
SN 001795 in the amount of P13,144,313.88 which, applied to the total tax liabilities of
Philex of P123,821,982.52; effectively lowered the latter's tax obligation to
P110,677,688.52.
Despite the reduction of its tax liabilities, the CTA still ordered Philex to pay the remaining
balance of P110,677,688.52 plus interest, elucidating its reason, to wit:
Thus, for legal compensation to take place, both obligations must
be liquidated and demandable. "Liquidated" debts are those where the exact
amount has already been determined (PARAS, Civil Code of the Philippines,
Annotated, Vol. IV, Ninth Edition, p. 259). In the instant case, the claims of the

Petitioner for VAT refund is still pending litigation, and still has to be
determined by this Court (C.T.A. Case No. 4707). A fortiori, the liquidated
debt of the Petitioner to the government cannot, therefore, be set-off against
the unliquidated claim which Petitioner conceived to exist in its favor (see
Compaia General de Tabacos vs. French and Unson, No. 14027, November 8,
1918, 39 Phil. 34). 8
Moreover, the Court of Tax Appeals ruled that "taxes cannot be subject to set-off on
compensation since claim for taxes is not a debt or contract." 9 The dispositive portion of
the CTA decision 10 provides:
In all the foregoing, this Petition for Review is hereby DENIED for lack of merit
and Petitioner is hereby ORDERED to PAY the Respondent the amount of
P110,677,668.52 representing excise tax liability for the period from the 2nd
quarter of 1991 to the 2nd quarter of 1992 plus 20% annual interest from
August 6, 1994 until fully paid pursuant to Section 248 and 249 of the Tax
Code, as amended.
Aggrieved with the decision, Philex appealed the case before the Court of Appeals
docketed as CA-GR. CV No. 36975. 11 Nonetheless, on April 8, 1996, the Court of Appeals a
Affirmed the Court of Tax Appeals observation. The pertinent portion of which reads: 12
WHEREFORE, the appeal by way of petition for review is hereby DISMISSED
and the decision dated March 16, 1995 is AFFIRMED.
Philex filed a motion for reconsideration which was, nevertheless, denied in a Resolution
dated July 11, 1996. 13
However, a few days after the denial of its motion for reconsideration, Philex was able to
obtain its VAT input credit/refund not only for the taxable year 1989 to 1991 but also for
1992 and 1994, computed as follows: 14
Period Covered Tax Credit Date
By Claims For Certificate of
VAT refund/credit Number Issue Amount
1994 (2nd Quarter) 007730 11 July 1996 P25,317,534.01
1994 (4th Quarter) 007731 11 July 1996 P21,791,020.61
1989 007732 11 July 1996 P37,322,799.19
1990-1991 007751 16 July 1996 P84,662,787.46
1992 (1st-3rd Quarter) 007755 23 July 1996 P36,501,147.95

In view of the grant of its VAT input credit/refund, Philex now contends that the same
should, ipso jure, off-set its excise tax liabilities 15 since both had already become "due and
demandable, as well as fully liquidated;" 16 hence, legal compensation can properly take
place.
We see no merit in this contention.
In several instances prior to the instant case, we have already made the pronouncement
that taxes cannot be subject to compensation for the simple reason that the government
and the taxpayer are not creditors and debtors of each other. 17 There is a material
distinction between a tax and debt. Debts are due to the Government in its corporate
capacity, while taxes are due to the Government in its sovereign capacity. 18 We find no
cogent reason to deviate from the aforementioned distinction.
Prescinding from this premise, in Francia v. Intermediate Appellate Court,
categorically held that taxes cannot be subject to set-off or compensation, thus:

19

we

We have consistently ruled that there can be no off-setting of taxes against

the claims that the taxpayer may have against the government. A person
cannot refuse to pay a tax on the ground that the government owes him an
amount equal to or greater than the tax being collected. The collection of a
tax cannot await the results of a lawsuit against the government.
The ruling in Francia has been applied to the subsequent case of Caltex Philippines, Inc. v.
Commission on Audit,20 which reiterated that:
. . . a taxpayer may not offset taxes due from the claims that he may have
against the government. Taxes cannot be the subject of compensation
because the government and taxpayer are not mutually creditors and debtors
of each other and a claim for taxes is not such a debt, demand, contract or
judgment as is allowed to be set-off.
Further, Philex's reliance on our holding in Commissioner of Internal Revenue v. ItogonSuyoc Mines Inc., wherein we ruled that a pending refund may be set off against an
existing tax liability even though the refund has not yet been approved by the
Commissioner, 21 is no longer without any support in statutory law.
It is important to note, that the premise of our ruling in the aforementioned case was
anchored on Section 51 (d) of the National Revenue Code of 1939. However, when the
National Internal Revenue Code of 1977 was enacted, the same provision upon which
the Itogon-Suyoc pronouncement was based was omitted. 22 Accordingly, the doctrine
enunciated in Itogon-Suyoc cannot be invoked by Philex.
Despite the foregoing rulings clearly adverse to Philex's position, it asserts that the
imposition of surcharge and interest for the non-payment of the excise taxes within the
time prescribed was unjustified. Philex posits the theory that it had no obligation to pay
the excise tax liabilities within the prescribed period since, after all, it still has pending
claims for VAT input credit/refund with BIR. 23

We fail to see the logic of Philex's claim for this is an outright disregard of the basic
principle in tax law that taxes are the lifeblood of the government and so should be
collected without unnecessary hindrance. 24 Evidently, to countenance Philex's whimsical
reason would render ineffective our tax collection system. Too simplistic, it finds no
support in law or in jurisprudence.
To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the ground
that it has a pending tax claim for refund or credit against the government which has not
yet been granted. It must be noted that a distinguishing feature of a tax is that it is
compulsory rather than a matter of bargain. 25 Hence, a tax does not depend upon the
consent of the taxpayer. 26 If any taxpayer can defer the payment of taxes by raising the
defense that it still has a pending claim for refund or credit, this would adversely affect the
government revenue system. A taxpayer cannot refuse to pay his taxes when they fall due
simply because he has a claim against the government or that the collection of the tax is
contingent on the result of the lawsuit it filed against the government. 27 Moreover,
Philex's theory that would automatically apply its VAT input credit/refund against its tax
liabilities can easily give rise to confusion and abuse, depriving the government of
authority over the manner by which taxpayers credit and offset their tax liabilities.
Corollarily, the fact that Philex has pending claims for VAT input claim/refund with the
government is immaterial for the imposition of charges and penalties prescribed under
Section 248 and 249 of the Tax Code of 1977. The payment of the surcharge is mandatory
and the BIR is not vested with any authority to waive the collection thereof. 28 The same
cannot be condoned for flimsy reasons, 29 similar to the one advanced by Philex in
justifying its non-payment of its tax liabilities.
Finally, Philex asserts that the BIR violated Section 106 (e) 30 of the National Internal
Revenue Code of 1977, which requires the refund of input taxes within 60 days, 31 when it
took five years for the latter to grant its tax claim for VAT input credit/refund. 32
In this regard, we agree with Philex. While there is no dispute that a claimant has the
burden of proof to establish the factual basis of his or her claim for tax credit or
refund, 33 however, once the claimant has submitted all the required documents it is the
function of the BIR to assess these documents with purposeful dispatch. After all, since
taxpayers owe honestly to government it is but just that government render fair service to
the taxpayers. 34
In the instant case, the VAT input taxes were paid between 1989 to 1991 but the refund of
these erroneously paid taxes was only granted in 1996. Obviously, had the BIR been more
diligent and judicious with their duty, it could have granted the refund earlier. We need not
remind the BIR that simple justice requires the speedy refund of wrongly-held taxes. 35 Fair
dealing and nothing less, is expected by the taxpayer from the BIR in the latter's discharge
of its function. As aptly held in Roxas v. Court of Tax Appeals: 36
The power of taxation is sometimes called also the power to destroy.
Therefore it should be exercised with caution to minimize injury to the
proprietary rights of a taxpayer. It must be exercised fairly, equally and
uniformly, lest the tax collector kill the "hen that lays the golden egg" And, in

order to maintain the general public's trust and confidence in the

Government this power must be used justly and not treacherously.
Despite our concern with the lethargic manner by which the BIR handled Philex's tax
claim, it is a settled rule that in the performance of governmental function, the State is not
bound by the neglect of its agents and officers. Nowhere is this more true than in the field
of taxation. 37 Again, while we understand Philex's predicament, it must be stressed that
the same is not a valid reason for the non-payment of its tax liabilities.
To be sure, this is not to state that the taxpayer is devoid of remedy against public
servants or employees, especially BIR examiners who, in investigating tax claims are seen
to drag their feet needlessly. First, if the BIR takes time in acting upon the taxpayer's claim
for refund, the latter can seek judicial remedy before the Court of Tax Appeals in the
manner prescribed by law. 38 Second, if the inaction can be characterized as willful neglect
of duty, then recourse under the Civil Code and the Tax Code can also be availed of.
Art. 27 of the Civil Code provides:
Art. 27. Any person suffering material or moral loss because a public servant
or employee refuses or neglects, without just cause, to perform his official
duty may file an action for damages and other relief against the latter,
without prejudice to any disciplinary action that may be taken.
More importantly, Section 269 (c) of the National Internal Revenue Act of 1997 states:
xxx xxx xxx
(c) Wilfully neglecting to give receipts, as by law required for any sum
collected in the performance of duty or wilfully neglecting to perform, any
other duties enjoyed by law.
Simply put, both provisions abhor official inaction, willful neglect and unreasonable delay
in the performance of official duties. 39 In no uncertain terms must we stress that every
public employee or servant must strive to render service to the people with utmost
diligence and efficiency. Insolence and delay have no place in government service. The
BIR, being the government collecting arm, must and should do no less. It simply cannot be
apathetic and laggard in rendering service to the taxpayer if it wishes to remain true to its
mission of hastening the country's development. We take judicial notice of the taxpayer's
generally negative perception towards the BIR; hence, it is up to the latter to prove its
detractors wrong.
In sum, while we can never condone the BIR's apparent callousness in performing its
duties, still, the same cannot justify Philex's non-payment of its tax liabilities. The adage
"no one should take the law into his own hands" should have guided Philex's action.
WHEREFORE, in view of the foregoing, the instant petition is hereby DISMISSED. The
assailed decision of the Court of Appeals dated April 8, 1996 is hereby AFFIRMED.
SO ORDERED.

G.R. No. 159796

July 17, 2007

ROMEO P. GEROCHI, KATULONG NG BAYAN (KB) and ENVIRONMENTALIST

CONSUMERS NETWORK, INC. (ECN), Petitioners,
vs.
DEPARTMENT OF ENERGY (DOE), ENERGY REGULATORY COMMISSION (ERC),
NATIONAL POWER CORPORATION (NPC), POWER SECTOR ASSETS AND

LIABILITIES MANAGEMENT GROUP (PSALM Corp.), STRATEGIC POWER UTILITIES

GROUP (SPUG), and PANAY ELECTRIC COMPANY INC. (PECO),Respondents.
DECISION
NACHURA, J.:
Petitioners Romeo P. Gerochi, Katulong Ng Bayan (KB), and Environmentalist Consumers
Network, Inc. (ECN) (petitioners), come before this Court in this original action praying that
Section 34 of Republic Act (RA) 9136, otherwise known as the "Electric Power Industry
Reform Act of 2001" (EPIRA), imposing the Universal Charge, 1and Rule 18 of the Rules and
Regulations (IRR)2 which seeks to implement the said imposition, be declared
unconstitutional. Petitioners also pray that the Universal Charge imposed upon the
consumers be refunded and that a preliminary injunction and/or temporary restraining
order (TRO) be issued directing the respondents to refrain from implementing, charging,
and collecting the said charge.3 The assailed provision of law reads:
SECTION 34. Universal Charge. Within one (1) year from the effectivity of this Act, a
universal charge to be determined, fixed and approved by the ERC, shall be imposed on all
electricity end-users for the following purposes:
(a) Payment for the stranded debts 4 in excess of the amount assumed by the
National Government and stranded contract costs of NPC 5 and as well as qualified
stranded contract costs of distribution utilities resulting from the restructuring of the
industry;
(b) Missionary electrification;6
(c) The equalization of the taxes and royalties applied to indigenous or renewable
sources of energy vis--vis imported energy fuels;
(d) An environmental charge equivalent to one-fourth of one centavo per kilowatthour (P0.0025/kWh), which shall accrue to an environmental fund to be used solely
for watershed rehabilitation and management. Said fund shall be managed by NPC
under existing arrangements; and
(e) A charge to account for all forms of cross-subsidies for a period not exceeding
three (3) years.
The universal charge shall be a non-bypassable charge which shall be passed on and
collected from all end-users on a monthly basis by the distribution utilities. Collections by
the distribution utilities and the TRANSCO in any given month shall be remitted to the
PSALM Corp. on or before the fifteenth (15th) of the succeeding month, net of any amount
due to the distribution utility. Any end-user or self-generating entity not connected to a
distribution utility shall remit its corresponding universal charge directly to the TRANSCO.
The PSALM Corp., as administrator of the fund, shall create a Special Trust Fund which
shall be disbursed only for the purposes specified herein in an open and transparent
manner. All amount collected for the universal charge shall be distributed to the respective
beneficiaries within a reasonable period to be provided by the ERC.

The Facts
Congress enacted the EPIRA on June 8, 2001; on June 26, 2001, it took effect. 7
On April 5, 2002, respondent National Power Corporation-Strategic Power Utilities
Group8 (NPC-SPUG) filed with respondent Energy Regulatory Commission (ERC) a petition
for the availment from the Universal Charge of its share for Missionary Electrification,
docketed as ERC Case No. 2002-165.9
On May 7, 2002, NPC filed another petition with ERC, docketed as ERC Case No. 2002-194,
praying that the proposed share from the Universal Charge for the Environmental charge
of P0.0025 per kilowatt-hour (/kWh), or a total of P119,488,847.59, be approved for
withdrawal from the Special Trust Fund (STF) managed by respondent Power Sector Assets
and
Liabilities Management Group (PSALM)10 for the rehabilitation and management of
watershed areas.11
On December 20, 2002, the ERC issued an Order 12 in ERC Case No. 2002-165 provisionally
approving the computed amount of P0.0168/kWh as the share of the NPC-SPUG from the
Universal Charge for Missionary Electrification and authorizing the National Transmission
Corporation (TRANSCO) and Distribution Utilities to collect the same from its end-users on
a monthly basis.
On June 26, 2003, the ERC rendered its Decision 13 (for ERC Case No. 2002-165) modifying
its Order of December 20, 2002, thus:
WHEREFORE, the foregoing premises considered, the provisional authority granted to
petitioner National Power Corporation-Strategic Power Utilities Group (NPC-SPUG) in the
Order dated December 20, 2002 is hereby modified to the effect that an additional amount
of P0.0205 per kilowatt-hour should be added to the P0.0168 per kilowatt-hour
provisionally authorized by the Commission in the said Order. Accordingly, a total amount
of P0.0373 per kilowatt-hour is hereby APPROVED for withdrawal from the Special Trust
Fund managed by PSALM as its share from the Universal Charge for Missionary
Electrification (UC-ME) effective on the following billing cycles:
(a) June 26-July 25, 2003 for National Transmission Corporation (TRANSCO); and
(b) July 2003 for Distribution Utilities (Dus).
Relative thereto, TRANSCO and Dus are directed to collect the UC-ME in the amount
of P0.0373 per kilowatt-hour and remit the same to PSALM on or before the 15th day of
the succeeding month.
In the meantime, NPC-SPUG is directed to submit, not later than April 30, 2004, a detailed
report to include Audited Financial Statements and physical status (percentage of
completion) of the projects using the prescribed format.1avvphi1

Let copies of this Order be furnished petitioner NPC-SPUG and all distribution utilities
(Dus).
SO ORDERED.
On August 13, 2003, NPC-SPUG filed a Motion for Reconsideration asking the ERC, among
others,14 to set aside the above-mentioned Decision, which the ERC granted in its Order
dated October 7, 2003, disposing:
WHEREFORE, the foregoing premises considered, the "Motion for Reconsideration" filed by
petitioner National Power Corporation-Small Power Utilities Group (NPC-SPUG) is hereby
GRANTED. Accordingly, the Decision dated June 26, 2003 is hereby modified accordingly.
Relative thereto, NPC-SPUG is directed to submit a quarterly report on the following:
1. Projects for CY 2002 undertaken;
2. Location
3. Actual amount utilized to complete the project;
4. Period of completion;
5. Start of Operation; and
6. Explanation of the reallocation of UC-ME funds, if any.
SO ORDERED.15
Meanwhile, on April 2, 2003, ERC decided ERC Case No. 2002-194, authorizing the NPC to
draw up toP70,000,000.00 from PSALM for its 2003 Watershed Rehabilitation Budget
subject to the availability of funds for the Environmental Fund component of the Universal
Charge.16
On the basis of the said ERC decisions, respondent Panay Electric Company, Inc. (PECO)
charged petitioner Romeo P. Gerochi and all other end-users with the Universal Charge as
reflected in their respective electric bills starting from the month of July 2003. 17
Hence, this original action.
Petitioners submit that the assailed provision of law and its IRR which sought to implement
the same are unconstitutional on the following grounds:
1) The universal charge provided for under Sec. 34 of the EPIRA and sought to be
implemented under Sec. 2, Rule 18 of the IRR of the said law is a tax which is to be
collected from all electric end-users and self-generating entities. The power to tax is
strictly a legislative function and as such, the delegation of said power to any
executive or administrative agency like the ERC is unconstitutional, giving the same
unlimited authority. The assailed provision clearly provides that the Universal

Charge is to be determined, fixed and approved by the ERC, hence leaving to the
latter complete discretionary legislative authority.
2) The ERC is also empowered to approve and determine where the funds collected
should be used.
3) The imposition of the Universal Charge on all end-users is oppressive and
confiscatory and amounts to taxation without representation as the consumers were
not given a chance to be heard and represented. 18
Petitioners contend that the Universal Charge has the characteristics of a tax and is
collected to fund the operations of the NPC. They argue that the cases 19 invoked by the
respondents clearly show the regulatory purpose of the charges imposed therein, which is
not so in the case at bench. In said cases, the respective funds 20 were created in order to
balance and stabilize the prices of oil and sugar, and to act as buffer to counteract the
changes and adjustments in prices, peso devaluation, and other variables which cannot be
adequately and timely monitored by the legislature. Thus, there was a need to delegate
powers to administrative bodies.21 Petitioners posit that the Universal Charge is imposed
not for a similar purpose.
On the other hand, respondent PSALM through the Office of the Government Corporate
Counsel (OGCC) contends that unlike a tax which is imposed to provide income for public
purposes, such as support of the government, administration of the law, or payment of
public expenses, the assailed Universal Charge is levied for a specific regulatory purpose,
which is to ensure the viability of the country's electric power industry. Thus, it is exacted
by the State in the exercise of its inherent police power. On this premise, PSALM submits
that there is no undue delegation of legislative power to the ERC since the latter merely
exercises a limited authority or discretion as to the execution and implementation of the
provisions of the EPIRA.22
Respondents Department of Energy (DOE), ERC, and NPC, through the Office of the
Solicitor General (OSG), share the same view that the Universal Charge is not a tax
because it is levied for a specific regulatory purpose, which is to ensure the viability of the
country's electric power industry, and is, therefore, an exaction in the exercise of the
State's police power. Respondents further contend that said Universal Charge does not
possess the essential characteristics of a tax, that its imposition would redound to the
benefit of the electric power industry and not to the public, and that its rate is uniformly
levied on electricity end-users, unlike a tax which is imposed based on the individual
taxpayer's ability to pay. Moreover, respondents deny that there is undue delegation of
legislative power to the ERC since the EPIRA sets forth sufficient determinable standards
which would guide the ERC in the exercise of the powers granted to it. Lastly, respondents
argue that the imposition of the Universal Charge is not oppressive and confiscatory since
it is an exercise of the police power of the State and it complies with the requirements of
due process.23
On its part, respondent PECO argues that it is duty-bound to collect and remit the amount
pertaining to the Missionary Electrification and Environmental Fund components of the
Universal Charge, pursuant to Sec. 34 of the EPIRA and the Decisions in ERC Case Nos.

2002-194 and 2002-165. Otherwise, PECO could be held liable under Sec. 46 24 of the
EPIRA, which imposes fines and penalties for any violation of its provisions or its IRR. 25
The Issues
The ultimate issues in the case at bar are:
1) Whether or not, the Universal Charge imposed under Sec. 34 of the EPIRA is a
tax; and
2) Whether or not there is undue delegation of legislative power to tax on the part
of the ERC.26
Before we discuss the issues, the Court shall first deal with an obvious procedural lapse.
Petitioners filed before us an original action particularly denominated as a Complaint
assailing the constitutionality of Sec. 34 of the EPIRA imposing the Universal Charge and
Rule 18 of the EPIRA's IRR. No doubt, petitioners have locus standi. They impugn the
constitutionality of Sec. 34 of the EPIRA because they sustained a direct injury as a result
of the imposition of the Universal Charge as reflected in their electric bills.
However, petitioners violated the doctrine of hierarchy of courts when they filed this
"Complaint" directly with us. Furthermore, the Complaint is bereft of any allegation of
grave abuse of discretion on the part of the ERC or any of the public respondents, in order
for the Court to consider it as a petition for certiorari or prohibition.
Article VIII, Section 5(1) and (2) of the 1987 Constitution 27 categorically provides that:
SECTION 5. The Supreme Court shall have the following powers:
1. Exercise original jurisdiction over cases affecting ambassadors, other public
ministers and consuls, and over petitions for certiorari, prohibition, mandamus, quo
warranto, and habeas corpus.
2. Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or the
rules of court may provide, final judgments and orders of lower courts in:
(a) All cases in which the constitutionality or validity of any treaty, international or
executive agreement, law, presidential decree, proclamation, order, instruction, ordinance,
or regulation is in question.
But this Court's jurisdiction to issue writs of certiorari, prohibition, mandamus, quo
warranto, and habeas corpus, while concurrent with that of the regional trial courts and
the Court of Appeals, does not give litigants unrestrained freedom of choice of forum from
which to seek such relief.28 It has long been established that this Court will not entertain
direct resort to it unless the redress desired cannot be obtained in the appropriate courts,
or where exceptional and compelling circumstances justify availment of a remedy within
and call for the exercise of our primary jurisdiction. 29 This circumstance alone warrants the
outright dismissal of the present action.

This procedural infirmity notwithstanding, we opt to resolve the constitutional issue raised
herein. We are aware that if the constitutionality of Sec. 34 of the EPIRA is not resolved
now, the issue will certainly resurface in the near future, resulting in a repeat of this
litigation, and probably involving the same parties. In the public interest and to avoid
unnecessary delay, this Court renders its ruling now.
The instant complaint is bereft of merit.
The First Issue
To resolve the first issue, it is necessary to distinguish the States power of taxation from
the police power.
The power to tax is an incident of sovereignty and is unlimited in its range, acknowledging
in its very nature no limits, so that security against its abuse is to be found only in the
responsibility of the legislature which imposes the tax on the constituency that is to pay
it.30 It is based on the principle that taxes are the lifeblood of the government, and their
prompt and certain availability is an imperious need. 31 Thus, the theory behind the
exercise of the power to tax emanates from necessity; without taxes, government cannot
fulfill its mandate of promoting the general welfare and well-being of the people. 32
On the other hand, police power is the power of the state to promote public welfare by
restraining and regulating the use of liberty and property. 33 It is the most pervasive, the
least limitable, and the most demanding of the three fundamental powers of the State.
The justification is found in the Latin maxims salus populi est suprema lex (the welfare of
the people is the supreme law) and sic utere tuo ut alienum non laedas (so use your
property as not to injure the property of others). As an inherent attribute of sovereignty
which virtually extends to all public needs, police power grants a wide panoply of
instruments through which the State, as parens patriae, gives effect to a host of its
regulatory powers.34 We have held that the power to "regulate" means the power to
protect, foster, promote, preserve, and control, with due regard for the interests, first and
foremost, of the public, then of the utility and of its patrons. 35
The conservative and pivotal distinction between these two powers rests in the purpose
for which the charge is made. If generation of revenue is the primary purpose and
regulation is merely incidental, the imposition is a tax; but if regulation is the primary
purpose, the fact that revenue is incidentally raised does not make the imposition a tax. 36
In exacting the assailed Universal Charge through Sec. 34 of the EPIRA, the State's police
power, particularly its regulatory dimension, is invoked. Such can be deduced from Sec. 34
which enumerates the purposes for which the Universal Charge is imposed 37 and which
can be amply discerned as regulatory in character. The EPIRA resonates such regulatory
purposes, thus:
SECTION 2. Declaration of Policy. It is hereby declared the policy of the State:
(a) To ensure and accelerate the total electrification of the country;

(b) To ensure the quality, reliability, security and affordability of the supply of
electric power;
(c) To ensure transparent and reasonable prices of electricity in a regime of free and
fair competition and full public accountability to achieve greater operational and
economic efficiency and enhance the competitiveness of Philippine products in the
global market;
(d) To enhance the inflow of private capital and broaden the ownership base of the
power generation, transmission and distribution sectors;
(e) To ensure fair and non-discriminatory treatment of public and private sector
entities in the process of restructuring the electric power industry;
(f) To protect the public interest as it is affected by the rates and services of electric
utilities and other providers of electric power;
(g) To assure socially and environmentally compatible energy sources and
infrastructure;
(h) To promote the utilization of indigenous and new and renewable energy
resources in power generation in order to reduce dependence on imported energy;
(i) To provide for an orderly and transparent privatization of the assets and liabilities
of the National Power Corporation (NPC);
(j) To establish a strong and purely independent regulatory body and system to
ensure consumer protection and enhance the competitive operation of the
electricity market; and
(k) To encourage the efficient use of energy and other modalities of demand side
management.
From the aforementioned purposes, it can be gleaned that the assailed Universal Charge is
not a tax, but an exaction in the exercise of the State's police power. Public welfare is
surely promoted.
Moreover, it is a well-established doctrine that the taxing power may be used as an
implement of police power.38 InValmonte v. Energy Regulatory Board, et al. 39 and in Gaston
v. Republic Planters Bank,40 this Court held that the Oil Price Stabilization Fund (OPSF) and
the Sugar Stabilization Fund (SSF) were exactions made in the exercise of the police
power. The doctrine was reiterated in Osmea v. Orbos41 with respect to the OPSF. Thus,
we disagree with petitioners that the instant case is different from the aforementioned
cases. With the Universal Charge, a Special Trust Fund (STF) is also created under the
administration of PSALM.42 The STF has some notable characteristics similar to the OPSF
and the SSF, viz.:
1) In the implementation of stranded cost recovery, the ERC shall conduct a review
to determine whether there is under-recovery or over recovery and adjust (true-up)

the level of the stranded cost recovery charge. In case of an over-recovery, the ERC
shall ensure that any excess amount shall be remitted to the STF. A separate
account shall be created for these amounts which shall be held in trust for any
future claims of distribution utilities for stranded cost recovery. At the end of the
stranded cost recovery period, any remaining amount in this account shall be used
to reduce the electricity rates to the end-users. 43
2) With respect to the assailed Universal Charge, if the total amount collected for
the same is greater than the actual availments against it, the PSALM shall retain the
balance within the STF to pay for periods where a shortfall occurs. 44
3) Upon expiration of the term of PSALM, the administration of the STF shall be
transferred to the DOF or any of the DOF attached agencies as designated by the
DOF Secretary.45
The OSG is in point when it asseverates:
Evidently, the establishment and maintenance of the Special Trust Fund, under the last
paragraph of Section 34, R.A. No. 9136, is well within the pervasive and non-waivable
power and responsibility of the government to secure the physical and economic survival
and well-being of the community, that comprehensive sovereign authority we designate as
the police power of the State.46
This feature of the Universal Charge further boosts the position that the same is an
exaction imposed primarily in pursuit of the State's police objectives. The STF reasonably
serves and assures the attainment and perpetuity of the purposes for which the Universal
Charge is imposed, i.e., to ensure the viability of the country's electric power industry.
The Second Issue
The principle of separation of powers ordains that each of the three branches of
government has exclusive cognizance of and is supreme in matters falling within its own
constitutionally allocated sphere. A logical corollary to the doctrine of separation of powers
is the principle of non-delegation of powers, as expressed in the Latin maxim potestas
delegata non delegari potest (what has been delegated cannot be delegated). This is
based on the ethical principle that such delegated power constitutes not only a right but a
duty to be performed by the delegate through the instrumentality of his own judgment
and not through the intervening mind of another. 47
In the face of the increasing complexity of modern life, delegation of legislative power to
various specialized administrative agencies is allowed as an exception to this
principle.48 Given the volume and variety of interactions in today's society, it is doubtful if
the legislature can promulgate laws that will deal adequately with and respond promptly
to the minutiae of everyday life. Hence, the need to delegate to administrative bodies the principal agencies tasked to execute laws in their specialized fields - the authority to
promulgate rules and regulations to implement a given statute and effectuate its policies.
All that is required for the valid exercise of this power of subordinate legislation is that the
regulation be germane to the objects and purposes of the law and that the regulation be

not in contradiction to, but in conformity with, the standards prescribed by the law. These
requirements are denominated as the completeness test and the sufficient standard test.
Under the first test, the law must be complete in all its terms and conditions when it
leaves the legislature such that when it reaches the delegate, the only thing he will have
to do is to enforce it. The second test mandates adequate guidelines or limitations in the
law to determine the boundaries of the delegate's authority and prevent the delegation
from running riot.49
The Court finds that the EPIRA, read and appreciated in its entirety, in relation to Sec. 34
thereof, is complete in all its essential terms and conditions, and that it contains sufficient
standards.
Although Sec. 34 of the EPIRA merely provides that "within one (1) year from the
effectivity thereof, a Universal Charge to be determined, fixed and approved by the ERC,
shall be imposed on all electricity end-users," and therefore, does not state the specific
amount to be paid as Universal Charge, the amount nevertheless is made certain by the
legislative parameters provided in the law itself. For one, Sec. 43(b)(ii) of the EPIRA
provides:
SECTION 43. Functions of the ERC. The ERC shall promote competition, encourage
market development, ensure customer choice and penalize abuse of market power in the
restructured electricity industry. In appropriate cases, the ERC is authorized to issue cease
and desist order after due notice and hearing. Towards this end, it shall be responsible for
the following key functions in the restructured industry:
xxxx
(b) Within six (6) months from the effectivity of this Act, promulgate and enforce, in
accordance with law, a National Grid Code and a Distribution Code which shall include, but
not limited to the following:
xxxx
(ii) Financial capability standards for the generating companies, the TRANSCO, distribution
utilities and suppliers: Provided, That in the formulation of the financial capability
standards, the nature and function of the entity shall be considered: Provided, further,
That such standards are set to ensure that the electric power industry participants meet
the minimum financial standards to protect the public interest. Determine, fix, and
approve, after due notice and public hearings the universal charge, to be imposed on all
electricity end-users pursuant to Section 34 hereof;
Moreover, contrary to the petitioners contention, the ERC does not enjoy a wide latitude
of discretion in the determination of the Universal Charge. Sec. 51(d) and (e) of the
EPIRA50 clearly provides:
SECTION 51. Powers. The PSALM Corp. shall, in the performance of its functions and for
the attainment of its objective, have the following powers:

xxxx
(d) To calculate the amount of the stranded debts and stranded contract costs of
NPC which shall form the basis for ERC in the determination of the universal
charge;
(e) To liquidate the NPC stranded contract costs, utilizing the proceeds from sales
and other property contributed to it, including the proceeds from the universal
charge.
Thus, the law is complete and passes the first test for valid delegation of legislative power.
As to the second test, this Court had, in the past, accepted as sufficient standards the
following: "interest of law and order;" 51 "adequate and efficient instruction;" 52 "public
interest;"53 "justice and equity;"54 "public convenience and welfare;"55 "simplicity, economy
and efficiency;"56 "standardization and regulation of medical education;" 57and "fair and
equitable employment practices." 58 Provisions of the EPIRA such as, among others, "to
ensure the total electrification of the country and the quality, reliability, security and
affordability of the supply of electric power" 59 and "watershed rehabilitation and
management"60 meet the requirements for valid delegation, as they provide the limitations
on the ERCs power to formulate the IRR. These are sufficient standards.
It may be noted that this is not the first time that the ERC's conferred powers were
challenged. In Freedom from Debt Coalition v. Energy Regulatory Commission,61 the Court
had occasion to say:
In determining the extent of powers possessed by the ERC, the provisions of the EPIRA
must not be read in separate parts. Rather, the law must be read in its entirety, because a
statute is passed as a whole, and is animated by one general purpose and intent. Its
meaning cannot to be extracted from any single part thereof but from a general
consideration of the statute as a whole. Considering the intent of Congress in enacting the
EPIRA and reading the statute in its entirety, it is plain to see that the law has expanded
the jurisdiction of the regulatory body, the ERC in this case, to enable the latter to
implement the reforms sought to be accomplished by the EPIRA. When the legislators
decided to broaden the jurisdiction of the ERC, they did not intend to abolish or reduce the
powers already conferred upon ERC's predecessors. To sustain the view that the ERC
possesses only the powers and functions listed under Section 43 of the EPIRA is to
frustrate the objectives of the law.
In his Concurring and Dissenting Opinion 62 in the same case, then Associate Justice, now
Chief Justice, Reynato S. Puno described the immensity of police power in relation to the
delegation of powers to the ERC and its regulatory functions over electric power as a vital
public utility, to wit:
Over the years, however, the range of police power was no longer limited to the
preservation of public health, safety and morals, which used to be the primary social
interests in earlier times. Police power now requires the State to "assume an affirmative
duty to eliminate the excesses and injustices that are the concomitants of an unrestrained
industrial economy." Police power is now exerted "to further the public welfare a

concept as vast as the good of society itself." Hence, "police power is but another name
for the governmental authority to further the welfare of society that is the basic end of all
government." When police power is delegated to administrative bodies with regulatory
functions, its exercise should be given a wide latitude. Police power takes on an even
broader dimension in developing countries such as ours, where the State must take a
more active role in balancing the many conflicting interests in society. The Questioned
Order was issued by the ERC, acting as an agent of the State in the exercise of police
power. We should have exceptionally good grounds to curtail its exercise. This approach is
more compelling in the field of rate-regulation of electric power rates. Electric power
generation and distribution is a traditional instrument of economic growth that affects not
only a few but the entire nation. It is an important factor in encouraging investment and
promoting business. The engines of progress may come to a screeching halt if the delivery
of electric power is impaired. Billions of pesos would be lost as a result of power outages
or unreliable electric power services. The State thru the ERC should be able to exercise its
police power with great flexibility, when the need arises.
This was reiterated in National Association of Electricity Consumers for Reforms v. Energy
Regulatory Commission63 where the Court held that the ERC, as regulator, should have
sufficient power to respond in real time to changes wrought by multifarious factors
affecting public utilities.
From the foregoing disquisitions, we therefore hold that there is no undue delegation of
legislative power to the ERC.
Petitioners failed to pursue in their Memorandum the contention in the Complaint that the
imposition of the Universal Charge on all end-users is oppressive and confiscatory, and
amounts to taxation without representation. Hence, such contention is deemed waived or
abandoned per Resolution64 of August 3, 2004.65 Moreover, the determination of whether
or not a tax is excessive, oppressive or confiscatory is an issue which essentially involves
questions of fact, and thus, this Court is precluded from reviewing the same. 66
As a penultimate statement, it may be well to recall what this Court said of EPIRA:
One of the landmark pieces of legislation enacted by Congress in recent years is the
EPIRA. It established a new policy, legal structure and regulatory framework for the electric
power industry. The new thrust is to tap private capital for the expansion and improvement
of the industry as the large government debt and the highly capital-intensive character of
the industry itself have long been acknowledged as the critical constraints to the program.
To attract private investment, largely foreign, the jaded structure of the industry had to be
addressed. While the generation and transmission sectors were centralized and
monopolistic, the distribution side was fragmented with over 130 utilities, mostly small
and uneconomic. The pervasive flaws have caused a low utilization of existing generation
capacity; extremely high and uncompetitive power rates; poor quality of service to
consumers; dismal to forgettable performance of the government power sector; high
system losses; and an inability to develop a clear strategy for overcoming these
shortcomings.
Thus, the EPIRA provides a framework for the restructuring of the industry, including the
privatization of the assets of the National Power Corporation (NPC), the transition to a

competitive structure, and the delineation of the roles of various government agencies and
the private entities. The law ordains the division of the industry into four (4) distinct
sectors, namely: generation, transmission, distribution and supply.
Corollarily, the NPC generating plants have to privatized and its transmission business
spun off and privatized thereafter.67
Finally, every law has in its favor the presumption of constitutionality, and to justify its
nullification, there must be a clear and unequivocal breach of the Constitution and not one
that is doubtful, speculative, or argumentative. 68Indubitably, petitioners failed to overcome
this presumption in favor of the EPIRA. We find no clear violation of the Constitution which
would warrant a pronouncement that Sec. 34 of the EPIRA and Rule 18 of its IRR are
unconstitutional and void.
WHEREFORE, the instant case is hereby DISMISSED for lack of merit.
SO ORDERED.

G.R. No. L-25043

April 26, 1968

ANTONIO ROXAS, EDUARDO ROXAS and ROXAS Y CIA., in their own respective
behalf and as judicial co-guardians of JOSE ROXAS, petitioners,
vs.
COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE, respondents.
BENGZON, J.P., J.:
Don Pedro Roxas and Dona Carmen Ayala, Spanish subjects, transmitted to their
grandchildren by hereditary succession the following properties:
(1) Agricultural lands with a total area of 19,000 hectares, situated in the
municipality of Nasugbu, Batangas province;
(2) A residential house and lot located at Wright St., Malate, Manila; and
(3) Shares of stocks in different corporations.
To manage the above-mentioned properties, said children, namely, Antonio Roxas,
Eduardo Roxas and Jose Roxas, formed a partnership called Roxas y Compania.
AGRICULTURAL LANDS
At the conclusion of the Second World War, the tenants who have all been tilling the lands
in Nasugbu for generations expressed their desire to purchase from Roxas y Cia. the
parcels which they actually occupied. For its part, the Government, in consonance with the
constitutional mandate to acquire big landed estates and apportion them among landless
tenants-farmers, persuaded the Roxas brothers to part with their landholdings.
Conferences were held with the farmers in the early part of 1948 and finally the Roxas
brothers agreed to sell 13,500 hectares to the Government for distribution to actual
occupants for a price of P2,079,048.47 plus P300,000.00 for survey and subdivision
expenses.
It turned out however that the Government did not have funds to cover the purchase
price, and so a special arrangement was made for the Rehabilitation Finance Corporation
to advance to Roxas y Cia. the amount of P1,500,000.00 as loan. Collateral for such loan
were the lands proposed to be sold to the farmers. Under the arrangement, Roxas y Cia.
allowed the farmers to buy the lands for the same price but by installment, and contracted
with the Rehabilitation Finance Corporation to pay its loan from the proceeds of the yearly
amortizations paid by the farmers.

In 1953 and 1955 Roxas y Cia. derived from said installment payments a net gain of
P42,480.83 and P29,500.71. Fifty percent of said net gain was reported for income tax
purposes as gain on the sale of capital asset held for more than one year pursuant to
Section 34 of the Tax Code.
RESIDENTIAL HOUSE
During their bachelor days the Roxas brothers lived in the residential house at Wright St.,
Malate, Manila, which they inherited from their grandparents. After Antonio and Eduardo
got married, they resided somewhere else leaving only Jose in the old house. In fairness to
his brothers, Jose paid to Roxas y Cia. rentals for the house in the sum of P8,000.00 a year.
ASSESSMENTS
On June 17, 1958, the Commissioner of Internal Revenue demanded from Roxas y Cia the
payment of real estate dealer's tax for 1952 in the amount of P150.00 plus P10.00
compromise penalty for late payment, and P150.00 tax for dealers of securities for 1952
plus P10.00 compromise penalty for late payment. The assessment for real estate dealer's
tax was based on the fact that Roxas y Cia. received house rentals from Jose Roxas in the
amount of P8,000.00. Pursuant to Sec. 194 of the Tax Code, an owner of a real estate who
derives a yearly rental income therefrom in the amount of P3,000.00 or more is considered
a real estate dealer and is liable to pay the corresponding fixed tax.
The Commissioner of Internal Revenue justified his demand for the fixed tax on dealers of
securities against Roxas y Cia., on the fact that said partnership made profits from the
purchase and sale of securities.
In the same assessment, the Commissioner assessed deficiency income taxes against the
Roxas Brothers for the years 1953 and 1955, as follows:

Antonio Roxas
Eduardo Roxas
Jose Roxas

1953
P7,010.00
7,281.00
6,323.00

1955
P5,813.00
5,828.00
5,588.00

The deficiency income taxes resulted from the inclusion as income of Roxas y Cia. of the
unreported 50% of the net profits for 1953 and 1955 derived from the sale of the Nasugbu
farm lands to the tenants, and the disallowance of deductions from gross income of
various business expenses and contributions claimed by Roxas y Cia. and the Roxas
brothers. For the reason that Roxas y Cia. subdivided its Nasugbu farm lands and sold
them to the farmers on installment, the Commissioner considered the partnership as
engaged in the business of real estate, hence, 100% of the profits derived therefrom was
taxed.
The following deductions were disallowed:
ROXAS Y CIA.:
195
3

Tickets for Banquet in honor of

S. Osmea

P
40.00

Gifts of San Miguel beer

28.00

Contributions to
Philippine Air Force Chapel

100.0
0

Manila Police Trust Fund

150.0
0

Philippines Herald's fund

Manila's neediest families
195
5

for 100.0
0

Contributions to Contribution to
Our Lady of Fatima
Chapel, FEU
50.00
ANTONIO ROXAS:

195
3

Contributions to
Pasay City Firemen Christmas
Fund
25.00
Pasay City Police Dept. X'mas
fund
50.00

195
5

Contributions to
Baguio
fund

City

Police

Christmas
25.00

Pasay City Firemen Christmas

fund
25.00
Pasay City Police Christmas fund 50.00
EDUARDO ROXAS:
195
3

Contributions to
Hijas de
Manresa

195
5

Retiro

de 450.0
0

Philippines Herald's fund

Manila's neediest families

for 100.0
0

Contributions
to
Philippines
Herald's fund for Manila's
neediest families
JOSE ROXAS:

195

Jesus'

120.0
0

Contributions
to
Philippines
Herald's fund for Manila's
neediest families

120.0
0

The Roxas brothers protested the assessment but inasmuch as said protest was denied,
they instituted an appeal in the Court of Tax Appeals on January 9, 1961. The Tax Court
heard the appeal and rendered judgment on July 31, 1965 sustaining the assessment
except the demand for the payment of the fixed tax on dealer of securities and the
disallowance of the deductions for contributions to the Philippine Air Force Chapel and
Hijas de Jesus' Retiro de Manresa. The Tax Court's judgment reads:
WHEREFORE, the decision appealed from is hereby affirmed with respect to
petitioners Antonio Roxas, Eduardo Roxas, and Jose Roxas who are hereby ordered
to pay the respondent Commissioner of Internal Revenue the amounts of
P12,808.00, P12,887.00 and P11,857.00, respectively, as deficiency income taxes
for the years 1953 and 1955, plus 5% surcharge and 1% monthly interest as
provided for in Sec. 51(a) of the Revenue Code; and modified with respect to the
partnership Roxas y Cia. in the sense that it should pay only P150.00, as real estate
dealer's tax. With costs against petitioners.
Not satisfied, Roxas y Cia. and the Roxas brothers appealed to this Court. The
Commissioner of Internal Revenue did not appeal.
The issues:
(1) Is the gain derived from the sale of the Nasugbu farm lands an ordinary gain,
hence 100% taxable?
(2) Are the deductions for business expenses and contributions deductible?
(3) Is Roxas y Cia. liable for the payment of the fixed tax on real estate dealers?
The Commissioner of Internal Revenue contends that Roxas y Cia. could be considered a
real estate dealer because it engaged in the business of selling real estate. The business
activity alluded to was the act of subdividing the Nasugbu farm lands and selling them to
the farmers-occupants on installment. To bolster his stand on the point, he cites one of the
purposes of Roxas y Cia. as contained in its articles of partnership, quoted below:
4. (a) La explotacion de fincas urbanes pertenecientes a la misma o que pueden
pertenecer a ella en el futuro, alquilandoles por los plazos y demas condiciones,
estime convenientes y vendiendo aquellas que a juicio de sus gerentes no deben
conservarse;
The above-quoted purpose notwithstanding, the proposition of the Commissioner of
Internal Revenue cannot be favorably accepted by Us in this isolated transaction with its
peculiar circumstances in spite of the fact that there were hundreds of vendees. Although
they paid for their respective holdings in installment for a period of ten years, it would
nevertheless not make the vendor Roxas y Cia. a real estate dealer during the ten-year
amortization period.
It should be borne in mind that the sale of the Nasugbu farm lands to the very farmers
who tilled them for generations was not only in consonance with, but more in obedience to
the request and pursuant to the policy of our Government to allocate lands to the landless.
It was the bounden duty of the Government to pay the agreed compensation after it had

persuaded Roxas y Cia. to sell its haciendas, and to subsequently subdivide them among
the farmers at very reasonable terms and prices. However, the Government could not
comply with its duty for lack of funds. Obligingly, Roxas y Cia. shouldered the
Government's burden, went out of its way and sold lands directly to the farmers in the
same way and under the same terms as would have been the case had the Government
done it itself. For this magnanimous act, the municipal council of Nasugbu passed a
resolution expressing the people's gratitude.
The power of taxation is sometimes called also the power to destroy. Therefore it should
be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must
be exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the
golden egg". And, in order to maintain the general public's trust and confidence in the
Government this power must be used justly and not treacherously. It does not conform
with Our sense of justice in the instant case for the Government to persuade the taxpayer
to lend it a helping hand and later on to penalize him for duly answering the urgent call.
In fine, Roxas y Cia. cannot be considered a real estate dealer for the sale in question.
Hence, pursuant to Section 34 of the Tax Code the lands sold to the farmers are capital
assets, and the gain derived from the sale thereof is capital gain, taxable only to the
extent of 50%.
DISALLOWED DEDUCTIONS
Roxas y Cia. deducted from its gross income the amount of P40.00 for tickets to a banquet
given in honor of Sergio Osmena and P28.00 for San Miguel beer given as gifts to various
persons. The deduction were claimed as representation expenses. Representation
expenses are deductible from gross income as expenditures incurred in carrying on a trade
or business under Section 30(a) of the Tax Code provided the taxpayer proves that they
are reasonable in amount, ordinary and necessary, and incurred in connection with his
business. In the case at bar, the evidence does not show such link between the expenses
and the business of Roxas y Cia. The findings of the Court of Tax Appeals must therefore
be sustained.
The petitioners also claim deductions for contributions to the Pasay City Police, Pasay City
Firemen, and Baguio City Police Christmas funds, Manila Police Trust Fund, Philippines
Herald's fund for Manila's neediest families and Our Lady of Fatima chapel at Far Eastern
University.
The contributions to the Christmas funds of the Pasay City Police, Pasay City Firemen and
Baguio City Police are not deductible for the reason that the Christmas funds were not
spent for public purposes but as Christmas gifts to the families of the members of said
entities. Under Section 39(h), a contribution to a government entity is deductible when
used exclusively for public purposes. For this reason, the disallowance must be sustained.
On the other hand, the contribution to the Manila Police trust fund is an allowable
deduction for said trust fund belongs to the Manila Police, a government entity, intended
to be used exclusively for its public functions.
The contributions to the Philippines Herald's fund for Manila's neediest families were
disallowed on the ground that the Philippines Herald is not a corporation or an association
contemplated in Section 30 (h) of the Tax Code. It should be noted however that the
contributions were not made to the Philippines Herald but to a group of civic spirited
citizens organized by the Philippines Herald solely for charitable purposes. There is no
question that the members of this group of citizens do not receive profits, for all the funds
they raised were for Manila's neediest families. Such a group of citizens may be classified

as an association organized exclusively for charitable purposes mentioned in Section 30(h)

of the Tax Code.
Rightly, the Commissioner of Internal Revenue disallowed the contribution to Our Lady of
Fatima chapel at the Far Eastern University on the ground that the said university gives
dividends to its stockholders. Located within the premises of the university, the chapel in
question has not been shown to belong to the Catholic Church or any religious
organization. On the other hand, the lower court found that it belongs to the Far Eastern
University, contributions to which are not deductible under Section 30(h) of the Tax Code
for the reason that the net income of said university injures to the benefit of its
stockholders. The disallowance should be sustained.
Lastly, Roxas y Cia. questions the imposition of the real estate dealer's fixed tax upon it,
because although it earned a rental income of P8,000.00 per annum in 1952, said rental
income came from Jose Roxas, one of the partners. Section 194 of the Tax Code, in
considering as real estate dealers owners of real estate receiving rentals of at least
P3,000.00 a year, does not provide any qualification as to the persons paying the rentals.
The law, which states: 1wph1.t
. . . "Real estate dealer" includes any person engaged in the business of buying,
selling, exchanging, leasing or renting property on his own account as principal and
holding himself out as a full or part-time dealer in real estate or as an owner of
rental property or properties rented or offered to rent for an aggregate amount of
three thousand pesos or more a year: . . . (Emphasis supplied) .
is too clear and explicit to admit construction. The findings of the Court of Tax Appeals or,
this point is sustained.1wph1.t
To Summarize, no deficiency income tax is due for 1953 from Antonio Roxas, Eduardo
Roxas and Jose Roxas. For 1955 they are liable to pay deficiency income tax in the sum of
P109.00, P91.00 and P49.00, respectively, computed as follows: *
ANTONIO ROXAS
P315,476.
59

Net income per return

Add: 1/3 share, profits in Roxas P
y Cia.
153,249.15
Less amount declared

146,135.46

Amount understated

P 7,113.69

Contributions disallowed

115.00
P 7,228.69

Less 1/3 share of contributions

amounting
to
P21,126.06
disallowed from partnership but
allowed to partners
7,042.02

186.67

Net income per review

P315,663.
26

Less: Exemptions

4,200.00

Net taxable income

P311,463.
26

Tax due

154,169.00

Tax paid

154,060.00

Deficiency

P
109.00
=======
===

EDUARDO ROXAS
P
304,166.9
2

Net income per return

Add: 1/3 share, profits in Roxas P
y Cia
153,249.15
Less profits declared

146,052.58

Amount understated

P 7,196.57

Less 1/3 share in contributions

amounting
to
P21,126.06
disallowed from partnership but
allowed to partners
7,042.02

155.55

Net income per review

P304,322.
47

Less: Exemptions

4,800.00

Net taxable income

P299,592.
47

Tax Due

P147,250.00

Tax paid

147,159.00

Deficiency

P91.00
=======
====

JOSE ROXAS
P222,681.
76

Net income per return

Add: 1/3 share, profits in Roxas
P153,429.15
y Cia.
Less amount reported
Amount understated

146,135.46

7,113.69
Less 1/3 share of contributions
disallowed from partnership but
allowed
as
deductions
to
partners
7,042.02

71.67

Net income per review

P222,753.
43

Less: Exemption

1,800.00

Net income subject to tax

P220,953.
43

Tax due

P102,763.00

Tax paid

102,714.00
P
49.00
=======
====

Deficiency

WHEREFORE, the decision appealed from is modified. Roxas y Cia. is hereby ordered to
pay the sum of P150.00 as real estate dealer's fixed tax for 1952, and Antonio Roxas,
Eduardo Roxas and Jose Roxas are ordered to pay the respective sums of P109.00, P91.00
and P49.00 as their individual deficiency income tax all corresponding for the year 1955.
No costs. So ordered.

G.R. No. 167330

September 18, 2009

PHILIPPINE HEALTH CARE PROVIDERS, INC., Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
RESOLUTION
CORONA, J.:
ARTICLE II
Declaration of Principles and State Policies
Section 15. The State shall protect and promote the right to health of the people and instill
health consciousness among them.
ARTICLE XIII
Social Justice and Human Rights

Section 11. The State shall adopt an integrated and comprehensive approach to health
development which shall endeavor to make essential goods, health and other social
services available to all the people at affordable cost. There shall be priority for the needs
of the underprivileged sick, elderly, disabled, women, and children. The State shall
endeavor to provide free medical care to paupers. 1
For resolution are a motion for reconsideration and supplemental motion for
reconsideration dated July 10, 2008 and July 14, 2008, respectively, filed by petitioner
Philippine Health Care Providers, Inc. 2
We recall the facts of this case, as follows:
Petitioner is a domestic corporation whose primary purpose is "[t]o establish, maintain,
conduct and operate a prepaid group practice health care delivery system or a health
maintenance organization to take care of the sick and disabled persons enrolled in the
health care plan and to provide for the administrative, legal, and financial responsibilities
of the organization." Individuals enrolled in its health care programs pay an annual
membership fee and are entitled to various preventive, diagnostic and curative medical
services provided by its duly licensed physicians, specialists and other professional
technical staff participating in the group practice health delivery system at a hospital or
clinic owned, operated or accredited by it.
xxx

xxx

xxx

On January 27, 2000, respondent Commissioner of Internal Revenue [CIR] sent petitioner a
formal demand letter and the corresponding assessment notices demanding the payment
of deficiency taxes, including surcharges and interest, for the taxable years 1996 and 1997
in the total amount of P224,702,641.18. xxxx
The deficiency [documentary stamp tax (DST)] assessment was imposed on petitioners
health care agreement with the members of its health care program pursuant to Section
185 of the 1997 Tax Code xxxx
xxx

xxx

xxx

Petitioner protested the assessment in a letter dated February 23, 2000. As respondent did
not act on the protest, petitioner filed a petition for review in the Court of Tax Appeals
(CTA) seeking the cancellation of the deficiency VAT and DST assessments.
On April 5, 2002, the CTA rendered a decision, the dispositive portion of which read:
WHEREFORE, in view of the foregoing, the instant Petition for Review is PARTIALLY
GRANTED. Petitioner is hereby ORDERED to PAY the deficiency VAT amounting
to P22,054,831.75 inclusive of 25% surcharge plus 20% interest from January 20, 1997
until fully paid for the 1996 VAT deficiency and P31,094,163.87 inclusive of 25% surcharge
plus 20% interest from January 20, 1998 until fully paid for the 1997 VAT deficiency.
Accordingly, VAT Ruling No. [231]-88 is declared void and without force and effect. The
1996 and 1997 deficiency DST assessment against petitioner is hereby CANCELLED AND
SET ASIDE. Respondent is ORDERED to DESIST from collecting the said DST deficiency tax.

SO ORDERED.
Respondent appealed the CTA decision to the [Court of Appeals (CA)] insofar as it
cancelled the DST assessment. He claimed that petitioners health care agreement was a
contract of insurance subject to DST under Section 185 of the 1997 Tax Code.
On August 16, 2004, the CA rendered its decision. It held that petitioners health care
agreement was in the nature of a non-life insurance contract subject to DST.
WHEREFORE, the petition for review is GRANTED. The Decision of the Court of Tax Appeals,
insofar as it cancelled and set aside the 1996 and 1997 deficiency documentary stamp tax
assessment and ordered petitioner to desist from collecting the same is REVERSED and
SET ASIDE.
Respondent is ordered to pay the amounts of P55,746,352.19 and P68,450,258.73 as
deficiency Documentary Stamp Tax for 1996 and 1997, respectively, plus 25% surcharge
for late payment and 20% interest per annum from January 27, 2000, pursuant to Sections
248 and 249 of the Tax Code, until the same shall have been fully paid.
SO ORDERED.
Petitioner moved for reconsideration but the CA denied it. Hence, petitioner filed this case.
xxx

xxx

xxx

In a decision dated June 12, 2008, the Court denied the petition and affirmed the CAs
decision. We held that petitioners health care agreement during the pertinent period was
in the nature of non-life insurance which is a contract of indemnity, citing Blue Cross
Healthcare, Inc. v. Olivares3 and Philamcare Health Systems, Inc. v. CA.4We also ruled that
petitioners contention that it is a health maintenance organization (HMO) and not an
insurance company is irrelevant because contracts between companies like petitioner and
the beneficiaries under their plans are treated as insurance contracts. Moreover, DST is
not a tax on the business transacted but an excise on the privilege, opportunity or facility
offered at exchanges for the transaction of the business.
Unable to accept our verdict, petitioner filed the present motion for reconsideration and
supplemental motion for reconsideration, asserting the following arguments:
(a) The DST under Section 185 of the National Internal Revenue of 1997 is imposed
only on a company engaged in the business of fidelity bonds and other insurance
policies. Petitioner, as an HMO, is a service provider, not an insurance company.
(b) The Court, in dismissing the appeal in CIR v. Philippine National Bank, affirmed in
effect the CAs disposition that health care services are not in the nature of an
insurance business.
(c) Section 185 should be strictly construed.

(d) Legislative intent to exclude health care agreements from items subject to DST
is clear, especially in the light of the amendments made in the DST law in 2002.
(e) Assuming arguendo that petitioners agreements are contracts of indemnity,
they are not those contemplated under Section 185.
(f) Assuming arguendo that petitioners agreements are akin to health insurance,
health insurance is not covered by Section 185.
(g) The agreements do not fall under the phrase "other branch of insurance"
mentioned in Section 185.
(h) The June 12, 2008 decision should only apply prospectively.
(i) Petitioner availed of the tax amnesty benefits under RA 5 9480 for the taxable
year 2005 and all prior years. Therefore, the questioned assessments on the DST
are now rendered moot and academic.6
Oral arguments were held in Baguio City on April 22, 2009. The parties submitted their
memoranda on June 8, 2009.
In its motion for reconsideration, petitioner reveals for the first time that it availed of a tax
amnesty under RA 94807(also known as the "Tax Amnesty Act of 2007") by fully paying the
amount of P5,127,149.08 representing 5% of its net worth as of the year ending December
31, 2005.8
We find merit in petitioners motion for reconsideration.
Petitioner was formally registered and incorporated with the Securities and Exchange
Commission on June 30, 1987.9 It is engaged in the dispensation of the following medical
services to individuals who enter into health care agreements with it:
Preventive medical services such as periodic monitoring of health problems, family
planning counseling, consultation and advices on diet, exercise and other healthy habits,
and immunization;
Diagnostic medical services such as routine physical examinations, x-rays, urinalysis,
fecalysis, complete blood count, and the like and
Curative medical services which pertain to the performing of other remedial and
therapeutic processes in the event of an injury or sickness on the part of the enrolled
member.10
Individuals enrolled in its health care program pay an annual membership fee.
Membership is on a year-to-year basis. The medical services are dispensed to enrolled
members in a hospital or clinic owned, operated or accredited by petitioner, through
physicians, medical and dental practitioners under contract with it. It negotiates with such
health care practitioners regarding payment schemes, financing and other procedures for
the delivery of health services. Except in cases of emergency, the professional services are

to be provided only by petitioner's physicians, i.e. those directly employed by it 11 or whose

services are contracted by it.12 Petitioner also provides hospital services such as room and
board accommodation, laboratory services, operating rooms, x-ray facilities and general
nursing care.13 If and when a member avails of the benefits under the agreement,
petitioner pays the participating physicians and other health care providers for the
services rendered, at pre-agreed rates.14
To avail of petitioners health care programs, the individual members are required to sign
and execute a standard health care agreement embodying the terms and conditions for
the provision of the health care services. The same agreement contains the various health
care services that can be engaged by the enrolled member, i.e., preventive, diagnostic
and curative medical services. Except for the curative aspect of the medical service
offered, the enrolled member may actually make use of the health care services being
offered by petitioner at any time.
Health Maintenance Organizations Are Not Engaged In The Insurance Business
We said in our June 12, 2008 decision that it is irrelevant that petitioner is an HMO and not
an insurer because its agreements are treated as insurance contracts and the DST is not a
tax on the business but an excise on the privilege, opportunity or facility used in the
transaction of the business.15
Petitioner, however, submits that it is of critical importance to characterize the business it
is engaged in, that is, to determine whether it is an HMO or an insurance company, as this
distinction is indispensable in turn to the issue of whether or not it is liable for DST on its
health care agreements.16
A second hard look at the relevant law and jurisprudence convinces the Court that the
arguments of petitioner are meritorious.
Section 185 of the National Internal Revenue Code of 1997 (NIRC of 1997) provides:
Section 185. Stamp tax on fidelity bonds and other insurance policies. On all policies of
insurance or bonds or obligations of the nature of indemnity for loss, damage, or
liability made or renewed by any person, association or company or corporation
transacting the business of accident, fidelity, employers liability, plate, glass, steam
boiler, burglar, elevator, automatic sprinkler, or other branch of insurance (except
life, marine, inland, and fire insurance), and all bonds, undertakings, or
recognizances, conditioned for the performance of the duties of any office or position, for
the doing or not doing of anything therein specified, and on all obligations guaranteeing
the validity or legality of any bond or other obligations issued by any province, city,
municipality, or other public body or organization, and on all obligations guaranteeing the
title to any real estate, or guaranteeing any mercantile credits, which may be made or
renewed by any such person, company or corporation, there shall be collected a
documentary stamp tax of fifty centavos (P0.50) on each four pesos (P4.00), or fractional
part thereof, of the premium charged. (Emphasis supplied)
It is a cardinal rule in statutory construction that no word, clause, sentence, provision or
part of a statute shall be considered surplusage or superfluous, meaningless, void and

insignificant. To this end, a construction which renders every word operative is preferred
over that which makes some words idle and nugatory. 17 This principle is expressed in the
maxim Ut magis valeat quam pereat, that is, we choose the interpretation which gives
effect to the whole of the statute its every word. 18
From the language of Section 185, it is evident that two requisites must concur before
the DST can apply, namely: (1) the document must be a policy of insurance or an
obligation in the nature of indemnity and (2)the maker should be transacting the
business of accident, fidelity, employers liability, plate, glass, steam boiler, burglar,
elevator, automatic sprinkler, or other branch of insurance (except life, marine, inland,
and fire insurance).
Petitioner is admittedly an HMO. Under RA 7875 (or "The National Health Insurance Act of
1995"), an HMO is "an entity that provides, offers or arranges for coverage of designated
health services needed by plan members for a fixed prepaid premium." 19 The payments do
not vary with the extent, frequency or type of services provided.
The question is: was petitioner, as an HMO, engaged in the business of insurance during
the pertinent taxable years? We rule that it was not.
Section 2 (2) of PD 20 1460 (otherwise known as the Insurance Code) enumerates what
constitutes "doing an insurance business" or "transacting an insurance business:"
a) making or proposing to make, as insurer, any insurance contract;
b) making or proposing to make, as surety, any contract of suretyship as a vocation
and not as merely incidental to any other legitimate business or activity of the
surety;
c) doing any kind of business, including a reinsurance business, specifically
recognized as constituting the doing of an insurance business within the meaning of
this Code;
d) doing or proposing to do any business in substance equivalent to any of the
foregoing in a manner designed to evade the provisions of this Code.
In the application of the provisions of this Code, the fact that no profit is derived from the
making of insurance contracts, agreements or transactions or that no separate or direct
consideration is received therefore, shall not be deemed conclusive to show that the
making thereof does not constitute the doing or transacting of an insurance business.
Various courts in the United States, whose jurisprudence has a persuasive effect on our
decisions,21 have determined that HMOs are not in the insurance business. One test that
they have applied is whether the assumption of risk and indemnification of loss (which are
elements of an insurance business) are the principal object and purpose of the
organization or whether they are merely incidental to its business. If these are the
principal objectives, the business is that of insurance. But if they are merely incidental and
service is the principal purpose, then the business is not insurance.

Applying the "principal object and purpose test," 22 there is significant American case law
supporting the argument that a corporation (such as an HMO, whether or not organized for
profit), whose main object is to provide the members of a group with health services, is
not engaged in the insurance business.
The rule was enunciated in Jordan v. Group Health Association23 wherein the Court of
Appeals of the District of Columbia Circuit held that Group Health Association should not
be considered as engaged in insurance activities since it was created primarily for the
distribution of health care services rather than the assumption of insurance risk.
xxx Although Group Healths activities may be considered in one aspect as creating
security against loss from illness or accident more truly they constitute the quantity
purchase of well-rounded, continuous medical service by its members. xxx The functions
of such an organization are not identical with those of insurance or indemnity
companies. The latter are concerned primarily, if not exclusively, with risk and the
consequences of its descent, not with service, or its extension in kind, quantity or
distribution; with the unusual occurrence, not the daily routine of living. Hazard is
predominant. On the other hand, the cooperative is concerned principally with
getting service rendered to its members and doing so at lower prices made
possible by quantity purchasing and economies in operation. Its primary
purpose is to reduce the cost rather than the risk of medical care; to broaden
the service to the individual in kind and quantity; to enlarge the number
receiving it; to regularize it as an everyday incident of living, like purchasing
food and clothing or oil and gas, rather than merely protecting against the
financial loss caused by extraordinary and unusual occurrences, such as death,
disaster at sea, fire and tornado. It is, in this instance, to take care of colds, ordinary
aches and pains, minor ills and all the temporary bodily discomforts as well as the more
serious and unusual illness. To summarize, the distinctive features of the
cooperative are the rendering of service, its extension, the bringing of physician
and patient together, the preventive features, the regularization of service as
well as payment, the substantial reduction in cost by quantity purchasing in
short, getting the medical job done and paid for; not, except incidentally to
these features, the indemnification for cost after the services is rendered.
Except the last, these are not distinctive or generally characteristic of the
insurance arrangement. There is, therefore, a substantial difference between
contracting in this way for the rendering of service, even on the contingency that it be
needed, and contracting merely to stand its cost when or after it is rendered.
That an incidental element of risk distribution or assumption may be present should not
outweigh all other factors. If attention is focused only on that feature, the line between
insurance or indemnity and other types of legal arrangement and economic function
becomes faint, if not extinct. This is especially true when the contract is for the sale of
goods or services on contingency. But obviously it was not the purpose of the insurance
statutes to regulate all arrangements for assumption or distribution of risk. That view
would cause them to engulf practically all contracts, particularly conditional sales and
contingent service agreements. The fallacy is in looking only at the risk element, to
the exclusion of all others present or their subordination to it. The question
turns, not on whether risk is involved or assumed, but on whether that or

something else to which it is related in the particular plan is its principal object
purpose.24 (Emphasis supplied)
In California Physicians Service v. Garrison,25 the California court felt that, after
scrutinizing the plan of operation as a whole of the corporation, it was service rather than
indemnity which stood as its principal purpose.
There is another and more compelling reason for holding that the service is not engaged in
the insurance business. Absence or presence of assumption of risk or peril is not
the sole test to be applied in determining its status. The question, more
broadly, is whether, looking at the plan of operation as a whole, service rather
than indemnity is its principal object and purpose. Certainly the objects and
purposes of the corporation organized and maintained by the California physicians have a
wide scope in the field of social service. Probably there is no more impelling need
than that of adequate medical care on a voluntary, low-cost basis for persons of
small income. The medical profession unitedly is endeavoring to meet that
need. Unquestionably this is service of a high order and not
indemnity.26 (Emphasis supplied)
American courts have pointed out that the main difference between an HMO and an
insurance company is that HMOs undertake to provide or arrange for the provision of
medical services through participating physicians while insurance companies simply
undertake to indemnify the insured for medical expenses incurred up to a pre-agreed
limit. Somerset Orthopedic Associates, P.A. v. Horizon Blue Cross and Blue Shield of New
Jersey27 is clear on this point:
The basic distinction between medical service corporations and ordinary health and
accident insurers is that the former undertake to provide prepaid medical
services through participating physicians, thus relieving subscribers of any further
financial burden, while the latter only undertake to indemnify an insured for medical
expenses up to, but not beyond, the schedule of rates contained in the policy.
xxx

xxx

xxx

The primary purpose of a medical service corporation, however, is an undertaking to

provide physicians who will render services to subscribers on a prepaid basis. Hence, if
there are no physicians participating in the medical service corporations plan,
not only will the subscribers be deprived of the protection which they might
reasonably have expected would be provided, but the corporation will, in effect,
be doing business solely as a health and accident indemnity insurer without
having qualified as such and rendering itself subject to the more stringent financial
requirements of the General Insurance Laws.
A participating provider of health care services is one who agrees in writing to render
health care services to or for persons covered by a contract issued by health service
corporation in return for which the health service corporation agrees to make
payment directly to the participating provider.28 (Emphasis supplied)

Consequently, the mere presence of risk would be insufficient to override the primary
purpose of the business to provide medical services as needed, with payment made
directly to the provider of these services. 29 In short, even if petitioner assumes the risk of
paying the cost of these services even if significantly more than what the member has
prepaid, it nevertheless cannot be considered as being engaged in the insurance business.
By the same token, any indemnification resulting from the payment for services rendered
in case of emergency by non-participating health providers would still be incidental to
petitioners purpose of providing and arranging for health care services and does not
transform it into an insurer. To fulfill its obligations to its members under the agreements,
petitioner is required to set up a system and the facilities for the delivery of such medical
services. This indubitably shows that indemnification is not its sole object.
In fact, a substantial portion of petitioners services covers preventive and diagnostic
medical services intended to keep members from developing medical conditions or
diseases.30 As an HMO, it is its obligation to maintain the good health of its
members. Accordingly, its health care programs are designed to prevent or to
minimize the possibility of any assumption of risk on its part. Thus, its undertaking
under its agreements is not to indemnify its members against any loss or damage arising
from a medical condition but, on the contrary, to provide the health and medical services
needed to prevent such loss or damage.31
Overall, petitioner appears to provide insurance-type benefits to its members (with respect
to its curative medical services), but these are incidental to the principal activity of
providing them medical care. The "insurance-like" aspect of petitioners business is
miniscule compared to its noninsurance activities. Therefore, since it substantially
provides health care services rather than insurance services, it cannot be considered as
being in the insurance business.
It is important to emphasize that, in adopting the "principal purpose test" used in the
above-quoted U.S. cases, we are not saying that petitioners operations are identical in
every respect to those of the HMOs or health providers which were parties to those cases.
What we are stating is that, for the purpose of determining what "doing an insurance
business" means, we have to scrutinize the operations of the business as a whole and not
its mere components. This is of course only prudent and appropriate, taking into account
the burdensome and strict laws, rules and regulations applicable to insurers and other
entities engaged in the insurance business. Moreover, we are also not unmindful that
there are other American authorities who have found particular HMOs to be actually
engaged in insurance activities. 32
Lastly, it is significant that petitioner, as an HMO, is not part of the insurance industry. This
is evident from the fact that it is not supervised by the Insurance Commission but by the
Department of Health.33 In fact, in a letter dated September 3, 2000, the Insurance
Commissioner confirmed that petitioner is not engaged in the insurance business. This
determination of the commissioner must be accorded great weight. It is well-settled that
the interpretation of an administrative agency which is tasked to implement a statute is
accorded great respect and ordinarily controls the interpretation of laws by the courts. The
reason behind this rule was explained in Nestle Philippines, Inc. v. Court of Appeals:34

The rationale for this rule relates not only to the emergence of the multifarious needs of a
modern or modernizing society and the establishment of diverse administrative agencies
for addressing and satisfying those needs; it also relates to the accumulation of
experience and growth of specialized capabilities by the administrative agency charged
with implementing a particular statute. In Asturias Sugar Central, Inc. vs. Commissioner of
Customs,35 the Court stressed that executive officials are presumed to have familiarized
themselves with all the considerations pertinent to the meaning and purpose of the law,
and to have formed an independent, conscientious and competent expert opinion thereon.
The courts give much weight to the government agency officials charged with the
implementation of the law, their competence, expertness, experience and informed
judgment, and the fact that they frequently are the drafters of the law they interpret. 36
A Health Care Agreement Is Not An Insurance Contract Contemplated Under
Section 185 Of The NIRC of 1997
Section 185 states that DST is imposed on "all policies of insurance or obligations of the
nature of indemnity for loss, damage, or liability." In our decision dated June 12, 2008,
we ruled that petitioners health care agreements are contracts of indemnity and are
therefore insurance contracts:
It is incorrect to say that the health care agreement is not based on loss or damage
because, under the said agreement, petitioner assumes the liability and indemnifies its
member for hospital, medical and related expenses (such as professional fees of
physicians). The term "loss or damage" is broad enough to cover the monetary expense or
liability a member will incur in case of illness or injury.
Under the health care agreement, the rendition of hospital, medical and professional
services to the member in case of sickness, injury or emergency or his availment of socalled "out-patient services" (including physical examination, x-ray and laboratory tests,
medical consultations, vaccine administration and family planning counseling) is the
contingent event which gives rise to liability on the part of the member. In case of
exposure of the member to liability, he would be entitled to indemnification by petitioner.
Furthermore, the fact that petitioner must relieve its member from liability by paying for
expenses arising from the stipulated contingencies belies its claim that its services are
prepaid. The expenses to be incurred by each member cannot be predicted beforehand, if
they can be predicted at all. Petitioner assumes the risk of paying for the costs of the
services even if they are significantly and substantially more than what the member has
"prepaid." Petitioner does not bear the costs alone but distributes or spreads them out
among a large group of persons bearing a similar risk, that is, among all the other
members of the health care program. This is insurance. 37
We reconsider. We shall quote once again the pertinent portion of Section 185:
Section 185. Stamp tax on fidelity bonds and other insurance policies. On all policies of
insurance or bondsor obligations of the nature of indemnity for loss, damage, or
liability made or renewed by any person, association or company or corporation
transacting the business of accident, fidelity, employers liability, plate, glass, steam

boiler, burglar, elevator, automatic sprinkler, or other branch of insurance (except life,
marine, inland, and fire insurance), xxxx (Emphasis supplied)
In construing this provision, we should be guided by the principle that tax statutes are
strictly construed against the taxing authority. 38 This is because taxation is a destructive
power which interferes with the personal and property rights of the people and takes from
them a portion of their property for the support of the government. 39 Hence, tax laws may
not be extended by implication beyond the clear import of their language, nor their
operation enlarged so as to embrace matters not specifically provided. 40
We are aware that, in Blue Cross and Philamcare, the Court pronounced that a health care
agreement is in the nature of non-life insurance, which is primarily a contract of indemnity.
However, those cases did not involve the interpretation of a tax provision. Instead, they
dealt with the liability of a health service provider to a member under the terms of their
health care agreement. Such contracts, as contracts of adhesion, are liberally interpreted
in favor of the member and strictly against the HMO. For this reason, we reconsider our
ruling that Blue Cross andPhilamcare are applicable here.
Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement
whereby one undertakes for a consideration to indemnify another against loss, damage or
liability arising from an unknown or contingent event. An insurance contract exists where
the following elements concur:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the happening of the designed peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to distribute actual losses
among a large group of persons bearing a similar risk and
5. In consideration of the insurers promise, the insured pays a premium. 41
Do the agreements between petitioner and its members possess all these elements? They
do not.
First. In our jurisdiction, a commentator of our insurance laws has pointed out that, even if
a contract contains all the elements of an insurance contract, if its primary purpose is the
rendering of service, it is not a contract of insurance:
It does not necessarily follow however, that a contract containing all the four elements
mentioned above would be an insurance contract. The primary purpose of the parties
in making the contract may negate the existence of an insurance contract. For
example, a law firm which enters into contracts with clients whereby in consideration of
periodical payments, it promises to represent such clients in all suits for or against them,
is not engaged in the insurance business. Its contracts are simply for the purpose of
rendering personal services. On the other hand, a contract by which a corporation, in
consideration of a stipulated amount, agrees at its own expense to defend a physician

against all suits for damages for malpractice is one of insurance, and the corporation will
be deemed as engaged in the business of insurance. Unlike the lawyers retainer contract,
the essential purpose of such a contract is not to render personal services, but to
indemnify against loss and damage resulting from the defense of actions for
malpractice.42 (Emphasis supplied)
Second. Not all the necessary elements of a contract of insurance are present in
petitioners agreements. To begin with, there is no loss, damage or liability on the part of
the member that should be indemnified by petitioner as an HMO. Under the agreement,
the member pays petitioner a predetermined consideration in exchange for the hospital,
medical and professional services rendered by the petitioners physician or affiliated
physician to him. In case of availment by a member of the benefits under the agreement,
petitioner does not reimburse or indemnify the member as the latter does not pay any
third party. Instead, it is the petitioner who pays the participating physicians and other
health care providers for the services rendered at pre-agreed rates. The member does not
make any such payment.
In other words, there is nothing in petitioner's agreements that gives rise to a monetary
liability on the part of the member to any third party-provider of medical services which
might in turn necessitate indemnification from petitioner. The terms "indemnify" or
"indemnity" presuppose that a liability or claim has already been incurred. There is no
indemnity precisely because the member merely avails of medical services to be paid or
already paid in advance at a pre-agreed price under the agreements.
Third. According to the agreement, a member can take advantage of the bulk of the
benefits anytime, e.g.laboratory services, x-ray, routine annual physical examination and
consultations, vaccine administration as well as family planning counseling, even in the
absence of any peril, loss or damage on his or her part.
Fourth. In case of emergency, petitioner is obliged to reimburse the member who receives
care from a non-participating physician or hospital. However, this is only a very minor part
of the list of services available. The assumption of the expense by petitioner is not
confined to the happening of a contingency but includes incidents even in the absence of
illness or injury.
In Michigan Podiatric Medical Association v. National Foot Care Program, Inc.,43 although
the health care contracts called for the defendant to partially reimburse a subscriber for
treatment received from a non-designated doctor, this did not make defendant an insurer.
Citing Jordan, the Court determined that "the primary activity of the defendant (was) the
provision of podiatric services to subscribers in consideration of prepayment for such
services."44 Since indemnity of the insured was not the focal point of the agreement but
the extension of medical services to the member at an affordable cost, it did not partake
of the nature of a contract of insurance.
Fifth. Although risk is a primary element of an insurance contract, it is not necessarily true
that risk alone is sufficient to establish it. Almost anyone who undertakes a contractual
obligation always bears a certain degree of financial risk. Consequently, there is a need to
distinguish prepaid service contracts (like those of petitioner) from the usual insurance
contracts.

Indeed, petitioner, as an HMO, undertakes a business risk when it offers to provide health
services: the risk that it might fail to earn a reasonable return on its investment. But it is
not the risk of the type peculiar only to insurance companies. Insurance risk, also known
as actuarial risk, is the risk that the cost of insurance claims might be higher than the
premiums paid. The amount of premium is calculated on the basis of assumptions made
relative to the insured.45
However, assuming that petitioners commitment to provide medical services to its
members can be construed as an acceptance of the risk that it will shell out more than the
prepaid fees, it still will not qualify as an insurance contract because petitioners objective
is to provide medical services at reduced cost, not to distribute risk like an insurer.
In sum, an examination of petitioners agreements with its members leads us to conclude
that it is not an insurance contract within the context of our Insurance Code.
There Was No Legislative Intent To Impose DST On Health Care Agreements Of
HMOs
Furthermore, militating in convincing fashion against the imposition of DST on petitioners
health care agreements under Section 185 of the NIRC of 1997 is the provisions legislative
history. The text of Section 185 came into U.S. law as early as 1904 when HMOs and
health care agreements were not even in existence in this jurisdiction. It was imposed
under Section 116, Article XI of Act No. 1189 (otherwise known as the "Internal Revenue
Law of 1904")46enacted on July 2, 1904 and became effective on August 1, 1904. Except
for the rate of tax, Section 185 of the NIRC of 1997 is a verbatim reproduction of the
pertinent portion of Section 116, to wit:
ARTICLE
Stamp Taxes on Specified Objects

XI

Section 116. There shall be levied, collected, and paid for and in respect to the several
bonds, debentures, or certificates of stock and indebtedness, and other documents,
instruments, matters, and things mentioned and described in this section, or for or in
respect to the vellum, parchment, or paper upon which such instrument, matters, or things
or any of them shall be written or printed by any person or persons who shall make, sign,
or issue the same, on and after January first, nineteen hundred and five, the several taxes
following:
xxx

xxx

xxx

Third xxx (c) on all policies of insurance or bond or obligation of the nature of
indemnity for loss, damage, or liability made or renewed by any person,
association, company, or corporation transacting the business of accident,
fidelity, employers liability, plate glass, steam boiler, burglar, elevator,
automatic sprinkle, or other branch of insurance (except life, marine, inland,
and fire insurance) xxxx (Emphasis supplied)
On February 27, 1914, Act No. 2339 (the Internal Revenue Law of 1914) was enacted
revising and consolidating the laws relating to internal revenue. The aforecited pertinent

portion of Section 116, Article XI of Act No. 1189 was completely reproduced as Section 30
(l), Article III of Act No. 2339. The very detailed and exclusive enumeration of items subject
to DST was thus retained.
On December 31, 1916, Section 30 (l), Article III of Act No. 2339 was again reproduced as
Section 1604 (l), Article IV of Act No. 2657 (Administrative Code). Upon its amendment on
March 10, 1917, the pertinent DST provision became Section 1449 (l) of Act No. 2711,
otherwise known as the Administrative Code of 1917.
Section 1449 (1) eventually became Sec. 222 of Commonwealth Act No. 466 (the NIRC of
1939), which codified all the internal revenue laws of the Philippines. In an amendment
introduced by RA 40 on October 1, 1946, the DST rate was increased but the provision
remained substantially the same.
Thereafter, on June 3, 1977, the same provision with the same DST rate was reproduced in
PD 1158 (NIRC of 1977) as Section 234. Under PDs 1457 and 1959, enacted on June 11,
1978 and October 10, 1984 respectively, the DST rate was again increased.1avvphi1
Effective January 1, 1986, pursuant to Section 45 of PD 1994, Section 234 of the NIRC of
1977 was renumbered as Section 198. And under Section 23 of EO 47 273 dated July 25,
1987, it was again renumbered and became Section 185.
On December 23, 1993, under RA 7660, Section 185 was amended but, again, only with
respect to the rate of tax.
Notwithstanding the comprehensive amendment of the NIRC of 1977 by RA 8424 (or the
NIRC of 1997), the subject legal provision was retained as the present Section 185. In
2004, amendments to the DST provisions were introduced by RA 9243 48 but Section 185
was untouched.
On the other hand, the concept of an HMO was introduced in the Philippines with the
formation of Bancom Health Care Corporation in 1974. The same pioneer HMO was later
reorganized and renamed Integrated Health Care Services, Inc. (or Intercare). However,
there are those who claim that Health Maintenance, Inc. is the HMO industry pioneer,
having set foot in the Philippines as early as 1965 and having been formally incorporated
in 1991. Afterwards, HMOs proliferated quickly and currently, there are 36 registered HMOs
with a total enrollment of more than 2 million. 49
We can clearly see from these two histories (of the DST on the one hand and HMOs on the
other) that when the law imposing the DST was first passed, HMOs were yet unknown in
the Philippines. However, when the various amendments to the DST law were enacted,
they were already in existence in the Philippines and the term had in fact already been
defined by RA 7875. If it had been the intent of the legislature to impose DST on health
care agreements, it could have done so in clear and categorical terms. It had many
opportunities to do so. But it did not. The fact that the NIRC contained no specific provision
on the DST liability of health care agreements of HMOs at a time they were already known
as such, belies any legislative intent to impose it on them. As a matter of fact,
petitioner was assessed its DST liability only on January 27, 2000, after more
than a decade in the business as an HMO.50

Considering that Section 185 did not change since 1904 (except for the rate of tax), it
would be safe to say that health care agreements were never, at any time, recognized as
insurance contracts or deemed engaged in the business of insurance within the context of
the provision.
The Power To Tax Is Not The Power To Destroy
As a general rule, the power to tax is an incident of sovereignty and is unlimited in its
range, acknowledging in its very nature no limits, so that security against its abuse is to
be found only in the responsibility of the legislature which imposes the tax on the
constituency who is to pay it.51 So potent indeed is the power that it was once opined that
"the power to tax involves the power to destroy." 52
Petitioner claims that the assessed DST to date which amounts to P376 million53 is way
beyond its net worth ofP259 million.54 Respondent never disputed these assertions. Given
the realities on the ground, imposing the DST on petitioner would be highly oppressive. It
is not the purpose of the government to throttle private business. On the contrary, the
government ought to encourage private enterprise. 55 Petitioner, just like any concern
organized for a lawful economic activity, has a right to maintain a legitimate business. 56 As
aptly held in Roxas, et al. v. CTA, et al.:57
The power of taxation is sometimes called also the power to destroy. Therefore it should
be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must
be exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the
golden egg."58
Legitimate enterprises enjoy the constitutional protection not to be taxed out of existence.
Incurring losses because of a tax imposition may be an acceptable consequence but killing
the business of an entity is another matter and should not be allowed. It is counterproductive and ultimately subversive of the nations thrust towards a better economy
which will ultimately benefit the majority of our people. 59
Petitioners Tax Liability Was Extinguished Under The Provisions Of RA 9840
Petitioner asserts that, regardless of the arguments, the DST assessment for taxable years
1996 and 1997 became moot and academic 60 when it availed of the tax amnesty under RA
9480 on December 10, 2007. It paidP5,127,149.08 representing 5% of its net worth as of
the year ended December 31, 2005 and complied with all requirements of the tax
amnesty. Under Section 6(a) of RA 9480, it is entitled to immunity from payment of taxes
as well as additions thereto, and the appurtenant civil, criminal or administrative penalties
under the 1997 NIRC, as amended, arising from the failure to pay any and all internal
revenue taxes for taxable year 2005 and prior years. 61
Far from disagreeing with petitioner, respondent manifested in its memorandum:
Section 6 of [RA 9840] provides that availment of tax amnesty entitles a taxpayer to
immunity from payment of the tax involved, including the civil, criminal, or administrative
penalties provided under the 1997 [NIRC], for tax liabilities arising in 2005 and the
preceding years.

In view of petitioners availment of the benefits of [RA 9840], and without conceding the
merits of this case as discussed above, respondent concedes that such tax amnesty
extinguishes the tax liabilities of petitioner. This admission, however, is not meant to
preclude a revocation of the amnesty granted in case it is found to have been granted
under circumstances amounting to tax fraud under Section 10 of said amnesty
law.62(Emphasis supplied)
Furthermore, we held in a recent case that DST is one of the taxes covered by the tax
amnesty program under RA 9480.63 There is no other conclusion to draw than that
petitioners liability for DST for the taxable years 1996 and 1997 was totally extinguished
by its availment of the tax amnesty under RA 9480.
Is The Court Bound By A Minute Resolution In Another Case?
Petitioner raises another interesting issue in its motion for reconsideration: whether this
Court is bound by the ruling of the CA64 in CIR v. Philippine National Bank65 that a health
care agreement of Philamcare Health Systems is not an insurance contract for purposes of
the DST.
In support of its argument, petitioner cites the August 29, 2001 minute resolution of this
Court dismissing the appeal in Philippine National Bank (G.R. No. 148680).66 Petitioner
argues that the dismissal of G.R. No. 148680 by minute resolution was a judgment on the
merits; hence, the Court should apply the CA ruling there that a health care agreement is
not an insurance contract.
It is true that, although contained in a minute resolution, our dismissal of the petition was
a disposition of the merits of the case. When we dismissed the petition, we effectively
affirmed the CA ruling being questioned. As a result, our ruling in that case has already
become final.67 When a minute resolution denies or dismisses a petition for failure to
comply with formal and substantive requirements, the challenged decision, together with
its findings of fact and legal conclusions, are deemed sustained. 68 But what is its effect on
other cases?
With respect to the same subject matter and the same issues concerning the same
parties, it constitutes res judicata.69 However, if other parties or another subject matter
(even with the same parties and issues) is involved, the minute resolution is not binding
precedent. Thus, in CIR v. Baier-Nickel,70 the Court noted that a previous case, CIR v. BaierNickel71 involving the same parties and the same issues, was previously disposed of
by the Court thru a minute resolution dated February 17, 2003 sustaining the ruling of the
CA. Nonetheless, the Court ruled that the previous case "ha(d) no bearing" on the
latter case because the two cases involved different subject matters as they were
concerned with the taxable income of different taxable years. 72
Besides, there are substantial, not simply formal, distinctions between a minute resolution
and a decision. The constitutional requirement under the first paragraph of Section 14,
Article VIII of the Constitution that the facts and the law on which the judgment is based
must be expressed clearly and distinctly applies only to decisions, not to minute
resolutions. A minute resolution is signed only by the clerk of court by authority of the
justices, unlike a decision. It does not require the certification of the Chief Justice.

Moreover, unlike decisions, minute resolutions are not published in the Philippine Reports.
Finally, the proviso of Section 4(3) of Article VIII speaks of a decision. 73 Indeed, as a rule,
this Court lays down doctrines or principles of law which constitute binding precedent in a
decision duly signed by the members of the Court and certified by the Chief Justice.
Accordingly, since petitioner was not a party in G.R. No. 148680 and since petitioners
liability for DST on its health care agreement was not the subject matter of G.R. No.
148680, petitioner cannot successfully invoke the minute resolution in that case (which is
not even binding precedent) in its favor. Nonetheless, in view of the reasons already
discussed, this does not detract in any way from the fact that petitioners health care
agreements are not subject to DST.
A Final Note
Taking into account that health care agreements are clearly not within the ambit of Section
185 of the NIRC and there was never any legislative intent to impose the same on HMOs
like petitioner, the same should not be arbitrarily and unjustly included in its coverage.
It is a matter of common knowledge that there is a great social need for adequate medical
services at a cost which the average wage earner can afford. HMOs arrange, organize and
manage health care treatment in the furtherance of the goal of providing a more efficient
and inexpensive health care system made possible by quantity purchasing of services and
economies of scale. They offer advantages over the pay-for-service system (wherein
individuals are charged a fee each time they receive medical services), including the
ability to control costs. They protect their members from exposure to the high cost of
hospitalization and other medical expenses brought about by a fluctuating economy.
Accordingly, they play an important role in society as partners of the State in achieving its
constitutional mandate of providing its citizens with affordable health services.
The rate of DST under Section 185 is equivalent to 12.5% of the premium charged. 74 Its
imposition will elevate the cost of health care services. This will in turn necessitate an
increase in the membership fees, resulting in either placing health services beyond the
reach of the ordinary wage earner or driving the industry to the ground. At the end of the
day, neither side wins, considering the indispensability of the services offered by HMOs.
WHEREFORE, the motion for reconsideration is GRANTED. The August 16, 2004 decision
of the Court of Appeals in CA-G.R. SP No. 70479 is REVERSED and SET ASIDE. The 1996
and 1997 deficiency DST assessment against petitioner is hereby CANCELLED and SET
ASIDE. Respondent is ordered to desist from collecting the said tax.
No costs.
SO ORDERED.

G.R. No. L-23771 August 4, 1988

THE COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
LINGAYEN GULF ELECTRIC POWER CO., INC. and THE COURT OF TAX
APPEALS, respondents.
SARMIENTO, J.:
This is an appeal from the decision * of the Court of Tax Appeals (C.T.A., for brevity) dated
September 15, 1964 in C.T.A. Cases Nos. 581 and 1302, which were jointly heard upon
agreement of the parties, absolving the respondent taxpayer from liability for the
deficiency percentage, franchise, and fixed taxes and surcharge assessed against it in the
sums of P19,293.41 and P3,616.86 for the years 1946 to 1954 and 1959 to 1961,
respectively.
The respondent taxpayer, Lingayen Gulf Electric Power Co., Inc., operates an electric
power plant serving the adjoining municipalities of Lingayen and Binmaley, both in the
province of Pangasinan, pursuant to the municipal franchise granted it by their respective
municipal councils, under Resolution Nos. 14 and 25 of June 29 and July 2, 1946,
respectively. Section 10 of these franchises provide that:
...The said grantee in consideration of the franchise hereby granted, shall pay quarterly
into the Provincial Treasury of Pangasinan, one per centum of the gross earnings obtained

thru this privilege during the first twenty years and two per centum during the remaining
fifteen years of the life of said franchise.
On February 24, 1948, the President of the Philippines approved the franchises granted to
the private respondent.
On November 21, 1955, the Bureau of Internal Revenue (BIR) assessed against and
demanded from the private respondent the total amount of P19,293.41 representing
deficiency franchise taxes and surcharges for the years 1946 to 1954 applying the
franchise tax rate of 5% on gross receipts from March 1, 1948 to December 31, 1954 as
prescribed in Section 259 of the National Internal Revenue Code, instead of the lower rates
as provided in the municipal franchises. On September 29, 1956, the private respondent
requested for a reinvestigation of the case on the ground that instead of incurring a
deficiency liability, it made an overpayment of the franchise tax. On April 30, 1957, the
BIR through its regional director, denied the private respondent's request for
reinvestigation and reiterated the demand for payment of the same. In its letters dated
July 2, and August 9, 1958 to the petitioner Commissioner, the private respondent
protested the said assessment and requested for a conference with a view to settling the
liability amicably. In his letters dated July 25 and August 28, 1958, the Commissioner
denied the request of the private respondent. Thus, the appeal to the respondent Court of
Tax Appeals on September 19, 1958, docketed as C.T.A. Case No. 581.
In a letter dated August 21, 1962, the Commissioner demanded from the private
respondent the payment of P3,616.86 representing deficiency franchise tax and
surcharges for the years 1959 to 1961 again applying the franchise tax rate of 5% on
gross receipts as prescribed in Section 259 of the National Internal Revenue Code. In a
letter dated October 5, 1962, the private respondent protested the assessment and
requested reconsideration thereof The same was denied on November 9, 1962. Thus, the
appeal to the respondent Court of Appeals on November 29, 1962, docketed as C.T.A. No.
1302.
Pending the hearing of the said cases, Republic Act (R.A.) No. 3843 was passed on June 22,
1 963, granting to the private respondent a legislative franchise for the operation of the
electric light, heat, and power system in the same municipalities of Pangasinan. Section 4
thereof provides that:
In consideration of the franchise and rights hereby granted, the grantee shall pay into the
Internal Revenue office of each Municipality in which it is supplying electric current to the
public under this franchise, a tax equal to two per centum of the gross receipts from
electric current sold or supplied under this franchise. Said tax shall be due and payable
quarterly and shall be in lieu of any and all taxes and/or licenses of any kind, nature or
description levied, established, or collected by any authority whatsoever, municipal,
provincial or national, now or in the future, on its poles, wires, insulator ... and on its
franchise, rights, privileges, receipts, revenues and profits, from which taxes and/or
licenses, the grantee is hereby expressly exempted and effective further upon the date the
original franchise was granted, no other tax and/or licenses other than the franchise tax of
two per centum on the gross receipts as provided for in the original franchise shall be
collected, any provision of law to the contrary notwithstanding.

On September 15, 1964, the respondent court ruled that the provisions of R.A. No. 3843
should apply and accordingly dismissed the claim of the Commissioner of Internal
Revenue. The said ruling is now the subject of the petition at bar.
The issues raised for resolution are:
1. Whether or not the 5% franchise tax prescribed in Section 259 of the National Internal
Revenue Code assessed against the private respondent on its gross receipts realized
before the effectivity of R.A- No. 3843 is collectible.
2. Whether or not Section 4 of R.A. No. 3843 is unconstitutional for being violative of the
"uniformity and equality of taxation" clause of the Constitution.
3. If the abovementioned Section 4 of R.A. No. 3843 is valid, whether or not it could be
given retroactive effect so as to render uncollectible the taxes in question which were
assessed before its enactment.
4. Whether or not the respondent taxpayer is liable for the fixed and deficiency percentage
taxes in the amount of P3,025.96 for the period from January 1, 1946 to February 29,
1948, the period before the approval of its municipal franchises.
The first issue raised by the petitioner before us is whether or not the five percent (5%)
franchise tax prescribed in Section 259 of the National Internal Revenue Code
(Commonwealth Act No. 466 as amended by R.A. No. 39) assessed against the private
respondent on its gross receipts realized before the effectivity of R.A- No. 3843 is
collectible. It is the contention of the petitioner Commissioner of Internal Revenue that the
private respondent should have been held liable for the 5% franchise tax on gross receipts
prescribed in Section 259 of the Tax Code, instead of the lower franchise tax rates
provided in the municipal franchises (1% of gross earnings for the first twenty years and
2% for the remaining fifteen years of the life of the franchises) because Section 259 of the
Tax Code, as amended by RA No. 39 of October 1, 1946, applied to existing and future
franchises. The franchises of the private respondent were already in existence at the time
of the adoption of the said amendment, since the franchises were accepted on March 1,
1948 after approval by the President of the Philippines on February 24, 1948. The private
respondent's original franchises did not contain the proviso that the tax provided therein
"shall be in lieu of all taxes;" moreover, the franchises contained a reservation clause that
they shag be subject to amendment, alteration, or repeal, but even in the absence of such
cause, the power of the Legislature to alter, amend, or repeal any franchise is always
deemed reserved. The franchise of the private respondent have been modified or
amended by Section 259 of the Tax Code, the petitioner submits.
We find no merit in petitioner's contention. R.A. No. 3843 granted the private respondent a
legislative franchise in June, 1963, amending, altering, or even repealing the original
municipal franchises, and providing that the private respondent should pay only a 2%
franchise tax on its gross receipts, "in lieu of any and all taxes and/or licenses of any kind,
nature or description levied, established, or collected by any authority whatsoever,
municipal, provincial, or national, now or in the future ... and effective further upon
the date the original franchise was granted, no other tax and/or licenses other than the
franchise tax of two per centum on the gross receipts ... shall be collected, any provision

of law to the contrary notwithstanding." Thus, by virtue of R.A- No. 3843, the private
respondent was liable to pay only the 2% franchise tax, effective from the date the original
municipal franchise was granted.
On the question as to whether or not Section 4 of R.A. No. 3843 is unconstitutional for
being violative of the "uniformity and equality of taxation" clause of the Constitution, and,
if adjudged valid, whether or not it should be given retroactive effect, the petitioner
submits that the said law is unconstitutional insofar as it provides for the payment by the
private respondent of a franchise tax of 2% of its gross receipts, while other taxpayers
similarly situated were subject to the 5% franchise tax imposed in Section 259 of the Tax
Code, thereby discriminatory and violative of the rule on uniformity and equality of
taxation.
A tax is uniform when it operates with the same force and effect in every place where the
subject of it is found. Uniformity means that all property belonging to the same class shall
be taxed alike The Legislature has the inherent power not only to select the subjects of
taxation but to grant exemptions. Tax exemptions have never been deemed violative of
the equal protection clause. 1 It is true that the private respondents municipal franchises
were obtained under Act No. 667 2 of the Philippine Commission, but these original
franchises have been replaced by a new legislative franchise, i.e. R.A. No. 3843. As
correctly held by the respondent court, the latter was granted subject to the terms and
conditions established in Act No. 3636, 3 as amended by C.A. No. 132. These conditions
Identify the private respondent's power plant as falling within that class of power plants
created by Act No. 3636, as amended. The benefits of the tax reduction provided by law
(Act No. 3636 as amended by C.A. No. 132 and R.A. No. 3843) apply to the respondent's
power plant and others circumscribed within this class. R.A-No. 3843 merely transferred
the petitioner's power plant from that class provided for in Act No. 667, as amended, to
which it belonged until the approval of R.A- No. 3843, and placed it within the class falling
under Act No. 3636, as amended. Thus, it only effected the transfer of a taxable property
from one class to another.
We do not have the authority to inquire into the wisdom of such act. Furthermore, the 5%
franchise tax rate provided in Section 259 of the Tax Code was never intended to have a
universal application. 4 We note that the said Section 259 of the Tax Code expressly allows
the payment of taxes at rates lower than 5% when the charter granting the franchise of a
grantee, like the one granted to the private respondent under Section 4 of R.A. No. 3843,
precludes the imposition of a higher tax. R.A. No. 3843 did not only fix and specify a
franchise tax of 2% on its gross receipts, but made it "in lieu of any and all taxes, all laws
to the contrary notwithstanding," thus, leaving no room for doubt regarding the legislative
intent. "Charters or special laws granted and enacted by the Legislature are in the nature
of private contracts. They do not constitute a part of the machinery of the general
government. They are usually adopted after careful consideration of the private rights in
relation with resultant benefits to the State ... in passing a special charter the attention of
the Legislature is directed to the facts and circumstances which the act or charter is
intended to meet. The Legislature consider (sic) and make (sic) provision for all the
circumstances of a particular case." 5 In view of the foregoing, we find no reason to disturb
the respondent court's ruling upholding the constitutionality of the law in question.

Given its validity, should the said law be applied retroactively so as to render uncollectible
the taxes in question which were assessed before its enactment? The question of whether
a statute operates retrospectively or only prospectively depends on the legislative intent.
In the instant case, Act No. 3843 provides that "effective ... upon the date the original
franchise was granted, no other tax and/or licenses other than the franchise tax of two per
centum on the gross receipts ... shall be collected, any provision to the contrary
notwithstanding." Republic Act No. 3843 therefore specifically provided for the retroactive
effect of the law.
The last issue to be resolved is whether or not the private respondent is liable for the fixed
and deficiency percentage taxes in the amount of P3,025.96 (i.e. for the period from
January 1, 1946 to February 29, 1948) before the approval of its municipal franchises. As
aforestated, the franchises were approved by the President only on February 24, 1948.
Therefore, before the said date, the private respondent was liable for the payment of
percentage and fixed taxes as seller of light, heat, and power which as the petitioner
claims, amounted to P3,025.96. The legislative franchise (R.A. No. 3843) exempted the
grantee from all kinds of taxes other than the 2% tax from the date the original franchise
was granted. The exemption, therefore, did not cover the period before the franchise was
granted, i.e. before February 24, 1948. However, as pointed out by the respondent court in
its findings, during the period covered by the instant case, that is from January 1, 1946 to
December 31, 1961, the private respondent paid the amount of P34,184.36, which was
very much more than the amount rightfully due from it. Hence, the private respondent
should no longer be made to pay for the deficiency tax in the amount of P3,025.98 for the
period from January 1, 1946 to February 29, 1948.
WHEREFORE, the appealed decision of the respondent Court of Tax Appeals is hereby
AFFIRMED. No pronouncement as to costs. SO ORDERED.

G.R. No. 119252 August 18, 1997

COMMISSIONER OF INTERNAL REVENUE and COMMISSIONER OF
CUSTOMS, petitioners,
vs.
HON. APOLINARIO B. SANTOS, in his capacity as Presiding Judge of the Regional

Trial Court, Branch 67, Pasig City; ANTONIO M. MARCO; JEWELRY BY MARCO &
CO., INC., and GUILD OF PHILIPPINE JEWELLERS, INC., respondents.

HERMOSISIMA, JR., J.:

Of grave concern to this Court is the judicial pronouncement of the court a quo that certain
provisions of the Tariff & Customs Code and the National Internal Revenue Code are
unconstitutional. This provokes the issue: Can the Regional Trial Courts declare a law
inoperative and without force and effect or otherwise unconstitutional? If it can, under
what circumstances?
In this petition, the Commissioner of Internal Revenue and the Commissioner of Customs
jointly seek the reversal of the Decision, 1 dated February 16, 1995, of herein public
respondent, Hon. Apolinario B. Santos, Presiding Judge of Branch 67 of the Regional Trial
Court of Pasig City.
The following facts, concisely related in the petition 2 of the Office of the Solicitor General,
appear to be undisputed:
1. Private respondent Guild of Philippine Jewelers, Inc., is an association of Filipino
jewelers engaged in the manufacture of jewelries (sic) and allied undertakings.
Among its members are Hans Brumann, Inc., Miladay Jewels, Inc., Mercelles, Inc.,
Solid Gold International Traders, Inc., Diagem Trading Corporation, and private
respondent Jewelry by Marco & Co., Inc. Private respondent Antonio M. Marco is the
President of the Guild.
2. On August 5, 1988, Felicidad L. Viray, then Regional Director, Region No. 4-A of
the Bureau of Internal Revenue, acting for and in behalf of the Commissioner of
Internal Revenue, issued Regional Mission Order No. 109-88 to BIR officers, led by
Eliseo Corcega, to conduct surveillance, monitoring, and inventory of all imported
articles of Hans Brumann, Inc., and place the same under preventive embargo. The
duration of the mission was from August 8 to August 20, 1988 (Exhibit "1"; Exhibit
"A").
3. On August 17, 1988, pursuant to the aforementioned Mission Order, the BIR
officers proceeded to the establishment of Hans Brumann, Inc., served the Mission
Order, and informed the establishment that they were going to make an inventory
of the articles involved to see if the proper taxes thereon have been paid. They then
made an inventory of the articles displayed in the cabinets with the assistance of an
employee of the establishment. They listed down the articles, which list was signed
by the assistant employee. They also requested the presentation of proof of
necessary payments for excise tax and value-added tax on said articles (pp. 10-15,
TSN, April 12, 1993, Exhibits "2", "2-A", "3", "3-A").
4. The BIR officers requested the establishment not to sell the articles until it can be
proven that the necessary taxes thereon have been paid. Accordingly, Mr. Hans
Brumann, the owner of the establishment, signed a receipt for Goods, Articles, and

Things Seized under Authority of the National Internal Revenue Code (dated August
17, 1988), acknowledging that the articles inventoried have been seized and left in
his possession, and promising not to dispose of the same without authority of the
Commissioner of Internal Revenue pending investigation. 3
5. Subsequently, BIR officer Eliseo Corcega submitted to his superiors a report of the
inventory conducted and a computation of the value-added tax and ad valorem tax
on the articles for evaluation and disposition. 4
6. Mr. Hans Brumann, the owner of the establishment, never filed a protest with the
BIR on the preventive embargo of the articles. 5
7. On October 17, 1988, Letter of Authority No. 0020596 was issued by Deputy
Commissioner Eufracio D. Santos to BIR officers to examine the books of accounts
and other accounting records of Hans Brumann, Inc., for "stocktaking investigation
for excise tax purposes for the period January 1, 1988 to present" (Exhibit "C"). In a
letter dated October 27, 1988, in connection with the physical count of the
inventory (stocks on hand) pursuant to said Letter of Authority, Hans Brumann, Inc.
was requested to prepare and make available to the BIR the documents indicated
therein (Exhibit "D").
8. Hans Brumann, Inc., did not produce the documents requested by the BIR. 6
9. Similar Letter of Authority were issued to BIR officers to examine the books of
accounts and other accounting records of Miladay Jewels, Inc., Mercelles, Inc., Solid
Gold International Traders, Inc., (Exhibits "E", "G" and "N") and Diagem Trading
Corporation 7 for "stocktaking/investigation far excise tax purpose for the period
January 1, 1988 to present."
10. In the case of Miladay Jewels, Inc. and Mercelles, Inc., there is no account of
what actually transpired in the implementation of the Letters of Authority.
11. In the case of Solid Gold International Traders Corporation, the BIR officers made
an inventory of the articles in the establishment. 8 The same is true with respect to
Diagem Traders Corporation. 9
12. On November 29, 1988, private respondents Antonio M. Marco and Jewelry By
Marco & Co., Inc. filed with the Regional Trial Court, National Capital Judicial Region,
Pasig City, Metro Manila, a petition for declaratory relief with writ of preliminary
injunction and/or temporary restraining order against herein petitioners and
Revenue Regional Director Felicidad L. Viray (docketed as Civil Case No. 56736)
praying that Sections 126, 127(a) and (b) and 150(a) of the National Internal
Revenue Code and Hdg. No. 71.01, 71.02, 71.03, and 71.04, Chapter 71 of the Tariff
and Customs Code of the Philippines be declared unconstitutional and void, and that
the Commissioner of Internal Revenue and Customs be prevented or enjoined from
issuing mission orders and other orders of similar nature. . . .
13. On February 9, 1989, herein petitioners filed their answer to the petition. . . .

14 On October 16, 1989, private respondents filed a Motion with Leave to Amend
Petition by including as petitioner the Guild of Philippine Jewelers, Inc., which motion
was granted. . . .
15. The case, which was originally assigned to Branch 154, was later reassigned to
Branch 67.
16. On February 16, 1995, public respondents rendered a decision, the dispositive
portion of which reads:
In view of the foregoing reflections, judgment is hereby rendered, as follows:
1. Declaring Section 104 of the Tariff and the Customs Code of the
Philippines, Hdg. 71.01, 71.02, 71.03, and 71.04, Chapter 71 as
amended by Executive Order No. 470, imposing three to ten (3% to
10%) percent tariff and customs duty on natural and cultured pearls
and precious or semi-precious stones, and Section 150 par. (a) the
National Internal Revenue Code of 1977, as amended, renumbered and
rearranged by Executive Order 273, imposing twenty (20%) percent
excise tax on jewelry, pearls and other precious stones, as
INOPERATIVE and WITHOUT FORCE and EFFECT insofar as petitioners
are concerned.
2. Enforcement of the same is hereby enjoined.
No cost.
SO ORDERED.
Section 150 (a) of Executive Order No. 273 reads:
Sec. 150. Non-essential goods. There shall be levied, assessed and
collected a tax equivalent to 20% based on the wholesale price or the value
of importation used by the Bureau of Customs in determining tariff and
customs duties; net of the excise tax and value-added tax, of the following
goods:
(a) All goods commonly or commercially known as jewelry,
whether real or imitation, pearls, precious and semi-precious
stones and imitations thereof; goods made of, or ornamented,
mounted and fitted with, precious metals or imitations thereof or
ivory (not including surgical and dental instruments, silverplated wares, frames or mountings for spectacles or eyeglasses,
and dental gold or gold alloys and other precious metals used in
filling, mounting or fitting of the teeth); opera glasses and
lorgnettes. The term "precious metals" shall include platinum,
gold, silver, and other metals of similar or greater value. The
term "imitations thereof" shall include platings and alloys of
such metals.

Section 150 (a) of Executive Order No. 273, which took effect on January 1, 1988,
amended the then Section 163 (a) of the Tax Code of 1986 which provided that:
Sec. 163. Percentage tax on sales of non-essential articles. There shall be
levied, assessed and collected, once only on every original sale, barter,
exchange or similar transaction for nominal or valuable consideration
intended to transfer ownership of, or title to, the articles herein below
enumerated a tax equivalent to 50% of the gross value in money of the
articles so sold, bartered, exchanged or transferred, such tax to be paid by
the manufacturer or producer:
(a) All articles commonly or commercially known as jewelry,
whether real or imitation, pearls, precious and semi-precious
stones, and imitations thereof, articles made of, or ornamented,
mounted or fitted with, precious metals or imitations thereof or
ivory (not including surgical and dental instruments, silverplated wares, frames or mounting for spectacles or eyeglasses,
and dental gold or gold alloys and other precious metal used in
filling, mounting or fitting of the teeth); opera glasses, and
lorgnettes. The term "precious metals" shall include platinum,
gold, silver, and other metals of similar or greater value. The
term "imitations thereof" shall include platings and alloys of
such metals;
Section 163 (a) of the 1986 Tax Code was formerly Section 194(a) of the 1977 Tax Code
and Section 184(a) of the Tax code, as amended by Presidential Decree No. 69, which took
effect on January 1, 1974.
It will be noted that, while under the present law, jewelry is subject to a 20% excise tax in
addition to a 10% value-added tax under the old law, it was subjected to 50% percentage
tax. It was even subjected to a 70% percentage tax under then Section 184(a) of the Tax
Code, as amended by P.D. 69.
Section 104, Hdg. Nos. 17.01, 17.02, 17.03 and 17.04, Chapter 71 of the Tariff and
Customs Code, as amended by Executive Order No. 470, dated July 20, 1991, imposes
import duty on natural or cultured pearls and precious or semi-precious stones at the rate
of 3% to 10% to be applied in stages from 1991 to 1994 and 30% in 1995.
Prior to the issuance of E.O. 470, the rate of import duty in 1988 was 10% to 50% when
the petition was filed in the court a quo.
In support of their petition before the lower court, the private respondents submitted a
position paper purporting to be an exhaustive study of the tax rates on jewelry prevailing
in other Asian countries, in comparison to tax rates levied on the same in the
Philippines. 10
The following issues were thus raised therein:

1. Whether or not the Honorable Court has jurisdiction over the subject
matter of the petition.
2. Whether the petition states a cause of action or whether the petition
alleges a justiciable controversy between the parties.
3. Whether Section 150, par. (a) of the NIRC and Section 104, Hdg. 71.01,
71.02, 71.03 and 71.04 of the Tariff and Customs Code are unconstitutional.
4. Whether the issuance of the Mission Order and Letters of Authority is valid
and legal.
In the assailed decision, the public respondent held indeed that the Regional Trial Court
has jurisdiction to take cognizance of the petition since "jurisdiction over the nature of the
suit is conferred by law and it is determine[d] through the allegations in the petition," and
that the "Court of Tax Appeals has no jurisdiction to declare a statute unconstitutional
much less issue writs of certiorari and prohibition in order to correct acts of respondents
allegedly committed with grave abuse of discretion amounting to lack of jurisdiction."
As to the second issue, the public respondent, made the holding that there exists a
justiciable controversy between the parties, agreeing with the statements made in the
position paper presented by the private respondents, and considering these statements to
be factual evidence, to wit:
Evidence for the petitioners indeed reveals that government taxation policy treats
jewelry, pearls, and other precious stones and metals as non-essential luxury items
and therefore, taxed heavily; that the atmospheric cost of taxation is killing the local
manufacturing jewelry industry because they cannot compete with neighboring and
other countries where importation and manufacturing of jewelry is not taxed
heavily, if not at all; that while government incentives and subsidies exit, local
manufacturers cannot avail of the same because officially many of them are
unregistered and are unable to produce the required official documents because
they operate underground, outside the tariff and tax structure; that local jewelry
manufacturing is under threat of extinction, otherwise discouraged, while domestic
trading has become more attractive; and as a consequence, neighboring countries,
such as: Hongkong, Singapore, Malaysia, Thailand, and other foreign competitors
supplying the Philippine market either through local channels or through the black
market for smuggled goods are the ones who are getting business and making
money, while members of the petitioner Guild of Philippine Jewelers, Inc. are
constantly subjected to bureaucratic harassment instead of being given by the
government the necessary support in order to survive and generate revenue for the
government, and most of all fight competitively not only in the domestic market but
in the arena of world market where the real contest is.
Considering the allegations of fact in the petition which were duly proven during the
trial, the Court holds that the petition states a cause of action and there exists a
justiciable controversy between the parties which would require determination of
constitutionality of the laws imposing excise tax and customs duty on
jewelry. 11 (emphasis ours)

The public respondent, in addressing the third issue, ruled that the laws in question are
confiscatory and oppressive. Again, virtually adopting verbatim the reasons presented by
the private respondents in their position paper, the lower court stated:
The Court finds that indeed government taxation policy trats(sic) hewelry(sic) as
non-essential luxury item and therefore, taxed heavily. Aside from the ten (10%)
percent value added tax (VAT), local jewelry manufacturers contend with the
(manufacturing) excise tax of twenty (20%) percent (to be applied in stages)
customs duties on imported raw materials, the highest in the Asia-Pacific region. In
contrast, imported gemstones and other precious metals are duty free in Hongkong,
Thailand, Malaysia and Singapore.
The Court elaborates further on the experiences of other countries in their
treatment of the jewelry sector.
MALAYSIA
Duties and taxes on imported gemstones and gold and the sales tax on jewelry
were abolished in Malaysia in 1984. They were removed to encourage the
development of Malaysia's jewelry manufacturing industry and to increase exports
of jewelry.
THAILAND
Gems and jewelry are Thailand's ninth most important export earner. In the past,
the industry was overlooked by successive administrations much to the dismay of
those involved in developing trade. Prohibitive import duties and sales tax on
precious gemstones restricted the growht (sic) of the industry, resulting in most of
the business being unofficial. It was indeed difficult for a government or
businessman to promote an industry which did not officially exist.
Despite these circumstances, Thailand's Gem business kept growing up in (sic)
businessmen began to realize it's potential. In 1978, the government quietly
removed the severe duties on precious stones, but imposed a sales tax of 3.5%.
Little was said or done at that time as the government wanted to see if a free trade
in gemstones and jewelry would increase local manufacturing and exports or if it
would mean more foreign made jewelry pouring into Thailand. However, as time
progressed, there were indications that local manufacturing was indeed being
encouraged and the economy was earning mom from exports. The government
soon removed the 3% sales tax too, putting Thailand at par with Hongkong and
Singapore. In these countries, there are no more import duties and sales tax on
gems. (Cited in pages 6 and 7 of Exhibit "M". The Center for Research and
Communication in cooperation with the Guild of Philippine Jewelers, Inc., June 1986).
To illustrate, shown hereunder is the Philippine tariff and tax structure on jewelry
and other precious and semi-precious stones compared to other neighboring
countries, to wit:

Tariff on imported
Jewelry and (Manufacturing) Sales Tax 10% (VAT)
precious stones Excise tax
Philippines 3% to 10% to be 20% 10% VAT
applied in stages
Malaysia None None None
Thailand None None None
Singapore None None None
Hongkong None None None
In this connection, the present tariff and tax structure increases manufacturing
costs and renders the local jewelry manufacturers uncompetitive against other
countries even before they start manufacturing and trading. Because of the
prohibitive cast (sic) of taxation, most manufacturers source from black market for
smuggled goods, and that while manufacturers can avail of tax exemption and/or
tax credits from the (manufacturing) excise tax, they have no documents to present
when filing this exemption because, or pointed out earlier, most of them source
their raw materials from the block market, and since many of them do not legally
exist or operate onofficially (sic), or underground, again they have no records
(receipts) to indicate where and when they will utilize such tax credits. (Cited in
Exhibit "M" Buencamino Report).
Given these constraints, the local manufacturer has no recourse but to the back
door for smuggled goods if only to be able to compete even ineffectively, or cease
manufacturing activities and instead engage in the tradinf (sic) of smuggled finished
jewelry.
Worthy of note is the fact that indeed no evidence was adduced by respondents to
disprove the foregoing allegations of fact. Under the foregoing factual
circumstances, the Court finds the questioned statutory provisions confiscatory and
destructive of the proprietary right of the petitioners to engage in business in
violation of Section 1, Article III of the Constitution which states, as follows:
No person shall be deprived of the life, liberty, or property without due process of
law . . . . 12
Anent the fourth and last issue, the herein public respondent did not find it necessary to
rule thereon, since, in his opinion, "the same has been rendered moot and academic by
the aforementioned pronouncement." 13
The petitioners now assail the decision rendered by the public respondent, contending that
the latter has no authority to pass judgment upon the taxation policy of the government.
In addition, the petitioners impugn the decision in question by asserting that there was no

showing that the tax laws on jewelry are confiscatory and destructive of private
respondent's proprietary rights.
We rule in favor of the petitioners.
It is interesting to note that public respondent, in the dispositive portion of his decision,
perhaps keeping in mind his limitations under the law as a trial judge, did not go so far as
to declare the laws in question to be unconstitutional. However, therein he declared the
laws to be inoperative and without force and effect insofar as the private respondents are
concerned. But, respondent judge, in the body of his decision, unequivocally but wrongly
declared the said provisions of law to be violative of Section 1, Article III of the
Constitution. In fact, in their Supplemental Comment on the Petition for Review, 14 the
private respondents insist that Judge Santos, in his capacity as judge of the Regional Trial
Court, acted within his authority in passing upon the issues, to wit:
A perusal of the appealed decision would undoubtedly disclose that public
respondent did not pass judgment on the soundness or wisdom of the government's
tax policy on jewelry. True, public respondent, in his questioned decision,
observed, inter alia, that indeed government tax policy treats jewelry as nonessential item, and therefore, taxed heavily; that the present tariff and tax structure
increase manufacturing cost and renders the local jewelry manufacturers
uncompetitive against other countries even before they start manufacturing and
trading; that many of the local manufacturers do not legally exist or operate
unofficially or underground; and that the manufacturers have no recourse but to the
back door for smuggled goods if only to be able to compete even if ineffectively or
cease manufacturing activities.
BUT, public respondent did not, in any manner, interfere with or encroach upon the
prerogative of the legislature to determine what should be the tax policy on jewelry.
On the other hand, the issue raised before, and passed upon by, the public
respondent was whether or not Section 150, paragraph (a) of the National Internal
Revenue Code (NIRC) and Section 104, Hdg. 71.01, 71.02, 71.03 and 71.04 of the
Tariff and Customs Code are unconstitutional, or differently stated, whether or not
the questioned statutory provisions affect the constitutional right of private
respondents to engage in business.
It is submitted that public respondent confined himself on this issue which is clearly
a judicial question.
We find it incongruous, in the face of the sweeping pronouncements made by Judge
Santos in his decision, that private respondents can still persist in their argument that the
former did not overreach the restrictions dictated upon him by law. There is no doubt in
the Court's mind, despite protestations to the contrary, that respondent judge encroached
upon matters properly falling within the province of legislative functions. In citing as basis
for his decision unproven comparative data pertaining to differences between tax rates of
various Asian countries, and concluding that the jewelry industry in the Philippines suffers
as a result, the respondent judge took it upon himself to supplant legislative policy
regarding jewelry taxation. In advocating the abolition of local tax and duty on jewelry
simply because other countries have adopted such policies, the respondent judge

overlooked the fact that such matters are not for him to decide. There are reasons why
jewelry, a non-essential item, is taxed as it is in this country, and these reasons,
deliberated upon by our legislature, are beyond the reach of judicial questioning. As held
in Macasiano vs. National Housing Authority: 15
The policy of the courts is to avoid ruling on constitutional questions and to
presume that the acts of the political departments are valid in the absence of
a clear and unmistakable showing to the contrary. To doubt is to sustain. This
presumption is based on the doctrine of separation of powers which enjoins
upon each department a becoming respect for the acts of the other
departments. The theory is that as the joint act of Congress and the
President of the Philippines, a law has been carefully studied and determined
to be in accordance with the fundamental low before it was finally enacted.
(emphasis ours)
What we see here is a debate on the WISDOM of the laws in question. This is a matter on
which the RTC is not competent to rule. 16 As Cooley observed: "Debatable questions are
for the legislature to decide. The courts do not sit to resolve the merits of conflicting
issues." 17 In Angara vs. Electoral Commission, 18 Justice Laurel made it clear that "the
judiciary does not pass upon questions of wisdom, justice or expediency of legislation."
And fittingly so, for in the exercise of judicial power, we are allowed only "to settle actual
controversies involving rights which are legally demandable and enforceable", and may
not annul an act of the political departments simply because we feel it is unwise or
impractical. 19This is not to say that Regional Trial Courts have no power whatsoever to
declare a law unconstitutional. In J.M. Tuason andCo. v. Court of Appeals, 20 we said that
"[p]lainly the Constitution contemplates that the inferior courts should have jurisdiction in
cases involving constitutionality of any treaty or law, for it speaks of appellate review
of final judgments of inferior courts in cases where such constitutionality happens to be in
issue." This authority of lower courts to decide questions of constitutionality in the first
instance reaffirmed in Ynos v. Intermediate Court of Appeals. 21 But this authority does not
extend to deciding questions which pertain to legislative policy.
The trial court is not the proper forum for the ventilation of the issues raised by the private
respondents. The arguments they presented focus on the wisdom of the provisions of law
which they seek to nullify. Regional Trial Courts can only look into the validity of a
provision, that is, whether or not it has been passed according to the procedures laid down
by law, and thus cannot inquire as to the reasons for its existence. Granting arguendo that
the private respondents may have provided convincing arguments why the jewelry
industry in the Philippines should not be taxed as it is, it is to the legislature that they
must resort to for relief, since with the legislature primarily lies the discretion to determine
the nature (kind), object (purpose), extent (rate), coverage (subjects) andsitus (place) of
taxation. This Court cannot freely delve into those matters which, by constitutional fiat,
rightly rest on legislative judgment. 22
As succinctly put in Lim vs. Pacquing: 23 "Where a controversy may be settled on a
platform other than one involving constitutional adjudication, the court should exercise
becoming modesty and avoid the constitutional question." As judges, we can only
interpret and apply the law and, despite our doubts about its wisdom, cannot repeal or
amend it. 24

The respondents presented an exhaustive study on the tax rates on jewelry levied by
different Asian countries. This is meant to convince us that compared to other countries,
the tax rates imposed on said industry in the Philippines is oppressive and confiscatory.
This Court, however, cannot subscribe to the theory that the tax rates of other countries
should be used as a yardstick in determining what may be the proper subjects of taxation
in our own country. It should be pointed out that in imposing the aforementioned taxes and
duties, the State, acting through the legislative and executive branches, is exercising its
sovereign prerogative. It is inherent in the power to tax that the State be free to select the
subjects of taxation, and it has been repeatedly held that "inequalities which result from a
singling out or one particular class for taxation, or exemption, infringe no constitutional
limitation." 25
WHEREFORE, premises considered, the petition is hereby GRANTED, and the Decision in
Civil Case No. 56736 is hereby REVERSED and SET ASIDE. No costs.
SO ORDERED.

G.R. No. 120082 September 11, 1996

MACTAN CEBU INTERNATIONAL AIRPORT AUTHORITY, petitioner,
vs.
HON. FERDINAND J. MARCOS, in his capacity as the Presiding Judge of the
Regional Trial Court, Branch 20, Cebu City, THE CITY OF CEBU, represented by its
Mayor HON. TOMAS R. OSMEA, and EUSTAQUIO B. CESA, respondents.

DAVIDE, JR., J.:

For review under Rule 45 of the Rules of Court on a pure question of law are the decision of
22 March 19951 of the Regional Trial Court (RTC) of Cebu City, Branch 20, dismissing the
petition for declaratory relief in Civil Case No. CEB-16900 entitled "Mactan Cebu
International Airport Authority vs. City of Cebu", and its order of 4, May 1995 2denying the
motion to reconsider the decision.
We resolved to give due course to this petition for its raises issues dwelling on the scope of
the taxing power of local government-owned and controlled corporations.
The uncontradicted factual antecedents are summarized in the instant petition as follows:
Petitioner Mactan Cebu International Airport Authority (MCIAA) was created by
virtue of Republic Act No. 6958, mandated to "principally undertake the economical,
efficient and effective control, management and supervision of the Mactan
International Airport in the Province of Cebu and the Lahug Airport in Cebu City, . . .
and such other Airports as may be established in the Province of Cebu . . . (Sec. 3,
RA 6958). It is also mandated to:
a) encourage, promote and develop international and
domestic air traffic in the Central Visayas and Mindanao
regions as a means of making the regions centers of
international trade and tourism, and accelerating the
development of the means of transportation and
communication in the country; and
b) upgrade the services and facilities of the airports and
to formulate internationally acceptable standards of
airport accommodation and service.
Since the time of its creation, petitioner MCIAA enjoyed the privilege of exemption
from payment of realty taxes in accordance with Section 14 of its Charter.
Sec. 14. Tax Exemptions. The authority shall be exempt from realty
taxes imposed by the National Government or any of its political
subdivisions, agencies and instrumentalities . . .
On October 11, 1994, however, Mr. Eustaquio B. Cesa, Officer-in-Charge, Office of
the Treasurer of the City of Cebu, demanded payment for realty taxes on several
parcels of land belonging to the petitioner (Lot Nos. 913-G, 743, 88 SWO, 948-A,
989-A, 474, 109(931), I-M, 918, 919, 913-F, 941, 942, 947, 77 Psd., 746 and 991-A),
located at Barrio Apas and Barrio Kasambagan, Lahug, Cebu City, in the total
amount of P2,229,078.79.
Petitioner objected to such demand for payment as baseless and unjustified,
claiming in its favor the aforecited Section 14 of RA 6958 which exempt it from

payment of realty taxes. It was also asserted that it is an instrumentality of the

government performing governmental functions, citing section 133 of the Local
Government Code of 1991 which puts limitations on the taxing powers of local
government units:
Sec. 133. Common Limitations on the Taxing Powers of Local
Government Units. Unless otherwise provided herein, the exercise of
the taxing powers of provinces, cities, municipalities, and barangay
shall not extend to the levy of the following:
a) . . .
xxx xxx xxx
o) Taxes, fees or charges of any kind on the National
Government, its agencies and instrumentalities, and local
government units. (Emphasis supplied)
Respondent City refused to cancel and set aside petitioner's realty tax account,
insisting that the MCIAA is a government-controlled corporation whose tax
exemption privilege has been withdrawn by virtue of Sections 193 and 234 of the
Local Governmental Code that took effect on January 1, 1992:
Sec. 193. Withdrawal of Tax Exemption Privilege. Unless otherwise provided in
this Code, tax exemptions or incentives granted to, or presently enjoyed by all
persons whether natural or juridical,including government-owned or controlled
corporations, except local water districts, cooperatives duly registered under RA No.
6938, non-stock, and non-profit hospitals and educational institutions, are hereby
withdrawn upon the effectivity of this Code. (Emphasis supplied)
xxx xxx xxx
Sec. 234. Exemptions from Real Property taxes. . . .
(a) . . .
xxx xxx xxx
(c) . . .
Except as provided herein, any exemption from payment of real
property tax previously granted to, or presently enjoyed by all persons,
whether natural or juridical, including government-owned or controlled
corporations are hereby withdrawn upon the effectivity of this Code.
As the City of Cebu was about to issue a warrant of levy against the properties of
petitioner, the latter was compelled to pay its tax account "under protest" and
thereafter filed a Petition for Declaratory Relief with the Regional Trial Court of Cebu,
Branch 20, on December 29, 1994. MCIAA basically contended that the taxing

powers of local government units do not extend to the levy of taxes or fees of any
kind on an instrumentality of the national government. Petitioner insisted that while
it is indeed a government-owned corporation, it nonetheless stands on the same
footing as an agency or instrumentality of the national government. Petitioner
insisted that while it is indeed a government-owned corporation, it nonetheless
stands on the same footing as an agency or instrumentality of the national
government by the very nature of its powers and functions.
Respondent City, however, asserted that MACIAA is not an instrumentality of the
government but merely a government-owned corporation performing proprietary
functions As such, all exemptions previously granted to it were deemed withdrawn
by operation of law, as provided under Sections 193 and 234 of the Local
Government Code when it took effect on January 1, 1992. 3
The petition for declaratory relief was docketed as Civil Case No. CEB-16900.
In its decision of 22 March 1995, 4 the trial court dismissed the petition in light of its
findings, to wit:
A close reading of the New Local Government Code of 1991 or RA 7160 provides the
express cancellation and withdrawal of exemption of taxes by government owned
and controlled corporation per Sections after the effectivity of said Code on January
1, 1992, to wit: [proceeds to quote Sections 193 and 234]
Petitioners claimed that its real properties assessed by respondent City Government
of Cebu are exempted from paying realty taxes in view of the exemption granted
under RA 6958 to pay the same (citing Section 14 of RA 6958).
However, RA 7160 expressly provides that "All general and special laws, acts, city
charters, decress [sic], executive orders, proclamations and administrative
regulations, or part or parts thereof which are inconsistent with any of the
provisions of this Code are hereby repealed or modified accordingly." ([f], Section
534, RA 7160).
With that repealing clause in RA 7160, it is safe to infer and state that the tax
exemption provided for in RA 6958 creating petitioner had been expressly repealed
by the provisions of the New Local Government Code of 1991.
So that petitioner in this case has to pay the assessed realty tax of its properties
effective after January 1, 1992 until the present.
This Court's ruling finds expression to give impetus and meaning to the overall
objectives of the New Local Government Code of 1991, RA 7160. "It is hereby
declared the policy of the State that the territorial and political subdivisions of the
State shall enjoy genuine and meaningful local autonomy to enable them to attain
their fullest development as self-reliant communities and make them more effective
partners in the attainment of national goals. Towards this end, the State shall
provide for a more responsive and accountable local government structure
instituted through a system of decentralization whereby local government units

shall be given more powers, authority, responsibilities, and resources. The process
of decentralization shall proceed from the national government to the local
government units. . . . 5
Its motion for reconsideration having been denied by the trial court in its 4 May 1995
order, the petitioner filed the instant petition based on the following assignment of errors:
I RESPONDENT JUDGE ERRED IN FAILING TO RULE THAT THE
PETITIONER IS VESTED WITH GOVERNMENT POWERS AND FUNCTIONS
WHICH PLACE IT IN THE SAME CATEGORY AS AN INSTRUMENTALITY OR
AGENCY OF THE GOVERNMENT.
II RESPONDENT JUDGE ERRED IN RULING THAT PETITIONER IS LIABLE
TO PAY REAL PROPERTY TAXES TO THE CITY OF CEBU.
Anent the first assigned error, the petitioner asserts that although it is a governmentowned or controlled corporation it is mandated to perform functions in the same category
as an instrumentality of Government. An instrumentality of Government is one created to
perform governmental functions primarily to promote certain aspects of the economic life
of the people. 6 Considering its task "not merely to efficiently operate and manage the
Mactan-Cebu International Airport, but more importantly, to carry out the Government
policies of promoting and developing the Central Visayas and Mindanao regions as centers
of international trade and tourism, and accelerating the development of the means of
transportation and communication in the country," 7 and that it is an attached agency of
the Department of Transportation and Communication (DOTC), 8 the petitioner "may stand
in [sic] the same footing as an agency or instrumentality of the national government."
Hence, its tax exemption privilege under Section 14 of its Charter "cannot be considered
withdrawn with the passage of the Local Government Code of 1991 (hereinafter LGC)
because Section 133 thereof specifically states that the taxing powers of local government
units shall not extend to the levy of taxes of fees or charges of any kind on the national
government its agencies and instrumentalities."
As to the second assigned error, the petitioner contends that being an instrumentality of
the National Government, respondent City of Cebu has no power nor authority to impose
realty taxes upon it in accordance with the aforesaid Section 133 of the LGC, as explained
in Basco vs. Philippine Amusement and Gaming Corporation; 9
Local governments have no power to tax instrumentalities of the National
Government. PAGCOR is a government owned or controlled corporation with an
original character, PD 1869. All its shares of stock are owned by the National
Government. . . .
PAGCOR has a dual role, to operate and regulate gambling casinos. The latter joke is
governmental, which places it in the category of an agency or instrumentality of the
Government. Being an instrumentality of the Government, PAGCOR should be and
actually is exempt from local taxes. Otherwise, its operation might be burdened,
impeded or subjected to control by a mere Local government.

The states have no power by taxation or otherwise, to retard, impede, burden or in

any manner control the operation of constitutional laws enacted by Congress to
carry into execution the powers vested in the federal government. (McCulloch v.
Maryland, 4 Wheat 316, 4 L Ed. 579).
This doctrine emanates from the "supremacy" of the National Government over
local government.
Justice Holmes, speaking for the Supreme Court, make references to the entire
absence of power on the part of the States to touch, in that way (taxation) at least,
the instrumentalities of the United States (Johnson v. Maryland, 254 US 51) and it
can be agreed that no state or political subdivision can regulate a federal
instrumentality in such a way as to prevent it from consummating its federal
responsibilities, or even to seriously burden it in the accomplishment of them.
(Antieau Modern Constitutional Law, Vol. 2, p. 140)
Otherwise mere creature of the State can defeat National policies thru
extermination of what local authorities may perceive to be undesirable activities or
enterprise using the power to tax as "a toll for regulation" (U.S. v. Sanchez, 340 US
42). The power to tax which was called by Justice Marshall as the "power to destroy "
(McCulloch v. Maryland, supra) cannot be allowed to defeat an instrumentality or
creation of the very entity which has the inherent power to wield it. (Emphasis
supplied)
It then concludes that the respondent Judge "cannot therefore correctly say that the
questioned provisions of the Code do not contain any distinction between a governmental
function as against one performing merely proprietary ones such that the exemption
privilege withdrawn under the said Code would apply to allgovernment corporations." For
it is clear from Section 133, in relation to Section 234, of the LGC that the legislature
meant to exclude instrumentalities of the national government from the taxing power of
the local government units.
In its comment respondent City of Cebu alleges that as local a government unit and a
political subdivision, it has the power to impose, levy, assess, and collect taxes within its
jurisdiction. Such power is guaranteed by the Constitution 10 and enhanced further by the
LGC. While it may be true that under its Charter the petitioner was exempt from the
payment of realty taxes, 11 this exemption was withdrawn by Section 234 of the LGC. In
response to the petitioner's claim that such exemption was not repealed because being an
instrumentality of the National Government, Section 133 of the LGC prohibits local
government units from imposing taxes, fees, or charges of any kind on it, respondent City
of Cebu points out that the petitioner is likewise a government-owned corporation, and
Section 234 thereof does not distinguish between government-owned corporation, and
Section 234 thereof does not distinguish between government-owned corporation, and
Section 234 thereof does not distinguish between government-owned or controlled
corporations performing governmental and purely proprietary functions. Respondent city
of Cebu urges this the Manila International Airport Authority is a governmental-owned
corporation, 12 and to reject the application of Basco because it was "promulgated . . .
before the enactment and the singing into law of R.A. No. 7160," and was not, therefore,
decided "in the light of the spirit and intention of the framers of the said law.

As a general rule, the power to tax is an incident of sovereignty and is unlimited in its
range, acknowledging in its very nature no limits, so that security against its abuse is to
be found only in the responsibility of the legislature which imposes the tax on the
constituency who are to pay it. Nevertheless, effective limitations thereon may be imposed
by the people through their Constitutions. 13 Our Constitution, for instance, provides that
the rule of taxation shall be uniform and equitable and Congress shall evolve a progressive
system of taxation. 14So potent indeed is the power that it was once opined that "the
power to tax involves the power to destroy." 15 Verily, taxation is a destructive power which
interferes with the personal and property for the support of the government. Accordingly,
tax statutes must be construed strictly against the government and liberally in favor of the
taxpayer. 16But since taxes are what we pay for civilized society, 17 or are the lifeblood of
the nation, the law frowns against exemptions from taxation and statutes granting tax
exemptions are thus construed strictissimi juris against the taxpayers and liberally in favor
of the taxing authority. 18 A claim of exemption from tax payment must be clearly shown
and based on language in the law too plain to be mistaken. 19 Elsewise stated, taxation is
the rule, exemption therefrom is the exception. 20 However, if the grantee of the exemption
is a political subdivision or instrumentality, the rigid rule of construction does not apply
because the practical effect of the exemption is merely to reduce the amount of money
that has to be handled by the government in the course of its operations. 21
The power to tax is primarily vested in the Congress; however, in our jurisdiction, it may
be exercised by local legislative bodies, no longer merely by virtue of a valid delegation as
before, but pursuant to direct authority conferred by Section 5, Article X of the
Constitution. 22 Under the latter, the exercise of the power may be subject to such
guidelines and limitations as the Congress may provide which, however, must be
consistent with the basic policy of local autonomy.
There can be no question that under Section 14 of R.A. No. 6958 the petitioner is exempt
from the payment of realty taxes imposed by the National Government or any of its
political subdivisions, agencies, and instrumentalities. Nevertheless, since taxation is the
rule and exemption therefrom the exception, the exemption may thus be withdrawn at the
pleasure of the taxing authority. The only exception to this rule is where the exemption
was granted to private parties based on material consideration of a mutual nature, which
then becomes contractual and is thus covered by the non-impairment clause of the
Constitution. 23
The LGC, enacted pursuant to Section 3, Article X of the constitution provides for the
exercise by local government units of their power to tax, the scope thereof or its
limitations, and the exemption from taxation.
Section 133 of the LGC prescribes the common limitations on the taxing powers of local
government units as follows:
Sec. 133. Common Limitations on the Taxing Power of Local Government Units.
Unless otherwise provided herein, the exercise of the taxing powers of provinces,
cities, municipalities, and barangays shall not extend to the levy of the following:
(a) Income tax, except when levied on banks and other financial
institutions;

(b) Documentary stamp tax;

(c) Taxes on estates, "inheritance, gifts, legacies and
acquisitions mortis causa, except as otherwise provided herein

other

(d) Customs duties, registration fees of vessels and wharfage on

wharves, tonnage dues, and all other kinds of customs fees charges
and dues except wharfage on wharves constructed and maintained by
the local government unit concerned:
(e) Taxes, fees and charges and other imposition upon goods carried
into or out of, or passing through, the territorial jurisdictions of local
government units in the guise or charges for wharfages, tolls for
bridges or otherwise, or other taxes, fees or charges in any form
whatsoever upon such goods or merchandise;
(f) Taxes fees or charges on agricultural and aquatic products when
sold by marginal farmers or fishermen;
(g) Taxes on business enterprise certified to be the Board of Investment
as pioneer or non-pioneer for a period of six (6) and four (4) years,
respectively from the date of registration;
(h) Excise taxes on articles enumerated under the National Internal
Revenue Code, as amended, and taxes, fees or charges on petroleum
products;
(i) Percentage or value added tax (VAT) on sales, barters or exchanges
or similar transactions on goods or services except as otherwise
provided herein;
(j) Taxes on the gross receipts of transportation contractor and person
engage in the transportation of passengers of freight by hire and
common carriers by air, land, or water, except as provided in this code;
(k) Taxes on premiums paid by ways reinsurance or retrocession;
(l) Taxes, fees, or charges for the registration of motor vehicles and for
the issuance of all kinds of licenses or permits for the driving of
thereof, except, tricycles;
(m) Taxes, fees, or other charges on Philippine product actually
exported, except as otherwise provided herein;
(n) Taxes, fees, or charges, on Countryside and Barangay Business
Enterprise and Cooperatives duly registered under R.A. No. 6810 and
Republic Act Numbered Sixty nine hundred thirty-eight (R.A. No. 6938)
otherwise known as the "Cooperative Code of the Philippines; and

(o) TAXES, FEES, OR CHARGES OF ANY KIND ON THE NATIONAL

GOVERNMENT, ITS AGENCIES AND INSTRUMENTALITIES, AND LOCAL
GOVERNMENT UNITS. (emphasis supplied)
Needless to say the last item (item o) is pertinent in this case. The "taxes, fees or charges"
referred to are "of any kind", hence they include all of these, unless otherwise provided by
the LGC. The term "taxes" is well understood so as to need no further elaboration,
especially in the light of the above enumeration. The term "fees" means charges fixed by
law or Ordinance for the regulation or inspection of business activity, 24 while "charges" are
pecuniary liabilities such as rents or fees against person or property. 25
Among the "taxes" enumerated in the LGC is real property tax, which is governed by
Section 232. It reads as follows:
Sec. 232. Power to Levy Real Property Tax. A province or city or a municipality
within the Metropolitan Manila Area may levy on an annual ad valorem tax on real
property such as land, building, machinery and other improvements not hereafter
specifically exempted.
Section 234 of LGC provides for the exemptions from payment of real property taxes and
withdraws previous exemptions therefrom granted to natural and juridical persons,
including government owned and controlled corporations, except as provided therein. It
provides:
Sec. 234. Exemptions from Real Property Tax. The following are exempted from
payment of the real property tax:
(a) Real property owned by the Republic of the Philippines or any of its
political subdivisions except when the beneficial use thereof had been
granted, for reconsideration or otherwise, to a taxable person;
(b) Charitable institutions, churches, parsonages or convents
appurtenants thereto, mosques nonprofits or religious cemeteries and
all lands, building and improvements actually, directly, and exclusively
used for religious charitable or educational purposes;
(c) All machineries and equipment that are actually, directly and
exclusively used by local water districts and government-owned or
controlled corporations engaged in the supply and distribution of water
and/or generation and transmission of electric power;
(d) All real property owned by duly registered cooperatives as provided
for under R.A. No. 6938; and;
(e) Machinery and equipment
environmental protection.

used

for

pollution

control

and

Except as provided herein, any exemptions from payment of real

property tax previously granted to or presently enjoyed by, all persons

whether natural or juridical, including all government owned or

controlled corporations are hereby withdrawn upon the effectivity of
his Code.
These exemptions are based on the ownership, character, and use of the property. Thus;
(a) Ownership Exemptions. Exemptions from real property taxes on the
basis of ownership are real properties owned by: (i) the Republic, (ii) a
province, (iii) a city, (iv) a municipality, (v) a barangay, and (vi)
registered cooperatives.
(b) Character Exemptions. Exempted from real property taxes on the
basis of their character are: (i) charitable institutions, (ii) houses and
temples of prayer like churches, parsonages or convents appurtenant
thereto, mosques, and (iii) non profit or religious cemeteries.
(c) Usage exemptions. Exempted from real property taxes on the basis
of the actual, direct and exclusive use to which they are devoted are:
(i) all lands buildings and improvements which are actually, directed
and exclusively used for religious, charitable or educational purpose;
(ii) all machineries and equipment actually, directly and exclusively
used or by local water districts or by government-owned or controlled
corporations engaged in the supply and distribution of water and/or
generation and transmission of electric power; and (iii) all machinery
and equipment used for pollution control and environmental
protection.
To help provide a healthy environment in the midst of the modernization of the
country, all machinery and equipment for pollution control and environmental
protection may not be taxed by local governments.
2. Other Exemptions Withdrawn. All other exemptions previously
granted to natural or juridical persons including government-owned or
controlled corporations are withdrawn upon the effectivity of the
Code. 26
Section 193 of the LGC is the general provision on withdrawal of tax exemption privileges.
It provides:
Sec. 193. Withdrawal of Tax Exemption Privileges. Unless otherwise provided in
this code, tax exemptions or incentives granted to or presently enjoyed by all
persons, whether natural or juridical, including government-owned, or controlled
corporations, except local water districts, cooperatives duly registered under R.A.
6938, non stock and non profit hospitals and educational constitutions, are hereby
withdrawn upon the effectivity of this Code.
On the other hand, the LGC authorizes local government units to grant tax exemption
privileges. Thus, Section 192 thereof provides:

Sec. 192. Authority to Grant Tax Exemption Privileges. Local government units
may, through ordinances duly approved, grant tax exemptions, incentives or reliefs
under such terms and conditions as they may deem necessary.
The foregoing sections of the LGC speaks of: (a) the limitations on the taxing powers of
local government units and the exceptions to such limitations; and (b) the rule on tax
exemptions and the exceptions thereto. The use of exceptions of provisos in these section,
as shown by the following clauses:
(1) "unless otherwise provided herein" in the opening paragraph of
Section 133;
(2) "Unless otherwise provided in this Code" in section 193;
(3) "not hereafter specifically exempted" in Section 232; and
(4) "Except as provided herein" in the last paragraph of Section 234
initially hampers a ready understanding of the sections. Note, too, that the
aforementioned clause in section 133 seems to be inaccurately worded. Instead of the
clause "unless otherwise provided herein," with the "herein" to mean, of course, the
section, it should have used the clause "unless otherwise provided in this Code." The
former results in absurdity since the section itself enumerates what are beyond the taxing
powers of local government units and, where exceptions were intended, the exceptions
were explicitly indicated in the text. For instance, in item (a) which excepts the income
taxes "when livied on banks and other financial institutions", item (d) which excepts
"wharfage on wharves constructed and maintained by the local government until
concerned"; and item (1) which excepts taxes, fees, and charges for the registration and
issuance of license or permits for the driving of "tricycles". It may also be observed that
within the body itself of the section, there are exceptions which can be found only in other
parts of the LGC, but the section interchangeably uses therein the clause "except as
otherwise provided herein" as in items (c) and (i), or the clause "except as otherwise
provided herein" as in items (c) and (i), or the clause "excepts as provided in this Code" in
item (j). These clauses would be obviously unnecessary or mere surplus-ages if the
opening clause of the section were" "Unless otherwise provided in this Code" instead of
"Unless otherwise provided herein". In any event, even if the latter is used, since under
Section 232 local government units have the power to levy real property tax, except those
exempted therefrom under Section 234, then Section 232 must be deemed to qualify
Section 133.
Thus, reading together Section 133, 232 and 234 of the LGC, we conclude that as a
general rule, as laid down in Section 133 the taxing powers of local government units
cannot extend to the levy of inter alia, "taxes, fees, and charges of any kind of the
National Government, its agencies and instrumentalties, and local government units";
however, pursuant to Section 232, provinces, cities, municipalities in the Metropolitan
Manila Area may impose the real property tax except on, inter alia, "real property owned
by the Republic of the Philippines or any of its political subdivisions except when the
beneficial used thereof has been granted, for consideration or otherwise, to a taxable
person", as provided in item (a) of the first paragraph of Section 234.

As to tax exemptions or incentives granted to or presently enjoyed by natural or juridical

persons, including government-owned and controlled corporations, Section 193 of the LGC
prescribes the general rule, viz., they are withdrawn upon the effectivity of the LGC,
except upon the effectivity of the LGC, except those granted to local water districts,
cooperatives duly registered under R.A. No. 6938, non stock and non-profit hospitals and
educational institutions, and unless otherwise provided in the LGC. The latter proviso could
refer to Section 234, which enumerates the properties exempt from real property tax. But
the last paragraph of Section 234 further qualifies the retention of the exemption in so far
as the real property taxes are concerned by limiting the retention only to those
enumerated there-in; all others not included in the enumeration lost the privilege upon the
effectivity of the LGC. Moreover, even as the real property is owned by the Republic of the
Philippines, or any of its political subdivisions covered by item (a) of the first paragraph of
Section 234, the exemption is withdrawn if the beneficial use of such property has been
granted to taxable person for consideration or otherwise.
Since the last paragraph of Section 234 unequivocally withdrew, upon the effectivity of the
LGC, exemptions from real property taxes granted to natural or juridical persons, including
government-owned or controlled corporations, except as provided in the said section, and
the petitioner is, undoubtedly, a government-owned corporation, it necessarily follows that
its exemption from such tax granted it in Section 14 of its charter, R.A. No. 6958, has been
withdrawn. Any claim to the contrary can only be justified if the petitioner can seek refuge
under any of the exceptions provided in Section 234, but not under Section 133, as it now
asserts, since, as shown above, the said section is qualified by Section 232 and 234.
In short, the petitioner can no longer invoke the general rule in Section 133 that the taxing
powers of the local government units cannot extend to the levy of:
(o) taxes, fees, or charges of any kind on the National Government, its
agencies, or instrumentalities, and local government units.
I must show that the parcels of land in question, which are real property, are any one of
those enumerated in Section 234, either by virtue of ownership, character, or use of the
property. Most likely, it could only be the first, but not under any explicit provision of the
said section, for one exists. In light of the petitioner's theory that it is an "instrumentality
of the Government", it could only be within be first item of the first paragraph of the
section by expanding the scope of the terms Republic of the Philippines" to
embrace . . . . . . "instrumentalities" and "agencies" or expediency we quote:
(a) real property owned by the Republic of the Philippines, or any of the
Philippines, or any of its political subdivisions except when the
beneficial use thereof has been granted, for consideration or
otherwise, to a taxable person.
This view does not persuade us. In the first place, the petitioner's claim that it is an
instrumentality of the Government is based on Section 133(o), which expressly mentions
the word "instrumentalities"; and in the second place it fails to consider the fact that the
legislature used the phrase "National Government, its agencies and instrumentalities" "in
Section 133(o),but only the phrase "Republic of the Philippines or any of its political
subdivision "in Section 234(a).

The terms "Republic of the Philippines" and "National Government" are not
interchangeable. The former is boarder and synonymous with "Government of the Republic
of the Philippines" which the Administrative Code of the 1987 defines as the "corporate
governmental entity though which the functions of the government are exercised through
at the Philippines, including, saves as the contrary appears from the context, the various
arms through which political authority is made effective in the Philippines, whether
pertaining to the autonomous reason, the provincial, city, municipal or barangay
subdivision or other forms of local government." 27 These autonomous regions, provincial,
city, municipal or barangay subdivisions" are the political subdivision. 28
On the other hand, "National Government" refers "to the entire machinery of the central
government, as distinguished from the different forms of local Governments." 29 The
National Government then is composed of the three great departments the executive, the
legislative and the judicial. 30
An "agency" of the Government refers to "any of the various units of the Government,
including a department, bureau, office instrumentality, or government-owned or controlled
corporation, or a local government or a distinct unit therein;" 31 while an "instrumentality"
refers to "any agency of the National Government, not integrated within the department
framework, vested with special functions or jurisdiction by law, endowed with some if not
all corporate powers, administering special funds, and enjoying operational autonomy;
usually through a charter. This term includes regulatory agencies, chartered institutions
and government-owned and controlled corporations". 32
If Section 234(a) intended to extend the exception therein to the withdrawal of the
exemption from payment of real property taxes under the last sentence of the said section
to the agencies and instrumentalities of the National Government mentioned in Section
133(o), then it should have restated the wording of the latter. Yet, it did not Moreover, that
Congress did not wish to expand the scope of the exemption in Section 234(a) to include
real property owned by other instrumentalities or agencies of the government including
government-owned and controlled corporations is further borne out by the fact that the
source of this exemption is Section 40(a) of P.D. No. 646, otherwise known as the Real
Property Tax Code, which reads:
Sec 40. Exemption from Real Property Tax. The exemption shall be as follows:
(a) Real property owned by the Republic of the Philippines
or any of its political subdivisions and any governmentowned or controlled corporations so exempt by is
charter: Provided, however, that this exemption shall not
apply to real property of the above mentioned entities the
beneficial use of which has been granted, for
consideration or otherwise, to a taxable person.
Note that as a reproduced in Section 234(a), the phrase "and any government-owned or
controlled corporation so exempt by its charter" was excluded. The justification for this
restricted exemption in Section 234(a) seems obvious: to limit further tax exemption
privileges, specially in light of the general provision on withdrawal of exemption from
payment of real property taxes in the last paragraph of property taxes in the last

paragraph of Section 234. These policy considerations are consistent with the State policy
to ensure autonomy to local governments 33 and the objective of the LGC that they enjoy
genuine and meaningful local autonomy to enable them to attain their fullest development
as self-reliant communities and make them effective partners in the attainment of national
goals. 34 The power to tax is the most effective instrument to raise needed revenues to
finance and support myriad activities of local government units for the delivery of basic
services essential to the promotion of the general welfare and the enhancement of peace,
progress, and prosperity of the people. It may also be relevant to recall that the original
reasons for the withdrawal of tax exemption privileges granted to government-owned and
controlled corporations and all other units of government were that such privilege resulted
in serious tax base erosion and distortions in the tax treatment of similarly situated
enterprises, and there was a need for this entities to share in the requirements of the
development, fiscal or otherwise, by paying the taxes and other charges due from them. 35
The crucial issues then to be addressed are: (a) whether the parcels of land in question
belong to the Republic of the Philippines whose beneficial use has been granted to the
petitioner, and (b) whether the petitioner is a "taxable person".
Section 15 of the petitioner's Charter provides:
Sec. 15. Transfer of Existing Facilities and Intangible Assets. All existing public
airport facilities, runways, lands, buildings and other properties, movable or
immovable, belonging to or presently administered by the airports, and all assets,
powers, rights, interests and privileges relating on airport works, or air operations,
including all equipment which are necessary for the operations of air navigation,
acrodrome control towers, crash, fire, and rescue facilities are hereby transferred to
the Authority: Provided however, that the operations control of all equipment
necessary for the operation of radio aids to air navigation, airways communication,
the approach control office, and the area control center shall be retained by the Air
Transportation Office. No equipment, however, shall be removed by the Air
Transportation Office from Mactan without the concurrence of the authority. The
authority may assist in the maintenance of the Air Transportation Office equipment.
The "airports" referred to are the "Lahug Air Port" in Cebu City and the "Mactan
International AirPort in the Province of Cebu", 36 which belonged to the Republic of the
Philippines, then under the Air Transportation Office (ATO). 37
It may be reasonable to assume that the term "lands" refer to "lands" in Cebu City then
administered by the Lahug Air Port and includes the parcels of land the respondent City of
Cebu seeks to levy on for real property taxes. This section involves a "transfer" of the
"lands" among other things, to the petitioner and not just the transfer of the beneficial use
thereof, with the ownership being retained by the Republic of the Philippines.
This "transfer" is actually an absolute conveyance of the ownership thereof because the
petitioner's authorized capital stock consists of, inter alia "the value of such real estate
owned and/or administered by the airports." 38 Hence, the petitioner is now the owner of
the land in question and the exception in Section 234(c) of the LGC is inapplicable.

Moreover, the petitioner cannot claim that it was never a "taxable person" under its
Charter. It was only exempted from the payment of real property taxes. The grant of the
privilege only in respect of this tax is conclusive proof of the legislative intent to make it a
taxable person subject to all taxes, except real property tax.
Finally, even if the petitioner was originally not a taxable person for purposes of real
property tax, in light of the forgoing disquisitions, it had already become even if it be
conceded to be an "agency" or "instrumentality" of the Government, a taxable person for
such purpose in view of the withdrawal in the last paragraph of Section 234 of exemptions
from the payment of real property taxes, which, as earlier adverted to, applies to the
petitioner.
Accordingly, the position taken by the petitioner is untenable. Reliance on Basco
vs. Philippine Amusement and Gaming Corporation 39 is unavailing since it was decided
before the effectivity of the LGC. Besides, nothing can prevent Congress from decreeing
that even instrumentalities or agencies of the government performing governmental
functions may be subject to tax. Where it is done precisely to fulfill a constitutional
mandate and national policy, no one can doubt its wisdom.
WHEREFORE, the instant petition is DENIED. The challenged decision and order of the
Regional Trial Court of Cebu, Branch 20, in Civil Case No. CEB-16900 are AFFIRMED.
No pronouncement as to costs.
SO ORDERED.

G.R. No. L-30232 July 29, 1988

LUZON STEVEDORING CORPORATION, petitioner-appellant,

vs.
COURT OF TAX APPEALS and the HONORABLE COMMISSIONER OF INTERNAL
REVENUE, respondents-appellees.
PARAS, J.:
This is a petition for review of the October 21, 1968 Decision * of the Court of Tax Appeals
in CTA Case No. 1484, "Luzon Stevedoring Corporation v. Hon. Ramon Oben,
Commissioner, Bureau of Internal Revenue", denying the various claims for tax refund; and
the February 20, 1969 Resolution of the same court denying the motion for
reconsideration.
Herein petitioner-appellant, in 1961 and 1962, for the repair and maintenance of its
tugboats, imported various engine parts and other equipment for which it paid, under
protest, the assessed compensating tax. Unable to secure a tax refund from the
Commissioner of Internal Revenue, on January 2, 1964, it filed a Petition for Review (Rollo,
pp. 14-18) with the Court of Tax Appeals, docketed therein as CTA Case No. 1484, praying
among others, that it be granted the refund of the amount of P33,442.13. The Court of Tax
Appeals, however, in a Decision dated October 21, 1969 (Ibid., pp. 22-27), denied the
various claims for tax refund. The decretal portion of the said decision reads:
WHEREFORE, finding petitioner's various claims for refund amounting to
P33,442.13 without sufficient legal justification, the said claims have to be, as
they are hereby, denied. With costs against petitioner.
On January 24, 1969, petitioner-appellant filed a Motion for Reconsideration (Ibid., pp. 2834), but the same was denied in a Resolution dated February 20, 1969 (Ibid., p. 35).
Hence, the instant petition.
This Court, in a Resolution dated March 13, 1969, gave due course to the petition ( Ibid., p.
40). Petitioner-appellant raised three (3) assignments of error, to wit:
I
The lower court erred in holding that the petitioner-appellant is engaged in
business as stevedore, the work of unloading and loading of a vessel in port,
contrary to the evidence on record.
II
The lower court erred in not holding that the business in which petitionerappellant is engaged, is part and parcel of the shipping industry.
III
The lower court erred in not allowing the refund sought by petitionerappellant.

The instant petition is without merit.

The pivotal issue in this case is whether or not petitioner's tugboats" can be interpreted to
be included in the term "cargo vessels" for purposes of the tax exemption provided for in
Section 190 of the National Internal Revenue Code, as amended by Republic Act No. 3176.
Said law provides:
Sec. 190. Compensating tax. ... And Provided further, That the tax imposed
in this section shall not apply to articles to be used by the importer himself in
the manufacture or preparation of articles subject to specific tax or those for
consignment abroad and are to form part thereof or to articles to be used by
the importer himself as passenger and/or cargo vessel, whether coastwise or
oceangoing, including engines and spare parts of said vessel. ....
Petitioner contends that tugboats are embraced and included in the term cargo
vessel under the tax exemption provisions of Section 190 of the Revenue Code, as
amended by Republic Act. No. 3176. He argues that in legal contemplation, the tugboat
and a barge loaded with cargoes with the former towing the latter for loading and
unloading of a vessel in part, constitute a single vessel. Accordingly, it concludes that the
engines, spare parts and equipment imported by it and used in the repair and
maintenance of its tugboats are exempt from compensating tax (Rollo, p. 23).
On the other hand, respondents-appellees counter that petitioner-appellant's "tugboats"
are not "Cargo vessel" because they are neither designed nor used for carrying and/or
transporting persons or goods by themselves but are mainly employed for towing and
pulling purposes. As such, it cannot be claimed that the tugboats in question are used in
carrying and transporting passengers or cargoes as a common carrier by water, either
coastwise or oceangoing and, therefore, not within the purview of Section 190 of the Tax
Code, as amended by Republic Act No. 3176 (Brief for Respondents-Appellees, pp. 45).
This Court has laid down the rule that "as the power of taxation is a high prerogative of
sovereignty, the relinquishment is never presumed and any reduction or dimunition
thereof with respect to its mode or its rate, must be strictly construed, and the same must
be coached in clear and unmistakable terms in order that it may be applied." (84 C.J.S. pp.
659-800), More specifically stated, the general rule is that any claim for exemption from
the tax statute should be strictly construed against the taxpayer (Acting Commissioner of
Customs v. Manila Electric Co. et al., 69 SCRA 469 [1977] and Commissioner of Internal
Revenue v. P.J. Kiener Co. Ltd., et al., 65 SCRA 142 [1975]).
As correctly analyzed by the Court of Tax Appeals, in order that the importations in
question may be declared exempt from the compensating tax, it is indispensable that the
requirements of the amendatory law be complied with, namely: (1) the engines and spare
parts must be used by the importer himself as a passenger and/or cargo, vessel; and (2)
the said passenger and/or cargo vessel must be used in coastwise or oceangoing
navigation (Decision, CTA Case No. 1484; Rollo, p. 24).

As pointed out by the Court of Tax Appeals, the amendatory provisions of Republic Act No.
3176 limit tax exemption from the compensating tax to imported items to be used by the
importer himself as operator of passenger and/or cargo vessel (Ibid., p. 25).
As quoted in the decision of the Court of Tax Appeals, a tugboat is defined as follows:
A tugboat is a strongly built, powerful steam or power vessel, used for towing
and, now, also used for attendance on vessel. (Webster New International
Dictionary, 2nd Ed.)
A tugboat is a diesel or steam power vessel designed primarily for moving
large ships to and from piers for towing barges and lighters in harbors, rivers
and canals. (Encyclopedia International Grolier, Vol. 18, p. 256).
A tug is a steam vessel built for towing, synonymous with tugboat. (Bouvier's
Law Dictionary.) (Rollo, p. 24).
Under the foregoing definitions, petitioner's tugboats clearly do not fall under the
categories of passenger and/or cargo vessels. Thus, it is a cardinal principle of statutory
construction that where a provision of law speaks categorically, the need for interpretation
is obviated, no plausible pretense being entertained to justify non-compliance. All that has
to be done is to apply it in every case that falls within its terms (Allied Brokerage Corp. v.
Commissioner of Customs, L-27641, 40 SCRA 555 [1971]; Quijano, etc. v. DBP, L-26419, 35
SCRA 270 [1970]).
And, even if construction and interpretation of the law is insisted upon, following another
fundamental rule that statutes are to be construed in the light of purposes to be achieved
and the evils sought to be remedied (People v. Purisima etc., et al., L-42050-66, 86 SCRA
544 [1978], it will be noted that the legislature in amending Section 190 of the Tax Code
by Republic Act 3176, as appearing in the records, intended to provide incentives and
inducements to bolster the shipping industry and not the business of stevedoring, as
manifested in the sponsorship speech of Senator Gil Puyat (Rollo, p. 26).
On analysis of petitioner-appellant's transactions, the Court of Tax Appeals found that no
evidence was adduced by petitioner-appellant that tugboats are passenger and/or cargo
vessels used in the shipping industry as an independent business. On the contrary,
petitioner-appellant's own evidence supports the view that it is engaged as a stevedore,
that is, the work of unloading and loading of a vessel in port; and towing of barges
containing cargoes is a part of petitioner's undertaking as a stevedore. In fact, even its
trade name is indicative that its sole and principal business is stevedoring and lighterage,
taxed under Section 191 of the National Internal Revenue Code as a contractor, and not an
entity which transports passengers or freight for hire which is taxed under Section 192 of
the same Code as a common carrier by water (Decision, CTA Case No. 1484; Rollo, p. 25).
Under the circumstances, there appears to be no plausible reason to disturb the findings
and conclusion of the Court of Tax Appeals.
As a matter of principle, this Court will not set aside the conclusion reached by an agency
such as the Court of Tax Appeals, which is, by the very nature of its function, dedicated

exclusively to the study and consideration of tax problems and has necessarily developed
an expertise on the subject unless there has been an abuse or improvident exercise of
authority (Reyes v. Commissioner of Internal Revenue, 24 SCRA 199 [1981]), which is not
present in the instant case.
PREMISES CONSIDERED, the instant petition is DISMISSED and the decision of the Court of
Tax Appeals is AFFIRMED.
SO ORDERED.

G.R. No. L-18330

July 31, 1963

JOSE DE BORJA, petitioner-appellee,

vs.
VICENTE G. GELLA, ET AL., respondents-appellants.

BAUTISTA ANGELO, J.:

Jose de Borja has been delinquent in the payment of his real estate taxes since 1958 for
properties located in the City of Manila and Pasay City and has offered to pay them with
two negotiable, certificates of indebtedness Nos. 3064 and 3065 in the amounts of
P793.40 and P717.69, respectively. Borja was, however, a mere assignee of the aforesaid
negotiable certificates, the applicants for backpay rights covered by them being
respectively Rafael Vizcaya and Pablo Batario Luna.
The offers to pay the estate taxes in question were rejected by the city treasurers of both
Manila and Pasay cities on the ground of their limited negotiability under Section 2,
Republic Act No. 304, as amended by Republic Act 800, and in the case of the city
treasurer of Manila on the further ground that he was ordered not to accept them by the
city mayor, for which reason Borja was prompted to bring the question to the Treasurer of
the Philippines who opined, among others, that the negotiable certificates cannot be
accepted as payment of real estate taxes inasmuch as the law provides for their
acceptance from their backpay holder only or the original applicant himself, but not his
assignee. In his letter of April 29, 1960 to the Treasurer of the Philippines, however, Borja
entertained hope that the certificates would be accepted for payment in view of the fact
that they are already long past due and redeemable, but his hope was frustrated. So on
June 30, 1960, Borja filed an action against the treasurers of both the City of Manila and
Pasay City, as well as the Treasurer of the Philippines, to impel them to execute an act
which the law allegedly requires them to perform, to wit: to accept the above-mentioned
certificates of indebtedness considering that they were already due and redeemable so as
not to deprive him illegally of his privilege to pay his obligation to the government thru
such means.
Respondents in due time filed their answer setting up the reasons for their refusal to
accept the certificates, and after the requisite trial was held, the court a quo rendered
judgment the dispositive part of which reads:
WHEREFORE, the treasurers of the City of Manila and Pasay City, their agents and
other persons acting in their behalf are hereby enjoined from including petitioner's
properties in the payment of real estate, taxes, and to sell them at public auction
and respondent Treasurer of the Philippines, and the treasurers of the City of Manila
and Pasay City are hereby ordered to accept petitioner's Negotiable Certificates of
Indebtedness Nos. 3064 and 3065 in the sums of P793.40 and P717.39 in payment
of real estate taxes of his properties in the City of Manila and Pasay City,
respectively, without costs.
Respondents took this appeal on purely questions of law.1wph1.t
Reduced to bare essentials, the 12 errors assigned by appellants may be boiled down to
the following: (a) has appellee the right to apply to the payment of his real estate taxes to
the government of Manila and Pasay cities the certificates of indebtedness he holds while
appellants have the correlative legal duty to accept the certificates in payment of said
taxes?; (b) can compensation be invoked to extinguish appellee's real estate tax liability
between the latter's obligation and the credit represented by said certificates of
indebtedness?

Anent the first issue, the pertinent legal provision to be reckoned with is Section 2 of
Republic Act No. 304, as amended by Republic Act No. 800, which in part reads:
SEC. 2. The Treasurer of the Philippines shall, upon application, and within one year
from the approval of this Act, and under such rules and regulations as may be
promulgated by the Secretary of Finance, acknowledge and file requests for the
recognition of the right to the salaries and wages as provided in section one hereof,
and notice of such acknowledgment shall be issued to the applicant which shall
state the total amount of such salaries or wages due to the applicant, and certify
that it shall be redeemed by the Government of the Philippines within ten years
from the date of their issuance without interest: Provided, that upon application . . .
a certificate of indebtedness may be issued by the Treasurer of the Philippines
covering the whole or part of the total salaries or wages the right to which has been
duly acknowledged and recognized, provided that the face value of such certificate
of indebtedness shall not exceed the amount that the applicant may need for the
payment of (1) obligations subsisting at the time of the approval of this Act for
which the applicant may directly be liable to the Government or to any of its
branches or instrumentalities, or the corporations owned or controlled by the
Government, or to any citizen of the Philippines, who may be willing to accept the
same for such settlement; (2) his taxes; . . . and Provided, also, That any person
who is not an alien, bank or other financial institution at least sixty per centum of
whose capital is owned by Filipinos may, notwithstanding any provision of its
charter, articles of incorporation, by-laws, or rules and regulations to the contrary,
accept or discount at not more than three and one-half per centum per annum for
ten years a negotiable certificate of indebtedness which shall be issued by the
Treasurer of the Philippines upon application by a holder of a back pay
acknowledgment. . . . .
To begin with, it cannot be contended that appellants are in duty bound to accept the
negotiable certificates of indebtedness held by appellee in payment of his real estate
taxes for the simple reason that they were not obligations subsisting at the time of the
approval of Republic Act No. 304 which took effect on June 18, 1948. It should be noted
that the real estate taxes in question have reference to those due in 1958 and subsequent
years. The law is explicit that in order that a certificate may be used in payment of an
obligation the same must be subsisting at the time of its approval even if we hold that a
tax partakes of this character, neither can it be contended that appellee can compel the
government to accept the alleged certificates of indebtedness in payment of his real
estate taxes under proviso No. 2 abovequoted also for the reason that in order that such
payment may be allowed the tax must be owed by the applicant himself . This is the
correct implication that may be drawn from the use by the law of the words "his taxes".
Verily, the right to use the backpay certificate in settlement of taxes is given only to the
applicant and not to any holder of any negotiable certificate to whom the law only gives
the right to have it discounted by a Filipino citizen or corporation under certain limitations.
Here appellee is not himself the applicant of the certificate, in question. He is merely an
assignee thereof, or a subsequent holder whose right is at most to have it discounted upon
maturity or to negotiate it in the meantime. A fortiori, it may be included that, not
having the right to use said certificates to pay his taxes, appellee cannot compel
appellants to accept them as he requests in the present petition for mandamus. As a
consequence, we cannot but hold that mandamus does not lie against appellants because

they have in no way neglected to perform an act enjoined upon them by law as a duty, nor
have they unlawfully excluded appellee from the use or enjoyment of a right to which be is
entitled.1
We are aware of the cases 2 cited by the court a quo wherein the government banking
institutions were ordered to accept the backpay certificates of petitioners in payment of
their indebtedness to them, but they are not here in point because in the cases mentioned
the petitioners were applicants and original holders of the corresponding backpay
certificates. Here appellee is not.
With regard to the second issue, i.e., whether compensation can be invoked insofar as the
two obligations are concerned, Articles 1278 and 1279 of the new Civil Code provide:
ART. 1278. Compensation shall take place when two persons, in their own right, are
creditors and debtors of each other.
ART. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same
time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable,
they be of the same kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they two liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by
third persons and communicated in due time to the debtor.
It is clear from the above legal provisions that compensation cannot be effected with
regard to the two obligations in question. In the first place, the debtor insofar as the
certificates of indebtedness are concerned is the Republic of the Philippines, whereas the
real estate taxes owed by appellee are due to the City of Manila and Pasay City, each one
of which having a distinct and separate personality from our Republic. With regard to the
certificates, the creditor is the appellee while the debtor is the Republic of the Philippines.
And with regard to the taxes, the creditors are the City of Manila and Pasay City while the
debtor is the appellee. It appears, therefore, that each one of the obligors concerning the
two obligations is not at the same time the principal creditor of the other. It cannot also be
said for certain that the certificates are already due. Although on their faces the
certificates issued to appellee state that they are redeemable on June 18, 1958, yet the
law does not say that they are redeemable from its approval on June 18, 1948 but "within
ten years from the date of issuance" of the certificates. There is no certainty, therefore,
when the certificates are really redeemable within the meaning of the law. Since the
requisites for the accomplishment of legal compensation cannot be fulfilled, the latter
cannot take place with regard to the two obligations as found by the court a quo.

WHEREFORE, the decision appealed from is reversed. The petition for mandamus is
dismissed. The injunction issued against respondents-appellants is hereby lifted. No costs.

G.R. No. L-15778

April 23, 1962

TAN TIONG BIO, ET AL., petitioners,

vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.

BAUTISTA ANGELO, J.:

On October 19, 1946, the Central Syndicate, a corporation organized under the laws of the
Philippines, thru its General Manager, David Sycip, sent a letter to the Collector of Internal
Revenue advising the latter that it purchased from Dee Hong Lue the entire stock of
surplus properties which the said Dee Hong Lue had bought from the Foreign Liquidation
Commission and that as it assumed Dee Hong Lue's obligation to pay the 3-1/2% sales tax
on said surplus goods, it was remitting the sum of P43,750.00 in his behalf as deposit to
answer for the payment of said sales tax with the understanding that it would later be
adjusted after the determination of the exact consideration of the sale.
On January 31, 1948, the syndicate again wrote the Collector requesting the refund of
P1,103.28 representing alleged excess payment of sales tax due to the adjustment and
reduction of the purchase price in the amount of P31,522.18. Said letter was referred to an
agent for verification and report. On September 18, 1951, after a thorough investigation of
the facts and circumstances surrounding the transaction, the agent reported (1) that Dee
Hong Lue purchased the surplus goods as trustee for the Central Syndicate which was in
the process of organization at the time of the bidding; (2) that it was the representatives
of the Central Syndicate that removed the surplus goods from their base at Leyte on
February 21, 1947; (3) that the syndicate must have realized a gross profit of 18.8% from
its sales thereof; and (4) that if the sales tax were to be assessed on its gross sales it
would still be liable for the amount of P33,797.88 as deficiency sales tax and surcharge in
addition to the amount of P43,750.00 which the corporation had deposited in the name of
Dee Hong Lue as estimated sales tax due from the latter.
Based on the above findings of the agent in charge of the investigation, the Collector
decided that the Central Syndicate was the importer and original seller of the surplus
goods in question and, therefore, the one liable to pay the sales tax. Accordingly, on
January 4, 1952, the Collector assessed against the syndicate the amount of P33,797.88
and P300.00 as deficiency sales tax, inclusive of the 25% surcharge and compromise
penalty, respectively, and on the same date, in a separate letter, he denied the request of
the syndicate for the refund of the sum of P1,103.28.
On September 8, 1954, the Central Syndicate elevated the case to the Court of Tax
Appeals questioning the ruling of the Collector which denies its claim for refund as well as
the assessment made against it of the sum of P33,797.88, plus the sum of P300.00 as
compromise penalty, as stated above. The Collector filed his answer thereto wherein he
reiterated his ruling and prayed that the Central Syndicate be ordered to pay the
deficiency sales tax and surcharge as demanded in his letters dated January 4, 1952 and
August 5, 1954. On October 28, 1954, the syndicate filed a motion requesting that the
issue of prescription it has raised against the collection of the tax be first determined as a
preliminary question, but action thereon was deferred by the Court of Tax Appeals until
after the trial of the case on the merits.
On November 5, 1954, the Collector filed a motion requiring the syndicate to file a bond to
guarantee the payment of the tax assessed against it which motion was denied by the
Court of Tax Appeals on the ground that cannot be legally done it appearing that the
syndicate is already a non-existing entity due to the expiration of its corporate existence.
In view of this development, the Collector filed a motion to dismiss the appeal on the

ground of lack of personality on the part of the syndicate, which met an opposition on the
part of the latter, but on January 25, 1955, the Court of Tax Appeals issued a resolution
dismissing the appeal primarily on the ground that the Central Syndicate has no
personality to maintain the action then pending before it. From this order the syndicate
appealed to the Supreme Court wherein it intimated that the appeal should not be
dismissed because it could be substituted by its successors-in-interest, to wit: Tan Tiong
Bio, Yu Khe Thai, Alfonso Sycip, Dee Hong Lue, Lim Shui Ty, Sy Seng Tong, Sy En, Co Giap
and David Sycip. And taking cue from this suggestion, this Court ruled against the
dismissal and held: "The resolution appealed from is set aside and the respondent court is
ordered to permit the substitution of the officers and directors of the defunct Central
Syndicate as appellants, and to proceed with the hearing of the appeal upon its merits." In
permitting the substitution, this Court labored under the premise that said officers and
directors "may be held personally liable for the unpaid deficiency assessments made by
the Collector of Internal Revenue against the defunct syndicate."
After trial, the Court of Tax Appeals rendered decision the dispositive part of which reads
as follows:
WHEREFORE, in view of the foregoing considerations, the decision of the Collector of
Internal Revenue appealed from is hereby affirmed, except with regard to the
imposition of the compromise penalty of P300.00 the collection of which is
unauthorized and illegal in the absence of a compromise agreement between the
parties. (Collector of Internal Revenue vs. University of Sto. Tomas, G. R. No. L11274, November 28, 1958; Collector of Internal Revenue vs. Bautista & Tan, G.R.
No. L-12250, May 27, 1959.) .
The petitioners Tan Tiong Bio, Yu Khe Thai, Lim Shui Ty, Alfonso Sycip, Sy En alias Sy
Seng Sui, Dee Hong Lue, and Sy Seng Tong, who appear in the Articles of
Incorporation of the Central Syndicate Annex A (pp. 60-66, CTA rec.) as
incorporators and directors of the corporation, the second named being in addition
its President and the seventh its Treasurer, are hereby ordered to pay jointly and
severally, to the Collector of Internal Revenue, the sum of P33,797.88 as deficiency
sales tax and surcharge on the surplus goods purchased by them from the Foreign
Liquidation Commission on July 5, 1946, from which they realized an estimated
gross sales of P1,447,551.65, with costs. ..
Petitioners interposed the present appeal.
The important issues to be determined in this appeal are: (1) whether the importer of the
surplus goods in question the sale of which is subject to the present tax liability is Dee
Hong Lue or the Central Syndicate who has been substituted by the present petitioners;
(2) whether the deficiency sales tax which is now sought to be collected has already
prescribed; and (3) the Central Syndicate having already been dissolved because of the
expiration of its corporate existence, whether the sales tax in question can be enforced
against its successors-in-interest who are the present petitioners.
1. Petitioners contend that the Central Syndicate cannot be held liable for the deficiency
sales tax in question because it is not the importer of the surplus goods purchased from
the Foreign Liquidation Commission for the reason that said surplus goods were purchased

by Dee Hong Lue as shown by the contract executed between him and the Foreign
Liquidation Commission and the fact that the Central Syndicate only purchased the same
from Dee Hong Lue and not from the Foreign Liquidation Commission as shown by Exhibit
13.
This contention cannot be sustained. As correctly observed by the Court of Tax Appeals,
the overwhelming evidence presented by the Collector points to the conclusion that Dee
Hong Lue purchased the surplus goods in question not for himself but for the Central
Syndicate which was then in the process of incorporation such that the deed of sale
Exhibit 13 which purports to show that Dee Hong Lue sold said goods to the syndicate for
a consideration of P1,250,000.00 (the same amount paid by Dee Hong Lue to the Foreign
Liquidation Commission) "is but a ruse to evade payment of a greater amount of
percentage tax." The aforesaid conclusion of the lower court was arrived at after a
thorough analysis of the evidence on record, pertinent portion of which we quote
hereunder with approval:
Exhibit "38-A" for the respondent (p. 178, BIR rec.) shows that as early as July 23,
1946, or before the organization and incorporation of Central Syndicate, Mr. David
Sycip, who was subsequently appointed General Manager of the corporation,
together with Messrs. Sy En alias Sy Seng Sui (one of the incorporators of Central
Syndicate), Serge Gordeof and Chin Siu Bun (an employee of the same corporation),
for and in the name of Central Syndicate then in the process of organization, went
to Leyte to take over the surplus properties sold by the FLC to Dee Hong Lue, which
the latter held in trust for the corporation. Exhibit 38-A, which is a certificate issued
by no less than David Sycip himself who was subsequently appointed General
Manager of the corporation admits in express terms the following "... the surplus
property sold by the Foreign Liquidation Commission to Dee Hong Lue (and held in
trust by the latter for the Syndicate ...." (Emphasis ours.) We give full weight and
credence to the adverse admissions made by David Sycip against the petitioners as
appearing in his certificate Exhibit 38-A (p. 178, BIR rec.) considering that at the
time he made them, he was a person jointly interested with the petitioners in the
transaction over which there was yet no controversy over any sales tax liability.
(Secs. 11 and 33, Rule 123, Rules of Court; Clem vs. Forbeso, Tex. Cir App. 10 S.W.
2d 223; Street vs. Masterson, Tex. Cir. App. 277 S.W. 407.) .
Exhibit '39' for the respondent (pp. 184-187, BIR rec.) which is a letter of Mr. Yu Khe
Thai President, Director and biggest stockholder of Central Syndicate (Exhibit A, pp.
60-65, CTA rec.) dated September 17, 1946 and addressed to the Commanding
General AFWESPAC, Manila, contains the following categorical admissions which
corroborate the admissions made by David Sycip; that the so-called Leyte 'Mystery
Pile' surplus properties were owned by Central Syndicate by virtue of a purchase
from the FLC, effected in the name of Dee Hong Lue on July 5, 1946, inasmuch as
Central Syndicate was then still in the process of organization; that Dee Hong Lue
held the said surplus properties in trust until the mere formal turnover to the
corporation on August 20, 1946, when the corporation had already been organized
and incorporated under the laws of the Philippines; and that on July 23, 1946 viz.,
twenty-two (22) days before the incorporation of Central Syndicate on August 15,
1946 'our General Manager, Mr. David Sycip accompanied by one of our directors,
Mr. Sy En, arrived in Leyte to take over the properties.'

Before passing on to the rest of the evidence supporting the finding of respondent,
we would like to call attention to this significant detail. It is stated in the letter,
Exhibit 39 (pp. 184-187, BIR rec.) of Mr. Yu Khe Thai that 'on July 23, 1946, our
General Manager, Mr. David Sycip, accompanied by one of our directors, Mr. Sy En,
arrived in Leyte to take over the properties,' We ask: Why was there such a hurry on
the part of the promoters of Central Syndicate in taking over the surplus properties
when the formal agreement, Exhibit 13 (p. 66, BIR rec.), purporting to be a contract
of sale of the 'Mystery Pile' between Dee Hong Lue as vendor, and the Central
Syndicate, as vendee, for the amount of P1,250,000.00, was effected twenty-eight
(28) days later viz., on August 20, 1946? Is this not another clear and unmistakable
indication that from the very start, as is the theory of the respondent, the real
purchasers of the 'Mystery Pile' from the FLC and as such the 'importers' of the
goods, were the Central Syndicate and/or the group of big financiers composing it
before said corporation was incorporated on August 15, 1946; and, that Dee Hong
Lue acted merely as agent of these persons when he purchased the pile from the
FLC? As a general rule, one does not exercise all the acts of ownership over a
property especially if it involves a big amount until after the documents evidencing
such ownership are fully accomplished.
Moreover, it appears that on October 3, 1946, Dee Hong Lue was investigated by
Major Primitivo San Agustin, Jr., G-2 of the Philippine Army, because of the discovery
of some gun parts found in his shipment of surplus material from Palo, Leyte.
In his sworn statement, Exhibit 16 (pp. 133-139, BIR rec.) before said officer, Dee
Hong Lue admitted the following: That he paid the FLC the amount of P1,250,000.00
"with the checks of Yu Khe Thai, maybe also Alfonso Sycip and my checks with
many others"; that "at the beginning I was trying to buy the pile for myself without
telling other people and other friends of mine." "Watkins came to me and he bid for
me for P600,000 or P700,000, but later on when the price went up to P1,250,000, I
talked to my friends who said I could get money." "So, I bought it with their checks
and mine" (Exhibit 16-B, p. 138, BIR rec.) and, that after buying the "Mystery Pile",
he (Dee Hong Lue) never inspected the same personally. (p. 141, BIR rec.)
In his affidavit, Exhibit 15 (p. 144, BIR rec.) Dee Hong Lue admitted that of the
amount of P1,250,000.00 which he paid in two installments sometime in July, 1946,
to the FLC, P1,181,250.00 (should be P1,181,000.00) of the amount came from the
following: Yu Khe Thai who advanced to him P250,000.00; Sy Seng Tong
P375,000.00; Alfonso Z. Sycip - P375,000.00; Tan Tiong Bio - P125,000.00; Robert
Dee Se Wee P25,000.00; and, Jose S. Lim P31,000.00 that his understanding
with these persons was that should they eventually join him in Central Syndicate,
such advances would be adjusted to constitute their investments; and, that soon
after the "Mystery Pile" was purchased from the FLC, all the above-named persons
with the exception of Robert Dee Se Wee and Jose S. Lim, formed the Central
Syndicate and a re-allocation of shares was made corresponding to the amounts
advanced by them.
Added to these, we have before us other documentary evidence for the respondent
consisting of Exhibits 18, 19, 20, 21, 23, 24, 25, 26, 27, 28 and 29 (pp. 85, 88, 9296, 99-103, 117-128, 119-120, 121-128, BIR rec.) all tending to prove the same

thing - that the Central Syndicate and/or the group of big financiers composing it
and not Dee Hong Lue was the real purchaser (importer) of the "Mystery Pile" from
the FLC; that in the contract of sale between Dee Hong Lue and the FLC the former
acted principally as agent (Article 1930, New Civil Code) of the petitioners Yu Khe
Thai, Sy Seng Tong, Alfonso Z. Sycip and Tan Tiong Bio who advanced the purchased
price of P1,125,000.00 out of the P1,250,000.00 paid to the FLC, Dee Hong Lue
being the purchaser in his own right only with respect to the amount of P69,000.00;
and, that the deed, Exhibit 13 (p. 77, BIR rec.) purporting to show that Dee Hong
Lue sold the "Mystery Pile" to the Central Syndicate for consideration of
P1,250.000.00 is but a ruse to evade payment of a greater amount of percentage
tax. 1wph1.t
To our mind, the deed of sale, Exhibit 13 (p. 66, BIR rec.) as well as the
circumstances surrounding the incorporation of the Central Syndicate, are shrouded
with as much mystery as the so-called "Mystery Pile" subject of the transaction. But,
as oil is to water, the truth and underlying motives behind these transactions have
to surface in the end. Petitioners would want us to believe that Dee Hong Lue
bought in his own right and for himself the surplus goods in question for
P1,250,000.00 from the FLC and then, by virtue of a valid contract of sale, Exhibit
13 (p. 66, BIR rec.) transferred and conveyed the same to the Central Syndicate at
cost. If this be so, what need was there for Dee Hong Lue to agree in the immediate
organization and incorporation of the Central Syndicate with six other capitalists
when he could very well have disposed of the surplus goods to the public in his
individual capacity and keep all the profits to himself without sharing 9/10th of it to
the other six incorporators and stockholders of the newly incorporated Syndicate.
It appears that Dee Hong Lue "sold" the pile to the Central Syndicate for exactly the
same price barely forty-six (46) days after acquiring it from FLC and exactly five (5)
days after the Syndicate was registered with the Securities and Exchange
Commission on August 19, 1946. This is indeed most unusual for a businessman like
Dee Hong Lue who, it is to be presumed, was out to make a killing when he acquired
the surplus goods from the FLC for the staggering amount of P1,750,000.00 in cash.
Again, why did Dee Hong Lue waste all his time and effort not to say his good
connections with the FLC by acquiring the goods from that agency only to sell it for
the same amount to the Central Syndicate? This would have been understandable if
Dee Hong Lue were the biggest and controlling stockholder of the Syndicate. He
could perhaps reason out to himself, "the profits which I am sacrificing now in this
sale to the Syndicate, I will get it anyway in the form of dividends from it after it
shall have disposed of all the "Mystery Pile" to the public.' But then, how could this
be possible when Dee Hong Lue was the smallest subscriber to the capital stock of
the Syndicate? It appears from the Articles of Incorporation that of the authorized
capital stock of the corporation in the amount of P500,000.00, Dee Hong Lue
subscribes to only P20,000.00 or 1/25th of the capital stock authorized and of this
amount only P5,000.00 was paid by him at the time of incorporation. So here is an
experienced businessman like Dee Hong Lue who, following the theory of
petitioners' counsel, bought the "'Mystery Pile" for himself for P1,250,000.00 in
cash, and after a few days sold the same at cost to a corporation wherein he owned
only 1/25th of the authorized capital stock and wherein he was not even an officer,

thus doling out to the other six incorporators and stockholders net profits in the sum
conservatively estimated by the respondent to be P206,116.45 out of a total of
P229,073.83 which normally could all go to him. We take judicial notice of the fact
that as a result of our immense losses in property throughout the archipelago the
during the Japanese occupation, either through destruction or systematic
commandering by the enemy and our forces, surplus properties commanded a very
good price in the open market after the liberation and that quite a number of
surplus dealers made immense fortunes out of it. We believe the respondent was
quite charitable if not more than fair to the Central Syndicate in computing the
profits realized by it in the resale of the "Mystery Pile" to the public at only 18.8% of
the acquisition price.
Now, from the side of the Central Syndicate. This corporation, as its articles of
incorporation, Exhibit A (pp. 60-66, CTA rec.) will show, was incorporated on August
15, 1946 with an authorized capital stock of P500,000.00 of which P200,000.00
worth was subscribed by seven (7) persons and P50,000.00 paid-up in cash at the
time of incorporation. Five (5) days after its incorporation, as the Deed of Sale,
Exhibit 13 (p. 66, BIR rec.) purports to show, the said corporation bought from Dee
Hong Lue the "Mystery Pile" for P1,250,000.00 in cash. This is indeed quite
phenomenal and fantastic not to say the utmost degree of finance considering that
the corporation had a subscribed capital stock of only P200,000.00 of which only
P50,000.00 was paid-up at the time of incorporation and with not the least proof
showing that it never borrowed money in its own name from outside source to raise
the enormous amount allegedly paid to Dee Hong Lue nor evidence to show that it
had by then in so short a time is five (5) days accumulated a substantial reserve to
meet Dee Hong Lue's selling price.
Furthermore, at first blush it would seem quite difficult to understand why the seven
(7) incorporators and stockholders of the Central Syndicate formed a corporation
with a subscribed capital stock of only P200,000.00, and with cash on hand of only
P50,000.00 knowing fully well that there was a transaction awaiting the newly
registered corporation involving an outlay of P1,250,000.00 in cash. We believe this
was done after mature deliberation and for some ulterior motive. As we see it, the
only logical answer is that the incorporator wanted to limit whatever civil liability
that might arise in favor of third persons, as the present tax liability has now arisen,
up to the amount of their subscriptions, although the surplus deal they transacted
and which we believe was the only purpose in the incorporation of the Central
Syndicate, was very much over and above their authorized capital. Moreover, by
limiting its capital, the corporation was also able to save on incidental expenses,
such as attorney's fee and the filing fee paid to the Securities and Exchange
Commission, which were based on the amount of the authorized capital stock.
Another mystery worth unravelling is what happened to the P1,181,240.00 (should
be P1,181,000.00) which Dee Hong Lue in his affidavit, Exhibit 15 (p. 144, BIR rec.)
claims to have received from Messrs. Uy Khe Thai, Sy Seng Tong, Alfonso Z. Sycip,
Tan Tiong Bio (all incorporators of the Syndicate) and two others as 'advances' with
which to pay the FLC. There is no evidence on record to show that Dee Hong Lue
ever returned this amount to those six (6) persons after he supposedly received
P1,250,000.00 from the newly incorporated Syndicate by virtue of the Deed of Sale,

Exhibit 13. This is the explanation that Dee Hong Lue gave in this regard as
appearing in his affidavit, Exhibit 15: "That soon after the above-mentioned
property was purchased, the above parties, with the exception of Robert Dee Se
Wee and Jose S. Lim decided to join the proposed Central Syndicate and a reallocation of shares was made for the reason that some of the above parties in turn
had to get advances from third parties." If this were true, why was it that Messrs. Yu
Khe Thai, Sy Seng Tong, Alfonso Z. Sycip and Tan Tiong Bio who advanced
P250,000.00; P375,000.00 and P125,000.00 to Dee Hong Lue were made to appear
in the Articles of incorporation of the Central Syndicate as having subscribed to
shares worth only P40,000.00; P30,000.00; P30,000.00 and P20,000.00 and of
having paid only P10,000.00, P7,500.00, P7,500.00, and P5,000.00 on their
subscriptions, respectively? Would it not be more in keeping with corporate practice,
following the explanation of Dee Hong Lue, to just credit those four (4) persons in
the corporation with shares worth the amount advanced by them to Dee Hong Lue?
On the basis of the above figures, the re-allocation of shares in favor of the four (4)
incorporators who advanced enormous sums for the Syndicate seems at first glance
to be totally disproportionate and unfair to them. However, in the final analysis it is
not so as we will now show. Immediately after the incorporation of the Syndicate, as
the evidence shows, Dee Hong Lue was made to execute a deed of transfer under
the guise of a contract of sale, conveying full and complete ownership of the
"Mystery Pile" to the newly organized corporation. So we have, on the face of the
Articles of Incorporation and Exhibit 13, a corporation with assets worth only
P50,000.00 cash owning properties worth over a million pesos. Obviously, the
incorporators of the Syndicate, particularly those four who advanced enormous
sums to Dee Hong Lue, are not ordinary businessmen who could easily be taken for
a ride. With the precipitated execution of the "Deed of Sale" by Dee Hong Lue in
favor of the Syndicate, transferring and conveying ownership over the entire pile to
the latter, the recoupment of their advances from the newly acquired assets of the
corporation was sufficiently secured, and at the same time, by making the
document appear to be a deed of sale instead of a deed of transfer as it should be
under Article 1891 of the New Civil Code, they have reduced (at least attempted to)
their sales tax liability with the argument that Dee Hong Lue was the original
"purchaser" or "importer" of the goods and therefore the taxable sale was that one
made by him to the Syndicate and not the sales made by the latter to the public.
After going over the Articles of Incorporation of the Central Syndicate and the other
circumstances of this case, we draw the conclusion that it was organized just for
this particular transaction that its life span was expressly limited to two (2) years
from and after the date of incorporation just to give it time to dispose of the
"Mystery Pile" to the public and then liquidate all its assets among the seven
incorporators-stockholders as in fact it was done on August 15, 1948; that from the
very start, the seven (7) incorporators had intended it to be a closed corporation
without the least intention of ever selling to other persons the remaining authorized
capital stock of P300,000.00 still unsubscribed; and, that upon its liquidation, the
seven (7) incorporators composing it got much more than their investments
including those who advanced P1,181,000.00 to the FLC for the corporation.
Petitioners would dispute the finding that Dee Hong Lue merely acted as a trustee of the
Central Syndicate when he purchased the surplus goods in question from the Foreign

Liquidation Commission on July 5, 1946 considering that on that date the syndicate has
not yet been incorporated on the theory that no legal relation may exist between parties
one of whom has yet no legal existence. Technically this may be true, but the fact remains
that it cannot be denied that Dee Hong Lue purchased the goods on behalf of those who
advanced the money for the purchase thereof who later became the incorporators and
only stockholders of the syndicate with the understanding that the amounts they had
respectively advanced would be their investment and would represent their interest in the
corporation. And this is further evidenced by the fact that this purchase made by Dee
Hong Lue was later approved and adopted as the act of the Central Syndicate itself as can
be gleaned from the certificate executed by David Sycip, general manager of said
syndicate, on September 16, 1946, wherein he emphasized that the persons named
therein (from whom Dee Hong Lue obtained the money) merely acted on behalf of the
syndicate and in fact were the ones who went to Leyte to take over the aforesaid surplus
goods. In any event, even if Dee Hong Lue may be deemed as the purchaser of the surplus
goods in his own right, nevertheless, the corporation still may be regarded as the importer
of the same goods for the reason that Dee Hong Lue transferred to it all his rights and
interests in the contract with the Foreign Liquidation Commission, and it was said
corporation that took delivery thereof from the place where they were stored in Leyte as
may be seen from the letter of Dee Hong Lue to the Foreign Liquidation Commission dated
September 2, 1946 and the letter of the Central Syndicate to the said Commission bearing
the same date. Under these facts, it is clear that the Central Syndicate is the importer of
the surplus goods as correctly observed by Judge Umali in his concurring opinion, from
which we quote: .
It is now well settled that a person who bought surplus goods from the Foreign
Liquidation Commission and who removed the goods bought from the U.S. military
bases in the Philippines is considered an importer of such goods and is subject to
the sales tax or compensating tax, as the case may be. (Go Cheng Tee v. Meer, 47
O.G. 269; Saura Import and Export v. Meer, G.R. No. L-2927, Jan. 26, 1951; P.M.P.
Navigation v. Meer, G.R. No. L-4621, March 24, 1953; Soriano y Cia v. Coll. of Int.
Rev., 51 O.G. 4548.) In this case it appearing that the Central Syndicate was the
owner of the 'Mystery Pile' before its removal from Base K and that it was the one
which actually took delivery thereof and removed the same from the U.S. military
base, it is the importer within the meaning of Section 186 of the Revenue Code, as it
stood before the enactment of Republic Act No. 594, and its sales of the surplus
goods are the original sales taxable under said section and not the sale to it by Dee
Hong Lue.
2. Since the Central Syndicate, as we have already pointed out, was the importer of the
surplus goods in question, it was its duty under Section 183 of the Internal Revenue Code
to file a return of its gross sales within 20 days after the end of each quarter in order that
the office of the internal revenue may assess the sales tax that may be due thereon, but,
as the record shows, the Central Syndicate failed to file any return of its quarterly sales on
the pretext that it was Dee Hong Lue who imported the surplus goods and it merely
purchased them from said importer. This is in fact what the syndicate intended to impress
upon the Collector when it wrote to him its letter of October 19, 1946 informing him that it
purchased from Dee Hong Lue the entire stock of the surplus goods which the latter had
bought from the Foreign Liquidation Commission and was therefore depositing in his name
the sum of P43,750.00 to answer for his sales tax liability, but this letter certainly cannot

be considered as a return that may set in operation the application of the prescriptive
period provided for in Section 331 of the Tax Code, for, evidently, said letter if at all could
only be considered as such in behalf of Dee Hong Lue and not in behalf of the Central
Syndicate because such is the only nature and import of the letter. Besides, how can such
letter be considered as a return of the sales of the Central Syndicate when it was only on
February 21, 1947 when it removed the surplus goods in question from their base at
Leyte? How can such return inure to the benefit of the syndicate when the same surplus
goods which were removed on said date could not have been sold by the corporation
earlier than the aforesaid date? It is obvious that the letter of October 19, 1946 cannot
possibly be considered as a return filed by the syndicate and so cannot serve as basis for
the computation of the prescriptive period of five years prescribed by law.
Nor can the fact that the Collector did not include in the assessment a surcharge of 50%
serve as an argument that a return had already been filed, for such failure can only mean
that an oversight had been committed in the non-inclusion of said surcharge. The
syndicate having failed to file its quarterly returns as required by Section 183 of the Tax
Code, the period that has to be reckoned with is that embodied in Section 332 of the same
Code which provides that in case of failure to file the return the tax may be assessed
within 10 years after discovery of the falsity, fraud or omission of the payment of the
proper tax. Since it appears that the Collector discovered the failure of the syndicate to file
the return only on September 12, 1951 he has therefore up to September 18, 1961 within
which to assess or collect the deficiency tax in question. Consequently the assessment
made on January 4, 1952 was made within the prescribed period.
3. Petitioners argue (1) that the Court of Tax Appeals acted in excess of its jurisdiction in
holding them liable as officers or directors of the defunct Central Syndicate for the tax
liability of the latter; (2) that petitioners cannot be held liable for said tax liability there
being no statutory provision in this jurisdiction authorizing the government to proceed
against the stockholders of a defunct corporation as transferees of the corporate assets
upon liquidation; (3) that assuming that the stockholders can be held so liable, they are
only liable to the extent of the benefits derived by them from the corporation and there is
no evidence showing that petitioners had been the beneficiaries of the defunct syndicate;
(4) that considering that the Collector instituted the present action on September 23, 1954
when he filed his answer to the appeal of petitioners, said action was already barred by
prescription pursuant to Sections 77 and 78 of the Corporation Law which allows
corporations to continue as a body corporate only for three years from its dissolution; and
(5) that assuming that petitioners are liable to pay the tax, their liability is not solidary, but
only limited to the benefits derived by them from the corporation.
It should be stated at the outset that it was petitioners themselves who caused their
substitution as parties in the present case, being the successors-in-interest of the defunct
syndicate, when they appealed this case to the Supreme Court for which reason the latter
Court declared that "the respondent Court of Tax Appeals should have allowed the
substitution of its former officers and directors is parties-appellants, since they are proper
parties in interest insofar as they may be (and in fact are) held personally liable for the
unpaid deficiency assessments made by the Collector of Internal Revenue against the
defunct Syndicate." In fact, because of this directive their substitution was effected. They
cannot, therefore, be now heard to complain if they are made responsible for the tax

liability of the defunct syndicate whose representation they assumed and whose assets
were distributed among them.
In the second place, there is good authority to the effect that the creditor of a dissolved
corporation may follow its assets once they passed into the hands of the stockholders.
Thus, recognized are the following rules in American jurisprudence: The dissolution of a
corporation does not extinguish the debts due or owing to it (Bacon v. Robertson, 18 How.
480, 15 L. Ed., 406; Curron v. State, 16 How. 304, 14 L. Ed., 705). A creditor of a dissolve
corporation may follow its assets, as in the nature of a trust fund, into the hands of its
stockholders (MacWilliams v. Excelsier Coal Co. [1924] 298 Fed. 384). An indebtedness of a
corporation to the federal government for income and excess profit taxes is not
extinguished by the dissolution of the corporation (Quinn v. McLeudon, 152 Ark. 271, 238
S.W., 32). And it has been stated, with reference to the effect of dissolution upon taxes due
from a corporation, "that the hands of the government cannot, of course, collect taxes
from a defunct corporation, it loses thereby none of its rights to assess taxes which had
been due from the corporation, and to collect them from persons, who by reason of
transactions with the corporation, hold property against which the tax can be enforced and
that the legal death of the corporation no more prevents such action than would the
physical death of an individual prevent the government from assessing taxes against him
and collecting them from his administrator, who holds the property which the decedent
had formerly possessed" (Wonder Bakeries Co. v. U.S. [1934] Ct. Cl. 6 F. Supp. 288).
Bearing in mind that our corporation law is of American origin, the foregoing authorities
have persuasive effect in considering similar cases in this jurisdiction. This must have
been taken into account when in G.R. No. L-8800 this Court said that petitioners could be
held personally liable for the taxes in question as successors-in-interest of the defunct
corporation.
Considering that the Central Syndicate realized from the sale of the surplus goods a net
profit of P229,073.83, and that the sale of said goods was the only transaction undertaken
by said syndicate, there being no evidence to the contrary, the conclusion is that said net
profit remained intact and was distributed among the stockholders when the corporation
liquidated and distributed its assets on August 15, 1948, immediately after the sale of the
said surplus goods. Petitioners are therefore the beneficiaries of the defunct corporation
and as such should be held liable to pay the taxes in question. However, there being no
express provision requiring the stockholders of the corporation to be solidarily liable for its
debts which liability must be express and cannot be presumed, petitioners should be held
to be liable for the tax in question only in proportion to their shares in the distribution of
the assets of the defunct corporation. The decision of the trial court should be modified
accordingly.
WHEREFORE, with the above modification, we hereby affirm the decision appealed from,
with costs against petitioners.

G.R. No. L-23645

October 29, 1968

BENJAMIN P. GOMEZ, petitioner-appellee,

vs.
ENRICO PALOMAR, in his capacity as Postmaster General, HON. BRIGIDO R.
VALENCIA, in his capacity as Secretary of Public Works and Communications,
and DOMINGO GOPEZ, in his capacity as Acting Postmaster of San Fernando,
Pampanga, respondent-appellants.
CASTRO, J.:
This appeal puts in issue the constitutionality of Republic Act 1635, 1 as amended by
Republic Act 2631,2 which provides as follows:
To help raise funds for the Philippine Tuberculosis Society, the Director of Posts shall
order for the period from August nineteen to September thirty every year the
printing and issue of semi-postal stamps of different denominations with face value
showing the regular postage charge plus the additional amount of five centavos for
the said purpose, and during the said period, no mail matter shall be accepted in
the mails unless it bears such semi-postal stamps: Provided, That no such additional
charge of five centavos shall be imposed on newspapers. The additional proceeds
realized from the sale of the semi-postal stamps shall constitute a special fund and
be deposited with the National Treasury to be expended by the Philippine
Tuberculosis Society in carrying out its noble work to prevent and eradicate
tuberculosis.

The respondent Postmaster General, in implementation of the law, thereafter issued four
(4) administrative orders numbered 3 (June 20, 1958), 7 (August 9, 1958), 9 (August 28,
1958), and 10 (July 15, 1960). All these administrative orders were issued with the
approval of the respondent Secretary of Public Works and Communications.
The pertinent portions of Adm. Order 3 read as follows:
Such semi-postal stamps could not be made available during the period from
August 19 to September 30, 1957, for lack of time. However, two denominations of
such stamps, one at "5 + 5" centavos and another at "10 + 5" centavos, will soon
be released for use by the public on their mails to be posted during the same period
starting with the year 1958.
xxx

xxx

xxx

During the period from August 19 to September 30 each year starting in 1958, no
mail matter of whatever class, and whether domestic or foreign, posted at any
Philippine Post Office and addressed for delivery in this country or abroad, shall be
accepted for mailing unless it bears at least one such semi-postal stamp showing
the additional value of five centavos intended for the Philippine Tuberculosis Society.
In the case of second-class mails and mails prepaid by means of mail permits or
impressions of postage meters, each piece of such mail shall bear at least one such
semi-postal stamp if posted during the period above stated starting with the year
1958, in addition to being charged the usual postage prescribed by existing
regulations. In the case of business reply envelopes and cards mailed during said
period, such stamp should be collected from the addressees at the time of delivery.
Mails entitled to franking privilege like those from the office of the President,
members of Congress, and other offices to which such privilege has been granted,
shall each also bear one such semi-postal stamp if posted during the said period.
Mails posted during the said period starting in 1958, which are found in street or
post-office mail boxes without the required semi-postal stamp, shall be returned to
the sender, if known, with a notation calling for the affixing of such stamp. If the
sender is unknown, the mail matter shall be treated as nonmailable and forwarded
to the Dead Letter Office for proper disposition.
Adm. Order 7, amending the fifth paragraph of Adm. Order 3, reads as follows:
In the case of the following categories of mail matter and mails entitled to franking
privilege which are not exempted from the payment of the five centavos intended
for the Philippine Tuberculosis Society, such extra charge may be collected in cash,
for which official receipt (General Form No. 13, A) shall be issued, instead of affixing
the semi-postal stamp in the manner hereinafter indicated:
1. Second-class mail. Aside from the postage at the second-class rate, the extra
charge of five centavos for the Philippine Tuberculosis Society shall be collected on
each separately-addressed piece of second-class mail matter, and the total sum
thus collected shall be entered in the same official receipt to be issued for the

postage at the second-class rate. In making such entry, the total number of pieces
of second-class mail posted shall be stated, thus: "Total charge for TB Fund on 100
pieces . .. P5.00." The extra charge shall be entered separate from the postage in
both of the official receipt and the Record of Collections.
2. First-class and third-class mail permits. Mails to be posted without postage
affixed under permits issued by this Bureau shall each be charged the usual
postage, in addition to the five-centavo extra charge intended for said society. The
total extra charge thus received shall be entered in the same official receipt to be
issued for the postage collected, as in subparagraph 1.
3. Metered mail. For each piece of mail matter impressed by postage meter
under metered mail permit issued by this Bureau, the extra charge of five centavos
for said society shall be collected in cash and an official receipt issued for the total
sum thus received, in the manner indicated in subparagraph 1.
4. Business reply cards and envelopes. Upon delivery of business reply cards and
envelopes to holders of business reply permits, the five-centavo charge intended for
said society shall be collected in cash on each reply card or envelope delivered, in
addition to the required postage which may also be paid in cash. An official receipt
shall be issued for the total postage and total extra charge received, in the manner
shown in subparagraph 1.
5. Mails entitled to franking privilege. Government agencies, officials, and other
persons entitled to the franking privilege under existing laws may pay in cash such
extra charge intended for said society, instead of affixing the semi-postal stamps to
their mails, provided that such mails are presented at the post-office window, where
the five-centavo extra charge for said society shall be collected on each piece of
such mail matter. In such case, an official receipt shall be issued for the total sum
thus collected, in the manner stated in subparagraph 1.
Mail under permits, metered mails and franked mails not presented at the postoffice window shall be affixed with the necessary semi-postal stamps. If found in
mail boxes without such stamps, they shall be treated in the same way as herein
provided for other mails.
Adm. Order 9, amending Adm. Order 3, as amended, exempts "Government and its
Agencies and Instrumentalities Performing Governmental Functions." Adm. Order 10,
amending Adm. Order 3, as amended, exempts "copies of periodical publications received
for mailing under any class of mail matter, including newspapers and magazines admitted
as second-class mail."
The FACTS. On September l5, 1963 the petitioner Benjamin P. Gomez mailed a letter at
the post office in San Fernando, Pampanga. Because this letter, addressed to a certain
Agustin Aquino of 1014 Dagohoy Street, Singalong, Manila did not bear the special anti-TB
stamp required by the statute, it was returned to the petitioner.
In view of this development, the petitioner brough suit for declaratory relief in the Court of
First Instance of Pampanga, to test the constitutionality of the statute, as well as the

implementing administrative orders issued, contending that it violates the equal protection
clause of the Constitution as well as the rule of uniformity and equality of taxation. The
lower court declared the statute and the orders unconstitutional; hence this appeal by the
respondent postal authorities.
For the reasons set out in this opinion, the judgment appealed from must be reversed.
I.
Before reaching the merits, we deem it necessary to dispose of the respondents'
contention that declaratory relief is unavailing because this suit was filed after the
petitioner had committed a breach of the statute. While conceding that the mailing by the
petitioner of a letter without the additional anti-TB stamp was a violation of Republic Act
1635, as amended, the trial court nevertheless refused to dismiss the action on the ground
that under section 6 of Rule 64 of the Rules of Court, "If before the final termination of the
case a breach or violation of ... a statute ... should take place, the action may thereupon
be converted into an ordinary action."
The prime specification of an action for declaratory relief is that it must be brought "before
breach or violation" of the statute has been committed. Rule 64, section 1 so provides.
Section 6 of the same rule, which allows the court to treat an action for declaratory relief
as an ordinary action, applies only if the breach or violation occurs after the filing of the
action but before the termination thereof.3
Hence, if, as the trial court itself admitted, there had been a breach of the statute before
the firing of this action, then indeed the remedy of declaratory relief cannot be availed of,
much less can the suit be converted into an ordinary action.
Nor is there merit in the petitioner's argument that the mailing of the letter in question did
not constitute a breach of the statute because the statute appears to be addressed only to
postal authorities. The statute, it is true, in terms provides that "no mail matter shall be
accepted in the mails unless it bears such semi-postal stamps." It does not follow,
however, that only postal authorities can be guilty of violating it by accepting mails
without the payment of the anti-TB stamp. It is obvious that they can be guilty of violating
the statute only if there are people who use the mails without paying for the additional
anti-TB stamp. Just as in bribery the mere offer constitutes a breach of the law, so in the
matter of the anti-TB stamp the mere attempt to use the mails without the stamp
constitutes a violation of the statute. It is not required that the mail be accepted by postal
authorities. That requirement is relevant only for the purpose of fixing the liability of postal
officials.
Nevertheless, we are of the view that the petitioner's choice of remedy is correct because
this suit was filed not only with respect to the letter which he mailed on September 15,
1963, but also with regard to any other mail that he might send in the future. Thus, in his
complaint, the petitioner prayed that due course be given to "other mails without the
semi-postal stamps which he may deliver for mailing ... if any, during the period covered
by Republic Act 1635, as amended, as well as other mails hereafter to be sent by or to
other mailers which bear the required postage, without collection of additional charge of
five centavos prescribed by the same Republic Act." As one whose mail was returned, the

petitioner is certainly interested in a ruling on the validity of the statute requiring the use
of additional stamps.
II.
We now consider the constitutional objections raised against the statute and the
implementing orders.
1. It is said that the statute is violative of the equal protection clause of the Constitution.
More specifically the claim is made that it constitutes mail users into a class for the
purpose of the tax while leaving untaxed the rest of the population and that even among
postal patrons the statute discriminatorily grants exemption to newspapers while
Administrative Order 9 of the respondent Postmaster General grants a similar exemption
to offices performing governmental functions. .
The five centavo charge levied by Republic Act 1635, as amended, is in the nature of an
excise tax, laid upon the exercise of a privilege, namely, the privilege of using the mails.
As such the objections levelled against it must be viewed in the light of applicable
principles of taxation.
To begin with, it is settled that the legislature has the inherent power to select the subjects
of taxation and to grant exemptions.4 This power has aptly been described as "of wide
range and flexibility."5 Indeed, it is said that in the field of taxation, more than in other
areas, the legislature possesses the greatest freedom in classification. 6 The reason for this
is that traditionally, classification has been a device for fitting tax programs to local needs
and usages in order to achieve an equitable distribution of the tax burden. 7
That legislative classifications must be reasonable is of course undenied. But what the
petitioner asserts is that statutory classification of mail users must bear some reasonable
relationship to the end sought to be attained, and that absent such relationship the
selection of mail users is constitutionally impermissible. This is altogether a different
proposition. As explained in Commonwealth v. Life Assurance Co.:8
While the principle that there must be a reasonable relationship between
classification made by the legislation and its purpose is undoubtedly true in some
contexts, it has no application to a measure whose sole purpose is to raise
revenue ... So long as the classification imposed is based upon some standard
capable of reasonable comprehension, be that standard based upon ability to
produce revenue or some other legitimate distinction, equal protection of the law
has been afforded. See Allied Stores of Ohio, Inc. v. Bowers, supra, 358 U.S. at 527,
79 S. Ct. at 441; Brown Forman Co. v. Commonwealth of Kentucky, 2d U.S. 56, 573,
80 S. Ct. 578, 580 (1910).
We are not wont to invalidate legislation on equal protection grounds except by the
clearest demonstration that it sanctions invidious discrimination, which is all that the
Constitution forbids. The remedy for unwise legislation must be sought in the legislature.
Now, the classification of mail users is not without any reason. It is based on ability to pay,
let alone the enjoyment of a privilege, and on administrative convinience. In the allocation

of the tax burden, Congress must have concluded that the contribution to the anti-TB fund
can be assured by those whose who can afford the use of the mails.
The classification is likewise based on considerations of administrative convenience. For it
is now a settled principle of law that "consideration of practical administrative
convenience and cost in the administration of tax laws afford adequate ground for
imposing a tax on a well recognized and defined class." 9 In the case of the anti-TB stamps,
undoubtedly, the single most important and influential consideration that led the
legislature to select mail users as subjects of the tax is the relative ease and
convenienceof collecting the tax through the post offices. The small amount of five
centavos does not justify the great expense and inconvenience of collecting through the
regular means of collection. On the other hand, by placing the duty of collection on postal
authorities the tax was made almost self-enforcing, with as little cost and as little
inconvenience as possible.
And then of course it is not accurate to say that the statute constituted mail users into a
class. Mail users were already a class by themselves even before the enactment of the
statue and all that the legislature did was merely to select their class. Legislation is
essentially empiric and Republic Act 1635, as amended, no more than reflects a distinction
that exists in fact. As Mr. Justice Frankfurter said, "to recognize differences that exist in
fact is living law; to disregard [them] and concentrate on some abstract identities is
lifeless logic."10
Granted the power to select the subject of taxation, the State's power to grant exemption
must likewise be conceded as a necessary corollary. Tax exemptions are too common in
the law; they have never been thought of as raising issues under the equal protection
clause.
It is thus erroneous for the trial court to hold that because certain mail users are exempted
from the levy the law and administrative officials have sanctioned an invidious
discrimination offensive to the Constitution. The application of the lower courts theory
would require all mail users to be taxed, a conclusion that is hardly tenable in the light of
differences in status of mail users. The Constitution does not require this kind of equality.
As the United States Supreme Court has said, the legislature may withhold the burden of
the tax in order to foster what it conceives to be a beneficent enterprise. 11 This is the case
of newspapers which, under the amendment introduced by Republic Act 2631, are exempt
from the payment of the additional stamp.
As for the Government and its instrumentalities, their exemption rests on the State's
sovereign immunity from taxation. The State cannot be taxed without its consent and such
consent, being in derogation of its sovereignty, is to be strictly construed. 12 Administrative
Order 9 of the respondent Postmaster General, which lists the various offices and
instrumentalities of the Government exempt from the payment of the anti-TB stamp, is but
a restatement of this well-known principle of constitutional law.
The trial court likewise held the law invalid on the ground that it singles out tuberculosis to
the exclusion of other diseases which, it is said, are equally a menace to public health. But
it is never a requirement of equal protection that all evils of the same genus be eradicated

or none at all.13 As this Court has had occasion to say, "if the law presumably hits the evil
where it is most felt, it is not to be overthrown because there are other instances to which
it might have been applied."14
2. The petitioner further argues that the tax in question is invalid, first, because it is not
levied for a public purpose as no special benefits accrue to mail users as taxpayers, and
second, because it violates the rule of uniformity in taxation.
The eradication of a dreaded disease is a public purpose, but if by public purpose the
petitioner means benefit to a taxpayer as a return for what he pays, then it is sufficient
answer to say that the only benefit to which the taxpayer is constitutionally entitled is that
derived from his enjoyment of the privileges of living in an organized society, established
and safeguarded by the devotion of taxes to public purposes. Any other view would
preclude the levying of taxes except as they are used to compensate for the burden on
those who pay them and would involve the abandonment of the most fundamental
principle of government that it exists primarily to provide for the common good. 15
Nor is the rule of uniformity and equality of taxation infringed by the imposition of a flat
rate rather than a graduated tax. A tax need not be measured by the weight of the mail or
the extent of the service rendered. We have said that considerations of administrative
convenience and cost afford an adequate ground for classification. The same
considerations may induce the legislature to impose a flat tax which in effect is a charge
for the transaction, operating equally on all persons within the class regardless of the
amount involved.16 As Mr. Justice Holmes said in sustaining the validity of a stamp act
which imposed a flat rate of two cents on every $100 face value of stock transferred:
One of the stocks was worth $30.75 a share of the face value of $100, the other
$172. The inequality of the tax, so far as actual values are concerned, is manifest.
But, here again equality in this sense has to yield to practical considerations and
usage. There must be a fixed and indisputable mode of ascertaining a stamp tax. In
another sense, moreover, there is equality. When the taxes on two sales are equal,
the same number of shares is sold in each case; that is to say, the same privilege is
used to the same extent. Valuation is not the only thing to be considered. As was
pointed out by the court of appeals, the familiar stamp tax of 2 cents on checks,
irrespective of income or earning capacity, and many others, illustrate the necessity
and practice of sometimes substituting count for weight ... 17
According to the trial court, the money raised from the sales of the anti-TB stamps is spent
for the benefit of the Philippine Tuberculosis Society, a private organization, without
appropriation by law. But as the Solicitor General points out, the Society is not really the
beneficiary but only the agency through which the State acts in carrying out what is
essentially a public function. The money is treated as a special fund and as such need not
be appropriated by law.18
3. Finally, the claim is made that the statute is so broadly drawn that to execute it the
respondents had to issue administrative orders far beyond their powers. Indeed, this is one
of the grounds on which the lower court invalidated Republic Act 1631, as amended,
namely, that it constitutes an undue delegation of legislative power.

Administrative Order 3, as amended by Administrative Orders 7 and 10, provides that for
certain classes of mail matters (such as mail permits, metered mails, business reply cards,
etc.), the five-centavo charge may be paid in cash instead of the purchase of the anti-TB
stamp. It further states that mails deposited during the period August 19 to September 30
of each year in mail boxes without the stamp should be returned to the sender, if known,
otherwise they should be treated as nonmailable.
It is true that the law does not expressly authorize the collection of five centavos except
through the sale of anti-TB stamps, but such authority may be implied in so far as it may
be necessary to prevent a failure of the undertaking. The authority given to the
Postmaster General to raise funds through the mails must be liberally construed,
consistent with the principle that where the end is required the appropriate means are
given.19
The anti-TB stamp is a distinctive stamp which shows on its face not only the amount of
the additional charge but also that of the regular postage. In the case of business reply
cards, for instance, it is obvious that to require mailers to affix the anti-TB stamp on their
cards would be to make them pay much more because the cards likewise bear the amount
of the regular postage.
It is likewise true that the statute does not provide for the disposition of mails which do not
bear the anti-TB stamp, but a declaration therein that "no mail matter shall be accepted in
the mails unless it bears such semi-postal stamp" is a declaration that such mail matter is
nonmailable within the meaning of section 1952 of the Administrative Code.
Administrative Order 7 of the Postmaster General is but a restatement of the law for the
guidance of postal officials and employees. As for Administrative Order 9, we have already
said that in listing the offices and entities of the Government exempt from the payment of
the stamp, the respondent Postmaster General merely observed an established principle,
namely, that the Government is exempt from taxation.
ACCORDINGLY, the judgment a quo is reversed, and the complaint is dismissed, without
pronouncement as to costs.

G.R. No. L-7859

December 22, 1955

WALTER LUTZ, as Judicial Administrator of the Intestate Estate of the deceased

Antonio Jayme Ledesma, plaintiff-appellant,
vs.
J. ANTONIO ARANETA, as the Collector of Internal Revenue, defendant-appellee.
REYES, J.B L., J.:
This case was initiated in the Court of First Instance of Negros Occidental to test the
legality of the taxes imposed by Commonwealth Act No. 567, otherwise known as the
Sugar Adjustment Act.
Promulgated in 1940, the law in question opens (section 1) with a declaration of
emergency, due to the threat to our industry by the imminent imposition of export taxes
upon sugar as provided in the Tydings-McDuffe Act, and the "eventual loss of its
preferential position in the United States market"; wherefore, the national policy was
expressed "to obtain a readjustment of the benefits derived from the sugar industry by the
component elements thereof" and "to stabilize the sugar industry so as to prepare it for
the eventuality of the loss of its preferential position in the United States market and the
imposition of the export taxes."
In section 2, Commonwealth Act 567 provides for an increase of the existing tax on the
manufacture of sugar, on a graduated basis, on each picul of sugar manufactured; while
section 3 levies on owners or persons in control of lands devoted to the cultivation of
sugar cane and ceded to others for a consideration, on lease or otherwise
a tax equivalent to the difference between the money value of the rental or
consideration collected and the amount representing 12 per centum of the assessed
value of such land.
According to section 6 of the law
SEC. 6. All collections made under this Act shall accrue to a special fund in the
Philippine Treasury, to be known as the 'Sugar Adjustment and Stabilization Fund,'

and shall be paid out only for any or all of the following purposes or to attain any or
all of the following objectives, as may be provided by law.
First, to place the sugar industry in a position to maintain itself, despite the gradual
loss of the preferntial position of the Philippine sugar in the United States market,
and ultimately to insure its continued existence notwithstanding the loss of that
market and the consequent necessity of meeting competition in the free markets of
the world;
Second, to readjust the benefits derived from the sugar industry by all of the
component elements thereof the mill, the landowner, the planter of the sugar
cane, and the laborers in the factory and in the field so that all might continue
profitably to engage therein;lawphi1.net
Third, to limit the production of sugar to areas more economically suited to the
production thereof; and
Fourth, to afford labor employed in the industry a living wage and to improve their
living and working conditions: Provided, That the President of the Philippines may,
until the adjourment of the next regular session of the National Assembly, make the
necessary disbursements from the fund herein created (1) for the establishment
and operation of sugar experiment station or stations and the undertaking of
researchers (a) to increase the recoveries of the centrifugal sugar factories with the
view of reducing manufacturing costs, (b) to produce and propagate higher yielding
varieties of sugar cane more adaptable to different district conditions in the
Philippines, (c) to lower the costs of raising sugar cane, (d) to improve the buying
quality of denatured alcohol from molasses for motor fuel, (e) to determine the
possibility of utilizing the other by-products of the industry, (f) to determine what
crop or crops are suitable for rotation and for the utilization of excess cane lands,
and (g) on other problems the solution of which would help rehabilitate and stabilize
the industry, and (2) for the improvement of living and working conditions in sugar
mills and sugar plantations, authorizing him to organize the necessary agency or
agencies to take charge of the expenditure and allocation of said funds to carry out
the purpose hereinbefore enumerated, and, likewise, authorizing the disbursement
from the fund herein created of the necessary amount or amounts needed for
salaries, wages, travelling expenses, equipment, and other sundry expenses of said
agency or agencies.
Plaintiff, Walter Lutz, in his capacity as Judicial Administrator of the Intestate Estate of
Antonio Jayme Ledesma, seeks to recover from the Collector of Internal Revenue the sum
of P14,666.40 paid by the estate as taxes, under section 3 of the Act, for the crop years
1948-1949 and 1949-1950; alleging that such tax is unconstitutional and void, being
levied for the aid and support of the sugar industry exclusively, which in plaintiff's opinion
is not a public purpose for which a tax may be constitutioally levied. The action having
been dismissed by the Court of First Instance, the plaintifs appealed the case directly to
this Court (Judiciary Act, section 17).
The basic defect in the plaintiff's position is his assumption that the tax provided for in
Commonwealth Act No. 567 is a pure exercise of the taxing power. Analysis of the Act, and

particularly of section 6 (heretofore quoted in full), will show that the tax is levied with a
regulatory purpose, to provide means for the rehabilitation and stabilization of the
threatened sugar industry. In other words, the act is primarily an exercise of the police
power.
This Court can take judicial notice of the fact that sugar production is one of the great
industries of our nation, sugar occupying a leading position among its export products;
that it gives employment to thousands of laborers in fields and factories; that it is a great
source of the state's wealth, is one of the important sources of foreign exchange needed
by our government, and is thus pivotal in the plans of a regime committed to a policy of
currency stability. Its promotion, protection and advancement, therefore redounds greatly
to the general welfare. Hence it was competent for the legislature to find that the general
welfare demanded that the sugar industry should be stabilized in turn; and in the wide
field of its police power, the lawmaking body could provide that the distribution of benefits
therefrom be readjusted among its components to enable it to resist the added strain of
the increase in taxes that it had to sustain (Sligh vs. Kirkwood, 237 U. S. 52, 59 L. Ed. 835;
Johnson vs. State ex rel. Marey, 99 Fla. 1311, 128 So. 853; Maxcy Inc. vs. Mayo, 103 Fla.
552, 139 So. 121).
As stated in Johnson vs. State ex rel. Marey, with reference to the citrus industry in Florida

The protection of a large industry constituting one of the great sources of the state's
wealth and therefore directly or indirectly affecting the welfare of so great a portion
of the population of the State is affected to such an extent by public interests as to
be within the police power of the sovereign. (128 Sp. 857).
Once it is conceded, as it must, that the protection and promotion of the sugar industry is
a matter of public concern, it follows that the Legislature may determine within reasonable
bounds what is necessary for its protection and expedient for its promotion. Here, the
legislative discretion must be allowed fully play, subject only to the test of reasonableness;
and it is not contended that the means provided in section 6 of the law (above quoted)
bear no relation to the objective pursued or are oppressive in character. If objective and
methods are alike constitutionally valid, no reason is seen why the state may not levy
taxes to raise funds for their prosecution and attainment. Taxation may be made the
implement of the state's police power (Great Atl. & Pac. Tea Co. vs. Grosjean, 301 U. S.
412, 81 L. Ed. 1193; U. S. vs. Butler, 297 U. S. 1, 80 L. Ed. 477; M'Culloch vs. Maryland, 4
Wheat. 316, 4 L. Ed. 579).
That the tax to be levied should burden the sugar producers themselves can hardly be a
ground of complaint; indeed, it appears rational that the tax be obtained precisely from
those who are to be benefited from the expenditure of the funds derived from it. At any
rate, it is inherent in the power to tax that a state be free to select the subjects of
taxation, and it has been repeatedly held that "inequalities which result from a singling out
of one particular class for taxation, or exemption infringe no constitutional limitation"
(Carmichael vs. Southern Coal & Coke Co., 301 U. S. 495, 81 L. Ed. 1245, citing numerous
authorities, at p. 1251).

From the point of view we have taken it appears of no moment that the funds raised under
the Sugar Stabilization Act, now in question, should be exclusively spent in aid of the sugar
industry, since it is that very enterprise that is being protected. It may be that other
industries are also in need of similar protection; that the legislature is not required by the
Constitution to adhere to a policy of "all or none." As ruled in Minnesota ex rel. Pearson vs.
Probate Court, 309 U. S. 270, 84 L. Ed. 744, "if the law presumably hits the evil where it is
most felt, it is not to be overthrown because there are other instances to which it might
have been applied;" and that "the legislative authority, exerted within its proper field,
need not embrace all the evils within its reach" (N. L. R. B. vs. Jones & Laughlin Steel Corp.
301 U. S. 1, 81 L. Ed. 893).
Even from the standpoint that the Act is a pure tax measure, it cannot be said that the
devotion of tax money to experimental stations to seek increase of efficiency in sugar
production, utilization of by-products and solution of allied problems, as well as to the
improvements of living and working conditions in sugar mills or plantations, without any
part of such money being channeled directly to private persons, constitutes expenditure of
tax money for private purposes, (compare Everson vs. Board of Education, 91 L. Ed. 472,
168 ALR 1392, 1400).
The decision appealed from is affirmed, with costs against appellant. So ordered.

G.R. No. 166006

March 14, 2008

PLANTERS PRODUCTS, INC., Petitioner,

vs.
FERTIPHIL CORPORATION, Respondent.
DECISION
REYES, R.T., J.:

THE Regional Trial Courts (RTC) have the authority and jurisdiction to consider the
constitutionality of statutes, executive orders, presidential decrees and other issuances.
The Constitution vests that power not only in the Supreme Court but in all Regional Trial
Courts.
The principle is relevant in this petition for review on certiorari of the Decision 1 of the
Court of Appeals (CA) affirming with modification that of the RTC in Makati City, 2 finding
petitioner Planters Products, Inc. (PPI) liable to private respondent Fertiphil Corporation
(Fertiphil) for the levies it paid under Letter of Instruction (LOI) No. 1465.
The Facts
Petitioner PPI and private respondent Fertiphil are private corporations incorporated under
Philippine laws.3 They are both engaged in the importation and distribution of fertilizers,
pesticides and agricultural chemicals.
On June 3, 1985, then President Ferdinand Marcos, exercising his legislative powers, issued
LOI No. 1465 which provided, among others, for the imposition of a capital recovery
component (CRC) on the domestic sale of all grades of fertilizers in the Philippines. 4 The
LOI provides:
3. The Administrator of the Fertilizer Pesticide Authority to include in its fertilizer pricing
formula a capital contribution component of not less than P10 per bag. This capital
contribution shall be collected until adequate capital is raised to make PPI viable. Such
capital contribution shall be applied by FPA to all domestic sales of fertilizers in the
Philippines.5 (Underscoring supplied)
Pursuant to the LOI, Fertiphil paid P10 for every bag of fertilizer it sold in the domestic
market to the Fertilizer and Pesticide Authority (FPA). FPA then remitted the amount
collected to the Far East Bank and Trust Company, the depositary bank of PPI. Fertiphil
paid P6,689,144 to FPA from July 8, 1985 to January 24, 1986. 6
After the 1986 Edsa Revolution, FPA voluntarily stopped the imposition of the P10 levy.
With the return of democracy, Fertiphil demanded from PPI a refund of the amounts it paid
under LOI No. 1465, but PPI refused to accede to the demand. 7
Fertiphil filed a complaint for collection and damages 8 against FPA and PPI with the RTC in
Makati. It questioned the constitutionality of LOI No. 1465 for being unjust, unreasonable,
oppressive, invalid and an unlawful imposition that amounted to a denial of due process of
law.9 Fertiphil alleged that the LOI solely favored PPI, a privately owned corporation, which
used the proceeds to maintain its monopoly of the fertilizer industry.
In its Answer,10 FPA, through the Solicitor General, countered that the issuance of LOI No.
1465 was a valid exercise of the police power of the State in ensuring the stability of the
fertilizer industry in the country. It also averred that Fertiphil did not sustain any damage
from the LOI because the burden imposed by the levy fell on the ultimate consumer, not
the seller.
RTC Disposition

On November 20, 1991, the RTC rendered judgment in favor of Fertiphil, disposing as
follows:
WHEREFORE, in view of the foregoing, the Court hereby renders judgment in favor of the
plaintiff and against the defendant Planters Product, Inc., ordering the latter to pay the
former:
1) the sum of P6,698,144.00 with interest at 12% from the time of judicial demand;
2) the sum of P100,000 as attorneys fees;
3) the cost of suit.
SO ORDERED.11
Ruling that the imposition of the P10 CRC was an exercise of the States inherent power of
taxation, the RTC invalidated the levy for violating the basic principle that taxes can only
be levied for public purpose, viz.:
It is apparent that the imposition of P10 per fertilizer bag sold in the country by LOI 1465 is
purportedly in the exercise of the power of taxation. It is a settled principle that the power
of taxation by the state is plenary. Comprehensive and supreme, the principal check upon
its abuse resting in the responsibility of the members of the legislature to their
constituents. However, there are two kinds of limitations on the power of taxation: the
inherent limitations and the constitutional limitations.
One of the inherent limitations is that a tax may be levied only for public purposes:
The power to tax can be resorted to only for a constitutionally valid public purpose. By the
same token, taxes may not be levied for purely private purposes, for building up of private
fortunes, or for the redress of private wrongs. They cannot be levied for the improvement
of private property, or for the benefit, and promotion of private enterprises, except where
the aid is incident to the public benefit. It is well-settled principle of constitutional law that
no general tax can be levied except for the purpose of raising money which is to be
expended for public use. Funds cannot be exacted under the guise of taxation to promote
a purpose that is not of public interest. Without such limitation, the power to tax could be
exercised or employed as an authority to destroy the economy of the people. A tax,
however, is not held void on the ground of want of public interest unless the want of such
interest is clear. (71 Am. Jur. pp. 371-372)
In the case at bar, the plaintiff paid the amount of P6,698,144.00 to the Fertilizer and
Pesticide Authority pursuant to the P10 per bag of fertilizer sold imposition under LOI 1465
which, in turn, remitted the amount to the defendant Planters Products, Inc. thru the
latters depository bank, Far East Bank and Trust Co. Thus, by virtue of LOI 1465 the
plaintiff, Fertiphil Corporation, which is a private domestic corporation, became poorer by
the amount ofP6,698,144.00 and the defendant, Planters Product, Inc., another private
domestic corporation, became richer by the amount of P6,698,144.00.

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

it is quite evident that LOI 1465 insofar as it imposes the amount of P10 per fertilizer bag
sold in the country and orders that the said amount should go to the defendant Planters
Product, Inc. is unlawful because it violates the mandate that a tax can be levied only for a
public purpose and not to benefit, aid and promote a private enterprise such as Planters
Product, Inc.12
PPI moved for reconsideration but its motion was denied. 13 PPI then filed a notice of appeal
with the RTC but it failed to pay the requisite appeal docket fee. In a separate but related
proceeding, this Court14 allowed the appeal of PPI and remanded the case to the CA for
proper disposition.
CA Decision
On November 28, 2003, the CA handed down its decision affirming with modification that
of the RTC, with the following fallo:
IN VIEW OF ALL THE FOREGOING, the decision appealed from is hereby AFFIRMED, subject
to the MODIFICATION that the award of attorneys fees is hereby DELETED. 15
In affirming the RTC decision, the CA ruled that the lis mota of the complaint for collection
was the constitutionality of LOI No. 1465, thus:
The question then is whether it was proper for the trial court to exercise its power to
judicially determine the constitutionality of the subject statute in the instant case.
As a rule, where the controversy can be settled on other grounds, the courts will not
resolve the constitutionality of a law (Lim v. Pacquing, 240 SCRA 649 [1995]). The policy of
the courts is to avoid ruling on constitutional questions and to presume that the acts of
political departments are valid, absent a clear and unmistakable showing to the contrary.
However, the courts are not precluded from exercising such power when the following
requisites are obtaining in a controversy before it: First, there must be before the court an
actual case calling for the exercise of judicial review. Second, the question must be ripe for
adjudication. Third, the person challenging the validity of the act must have standing to
challenge. Fourth, the question of constitutionality must have been raised at the earliest
opportunity; and lastly, the issue of constitutionality must be the very lis mota of the case
(Integrated Bar of the Philippines v. Zamora, 338 SCRA 81 [2000]).
Indisputably, the present case was primarily instituted for collection and damages.
However, a perusal of the complaint also reveals that the instant action is founded on the
claim that the levy imposed was an unlawful and unconstitutional special assessment.
Consequently, the requisite that the constitutionality of the law in question be the very lis
mota of the case is present, making it proper for the trial court to rule on the
constitutionality of LOI 1465.16
The CA held that even on the assumption that LOI No. 1465 was issued under the police
power of the state, it is still unconstitutional because it did not promote public welfare. The
CA explained:

In declaring LOI 1465 unconstitutional, the trial court held that the levy imposed under the
said law was an invalid exercise of the States power of taxation inasmuch as it violated
the inherent and constitutional prescription that taxes be levied only for public purposes. It
reasoned out that the amount collected under the levy was remitted to the depository
bank of PPI, which the latter used to advance its private interest.
On the other hand, appellant submits that the subject statutes passage was a valid
exercise of police power. In addition, it disputes the court a quos findings arguing that the
collections under LOI 1465 was for the benefit of Planters Foundation, Incorporated (PFI), a
foundation created by law to hold in trust for millions of farmers, the stock ownership of
PPI.
Of the three fundamental powers of the State, the exercise of police power has been
characterized as the most essential, insistent and the least limitable of powers, extending
as it does to all the great public needs. It may be exercised as long as the activity or the
property sought to be regulated has some relevance to public welfare (Constitutional Law,
by Isagani A. Cruz, p. 38, 1995 Edition).
Vast as the power is, however, it must be exercised within the limits set by the
Constitution, which requires the concurrence of a lawful subject and a lawful method.
Thus, our courts have laid down the test to determine the validity of a police measure as
follows: (1) the interests of the public generally, as distinguished from those of a particular
class, requires its exercise; and (2) the means employed are reasonably necessary for the
accomplishment of the purpose and not unduly oppressive upon individuals (National
Development Company v. Philippine Veterans Bank, 192 SCRA 257 [1990]).
It is upon applying this established tests that We sustain the trial courts holding LOI 1465
unconstitutional. To be sure, ensuring the continued supply and distribution of fertilizer in
the country is an undertaking imbued with public interest. However, the method by which
LOI 1465 sought to achieve this is by no means a measure that will promote the public
welfare. The governments commitment to support the successful rehabilitation and
continued viability of PPI, a private corporation, is an unmistakable attempt to mask the
subject statutes impartiality. There is no way to treat the self-interest of a favored entity,
like PPI, as identical with the general interest of the countrys farmers or even the Filipino
people in general. Well to stress, substantive due process exacts fairness and equal
protection disallows distinction where none is needed. When a statutes public purpose is
spoiled by private interest, the use of police power becomes a travesty which must be
struck down for being an arbitrary exercise of government power. To rule in favor of
appellant would contravene the general principle that revenues derived from taxes cannot
be used for purely private purposes or for the exclusive benefit of private individuals.17
The CA did not accept PPIs claim that the levy imposed under LOI No. 1465 was for the
benefit of Planters Foundation, Inc., a foundation created to hold in trust the stock
ownership of PPI. The CA stated:
Appellant next claims that the collections under LOI 1465 was for the benefit of Planters
Foundation, Incorporated (PFI), a foundation created by law to hold in trust for millions of
farmers, the stock ownership of PFI on the strength of Letter of Undertaking (LOU) issued

by then Prime Minister Cesar Virata on April 18, 1985 and affirmed by the Secretary of
Justice in an Opinion dated October 12, 1987, to wit:
"2. Upon the effective date of this Letter of Undertaking, the Republic shall cause FPA to
include in its fertilizer pricing formula a capital recovery component, the proceeds of which
will be used initially for the purpose of funding the unpaid portion of the outstanding
capital stock of Planters presently held in trust by Planters Foundation, Inc. (Planters
Foundation), which unpaid capital is estimated at approximately P206 million (subject to
validation by Planters and Planters Foundation) (such unpaid portion of the outstanding
capital stock of Planters being hereafter referred to as the Unpaid Capital), and
subsequently for such capital increases as may be required for the continuing viability of
Planters.
The capital recovery component shall be in the minimum amount of P10 per bag, which
will be added to the price of all domestic sales of fertilizer in the Philippines by any
importer and/or fertilizer mother company. In this connection, the Republic hereby
acknowledges that the advances by Planters to Planters Foundation which were applied to
the payment of the Planters shares now held in trust by Planters Foundation, have been
assigned to, among others, the Creditors. Accordingly, the Republic, through FPA, hereby
agrees to deposit the proceeds of the capital recovery component in the special trust
account designated in the notice dated April 2, 1985, addressed by counsel for the
Creditors to Planters Foundation. Such proceeds shall be deposited by FPA on or before the
15th day of each month.
The capital recovery component shall continue to be charged and collected until payment
in full of (a) the Unpaid Capital and/or (b) any shortfall in the payment of the Subsidy
Receivables, (c) any carrying cost accruing from the date hereof on the amounts which
may be outstanding from time to time of the Unpaid Capital and/or the Subsidy
Receivables and (d) the capital increases contemplated in paragraph 2 hereof. For the
purpose of the foregoing clause (c), the carrying cost shall be at such rate as will
represent the full and reasonable cost to Planters of servicing its debts, taking into
account both its peso and foreign currency-denominated obligations." (Records, pp. 42-43)
Appellants proposition is open to question, to say the least. The LOU issued by then Prime
Minister Virata taken together with the Justice Secretarys Opinion does not
preponderantly demonstrate that the collections made were held in trust in favor of
millions of farmers. Unfortunately for appellant, in the absence of sufficient evidence to
establish its claims, this Court is constrained to rely on what is explicitly provided in LOI
1465 that one of the primary aims in imposing the levy is to support the successful
rehabilitation and continued viability of PPI. 18
PPI moved for reconsideration but its motion was denied. 19 It then filed the present petition
with this Court.
Issues
Petitioner PPI raises four issues for Our consideration, viz.:
I

THE CONSTITUTIONALITY OF LOI 1465 CANNOT BE COLLATERALLY ATTACKED AND BE

DECREED VIA A DEFAULT JUDGMENT IN A CASE FILED FOR COLLECTION AND DAMAGES
WHERE THE ISSUE OF CONSTITUTIONALITY IS NOT THE VERY LIS MOTA OF THE
CASE. NEITHER CAN LOI 1465 BE CHALLENGED BY ANY PERSON OR ENTITY WHICH HAS NO
STANDING TO DO SO.
II
LOI 1465, BEING A LAW IMPLEMENTED FOR THE PURPOSE OF ASSURING THE FERTILIZER
SUPPLY AND DISTRIBUTION IN THE COUNTRY, AND FOR BENEFITING A FOUNDATION
CREATED BY LAW TO HOLD IN TRUST FOR MILLIONS OF FARMERS THEIR STOCK
OWNERSHIP IN PPI CONSTITUTES A VALID LEGISLATION PURSUANT TO THE EXERCISE OF
TAXATION AND POLICE POWER FOR PUBLIC PURPOSES.
III
THE AMOUNT COLLECTED UNDER THE CAPITAL RECOVERY COMPONENT WAS REMITTED TO
THE GOVERNMENT, AND BECAME GOVERNMENT FUNDS PURSUANT TO AN EFFECTIVE AND
VALIDLY ENACTED LAW WHICH IMPOSED DUTIES AND CONFERRED RIGHTS BY VIRTUE OF
THE
PRINCIPLE
OF
"OPERATIVE
FACT" PRIOR
TO
ANY
DECLARATION
OF
UNCONSTITUTIONALITY OF LOI 1465.
IV
THE PRINCIPLE OF UNJUST VEXATION (SHOULD BE ENRICHMENT) FINDS NO APPLICATION
IN THE INSTANT CASE.20 (Underscoring supplied)
Our Ruling
We shall first tackle the procedural issues of locus standi and the jurisdiction of the RTC to
resolve constitutional issues.
Fertiphil has locus standi because it suffered direct injury; doctrine of standing is a mere
procedural technicality which may be waived.
PPI argues that Fertiphil has no locus standi to question the constitutionality of LOI No.
1465 because it does not have a "personal and substantial interest in the case or will
sustain direct injury as a result of its enforcement." 21 It asserts that Fertiphil did not suffer
any damage from the CRC imposition because "incidence of the levy fell on the ultimate
consumer or the farmers themselves, not on the seller fertilizer company." 22
We cannot agree. The doctrine of locus standi or the right of appearance in a court of
justice has been adequately discussed by this Court in a catena of cases. Succinctly put,
the doctrine requires a litigant to have a material interest in the outcome of a case. In
private suits, locus standi requires a litigant to be a "real party in interest," which is
defined as "the party who stands to be benefited or injured by the judgment in the suit or
the party entitled to the avails of the suit." 23

In public suits, this Court recognizes the difficulty of applying the doctrine especially when
plaintiff asserts a public right on behalf of the general public because of conflicting public
policy issues. 24 On one end, there is the right of the ordinary citizen to petition the courts
to be freed from unlawful government intrusion and illegal official action. At the other end,
there is the public policy precluding excessive judicial interference in official acts, which
may unnecessarily hinder the delivery of basic public services.
In this jurisdiction, We have adopted the "direct injury test" to determine locus standi in
public suits. In People v. Vera, 25 it was held that a person who impugns the validity of a
statute must have "a personal and substantial interest in the case such that he has
sustained, or will sustain direct injury as a result." The "direct injury test" in public suits is
similar to the "real party in interest" rule for private suits under Section 2, Rule 3 of the
1997 Rules of Civil Procedure.26
Recognizing that a strict application of the "direct injury" test may hamper public interest,
this Court relaxed the requirement in cases of "transcendental importance" or with "far
reaching implications." Being a mere procedural technicality, it has also been held that
locus standi may be waived in the public interest. 27
Whether or not the complaint for collection is characterized as a private or public suit,
Fertiphil has locus standi to file it. Fertiphil suffered a direct injury from the enforcement of
LOI No. 1465. It was required, and it did pay, theP10 levy imposed for every bag of
fertilizer sold on the domestic market. It may be true that Fertiphil has passed some or all
of the levy to the ultimate consumer, but that does not disqualify it from attacking the
constitutionality of the LOI or from seeking a refund. As seller, it bore the ultimate burden
of paying the levy. It faced the possibility of severe sanctions for failure to pay the levy.
The fact of payment is sufficient injury to Fertiphil.
Moreover, Fertiphil suffered harm from the enforcement of the LOI because it was
compelled to factor in its product the levy. The levy certainly rendered the fertilizer
products of Fertiphil and other domestic sellers much more expensive. The harm to their
business consists not only in fewer clients because of the increased price, but also in
adopting alternative corporate strategies to meet the demands of LOI No. 1465. Fertiphil
and other fertilizer sellers may have shouldered all or part of the levy just to be
competitive in the market. The harm occasioned on the business of Fertiphil is sufficient
injury for purposes of locus standi.
Even assuming arguendo that there is no direct injury, We find that the liberal policy
consistently adopted by this Court on locus standi must apply. The issues raised by
Fertiphil are of paramount public importance. It involves not only the constitutionality of a
tax law but, more importantly, the use of taxes for public purpose. Former President
Marcos issued LOI No. 1465 with the intention of rehabilitating an ailing private company.
This is clear from the text of the LOI. PPI is expressly named in the LOI as the direct
beneficiary of the levy. Worse, the levy was made dependent and conditional upon PPI
becoming financially viable. The LOI provided that "the capital contribution shall be
collected until adequate capital is raised to make PPI viable."
The constitutionality of the levy is already in doubt on a plain reading of the statute. It is
Our constitutional duty to squarely resolve the issue as the final arbiter of all justiciable

controversies. The doctrine of standing, being a mere procedural technicality, should be

waived, if at all, to adequately thresh out an important constitutional issue.
RTC may resolve constitutional issues; the constitutional issue was adequately raised in
the complaint; it is the lis mota of the case.
PPI insists that the RTC and the CA erred in ruling on the constitutionality of the LOI. It
asserts that the constitutionality of the LOI cannot be collaterally attacked in a complaint
for collection.28 Alternatively, the resolution of the constitutional issue is not necessary for
a determination of the complaint for collection.29
Fertiphil counters that the constitutionality of the LOI was adequately pleaded in its
complaint. It claims that the constitutionality of LOI No. 1465 is the very lis mota of the
case because the trial court cannot determine its claim without resolving the issue. 30
It is settled that the RTC has jurisdiction to resolve the constitutionality of a statute,
presidential decree or an executive order. This is clear from Section 5, Article VIII of the
1987 Constitution, which provides:
SECTION 5. The Supreme Court shall have the following powers:
xxxx
(2) Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or the
Rules of Court may provide,final judgments and orders of lower courts in:
(a) All cases in which the constitutionality or validity of any treaty, international or
executive agreement, law, presidential decree, proclamation, order, instruction, ordinance,
or regulation is in question. (Underscoring supplied)
In Mirasol v. Court of Appeals, 31 this Court recognized the power of the RTC to resolve
constitutional issues, thus:
On the first issue. It is settled that Regional Trial Courts have the authority and jurisdiction
to consider the constitutionality of a statute, presidential decree, or executive order. The
Constitution vests the power of judicial review or the power to declare a law, treaty,
international or executive agreement, presidential decree, order, instruction, ordinance, or
regulation not only in this Court, but in all Regional Trial Courts. 32
In the recent case of Equi-Asia Placement, Inc. v. Department of Foreign Affairs, 33 this
Court reiterated:
There is no denying that regular courts have jurisdiction over cases involving the validity
or constitutionality of a rule or regulation issued by administrative agencies. Such
jurisdiction, however, is not limited to the Court of Appeals or to this Court alone for even
the regional trial courts can take cognizance of actions assailing a specific rule or set of
rules promulgated by administrative bodies. Indeed, the Constitution vests the power of
judicial review or the power to declare a law, treaty, international or executive agreement,

presidential decree, order, instruction, ordinance, or regulation in the courts, including the
regional trial courts.34
Judicial review of official acts on the ground of unconstitutionality may be sought or
availed of through any of the actions cognizable by courts of justice, not necessarily in a
suit for declaratory relief. Such review may be had in criminal actions, as in People v.
Ferrer35 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, isunlawful, unjust, uncalled for, unreasonable, inequitable and
oppressive because:
xxxx
(c) It favors only one private domestic corporation, i.e., defendant PPPI, and imposed at
the expense and disadvantage of the other fertilizer importers/distributors who were
themselves in tight business situation and were then exerting all efforts and maximizing
management and marketing skills to remain viable;
xxxx
(e) It was a glaring example of crony capitalism, a forced program through which the PPI,
having been presumptuously masqueraded as "the" fertilizer industry itself, was the sole
and anointed beneficiary;
7. The CRC was an unlawful; and unconstitutional special assessment and its imposition is
tantamount to illegal exaction amounting to a denial of due process since the persons of
entities which had to bear the burden of paying the CRC derived no benefit therefrom; that
on the contrary it was used by PPI in trying to regain its former despicable monopoly of the
fertilizer industry to the detriment of other distributors and importers. 38 (Underscoring
supplied)
The constitutionality of LOI No. 1465 is also the very lis mota of the complaint for
collection. Fertiphil filed the complaint to compel PPI to refund the levies paid under the
statute on the ground that the law imposing the levy is unconstitutional. The thesis is that
an unconstitutional law is void. It has no legal effect. Being void, Fertiphil had no legal
obligation to pay the levy. Necessarily, all levies duly paid pursuant to an unconstitutional
law should be refunded under the civil code principle against unjust enrichment. The
refund is a mere consequence of the law being declared unconstitutional. The RTC surely
cannot order PPI to refund Fertiphil if it does not declare the LOI unconstitutional. It is the

unconstitutionality of the LOI which triggers the refund. The issue of constitutionality is the
very lis mota of the complaint with the RTC.
The P10 levy under LOI No. 1465 is an exercise of the power of taxation.
At any rate, the Court holds that the RTC and the CA did not err in ruling against the
constitutionality of the LOI.
PPI insists that LOI No. 1465 is a valid exercise either of the police power or the power of
taxation. It claims that the LOI was implemented for the purpose of assuring the fertilizer
supply and distribution in the country and for benefiting a foundation created by law to
hold in trust for millions of farmers their stock ownership in PPI.
Fertiphil counters that the LOI is unconstitutional because it was enacted to give benefit to
a private company. The levy was imposed to pay the corporate debt of PPI. Fertiphil also
argues that, even if the LOI is enacted under the police power, it is still unconstitutional
because it did not promote the general welfare of the people or public interest.
Police power and the power of taxation are inherent powers of the State. These powers are
distinct and have different tests for validity. Police power is the power of the State to enact
legislation that may interfere with personal liberty or property in order to promote the
general welfare,39 while the power of taxation is the power to levy taxes to be used for
public purpose. The main purpose of police power is the regulation of a behavior or
conduct, while taxation is revenue generation. The "lawful subjects" and "lawful means"
tests are used to determine the validity of a law enacted under the police power. 40 The
power of taxation, on the other hand, is circumscribed by inherent and constitutional
limitations.
We agree with the RTC that the imposition of the levy was an exercise by the State of its
taxation power. While it is true that the power of taxation can be used as an implement of
police 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 revenueraising. Thus, they are not mentioned by Sec. 59(b) of the Code as taxes like the motor
vehicle registration fee and chauffeurs license fee. Such fees are to go into the
expenditures of the Land Transportation Commission as provided for in the last proviso of
Sec. 61.44(Underscoring supplied)
The P10 levy under LOI No. 1465 is too excessive to serve a mere regulatory purpose. The
levy, no doubt, was a big burden on the seller or the ultimate consumer. It increased the
price of a bag of fertilizer by as much as five percent. 45 A plain reading of the LOI also
supports the conclusion that the levy was for revenue generation. The LOI expressly
provided that the levy was imposed "until adequate capital is raised to make PPI viable."
Taxes are exacted only for a public purpose. The P10 levy is unconstitutional because it
was not for a public purpose. The levy was imposed to give undue benefit to PPI.
An inherent limitation on the power of taxation is public purpose. Taxes are exacted only
for a public purpose. They cannot be used for purely private purposes or for the exclusive
benefit of private persons.46 The reason for this is simple. The power to tax exists for the
general welfare; hence, implicit in its power is the limitation that it should be used only for
a public purpose. It would be a robbery for the State to tax its citizens and use the funds
generated for a private purpose. As an old United States case bluntly put it: "To lay with
one hand, the power of the government on the property of the citizen, and with the other
to bestow it upon favored individuals to aid private enterprises and build up private
fortunes, is nonetheless a robbery because it is done under the forms of law and is called
taxation."47
The term "public purpose" is not defined. It is an elastic concept that can be hammered to
fit modern standards. Jurisprudence states that "public purpose" should be given a broad
interpretation. It does not only pertain to those purposes which are traditionally viewed as
essentially government functions, such as building roads and delivery of basic services,
but also includes those purposes designed to promote social justice. Thus, public money
may now be used for the relocation of illegal settlers, low-cost housing and urban or
agrarian reform.
While the categories of what may constitute a public purpose are continually expanding in
light of the expansion of government functions, the inherent requirement that taxes can
only be exacted for a public purpose still stands. Public purpose is the heart of a tax law.
When a tax law is only a mask to exact funds from the public when its true intent is to give
undue benefit and advantage to a private enterprise, that law will not satisfy the
requirement of "public purpose."
The purpose of a law is evident from its text or inferable from other secondary sources.
Here, We agree with the RTC and that CA that the levy imposed under LOI No. 1465 was
not for a public purpose.

First, the LOI expressly provided that the levy be imposed to benefit PPI, a private
company. The purpose is explicit from Clause 3 of the law, thus:
3. The Administrator of the Fertilizer Pesticide Authority to include in its fertilizer pricing
formula a capital contribution component of not less than P10 per bag. This capital
contribution shall be collected until adequate capital is raised to make PPI viable. Such
capital contribution shall be applied by FPA to all domestic sales of fertilizers in the
Philippines.48 (Underscoring supplied)
It is a basic rule of statutory construction that the text of a statute should be given a literal
meaning. In this case, the text of the LOI is plain that the levy was imposed in order to
raise capital for PPI. The framers of the LOI did not even hide the insidious purpose of the
law. They were cavalier enough to name PPI as the ultimate beneficiary of the taxes levied
under the LOI. We find it utterly repulsive that a tax law would expressly name a private
company as the ultimate beneficiary of the taxes to be levied from the public. This is a
clear case of crony capitalism.
Second, the LOI provides that the imposition of the P10 levy was conditional and
dependent upon PPI becoming financially "viable." This suggests that the levy was actually
imposed to benefit PPI. The LOI notably does not fix a maximum amount when PPI is
deemed financially "viable." Worse, the liability of Fertiphil and other domestic sellers of
fertilizer to pay the levy is made indefinite. They are required to continuously pay the levy
until adequate capital is raised for PPI.
Third, the RTC and the CA held that the levies paid under the LOI were directly remitted
and deposited by FPA to Far East Bank and Trust Company, the depositary bank of
PPI.49 This proves that PPI benefited from the LOI. It is also proves that the main purpose of
the law was to give undue benefit and advantage to PPI.
Fourth, the levy was used to pay the corporate debts of PPI. A reading of the Letter of
Understanding50 dated May 18, 1985 signed by then Prime Minister Cesar Virata reveals
that PPI was in deep financial problem because of its huge corporate debts. There were
pending petitions for rehabilitation against PPI before the Securities and Exchange
Commission. The government guaranteed payment of PPIs debts to its foreign creditors.
To fund the payment, President Marcos issued LOI No. 1465. The pertinent portions of the
letter of understanding read:
Republic
Office
Manila

of
of

the
the

Prime

Philippines
Minister

LETTER OF UNDERTAKING
May 18, 1985
TO:
THE
BANKING
AND
LISTED
IN
ANNEX
A
CREDITORS
(COLLECTIVELY,
OF PLANTERS PRODUCTS, INC. ("PLANTERS")

FINANCIAL
HERETO
THE

INSTITUTIONS
WHICH
ARE
"CREDITORS")

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) thatthere 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.
Prime Minister and Minister of Finance51

A.

VIRATA

It is clear from the Letter of Understanding that the levy was imposed precisely to pay the
corporate debts of PPI. We cannot agree with PPI that the levy was imposed to ensure the
stability of the fertilizer industry in the country. The letter of understanding and the plain
text of the LOI clearly indicate that the levy was exacted for the benefit of a private
corporation.
All told, the RTC and the CA did not err in holding that the levy imposed under LOI No.
1465 was not for a public purpose. LOI No. 1465 failed to comply with the public purpose
requirement for tax laws.
The LOI is still unconstitutional even if enacted under the police power; it did not promote
public interest.
Even if We consider LOI No. 1695 enacted under the police power of the State, it would still
be invalid for failing to comply with the test of "lawful subjects" and "lawful means."
Jurisprudence states the test as follows: (1) the interest of the public generally, as
distinguished from those of particular class, requires its exercise; and (2) the means
employed are reasonably necessary for the accomplishment of the purpose and not
unduly oppressive upon individuals. 52
For the same reasons as discussed, LOI No. 1695 is invalid because it did not promote
public interest. The law was enacted to give undue advantage to a private corporation. We
quote with approval the CA ratiocination on this point, thus:
It is upon applying this established tests that We sustain the trial courts holding LOI 1465
unconstitutional.1awphil To be sure, ensuring the continued supply and distribution of
fertilizer in the country is an undertaking imbued with public interest. However, the
method by which LOI 1465 sought to achieve this is by no means a measure that will
promote the public welfare. The governments commitment to support the successful
rehabilitation and continued viability of PPI, a private corporation, is an unmistakable
attempt to mask the subject statutes impartiality. There is no way to treat the self-interest
of a favored entity, like PPI, as identical with the general interest of the countrys farmers
or even the Filipino people in general. Well to stress, substantive due process exacts
fairness and equal protection disallows distinction where none is needed. When a statutes
public purpose is spoiled by private interest, the use of police power becomes a travesty
which must be struck down for being an arbitrary exercise of government power. To rule in
favor of appellant would contravene the general principle that revenues derived from
taxes cannot be used for purely private purposes or for the exclusive benefit of private
individuals. (Underscoring supplied)
The general rule is that an unconstitutional law is void; the doctrine of operative fact is
inapplicable.
PPI also argues that Fertiphil cannot seek a refund even if LOI No. 1465 is declared
unconstitutional. It banks on the doctrine of operative fact, which provides that an
unconstitutional law has an effect before being declared unconstitutional. PPI wants to
retain the levies paid under LOI No. 1465 even if it is subsequently declared to be
unconstitutional.

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

appeal, unless it has been raised in the court a quo. 53 PPI did not raise the applicability of
the doctrine of operative fact with the RTC and the CA. It cannot belatedly raise the issue
with Us in order to extricate itself from the dire effects of an unconstitutional law.
At any rate, We find the doctrine inapplicable. The general rule is that an unconstitutional
law is void. It produces no rights, imposes no duties and affords no protection. It has no
legal effect. It is, in legal contemplation, inoperative as if it has not been passed. 54 Being
void, Fertiphil is not required to pay the levy. All levies paid should be refunded in
accordance with the general civil code principle against unjust enrichment. The general
rule is supported by Article 7 of the Civil Code, which provides:
ART. 7. Laws are repealed only by subsequent ones, and their violation or non-observance
shall not be excused by disuse or custom or practice to the contrary.
When the courts declare a law to be inconsistent with the Constitution, the former shall be
void and the latter shall govern.
The doctrine of operative fact, as an exception to the general rule, only applies as a
matter of equity and fair play. 55 It nullifies the effects of an unconstitutional law by
recognizing that the existence of a statute prior to a determination of unconstitutionality is
an operative fact and may have consequences which cannot always be ignored. The past
cannot always be erased by a new judicial declaration. 56
The doctrine is applicable when a declaration of unconstitutionality will impose an undue
burden on those who have relied on the invalid law. Thus, it was applied to a criminal case
when a declaration of unconstitutionality would put the accused in double jeopardy 57 or
would put in limbo the acts done by a municipality in reliance upon a law creating it. 58
Here, We do not find anything iniquitous in ordering PPI to refund the amounts paid by
Fertiphil under LOI No. 1465. It unduly benefited from the levy. It was proven during the
trial that the levies paid were remitted and deposited to its bank account. Quite the
reverse, it would be inequitable and unjust not to order a refund. To do so would unjustly
enrich PPI at the expense of Fertiphil. Article 22 of the Civil Code explicitly provides that
"every person who, through an act of performance by another comes into possession of
something at the expense of the latter without just or legal ground shall return the same
to him." We cannot allow PPI to profit from an unconstitutional law. Justice and equity
dictate that PPI must refund the amounts paid by Fertiphil.
WHEREFORE, the petition is DENIED. The Court of Appeals Decision dated November 28,
2003 is AFFIRMED.
SO ORDERED.

G.R. No. 101273 July 3, 1992

CONGRESSMAN ENRIQUE T. GARCIA (Second District of Bataan), petitioner,
vs.
THE EXECUTIVE SECRETARY, THE COMMISSIONER OF CUSTOMS, THE NATIONAL
ECONOMIC AND DEVELOPMENT AUTHORITY, THE TARIFF COMMISSION, THE
SECRETARY OF FINANCE, and THE ENERGY REGULATORY BOARD, respondents.

FELICIANO, J.:
On 27 November 1990, the President issued Executive Order No. 438 which imposed, in
addition to any other duties, taxes and charges imposed by law on all articles imported
into the Philippines, an additional duty of five percent (5%) ad valorem. This additional
duty was imposed across the board on all imported articles, including crude oil and other
oil products imported into the Philippines. This additional duty was subsequently increased
from five percent (5%) ad valorem to nine percent (9%) ad valorem by the promulgation of
Executive Order No. 443, dated 3 January 1991.
On 24 July 1991, the Department of Finance requested the Tariff Commission to initiate the
process required by the Tariff and Customs Code for the imposition of a specific levy on
crude oil and other petroleum products, covered by HS Heading Nos. 27.09, 27.10 and
27.11 of Section 104 of the Tariff and Customs Code as amended. Accordingly, the Tariff
Commission, following the procedure set forth in Section 401 of the Tariff and Customs
Code, scheduled a public hearing to give interested parties an opportunity to be heard and
to present evidence in support of their respective positions.

Meantime, Executive Order No. 475 was issued by the President, on 15 August 1991
reducing the rate of additional duty on all imported articles from nine percent (9%) to five
percent (5%) ad valorem, except in the cases of crude oil and other oil products which
continued to be subject to the additional duty of nine percent (9%) ad valorem.
Upon completion of the public hearings, the Tariff Commission submitted to the President a
"Report on Special Duty on Crude Oil and Oil Products" dated 16 August 1991, for
consideration and appropriate action. Seven (7) days later, the President issued Executive
Order No. 478, dated 23 August 1991, which levied (in addition to the aforementioned
additional duty of nine percent (9%) ad valorem and all other existing ad valorem duties)
a special duty of P0.95 per liter or P151.05 per barrel of imported crude oil and P1.00 per
liter of imported oil products.
In the present Petition for Certiorari, Prohibition and Mandamus, petitioner assails the
validity of Executive Orders Nos. 475 and 478. He argues that Executive Orders Nos. 475
and 478 are violative of Section 24, Article VI of the 1987 Constitution which provides as
follows:
Sec. 24: All appropriation, revenue or tariff bills, bills authorizing increase of
the public debt, bills of local application, and private bills shall originate
exclusively in the House of Representatives, but the Senate may propose or
concur with amendments.
He contends that since the Constitution vests the authority to enact revenue bills in
Congress, the President may not assume such power by issuing Executive Orders
Nos. 475 and 478 which are in the nature of revenue-generating measures.
Petitioner further argues that Executive Orders No. 475 and 478 contravene Section 401 of
the Tariff and Customs Code, which Section authorizes the President, according to
petitioner, to increase, reduce or remove tariff duties or to impose additional
duties only when necessary to protect local industries or products but not for the purpose
of raising additional revenue for the government.
Thus, petitioner questions first the constitutionality and second the legality of Executive
Orders Nos. 475 and 478, and asks us to restrain the implementation of those Executive
Orders. We will examine these questions in that order.
Before doing so, however, the Court notes that the recent promulgation of Executive Order
No. 507 did not render the instant Petition moot and academic. Executive Order No. 517
which is dated 30 April 1992 provides as follows:
Sec. 1. Lifting of the Additional Duty. The additional duty in the nature
of ad valorem imposed on all imported articles prescribed by the provisions of
Executive Order No. 443, as amended, is hereby lifted; Provided, however,
that the selected articles covered by HS Heading Nos. 27.09 and 27.10 of
Section 104 of the Tariff and Customs Code, as amended, subject of Annex
"A" hereof, shall continue to be subject to the additional duty of nine (9%)
percent ad valorem.

Under the above quoted provision, crude oil and other oil products continue to be
subject to the additional duty of nine percent (9%) ad valorem under Executive
Order No. 475 and to the special duty of P0.95 per liter of imported crude oil and
P1.00 per liter of imported oil products under Executive Order No. 478.
Turning first to the question of constitutionality, under Section 24, Article VI of the
Constitution, the enactment of appropriation, revenue and tariff bills, like all other bills is,
of course, within the province of the Legislative rather than the Executive Department. It
does not follow, however, that therefore Executive Orders Nos. 475 and 478, assuming
they may be characterized as revenue measures, are prohibited to the President, that they
must be enacted instead by the Congress of the Philippines. Section 28(2) of Article VI of
the Constitution provides as follows:
(2) The Congress may, by law, authorize the President to fix within specified
limits, and subject to such limitations and restrictions as it may impose, tariff
rates, import and export quotas, tonage and wharfage dues, and other duties
or imposts within the framework of the national development program of the
Government. (Emphasis supplied)
There is thus explicit constitutional permission 1 to Congress to authorize the President
"subject to such limitations and restrictions is [Congress] may impose" to fix "within
specific limits" "tariff rates . . . and other duties or imposts . . ."
The relevant congressional statute is the Tariff and Customs Code of the Philippines, and
Sections 104 and 401, the pertinent provisions thereof. These are the provisions which the
President explicitly invoked in promulgating Executive Orders Nos. 475 and 478. Section
104 of the Tariff and Customs Code provides in relevant part:
Sec. 104. All tariff sections, chapters, headings and subheadings and the rates of
import duty under Section 104 of Presidential Decree No. 34 and all subsequent
amendments issued under Executive Orders and Presidential Decrees are hereby
adopted and form part of this Code.
There shall be levied, collected, and paid upon all imported articles the rates of duty
indicated in the Section under this section except as otherwise specifically provided
for in this Code: Provided, that, the maximum rate shall not exceed one hundred per
cent ad valorem.
The rates of duty herein provided or subsequently fixed pursuant to Section Four
Hundred One of this Code shall be subject to periodic investigation by the Tariff
Commission and may be revised by the President upon recommendation of the
National Economic and Development Authority.
xxx xxx xxx
(Emphasis supplied)
Section 401 of the same Code needs to be quoted in full:

Sec. 401. Flexible Clause.

a. In the interest of national economy, general welfare and/or national security, and
subject to the limitations herein prescribed, the President, upon recommendation of
the National Economic and Development Authority (hereinafter referred to as
NEDA), is hereby empowered: (1) to increase, reduce or removeexisting protective
rates of import duty (including any necessary change in classification). The existing
rates may be increased or decreased but in no case shall the reduced rate of import
duty be lower than the basic rate of ten (10) per cent ad valorem, nor shall the
increased rate of import duty be higher than a maximum of one hundred (100) per
cent ad valorem; (2) to establish import quota or to ban imports of any commodity,
as may be necessary; and (3) to impose an additional duty on all imports not
exceeding ten (10) per cent ad valorem, whenever necessary; Provided, That upon
periodic investigations by the Tariff Commission and recommendation of the NEDA,
the President may cause a gradual reduction of protection levels granted in Section
One hundred and four of this Code, including those subsequently granted pursuant
to this section.
b. Before any recommendation is submitted to the President by the NEDA pursuant
to the provisions of this section, except in the imposition of an additional duty not
exceeding ten (10) per cent ad valorem, the Commission shall conduct an
investigation in the course of which they shall hold public hearings wherein
interested parties shall be afforded reasonable opportunity to be present, produce
evidence and to be heard. The Commission shall also hear the views and
recommendations of any government office, agency or instrumentality concerned.
The Commission shall submit their findings and recommendations to the NEDA
within thirty (30) days after the termination of the public hearings.
c. The power of the President to increase or decrease rates of import duty within the
limits fixed in subsection "a" shall include the authority to modify the form of duty.
In modifying the form of duty, the corresponding ad valorem or specific equivalents
of the duty with respect to imports from the principal competing foreign country for
the most recent representative period shall be used as bases.
d. The Commissioner of Customs shall regularly furnish the Commission a copy of all
customs import entries as filed in the Bureau of Customs. The Commission or its
duly authorized representatives shall have access to, and the right to copy all
liquidated customs import entries and other documents appended thereto as finally
filed in the Commission on Audit.
e. The NEDA shall promulgate rules and regulations necessary to carry out the
provisions of this section.
f. Any Order issued by the President pursuant to the provisions of this section shall
take effect thirty (30) days after promulgation, except in the imposition of additional
duty not exceeding ten (10) per cent ad valorem which shall take effect at the
discretion of the President. (Emphasis supplied)

Petitioner, however, seeks to avoid the thrust of the delegated authorizations found in
Sections 104 and 401 of the Tariff and Customs Code, by contending that the President is
authorized to act under the Tariff and Customs Code only "to protect local industries and
products for the sake of the national economy, general welfare and/or national
security."2 He goes on to claim that:
E.O. Nos. 478 and 475 having nothing to do whatsoever with the protection
of local industries and products for the sake of national economy, general
welfare and/or national security. On the contrary, they work in reverse,
especially as to crude oil, an essential product which we do not have to
protect, since we produce only minimal quantities and have to import the rest
of what we need.
These Executive Orders are avowedly solely to enable the government to
raise government finances, contrary to Sections 24 and 28 (2) of Article VI of
the Constitution, as well as to Section 401 of the Tariff and Customs
Code. 3 (Emphasis in the original)
The Court is not persuaded. In the first place, there is nothing in the language of either
Section 104 or of 401 of the Tariff and Customs Code that suggest such a sharp and
absolute limitation of authority. The entire contention of petitioner is anchored on just two
(2) words, one found in Section 401 (a)(1): "existing protective rates of import duty," and
the second in the proviso found at the end of Section 401 (a): "protection levels granted in
Section 104 of this Code . . . . " We believe that the words "protective" and ''protection"
are simply not enough to support the very broad and encompassing limitation which
petitioner seeks to rest on those two (2) words.
In the second place, petitioner's singular theory collides with a very practical fact of which
this Court may take judicial notice that the Bureau of Customs which administers the
Tariff and Customs Code, is one of the two (2) principal traditional generators or producers
of governmental revenue, the other being the Bureau of Internal Revenue. (There is a third
agency, non-traditional in character, that generates lower but still comparable levels of
revenue for the government The Philippine Amusement and Games Corporation
[PAGCOR].)
In the third place, customs duties which are assessed at the prescribed tariff rates are very
much like taxes which are frequently imposed for both revenue-raising and for regulatory
purposes. 4 Thus, it has been held that "customs duties" is "the name given to taxes on
the importation and exportation of commodities, the tariff or tax assessed upon
merchandise imported from, or exported to, a foreign country." 5 The levying of customs
duties on imported goods may have in some measure the effect of protecting local
industries where such local industries actually exist and are producing comparable
goods. Simultaneously, however, the very same customs duties inevitably have the effect
of producing governmental revenues. Customs duties like internal revenue taxes are
rarely, if ever, designed to achieve one policy objective only. Most commonly, customs
duties, which constitute taxes in the sense of exactions the proceeds of which become
public funds 6 have either or both the generation of revenue and the regulation of
economic or social activity as their moving purposes and frequently, it is very difficult to
say which, in a particular instance, is the dominant or principal objective. In the instant

case, since the Philippines in fact produces ten (10) to fifteen percent (15%) of the crude
oil consumed here, the imposition of increased tariff rates and a special duty on imported
crude oil and imported oil products may be seen to have some "protective" impact upon
indigenous oil production. For the effective, price of imported crude oil and oil products is
increased. At the same time, it cannot be gainsaid that substantial revenues for the
government are raised by the imposition of such increased tariff rates or special duty.
In the fourth place, petitioner's concept which he urges us to build into our constitutional
and customs law, is a stiflingly narrow one. Section 401 of the Tariff and Customs Code
establishes general standards with which the exercise of the authority delegated by that
provision to the President must be consistent: that authority must be exercised in "the
interest of national economy, general welfare and/or national security." Petitioner,
however, insists that the "protection of local industries" is the only permissible objective
that can be secured by the exercise of that delegated authority, and that therefore
"protection of local industries" is the sum total or the alpha and the omega of "the national
economy, general welfare and/or national security." We find it extremely difficult to take
seriously such a confined and closed view of the legislative standards and policies
summed up in Section 401. We believe, for instance, that the protection of consumers,
who after all constitute the very great bulk of our population, is at the very least as
important a dimension of "the national economy, general welfare and national security" as
the protection of local industries. And so customs duties may be reduced or even removed
precisely for the purpose of protecting consumers from the high prices and shoddy quality
and inefficient service that tariff-protected and subsidized local manufacturers may
otherwise impose upon the community.
It seems also important to note that tariff rates are commonly established and the
corresponding customs duties levied and collected upon articles and goods which are not
found at all and not produced in the Philippines. The Tariff and Customs Code is replete
with such articles and commodities: among the more interesting examples
are ivory(Chapter 5, 5.10); castoreum or musk taken from the beaver (Chapter 5,
5.14); Olives (Chapter 7, Notes); truffles or European fungi growing under the soil on tree
roots (Chapter 7, Notes); dates (Chapter 8, 8.01); figs (Chapter 8, 8.03); caviar (Chapter
16, 16.01); aircraft (Chapter 88, 88.0l); special diagnostic instruments and apparatus for
human medicine and surgery (Chapter 90, Notes); X-ray generators; X-ray tubes;
X-ray screens, etc. (Chapter 90, 90.20); etc. In such cases, customs duties may be seen to
be imposed either for revenue purposes purely or perhaps, in certain cases, to discourage
any importation of the items involved. In either case, it is clear that customs duties are
levied and imposed entirely apart from whether or not there are any competing local
industries to protect.
Accordingly, we believe and so hold that Executive Orders Nos. 475 and 478 which may be
conceded to be substantially moved by the desire to generate additional public revenues,
are not, for that reason alone, either constitutionally flawed, or legally infirm under Section
401 of the Tariff and Customs Code. Petitioner has not successfully overcome the
presumptions of constitutionality and legality to which those Executive Orders are
entitled. 7
The conclusion we have reached above renders it unnecessary to deal with petitioner's
additional contention that, should Executive Orders Nos. 475 and 478 be declared

unconstitutional and illegal, there should be a roll back of prices of petroleum products
equivalent to the "resulting excess money not be needed to adequately maintain the Oil
Price Stabilization Fund (OPSF)." 8
WHEREFORE, premises considered, the Petition for Certiorari, Prohibition and Mandamus is
hereby DISMISSED for lack of merit. Costs against petitioner.
SO ORDERED.

G.R. No. 115455 August 25, 1994

ARTURO M. TOLENTINO, petitioner,
vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL
REVENUE, respondents.
G.R. No. 115525 August 25, 1994
JUAN T. DAVID, petitioner,
vs.
TEOFISTO T. GUINGONA, JR., as Executive Secretary; ROBERTO DE OCAMPO, as
Secretary of Finance; LIWAYWAY VINZONS-CHATO, as Commissioner of Internal
Revenue; and their AUTHORIZED AGENTS OR REPRESENTATIVES, respondents.
G.R. No. 115543 August 25, 1994
RAUL S. ROCO and the INTEGRATED BAR OF THE PHILIPPINES, petitioners,
vs.
THE SECRETARY OF THE DEPARTMENT OF FINANCE; THE COMMISSIONERS OF THE
BUREAU OF INTERNAL REVENUE AND BUREAU OF CUSTOMS, respondents.
G.R. No. 115544 August 25, 1994
PHILIPPINE PRESS INSTITUTE, INC.; EGP PUBLISHING CO., INC.; PUBLISHING
CORPORATION; PHILIPPINE JOURNALISTS, INC.; JOSE L. PAVIA; and OFELIA L.
DIMALANTA, petitioners,
vs.
HON. LIWAYWAY V. CHATO, in her capacity as Commissioner of Internal Revenue;
HON. TEOFISTO T. GUINGONA, JR., in his capacity as Executive Secretary; and
HON. ROBERTO B. DE OCAMPO, in his capacity as Secretary of
Finance, respondents.
G.R. No. 115754 August 25, 1994

CHAMBER OF REAL ESTATE AND BUILDERS ASSOCIATIONS, INC.,

(CREBA), petitioner,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.
G.R. No. 115781 August 25, 1994
KILOSBAYAN, INC., JOVITO R. SALONGA, CIRILO A. RIGOS, ERME CAMBA, EMILIO
C. CAPULONG, JR., JOSE T. APOLO, EPHRAIM TENDERO, FERNANDO SANTIAGO,
JOSE ABCEDE, CHRISTINE TAN, FELIPE L. GOZON, RAFAEL G. FERNANDO, RAOUL
V. VICTORINO, JOSE CUNANAN, QUINTIN S. DOROMAL, MOVEMENT OF
ATTORNEYS FOR BROTHERHOOD, INTEGRITY AND NATIONALISM, INC.
("MABINI"), FREEDOM FROM DEBT COALITION, INC., PHILIPPINE BIBLE SOCIETY,
INC., and WIGBERTO TAADA,petitioners,
vs.
THE EXECUTIVE SECRETARY, THE SECRETARY OF FINANCE, THE COMMISSIONER
OF INTERNAL REVENUE and THE COMMISSIONER OF CUSTOMS, respondents.
G.R. No. 115852 August 25, 1994
PHILIPPINE AIRLINES, INC., petitioner,
vs.
THE SECRETARY OF FINANCE, and COMMISSIONER OF INTERNAL
REVENUE, respondents.
G.R. No. 115873 August 25, 1994
COOPERATIVE UNION OF THE PHILIPPINES, petitioners,
vs.
HON. LIWAYWAY V. CHATO, in her capacity as the Commissioner of Internal
Revenue, HON. TEOFISTO T. GUINGONA, JR., in his capacity as Executive
Secretary, and HON. ROBERTO B. DE OCAMPO, in his capacity as Secretary of
Finance, respondents.
G.R. No. 115931 August 25, 1994
PHILIPPINE EDUCATIONAL PUBLISHERS ASSOCIATION, INC., and ASSOCIATION OF
PHILIPPINE BOOK-SELLERS, petitioners,
vs.
HON. ROBERTO B. DE OCAMPO, as the Secretary of Finance; HON. LIWAYWAY V.
CHATO, as the Commissioner of Internal Revenue and HON. GUILLERMO
PARAYNO, JR., in his capacity as the Commissioner of Customs, respondents.
MENDOZA, J.:
The value-added tax (VAT) is levied on the sale, barter or exchange of goods and
properties as well as on the sale or exchange of services. It is equivalent to 10% of the
gross selling price or gross value in money of goods or properties sold, bartered or
exchanged or of the gross receipts from the sale or exchange of services. Republic Act No.

7716 seeks to widen the tax base of the existing VAT system and enhance its
administration by amending the National Internal Revenue Code.
These are various suits for certiorari and prohibition, challenging the constitutionality of
Republic Act No. 7716 on various grounds summarized in the resolution of July 6, 1994 of
this Court, as follows:
I. Procedural Issues:
A. Does Republic Act No. 7716 violate Art. VI, 24 of the Constitution?
B. Does it violate Art. VI, 26(2) of the Constitution?
C. What is the extent of the power of the Bicameral Conference Committee?
II. Substantive Issues:
A. Does the law violate the following provisions in the Bill of Rights (Art. III)?
1. 1
2. 4
3. 5
4. 10
B. Does the law violate the following other provisions of the Constitution?
1. Art. VI, 28(1)
2. Art. VI, 28(3)
These questions will be dealt in the order they are stated above. As will presently be
explained not all of these questions are judicially cognizable, because not all provisions of
the Constitution are self executing and, therefore, judicially enforceable. The other
departments of the government are equally charged with the enforcement of the
Constitution, especially the provisions relating to them.
I. PROCEDURAL ISSUES
The contention of petitioners is that in enacting Republic Act No. 7716, or the Expanded
Value-Added Tax Law, Congress violated the Constitution because, although H. No. 11197
had originated in the House of Representatives, it was not passed by the Senate but was
simply consolidated with the Senate version (S. No. 1630) in the Conference Committee to
produce the bill which the President signed into law. The following provisions of the
Constitution are cited in support of the proposition that because Republic Act No. 7716
was passed in this manner, it did not originate in the House of Representatives and it has
not thereby become a law:

Art. VI, 24: All appropriation, revenue or tariff bills, bills authorizing increase
of the public debt, bills of local application, and private bills shall originate
exclusively in the House of Representatives, but the Senate may propose or
concur with amendments.
Id., 26(2): No bill passed by either House shall become a law unless it has
passed three readings on separate days, and printed copies thereof in its final
form have been distributed to its Members three days before its passage,
except when the President certifies to the necessity of its immediate
enactment to meet a public calamity or emergency. Upon the last reading of
a bill, no amendment thereto shall be allowed, and the vote thereon shall be
taken immediately thereafter, and the yeasand nays entered in the Journal.
It appears that on various dates between July 22, 1992 and August 31, 1993, several
bills 1 were introduced in the House of Representatives seeking to amend certain
provisions of the National Internal Revenue Code relative to the value-added tax or VAT.
These bills were referred to the House Ways and Means Committee which recommended
for approval a substitute measure, H. No. 11197, entitled
AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT) SYSTEM TO WIDEN ITS
TAX BASE AND ENHANCE ITS ADMINISTRATION, AMENDING FOR THESE
PURPOSES SECTIONS 99, 100, 102, 103, 104, 105, 106, 107, 108 AND 110 OF
TITLE IV, 112, 115 AND 116 OF TITLE V, AND 236, 237 AND 238 OF TITLE IX,
AND REPEALING SECTIONS 113 AND 114 OF TITLE V, ALL OF THE NATIONAL
INTERNAL REVENUE CODE, AS AMENDED
The bill (H. No. 11197) was considered on second reading starting November 6, 1993 and,
on November 17, 1993, it was approved by the House of Representatives after third and
final reading.
It was sent to the Senate on November 23, 1993 and later referred by that body to its
Committee on Ways and Means.
On February 7, 1994, the Senate Committee submitted its report recommending approval
of S. No. 1630, entitled
AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT) SYSTEM TO WIDEN ITS
TAX BASE AND ENHANCE ITS ADMINISTRATION, AMENDING FOR THESE
PURPOSES SECTIONS 99, 100, 102, 103, 104, 105, 107, 108, AND 110 OF
TITLE IV, 112 OF TITLE V, AND 236, 237, AND 238 OF TITLE IX, AND
REPEALING SECTIONS 113, 114 and 116 OF TITLE V, ALL OF THE NATIONAL
INTERNAL REVENUE CODE, AS AMENDED, AND FOR OTHER PURPOSES
It was stated that the bill was being submitted "in substitution of Senate Bill No. 1129,
taking into consideration P.S. Res. No. 734 and H.B. No. 11197."
On February 8, 1994, the Senate began consideration of the bill (S. No. 1630). It finished
debates on the bill and approved it on second reading on March 24, 1994. On the same

day, it approved the bill on third reading by the affirmative votes of 13 of its members,
with one abstention.
H. No. 11197 and its Senate version (S. No. 1630) were then referred to a conference
committee which, after meeting four times (April 13, 19, 21 and 25, 1994), recommended
that "House Bill No. 11197, in consolidation with Senate Bill No. 1630, be approved in
accordance with the attached copy of the bill as reconciled and approved by the
conferees."
The Conference Committee bill, entitled "AN ACT RESTRUCTURING THE VALUE-ADDED TAX
(VAT) SYSTEM, WIDENING ITS TAX BASE AND ENHANCING ITS ADMINISTRATION AND FOR
THESE PURPOSES AMENDING AND REPEALING THE RELEVANT PROVISIONS OF THE
NATIONAL INTERNAL REVENUE CODE, AS AMENDED, AND FOR OTHER PURPOSES," was
thereafter approved by the House of Representatives on April 27, 1994 and by the Senate
on May 2, 1994. The enrolled bill was then presented to the President of the Philippines
who, on May 5, 1994, signed it. It became Republic Act No. 7716. On May 12, 1994,
Republic Act No. 7716 was published in two newspapers of general circulation and, on May
28, 1994, it took effect, although its implementation was suspended until June 30, 1994 to
allow time for the registration of business entities. It would have been enforced on July 1,
1994 but its enforcement was stopped because the Court, by the vote of 11 to 4 of its
members, granted a temporary restraining order on June 30, 1994.
First. Petitioners' contention is that Republic Act No. 7716 did not "originate exclusively" in
the House of Representatives as required by Art. VI, 24 of the Constitution, because it is
in fact the result of the consolidation of two distinct bills, H. No. 11197 and S. No. 1630. In
this connection, petitioners point out that although Art. VI, SS 24 was adopted from the
American Federal Constitution, 2 it is notable in two respects: the verb "shall originate" is
qualified in the Philippine Constitution by the word "exclusively" and the phrase "as on
other bills" in the American version is omitted. This means, according to them, that to be
considered as having originated in the House, Republic Act No. 7716 must retain the
essence of H. No. 11197.
This argument will not bear analysis. To begin with, it is not the law but the revenue bill
which is required by the Constitution to "originate exclusively" in the House of
Representatives. It is important to emphasize this, because a bill originating in the House
may undergo such extensive changes in the Senate that the result may be a rewriting of
the whole. The possibility of a third version by the conference committee will be discussed
later. At this point, what is important to note is that, as a result of the Senate action, a
distinct bill may be produced. To insist that a revenue statute and not only the bill which
initiated the legislative process culminating in the enactment of the law must
substantially be the same as the House bill would be to deny the Senate's power not only
to "concur with amendments" but also to "propose amendments." It would be to violate
the coequality of legislative power of the two houses of Congress and in fact make the
House superior to the Senate.
The contention that the constitutional design is to limit the Senate's power in respect of
revenue bills in order to compensate for the grant to the Senate of the treaty-ratifying
power 3 and thereby equalize its powers and those of the House overlooks the fact that
the powers being compared are different. We are dealing here with the legislative power

which under the Constitution is vested not in any particular chamber but in the Congress
of the Philippines, consisting of "a Senate and a House of Representatives." 4 The exercise
of the treaty-ratifying power is not the exercise of legislative power. It is the exercise of a
check on the executive power. There is, therefore, no justification for comparing the
legislative powers of the House and of the Senate on the basis of the possession of such
nonlegislative power by the Senate. The possession of a similar power by the U.S.
Senate 5 has never been thought of as giving it more legislative powers than the House of
Representatives.
In the United States, the validity of a provision ( 37) imposing an ad valorem tax based on
the weight of vessels, which the U.S. Senate had inserted in the Tariff Act of 1909, was
upheld against the claim that the provision was a revenue bill which originated in the
Senate in contravention of Art. I, 7 of the U.S. Constitution. 6 Nor is the power to amend
limited to adding a provision or two in a revenue bill emanating from the House. The U.S.
Senate has gone so far as changing the whole of bills following the enacting clause and
substituting its own versions. In 1883, for example, it struck out everything after the
enacting clause of a tariff bill and wrote in its place its own measure, and the House
subsequently accepted the amendment. The U.S. Senate likewise added 847 amendments
to what later became the Payne-Aldrich Tariff Act of 1909; it dictated the schedules of the
Tariff Act of 1921; it rewrote an extensive tax revision bill in the same year and recast
most of the tariff bill of 1922. 7 Given, then, the power of the Senate to propose
amendments, the Senate can propose its own version even with respect to bills which are
required by the Constitution to originate in the House.
It is insisted, however, that S. No. 1630 was passed not in substitution of H. No. 11197 but
of another Senate bill (S. No. 1129) earlier filed and that what the Senate did was merely
to "take [H. No. 11197] into consideration" in enacting S. No. 1630. There is really no
difference between the Senate preserving H. No. 11197 up to the enacting clause and then
writing its own version following the enacting clause (which, it would seem, petitioners
admit is an amendment by substitution), and, on the other hand, separately presenting a
bill of its own on the same subject matter. In either case the result are two bills on the
same subject.
Indeed, what the Constitution simply means is that the initiative for filing revenue, tariff, or
tax bills, bills authorizing an increase of the public debt, private bills and bills of local
application must come from the House of Representatives on the theory that, elected as
they are from the districts, the members of the House can be expected to be more
sensitive to the local needs and problems. On the other hand, the senators, who are
elected at large, are expected to approach the same problems from the national
perspective. Both views are thereby made to bear on the enactment of such laws.
Nor does the Constitution prohibit the filing in the Senate of a substitute bill in anticipation
of its receipt of the bill from the House, so long as action by the Senate as a body is
withheld pending receipt of the House bill. The Court cannot, therefore, understand the
alarm expressed over the fact that on March 1, 1993, eight months before the House
passed H. No. 11197, S. No. 1129 had been filed in the Senate. After all it does not appear
that the Senate ever considered it. It was only after the Senate had received H. No. 11197
on November 23, 1993 that the process of legislation in respect of it began with the
referral to the Senate Committee on Ways and Means of H. No. 11197 and the submission

by the Committee on February 7, 1994 of S. No. 1630. For that matter, if the question were
simply the priority in the time of filing of bills, the fact is that it was in the House that a bill
(H. No. 253) to amend the VAT law was first filed on July 22, 1992. Several other bills had
been filed in the House before S. No. 1129 was filed in the Senate, and H. No. 11197 was
only a substitute of those earlier bills.
Second. Enough has been said to show that it was within the power of the Senate to
propose S. No. 1630. We now pass to the next argument of petitioners that S. No. 1630 did
not pass three readings on separate days as required by the Constitution 8 because the
second and third readings were done on the same day, March 24, 1994. But this was
because on February 24, 1994 9 and again on March 22, 1994, 10 the President had
certified S. No. 1630 as urgent. The presidential certification dispensed with the
requirement not only of printing but also that of reading the bill on separate days. The
phrase "except when the President certifies to the necessity of its immediate enactment,
etc." in Art. VI, 26(2) qualifies the two stated conditions before a bill can become a law:
(i) the bill has passed three readings on separate days and (ii) it has been printed in its
final form and distributed three days before it is finally approved.
In other words, the "unless" clause must be read in relation to the "except" clause,
because the two are really coordinate clauses of the same sentence. To construe the
"except" clause as simply dispensing with the second requirement in the "unless" clause
(i.e., printing and distribution three days before final approval) would not only violate the
rules of grammar. It would also negate the very premise of the "except" clause: the
necessity of securing the immediate enactment of a bill which is certified in order to meet
a public calamity or emergency. For if it is only the printing that is dispensed with by
presidential certification, the time saved would be so negligible as to be of any use in
insuring immediate enactment. It may well be doubted whether doing away with the
necessity of printing and distributing copies of the bill three days before the third reading
would insure speedy enactment of a law in the face of an emergency requiring the calling
of a special election for President and Vice-President. Under the Constitution such a law is
required to be made within seven days of the convening of Congress in emergency
session. 11
That upon the certification of a bill by the President the requirement of three readings on
separate days and of printing and distribution can be dispensed with is supported by the
weight of legislative practice. For example, the bill defining the certiorari jurisdiction of this
Court which, in consolidation with the Senate version, became Republic Act No. 5440, was
passed on second and third readings in the House of Representatives on the same day
(May 14, 1968) after the bill had been certified by the President as urgent. 12
There is, therefore, no merit in the contention that presidential certification dispenses only
with the requirement for the printing of the bill and its distribution three days before its
passage but not with the requirement of three readings on separate days, also.
It is nonetheless urged that the certification of the bill in this case was invalid because
there was no emergency, the condition stated in the certification of a "growing budget
deficit" not being an unusual condition in this country.

It is noteworthy that no member of the Senate saw fit to controvert the reality of the
factual basis of the certification. To the contrary, by passing S. No. 1630 on second and
third readings on March 24, 1994, the Senate accepted the President's certification. Should
such certification be now reviewed by this Court, especially when no evidence has been
shown that, because S. No. 1630 was taken up on second and third readings on the same
day, the members of the Senate were deprived of the time needed for the study of a vital
piece of legislation?
The sufficiency of the factual basis of the suspension of the writ of habeas corpus or
declaration of martial law under Art. VII, 18, or the existence of a national emergency
justifying the delegation of extraordinary powers to the President under Art. VI, 23(2), is
subject to judicial review because basic rights of individuals may be at hazard. But the
factual basis of presidential certification of bills, which involves doing away with
procedural requirements designed to insure that bills are duly considered by members of
Congress, certainly should elicit a different standard of review.
Petitioners also invite attention to the fact that the President certified S. No. 1630 and not
H. No. 11197. That is because S. No. 1630 was what the Senate was considering. When
the matter was before the House, the President likewise certified H. No. 9210 the pending
in the House.
Third. Finally it is contended that the bill which became Republic Act No. 7716 is the bill
which the Conference Committee prepared by consolidating H. No. 11197 and S. No. 1630.
It is claimed that the Conference Committee report included provisions not found in either
the House bill or the Senate bill and that these provisions were "surreptitiously" inserted
by the Conference Committee. Much is made of the fact that in the last two days of its
session on April 21 and 25, 1994 the Committee met behind closed doors. We are not told,
however, whether the provisions were not the result of the give and take that often mark
the proceedings of conference committees.
Nor is there anything unusual or extraordinary about the fact that the Conference
Committee met in executive sessions. Often the only way to reach agreement on
conflicting provisions is to meet behind closed doors, with only the conferees present.
Otherwise, no compromise is likely to be made. The Court is not about to take the
suggestion of a cabal or sinister motive attributed to the conferees on the basis solely of
their "secret meetings" on April 21 and 25, 1994, nor read anything into the incomplete
remarks of the members, marked in the transcript of stenographic notes by ellipses. The
incomplete sentences are probably due to the stenographer's own limitations or to the
incoherence that sometimes characterize conversations. William Safire noted some such
lapses in recorded talks even by recent past Presidents of the United States.
In any event, in the United States conference committees had been customarily held in
executive sessions with only the conferees and their staffs in attendance. 13 Only in
November 1975 was a new rule adopted requiring open sessions. Even then a majority of
either chamber's conferees may vote in public to close the meetings. 14
As to the possibility of an entirely new bill emerging out of a Conference Committee, it has
been explained:

Under congressional rules of procedure, conference committees are not

expected to make any material change in the measure at issue, either by
deleting provisions to which both houses have already agreed or by inserting
new provisions. But this is a difficult provision to enforce. Note the problem
when one house amends a proposal originating in either house by striking out
everything following the enacting clause and substituting provisions which
make it an entirely new bill. The versions are now altogether different,
permitting a conference committee to draft essentially a new bill. . . . 15
The result is a third version, which is considered an "amendment in the nature of a
substitute," the only requirement for which being that the third version be germane to the
subject of the House and Senate bills. 16
Indeed, this Court recently held that it is within the power of a conference committee to
include in its report an entirely new provision that is not found either in the House bill or in
the Senate bill. 17 If the committee can propose an amendment consisting of one or two
provisions, there is no reason why it cannot propose several provisions, collectively
considered as an "amendment in the nature of a substitute," so long as such amendment
is germane to the subject of the bills before the committee. After all, its report was not
final but needed the approval of both houses of Congress to become valid as an act of the
legislative department. The charge that in this case the Conference Committee acted as a
third legislative chamber is thus without any basis. 18
Nonetheless, it is argued that under the respective Rules of the Senate and the House of
Representatives a conference committee can only act on the differing provisions of a
Senate bill and a House bill, and that contrary to these Rules the Conference Committee
inserted provisions not found in the bills submitted to it. The following provisions are cited
in support of this contention:
Rules of the Senate
Rule XII:
26. In the event that the Senate does not agree with the House of
Representatives on the provision of any bill or joint resolution, the differences
shall be settled by a conference committee of both Houses which shall meet
within ten days after their composition.
The President shall designate the members of the conference committee in
accordance with subparagraph (c), Section 3 of Rule III.
Each Conference Committee Report shall contain a detailed and sufficiently
explicit statement of the changes in or amendments to the subject
measure, and shall be signed by the conferees.
The consideration of such report shall not be in order unless the report has
been filed with the Secretary of the Senate and copies thereof have been
distributed to the Members.

(Emphasis added)
Rules of the House of Representatives
Rule XIV:
85. Conference Committee Reports. In the event that the House does not
agree with the Senate on the amendments to any bill or joint resolution, the
differences may be settled by conference committees of both Chambers.
The consideration of conference committee reports shall always be in order,
except when the journal is being read, while the roll is being called or the
House is dividing on any question. Each of the pages of such reports shall be
signed by the conferees. Each report shall contain a detailed, sufficiently
explicit statement of the changes in or amendments to the subject measure.
The consideration of such report shall not be in order unless copies thereof
are distributed to the Members: Provided, That in the last fifteen days of each
session period it shall be deemed sufficient that three copies of the report,
signed as above provided, are deposited in the office of the Secretary
General.
(Emphasis added)
To be sure, nothing in the Rules limits a conference committee to a consideration of
conflicting provisions. But Rule XLIV, 112 of the Rules of the Senate is cited to the effect
that "If there is no Rule applicable to a specific case the precedents of the Legislative
Department of the Philippines shall be resorted to, and as a supplement of these, the
Rules contained in Jefferson's Manual." The following is then quoted from the Jefferson's
Manual:
The managers of a conference must confine themselves to the differences
committed to them. . . and may not include subjects not within
disagreements, even though germane to a question in issue.
Note that, according to Rule XLIX, 112, in case there is no specific rule applicable, resort
must be to the legislative practice. The Jefferson's Manual is resorted to only as
supplement. It is common place in Congress that conference committee reports include
new matters which, though germane, have not been committed to the committee. This
practice was admitted by Senator Raul S. Roco, petitioner in G.R. No. 115543, during the
oral argument in these cases. Whatever, then, may be provided in the Jefferson's Manual
must be considered to have been modified by the legislative practice. If a change is
desired in the practice it must be sought in Congress since this question is not covered by
any constitutional provision but is only an internal rule of each house. Thus, Art. VI, 16(3)
of the Constitution provides that "Each House may determine the rules of its proceedings. .
. ."
This observation applies to the other contention that the Rules of the two chambers were
likewise disregarded in the preparation of the Conference Committee Report because the

Report did not contain a "detailed and sufficiently explicit statement of changes in, or
amendments to, the subject measure." The Report used brackets and capital letters to
indicate the changes. This is a standard practice in bill-drafting. We cannot say that in
using these marks and symbols the Committee violated the Rules of the Senate and the
House. Moreover, this Court is not the proper forum for the enforcement of these internal
Rules. To the contrary, as we have already ruled, "parliamentary rules are merely
procedural and with their observance the courts have no concern." 19 Our concern is with
the procedural requirements of the Constitution for the enactment of laws. As far as these
requirements are concerned, we are satisfied that they have been faithfully observed in
these cases.
Nor is there any reason for requiring that the Committee's Report in these cases must
have undergone three readings in each of the two houses. If that be the case, there would
be no end to negotiation since each house may seek modifications of the compromise bill.
The nature of the bill, therefore, requires that it be acted upon by each house on a "take it
or leave it" basis, with the only alternative that if it is not approved by both houses,
another conference committee must be appointed. But then again the result would still be
a compromise measure that may not be wholly satisfying to both houses.
Art. VI, 26(2) must, therefore, be construed as referring only to bills introduced for the
first time in either house of Congress, not to the conference committee report. For if the
purpose of requiring three readings is to give members of Congress time to study bills, it
cannot be gainsaid that H. No. 11197 was passed in the House after three readings; that in
the Senate it was considered on first reading and then referred to a committee of that
body; that although the Senate committee did not report out the House bill, it submitted a
version (S. No. 1630) which it had prepared by "taking into consideration" the House bill;
that for its part the Conference Committee consolidated the two bills and prepared a
compromise version; that the Conference Committee Report was thereafter approved by
the House and the Senate, presumably after appropriate study by their members. We
cannot say that, as a matter of fact, the members of Congress were not fully informed of
the provisions of the bill. The allegation that the Conference Committee usurped the
legislative power of Congress is, in our view, without warrant in fact and in law.
Fourth. Whatever doubts there may be as to the formal validity of Republic Act No. 7716
must be resolved in its favor. Our cases 20 manifest firm adherence to the rule that an
enrolled copy of a bill is conclusive not only of its provisions but also of its due enactment.
Not even claims that a proposed constitutional amendment was invalid because the
requisite votes for its approval had not been obtained 21 or that certain provisions of a
statute had been "smuggled" in the printing of the bill 22 have moved or persuaded us to
look behind the proceedings of a coequal branch of the government. There is no reason
now to depart from this rule.
No claim is here made that the "enrolled bill" rule is absolute. In fact in one case 23 we
"went behind" an enrolled bill and consulted the Journal to determine whether certain
provisions of a statute had been approved by the Senate in view of the fact that the
President of the Senate himself, who had signed the enrolled bill, admitted a mistake and
withdrew his signature, so that in effect there was no longer an enrolled bill to consider.

But where allegations that the constitutional procedures for the passage of bills have not
been observed have no more basis than another allegation that the Conference
Committee "surreptitiously" inserted provisions into a bill which it had prepared, we should
decline the invitation to go behind the enrolled copy of the bill. To disregard the "enrolled
bill" rule in such cases would be to disregard the respect due the other two departments of
our government.
Fifth. An additional attack on the formal validity of Republic Act No. 7716 is made by the
Philippine Airlines, Inc., petitioner in G.R. No. 11582, namely, that it violates Art. VI, 26(1)
which provides that "Every bill passed by Congress shall embrace only one subject which
shall be expressed in the title thereof." It is contended that neither H. No. 11197 nor S. No.
1630 provided for removal of exemption of PAL transactions from the payment of the VAT
and that this was made only in the Conference Committee bill which became Republic Act
No. 7716 without reflecting this fact in its title.
The title of Republic Act No. 7716 is:
AN ACT RESTRUCTURING THE VALUE- ADDED TAX (VAT) SYSTEM, WIDENING
ITS TAX BASE AND ENHANCING ITS ADMINISTRATION, AND FOR THESE
PURPOSES AMENDING AND REPEALING THE RELEVANT PROVISIONS OF THE
NATIONAL INTERNAL REVENUE CODE, AS AMENDED, AND FOR OTHER
PURPOSES.
Among the provisions of the NIRC amended is 103, which originally read:
103. Exempt transactions. The following shall be exempt from the valueadded tax:
....
(q) Transactions which are exempt under special laws or international
agreements to which the Philippines is a signatory. Among the transactions
exempted from the VAT were those of PAL because it was exempted under its
franchise (P.D. No. 1590) from the payment of all "other taxes . . . now or in
the near future," in consideration of the payment by it either of the corporate
income tax or a franchise tax of 2%.
As a result of its amendment by Republic Act No. 7716, 103 of the NIRC now provides:
103. Exempt transactions. The following shall be exempt from the valueadded tax:
....
(q) Transactions which are exempt under special laws, except those granted
under Presidential Decree Nos. 66, 529, 972, 1491, 1590. . . .
The effect of the amendment is to remove the exemption granted to PAL, as far as the VAT
is concerned.

The question is whether this amendment of 103 of the NIRC is fairly embraced in the title
of Republic Act No. 7716, although no mention is made therein of P.D. No. 1590 as among
those which the statute amends. We think it is, since the title states that the purpose of
the statute is to expand the VAT system, and one way of doing this is to widen its base by
withdrawing some of the exemptions granted before. To insist that P.D. No. 1590 be
mentioned in the title of the law, in addition to 103 of the NIRC, in which it is specifically
referred to, would be to insist that the title of a bill should be a complete index of its
content.
The constitutional requirement that every bill passed by Congress shall embrace only one
subject which shall be expressed in its title is intended to prevent surprise upon the
members of Congress and to inform the people of pending legislation so that, if they wish
to, they can be heard regarding it. If, in the case at bar, petitioner did not know before that
its exemption had been withdrawn, it is not because of any defect in the title but perhaps
for the same reason other statutes, although published, pass unnoticed until some event
somehow calls attention to their existence. Indeed, the title of Republic Act No. 7716 is not
any more general than the title of PAL's own franchise under P.D. No. 1590, and yet no
mention is made of its tax exemption. The title of P.D. No. 1590 is:
AN ACT GRANTING A NEW FRANCHISE TO PHILIPPINE AIRLINES, INC. TO
ESTABLISH, OPERATE, AND MAINTAIN AIR-TRANSPORT SERVICES IN THE
PHILIPPINES AND BETWEEN THE PHILIPPINES AND OTHER COUNTRIES.
The trend in our cases is to construe the constitutional requirement in such a manner that
courts do not unduly interfere with the enactment of necessary legislation and to consider
it sufficient if the title expresses the general subject of the statute and all its provisions are
germane to the general subject thus expressed. 24
It is further contended that amendment of petitioner's franchise may only be made by
special law, in view of 24 of P.D. No. 1590 which provides:
This franchise, as amended, or any section or provision hereof may only be
modified, amended, or repealed expressly by a special law or decree that
shall specifically modify, amend, or repeal this franchise or any section or
provision thereof.
This provision is evidently intended to prevent the amendment of the franchise by mere
implication resulting from the enactment of a later inconsistent statute, in consideration of
the fact that a franchise is a contract which can be altered only by consent of the parties.
Thus
in Manila
Railroad
Co.
v.
25
Rafferty, it was held that an Act of the U.S. Congress, which provided for the payment of
tax on certain goods and articles imported into the Philippines, did not amend the
franchise of plaintiff, which exempted it from all taxes except those mentioned in its
franchise. It was held that a special law cannot be amended by a general law.
In contrast, in the case at bar, Republic Act No. 7716 expressly amends PAL's franchise
(P.D. No. 1590) by specifically excepting from the grant of exemptions from the VAT PAL's
exemption under P.D. No. 1590. This is within the power of Congress to do under Art. XII,
11 of the Constitution, which provides that the grant of a franchise for the operation of a

public utility is subject to amendment, alteration or repeal by Congress when the common
good so requires.
II. SUBSTANTIVE ISSUES
A. Claims of Press Freedom, Freedom of Thought
and Religious Freedom
The Philippine Press Institute (PPI), petitioner in G.R. No. 115544, is a nonprofit
organization of newspaper publishers established for the improvement of journalism in the
Philippines. On the other hand, petitioner in G.R. No. 115781, the Philippine Bible Society
(PBS), is a nonprofit organization engaged in the printing and distribution of bibles and
other religious articles. Both petitioners claim violations of their rights under 4 and 5 of
the Bill of Rights as a result of the enactment of the VAT Law.
The PPI questions the law insofar as it has withdrawn the exemption previously granted to
the press under 103 (f) of the NIRC. Although the exemption was subsequently restored
by administrative regulation with respect to the circulation income of newspapers, the PPI
presses its claim because of the possibility that the exemption may still be removed by
mere revocation of the regulation of the Secretary of Finance. On the other hand, the PBS
goes so far as to question the Secretary's power to grant exemption for two reasons: (1)
The Secretary of Finance has no power to grant tax exemption because this is vested in
Congress and requires for its exercise the vote of a majority of all its members 26 and (2)
the Secretary's duty is to execute the law.
103 of the NIRC contains a list of transactions exempted from VAT. Among the
transactions previously granted exemption were:
(f) Printing, publication, importation or sale of books and any newspaper,
magazine, review, or bulletin which appears at regular intervals with fixed
prices for subscription and sale and which is devoted principally to the
publication of advertisements.
Republic Act No. 7716 amended 103 by deleting (f) with the result that print media
became subject to the VAT with respect to all aspects of their operations. Later, however,
based on a memorandum of the Secretary of Justice, respondent Secretary of Finance
issued Revenue Regulations No. 11-94, dated June 27, 1994, exempting the "circulation
income of print media pursuant to 4 Article III of the 1987 Philippine Constitution
guaranteeing against abridgment of freedom of the press, among others." The exemption
of "circulation income" has left income from advertisements still subject to the VAT.
It is unnecessary to pass upon the contention that the exemption granted is beyond the
authority of the Secretary of Finance to give, in view of PPI's contention that even with the
exemption of the circulation revenue of print media there is still an unconstitutional
abridgment of press freedom because of the imposition of the VAT on the gross receipts of
newspapers from advertisements and on their acquisition of paper, ink and services for
publication. Even on the assumption that no exemption has effectively been granted to
print media transactions, we find no violation of press freedom in these cases.

To be sure, we are not dealing here with a statute that on its face operates in the area of
press freedom. The PPI's claim is simply that, as applied to newspapers, the law abridges
press freedom. Even with due recognition of its high estate and its importance in a
democratic society, however, the press is not immune from general regulation by the
State. It has been held:
The publisher of a newspaper has no immunity from the application of
general laws. He has no special privilege to invade the rights and liberties of
others. He must answer for libel. He may be punished for contempt of court. .
. . Like others, he must pay equitable and nondiscriminatory taxes on his
business. . . . 27
The PPI does not dispute this point, either.
What it contends is that by withdrawing the exemption previously granted to print media
transactions involving printing, publication, importation or sale of newspapers, Republic
Act No. 7716 has singled out the press for discriminatory treatment and that within the
class of mass media the law discriminates against print media by giving broadcast media
favored treatment. We have carefully examined this argument, but we are unable to find a
differential treatment of the press by the law, much less any censorial motivation for its
enactment. If the press is now required to pay a value-added tax on its transactions, it is
not because it is being singled out, much less targeted, for special treatment but only
because of the removal of the exemption previously granted to it by law. The withdrawal of
exemption is all that is involved in these cases. Other transactions, likewise previously
granted exemption, have been delisted as part of the scheme to expand the base and the
scope of the VAT system. The law would perhaps be open to the charge of discriminatory
treatment if the only privilege withdrawn had been that granted to the press. But that is
not the case.
The situation in the case at bar is indeed a far cry from those cited by the PPI in support of
its claim that Republic Act No. 7716 subjects the press to discriminatory taxation. In the
cases cited, the discriminatory purpose was clear either from the background of the law or
from its operation. For example, in Grosjean v. American Press Co., 28 the law imposed a
license tax equivalent to 2% of the gross receipts derived from advertisements only on
newspapers which had a circulation of more than 20,000 copies per week. Because the tax
was not based on the volume of advertisement alone but was measured by the extent of
its circulation as well, the law applied only to the thirteen large newspapers in Louisiana,
leaving untaxed four papers with circulation of only slightly less than 20,000 copies a week
and 120 weekly newspapers which were in serious competition with the thirteen
newspapers in question. It was well known that the thirteen newspapers had been critical
of Senator Huey Long, and the Long-dominated legislature of Louisiana respondent by
taxing what Long described as the "lying newspapers" by imposing on them "a tax on
lying." The effect of the tax was to curtail both their revenue and their circulation. As the
U.S. Supreme Court noted, the tax was "a deliberate and calculated device in the guise of
a tax to limit the circulation of information to which the public is entitled in virtue of the
constitutional guaranties." 29 The case is a classic illustration of the warning that the power
to tax is the power to destroy.

In the other case 30 invoked by the PPI, the press was also found to have been singled out
because everything was exempt from the "use tax" on ink and paper, except the press.
Minnesota imposed a tax on the sales of goods in that state. To protect the sales tax, it
enacted a complementary tax on the privilege of "using, storing or consuming in that state
tangible personal property" by eliminating the residents' incentive to get goods from
outside states where the sales tax might be lower. The Minnesota Star Tribune was
exempted from both taxes from 1967 to 1971. In 1971, however, the state legislature
amended the tax scheme by imposing the "use tax" on the cost of paper and ink used for
publication. The law was held to have singled out the press because (1) there was no
reason for imposing the "use tax" since the press was exempt from the sales tax and (2)
the "use tax" was laid on an "intermediate transaction rather than the ultimate retail sale."
Minnesota had a heavy burden of justifying the differential treatment and it failed to do so.
In addition, the U.S. Supreme Court found the law to be discriminatory because the
legislature, by again amending the law so as to exempt the first $100,000 of paper and ink
used, further narrowed the coverage of the tax so that "only a handful of publishers pay
any tax at all and even fewer pay any significant amount of tax." 31 The discriminatory
purpose was thus very clear.
More recently, in Arkansas Writers' Project, Inc. v. Ragland, 32 it was held that a law which
taxed general interest magazines but not newspapers and religious, professional, trade
and sports journals was discriminatory because while the tax did not single out the press
as a whole, it targeted a small group within the press. What is more, by differentiating on
the basis of contents (i.e., between general interest and special interests such as religion
or sports) the law became "entirely incompatible with the First Amendment's guarantee of
freedom of the press."
These cases come down to this: that unless justified, the differential treatment of the press
creates risks of suppression of expression. In contrast, in the cases at bar, the statute
applies to a wide range of goods and services. The argument that, by imposing the VAT
only on print media whose gross sales exceeds P480,000 but not more than P750,000, the
law discriminates 33 is without merit since it has not been shown that as a result the class
subject to tax has been unreasonably narrowed. The fact is that this limitation does not
apply to the press along but to all sales. Nor is impermissible motive shown by the fact
that print media and broadcast media are treated differently. The press is taxed on its
transactions involving printing and publication, which are different from the transactions of
broadcast media. There is thus a reasonable basis for the classification.
The cases canvassed, it must be stressed, eschew any suggestion that "owners of
newspapers are immune from any forms of ordinary taxation." The license tax in
the Grosjean case was declared invalid because it was "one single in kind, with a long
history
of
hostile
misuse
against
the
freedom
of
the
press." 34 On the other hand, Minneapolis Star acknowledged that "The First Amendment
does not prohibit all regulation of the press [and that] the States and the Federal
Government can subject newspapers to generally applicable economic regulations without
creating constitutional problems." 35
What has been said above also disposes of the allegations of the PBS that the removal of
the exemption of printing, publication or importation of books and religious articles, as well
as their printing and publication, likewise violates freedom of thought and of conscience.

For as the U.S. Supreme Court unanimously held in Jimmy Swaggart Ministries v. Board of
Equalization, 36 the Free Exercise of Religion Clause does not prohibit imposing a generally
applicable sales and use tax on the sale of religious materials by a religious organization.
This brings us to the question whether the registration provision of the law, 37 although of
general applicability, nonetheless is invalid when applied to the press because it lays a
prior restraint on its essential freedom. The case ofAmerican Bible Society v. City of
Manila 38 is cited by both the PBS and the PPI in support of their contention that the law
imposes censorship. There, this Court held that an ordinance of the City of Manila, which
imposed a license fee on those engaged in the business of general merchandise, could not
be applied to the appellant's sale of bibles and other religious literature. This Court relied
on Murdock v. Pennsylvania, 39 in which it was held that, as a license fee is fixed in amount
and unrelated to the receipts of the taxpayer, the license fee, when applied to a religious
sect, was actually being imposed as a condition for the exercise of the sect's right under
the Constitution. For that reason, it was held, the license fee "restrains in advance those
constitutional liberties of press and religion and inevitably tends to suppress their
exercise." 40
But, in this case, the fee in 107, although a fixed amount (P1,000), is not imposed for the
exercise of a privilege but only for the purpose of defraying part of the cost of registration.
The registration requirement is a central feature of the VAT system. It is designed to
provide a record of tax credits because any person who is subject to the payment of the
VAT pays an input tax, even as he collects an output tax on sales made or services
rendered. The registration fee is thus a mere administrative fee, one not imposed on the
exercise of a privilege, much less a constitutional right.
For the foregoing reasons, we find the attack on Republic Act No. 7716 on the ground that
it offends the free speech, press and freedom of religion guarantees of the Constitution to
be without merit. For the same reasons, we find the claim of the Philippine Educational
Publishers Association (PEPA) in G.R. No. 115931 that the increase in the price of books
and other educational materials as a result of the VAT would violate the constitutional
mandate to the government to give priority to education, science and technology (Art. II,
17) to be untenable.

B. Claims of Regressivity, Denial of Due Process,

Equal
Protection,
and
Impairment
of Contracts
There is basis for passing upon claims that on its face the statute violates the guarantees
of freedom of speech, press and religion. The possible "chilling effect" which it may have
on the essential freedom of the mind and conscience and the need to assure that the
channels of communication are open and operating importunately demand the exercise of
this Court's power of review.
There is, however, no justification for passing upon the claims that the law also violates
the rule that taxation must be progressive and that it denies petitioners' right to due
process and that equal protection of the laws. The reason for this different treatment has

been cogently stated by an eminent authority on constitutional law thus: "[W]hen freedom
of the mind is imperiled by law, it is freedom that commands a momentum of respect;
when property is imperiled it is the lawmakers' judgment that commands respect. This
dual standard may not precisely reverse the presumption of constitutionality in civil
liberties cases, but obviously it does set up a hierarchy of values within the due process
clause." 41
Indeed, the absence of threat of immediate harm makes the need for judicial intervention
less evident and underscores the essential nature of petitioners' attack on the law on the
grounds of regressivity, denial of due process and equal protection and impairment of
contracts as a mere academic discussion of the merits of the law. For the fact is that there
have even been no notices of assessments issued to petitioners and no determinations at
the administrative levels of their claims so as to illuminate the actual operation of the law
and enable us to reach sound judgment regarding so fundamental questions as those
raised in these suits.
Thus, the broad argument against the VAT is that it is regressive and that it violates the
requirement that "The rule of taxation shall be uniform and equitable [and] Congress shall
evolve a progressive system of taxation." 42Petitioners in G.R. No. 115781 quote from a
paper, entitled "VAT Policy Issues: Structure, Regressivity, Inflation and Exports" by Alan A.
Tait of the International Monetary Fund, that "VAT payment by low-income households will
be a higher proportion of their incomes (and expenditures) than payments by higherincome households. That is, the VAT will be regressive." Petitioners contend that as a
result of the uniform 10% VAT, the tax on consumption goods of those who are in the
higher-income bracket, which before were taxed at a rate higher than 10%, has been
reduced, while basic commodities, which before were taxed at rates ranging from 3% to
5%, are now taxed at a higher rate.
Just as vigorously as it is asserted that the law is regressive, the opposite claim is pressed
by respondents that in fact it distributes the tax burden to as many goods and services as
possible particularly to those which are within the reach of higher-income groups, even as
the law exempts basic goods and services. It is thus equitable. The goods and properties
subject to the VAT are those used or consumed by higher-income groups. These include
real properties held primarily for sale to customers or held for lease in the ordinary course
of business, the right or privilege to use industrial, commercial or scientific equipment,
hotels, restaurants and similar places, tourist buses, and the like. On the other hand, small
business establishments, with annual gross sales of less than P500,000, are exempted.
This, according to respondents, removes from the coverage of the law some 30,000
business establishments. On the other hand, an occasional paper 43 of the Center for
Research and Communication cities a NEDA study that the VAT has minimal impact on
inflation and income distribution and that while additional expenditure for the lowest
income class is only P301 or 1.49% a year, that for a family earning P500,000 a year or
more is P8,340 or 2.2%.
Lacking empirical data on which to base any conclusion regarding these arguments, any
discussion whether the VAT is regressive in the sense that it will hit the "poor" and middleincome group in society harder than it will the "rich," as the Cooperative Union of the
Philippines (CUP) claims in G.R. No. 115873, is largely an academic exercise. On the other
hand, the CUP's contention that Congress' withdrawal of exemption of producers

cooperatives, marketing cooperatives, and service cooperatives, while maintaining that

granted to electric cooperatives, not only goes against the constitutional policy to promote
cooperatives as instruments of social justice (Art. XII, 15) but also denies such
cooperatives the equal protection of the law is actually a policy argument. The legislature
is not required to adhere to a policy of "all or none" in choosing the subject of taxation. 44
Nor is the contention of the Chamber of Real Estate and Builders Association (CREBA),
petitioner in G.R. 115754, that the VAT will reduce the mark up of its members by as much
as 85% to 90% any more concrete. It is a mere allegation. On the other hand, the claim of
the Philippine Press Institute, petitioner in G.R. No. 115544, that the VAT will drive some of
its members out of circulation because their profits from advertisements will not be
enough to pay for their tax liability, while purporting to be based on the financial
statements of the newspapers in question, still falls short of the establishment of facts by
evidence so necessary for adjudicating the question whether the tax is oppressive and
confiscatory.
Indeed, regressivity is not a negative standard for courts to enforce. What Congress is
required by the Constitution to do is to "evolve a progressive system of taxation." This is a
directive to Congress, just like the directive to it to give priority to the enactment of laws
for the enhancement of human dignity and the reduction of social, economic and political
inequalities (Art. XIII, 1), or for the promotion of the right to "quality education" (Art. XIV,
1). These provisions are put in the Constitution as moral incentives to legislation, not as
judicially enforceable rights.
At all events, our 1988 decision in Kapatiran 45 should have laid to rest the questions now
raised against the VAT. There similar arguments made against the original VAT Law
(Executive Order No. 273) were held to be hypothetical, with no more basis than
newspaper articles which this Court found to be "hearsay and [without] evidentiary value."
As Republic Act No. 7716 merely expands the base of the VAT system and its coverage as
provided in the original VAT Law, further debate on the desirability and wisdom of the law
should have shifted to Congress.
Only slightly less abstract but nonetheless hypothetical is the contention of CREBA that
the imposition of the VAT on the sales and leases of real estate by virtue of contracts
entered into prior to the effectivity of the law would violate the constitutional provision
that "No law impairing the obligation of contracts shall be passed." It is enough to say that
the parties to a contract cannot, through the exercise of prophetic discernment, fetter the
exercise of the taxing power of the State. For not only are existing laws read into contracts
in order to fix obligations as between parties, but the reservation of essential attributes of
sovereign power is also read into contracts as a basic postulate of the legal order. The
policy of protecting contracts against impairment presupposes the maintenance of a
government which retains adequate authority to secure the peace and good order of
society. 46
In truth, the Contract Clause has never been thought as a limitation on the exercise of the
State's power of taxation save only where a tax exemption has been granted for a valid
consideration. 47 Such is not the case of PAL in G.R. No. 115852, and we do not understand
it to make this claim. Rather, its position, as discussed above, is that the removal of its tax
exemption cannot be made by a general, but only by a specific, law.

The substantive issues raised in some of the cases are presented in abstract, hypothetical
form because of the lack of a concrete record. We accept that this Court does not only
adjudicate private cases; that public actions by "non-Hohfeldian" 48 or ideological plaintiffs
are now cognizable provided they meet the standing requirement of the Constitution; that
under Art. VIII, 1, 2 the Court has a "special function" of vindicating constitutional
rights. Nonetheless the feeling cannot be escaped that we do not have before us in these
cases a fully developed factual record that alone can impart to our adjudication the impact
of actuality 49 to insure that decision-making is informed and well grounded. Needless to
say, we do not have power to render advisory opinions or even jurisdiction over petitions
for declaratory judgment. In effect we are being asked to do what the Conference
Committee is precisely accused of having done in these cases to sit as a third legislative
chamber to review legislation.
We are told, however, that the power of judicial review is not so much power as it is duty
imposed on this Court by the Constitution and that we would be remiss in the performance
of that duty if we decline to look behind the barriers set by the principle of separation of
powers. Art. VIII, 1, 2 is cited in support of this view:
Judicial power includes the duty of the courts of justice to settle actual
controversies involving rights which are legally demandable and enforceable,
and to determine whether or not there has been a grave abuse of discretion
amounting to lack or excess of jurisdiction on the part of any branch or
instrumentality of the Government.
To view the judicial power of review as a duty is nothing new. Chief Justice Marshall said so
in 1803, to justify the assertion of this power in Marbury v. Madison:
It is emphatically the province and duty of the judicial department to say
what the law is. Those who apply the rule to particular cases must of
necessity expound and interpret that rule. If two laws conflict with each
other, the courts must decide on the operation of each. 50
Justice Laurel echoed this justification in 1936 in Angara v. Electoral Commission:
And when the judiciary mediates to allocate constitutional boundaries, it does
not assert any superiority over the other departments; it does not in reality
nullify or invalidate an act of the legislature, but only asserts the solemn and
sacred obligation assigned to it by the Constitution to determine conflicting
claims of authority under the Constitution and to establish for the parties in
an actual controversy the rights which that instrument secures and
guarantees to them. 51
This
conception
of
the
judicial
52
cases of this Court following Angara.

power

has

been

affirmed

in

several

It does not add anything, therefore, to invoke this "duty" to justify this Court's intervention
in what is essentially a case that at best is not ripe for adjudication. That duty must still be
performed in the context of a concrete case or controversy, as Art. VIII, 5(2) clearly
defines our jurisdiction in terms of "cases," and nothing but "cases." That the other

departments of the government may have committed a grave abuse of discretion is not an
independent ground for exercising our power. Disregard of the essential limits imposed by
the case and controversy requirement can in the long run only result in undermining our
authority as a court of law. For, as judges, what we are called upon to render is judgment
according to law, not according to what may appear to be the opinion of the day.
_______________________________
In the preceeding pages we have endeavored to discuss, within limits, the validity of
Republic Act No. 7716 in its formal and substantive aspects as this has been raised in the
various cases before us. To sum up, we hold:
(1) That the procedural requirements of the Constitution have been complied with by
Congress in the enactment of the statute;
(2) That judicial inquiry whether the formal requirements for the enactment of statutes
beyond those prescribed by the Constitution have been observed is precluded by the
principle of separation of powers;
(3) That the law does not abridge freedom of speech, expression or the press, nor interfere
with the free exercise of religion, nor deny to any of the parties the right to an education;
and
(4) That, in view of the absence of a factual foundation of record, claims that the law is
regressive, oppressive and confiscatory and that it violates vested rights protected under
the Contract Clause are prematurely raised and do not justify the grant of prospective
relief by writ of prohibition.
WHEREFORE, the petitions in these cases are DISMISSED.

G.R. No. L-59431 July 25, 1984

ANTERO M. SISON, JR., petitioner,
vs.
RUBEN B. ANCHETA, Acting Commissioner, Bureau of Internal Revenue; ROMULO
VILLA, Deputy Commissioner, Bureau of Internal Revenue; TOMAS TOLEDO
Deputy Commissioner, Bureau of Internal Revenue; MANUEL ALBA, Minister of
Budget, FRANCISCO TANTUICO, Chairman, Commissioner on Audit, and CESAR E.
A. VIRATA, Minister of Finance, respondents.
FERNANDO, C.J.:
The success of the challenge posed in this suit for declaratory relief or prohibition
proceeding 1 on the validity of Section I of Batas Pambansa Blg. 135 depends upon a
showing of its constitutional infirmity. The assailed provision further amends Section 21 of
the National Internal Revenue Code of 1977, which provides for rates of tax on citizens or
residents on (a) taxable compensation income, (b) taxable net income, (c) royalties,
prizes, and other winnings, (d) interest from bank deposits and yield or any other
monetary benefit from deposit substitutes and from trust fund and similar arrangements,
(e) dividends and share of individual partner in the net profits of taxable partnership, (f)
adjusted gross income. 2 Petitioner3 as taxpayer alleges that by virtue thereof, "he would
be unduly discriminated against by the imposition of higher rates of tax upon his income
arising from the exercise of his profession vis-a-vis those which are imposed upon fixed
income or salaried individual taxpayers. 4 He characterizes the above sction as arbitrary
amounting to class legislation, oppressive and capricious in character 5 For petitioner,
therefore, there is a transgression of both the equal protection and due process
clauses 6 of the Constitution as well as of the rule requiring uniformity in taxation. 7

The Court, in a resolution of January 26, 1982, required respondents to file an answer
within 10 days from notice. Such an answer, after two extensions were granted the Office
of the Solicitor General, was filed on May 28, 1982. 8 The facts as alleged were admitted
but not the allegations which to their mind are "mere arguments, opinions or conclusions
on the part of the petitioner, the truth [for them] being those stated [in their] Special and
Affirmative Defenses." 9The answer then affirmed: "Batas Pambansa Big. 135 is a valid
exercise of the State's power to tax. The authorities and cases cited while correctly quoted
or paraghraph do not support petitioner's stand." 10 The prayer is for the dismissal of the
petition for lack of merit.
This Court finds such a plea more than justified. The petition must be dismissed.
1. It is manifest that the field of state activity has assumed a much wider scope, The
reason was so clearly set forth by retired Chief Justice Makalintal thus: "The areas which
used to be left to private enterprise and initiative and which the government was called
upon to enter optionally, and only 'because it was better equipped to administer for the
public welfare than is any private individual or group of individuals,' continue to lose their
well-defined boundaries and to be absorbed within activities that the government must
undertake in its sovereign capacity if it is to meet the increasing social challenges of the
times." 11 Hence the need for more revenues. The power to tax, an inherent prerogative,
has to be availed of to assure the performance of vital state functions. It is the source of
the bulk of public funds. To praphrase a recent decision, taxes being the lifeblood of the
government, their prompt and certain availability is of the essence. 12
2. The power to tax moreover, to borrow from Justice Malcolm, "is an attribute of
sovereignty. It is the strongest of all the powers of of government." 13 It is, of course, to
be admitted that for all its plenitude 'the power to tax is not unconfined. There are
restrictions. The Constitution sets forth such limits . Adversely affecting as it does properly
rights, both the due process and equal protection clauses inay properly be invoked, all
petitioner does, to invalidate in appropriate cases a revenue measure. if it were otherwise,
there would -be truth to the 1803 dictum of Chief Justice Marshall that "the power to tax
involves the power to destroy." 14 In a separate opinion in Graves v. New York, 15 Justice
Frankfurter, after referring to it as an 1, unfortunate remark characterized it as "a flourish
of rhetoric [attributable to] the intellectual fashion of the times following] a free use of
absolutes." 16 This is merely to emphasize that it is riot and there cannot be such a
constitutional mandate. Justice Frankfurter could rightfully conclude: "The web of unreality
spun from Marshall's famous dictum was brushed away by one stroke of Mr. Justice
Holmess pen: 'The power to tax is not the power to destroy while this Court sits." 17 So it
is in the Philippines.
3. This Court then is left with no choice. The Constitution as the fundamental law overrides
any legislative or executive, act that runs counter to it. In any case therefore where it can
be demonstrated that the challenged statutory provision as petitioner here alleges
fails to abide by its command, then this Court must so declare and adjudge it null. The
injury thus is centered on the question of whether the imposition of a higher tax rate on
taxable net income derived from business or profession than on compensation is
constitutionally infirm.

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

allegation, as here. does not suffice. There must be a factual foundation of such
unconstitutional taint. Considering that petitioner here would condemn such a provision as
void or its face, he has not made out a case. This is merely to adhere to the authoritative
doctrine that were the due process and equal protection clauses are invoked, considering
that they arc not fixed rules but rather broad standards, there is a need for of such
persuasive character as would lead to such a conclusion. Absent such a showing, the
presumption of validity must prevail. 18
5. It is undoubted that the due process clause may be invoked where a taxing statute is so
arbitrary that it finds no support in the Constitution. An obvious example is where it can be
shown to amount to the confiscation of property. That would be a clear abuse of power. It
then becomes the duty of this Court to say that such an arbitrary act amounted to the
exercise of an authority not conferred. That properly calls for the application of the Holmes
dictum. It has also been held that where the assailed tax measure is beyond the
jurisdiction of the state, or is not for a public purpose, or, in case of a retroactive statute is
so harsh and unreasonable, it is subject to attack on due process grounds. 19
6. Now for equal protection. The applicable standard to avoid the charge that there is a
denial of this constitutional mandate whether the assailed act is in the exercise of the lice
power or the power of eminent domain is to demonstrated that the governmental act
assailed, far from being inspired by the attainment of the common weal was prompted by
the spirit of hostility, or at the very least, discrimination that finds no support in reason. It
suffices then that the laws operate equally and uniformly on all persons under similar
circumstances or that all persons must be treated in the same manner, the conditions not
being different, both in the privileges conferred and the liabilities imposed. Favoritism and
undue preference cannot be allowed. For the principle is that equal protection and security
shall be given to every person under circumtances which if not Identical are analogous. If
law be looked upon in terms of burden or charges, those that fall within a class should be
treated in the same fashion, whatever restrictions cast on some in the group equally
binding on the rest." 20 That same formulation applies as well to taxation measures. The
equal protection clause is, of course, inspired by the noble concept of approximating the
Ideal of the laws benefits being available to all and the affairs of men being governed by
that serene and impartial uniformity, which is of the very essence of the Idea of law. There
is, however, wisdom, as well as realism in these words of Justice Frankfurter: "The equality
at which the 'equal protection' clause aims is not a disembodied equality. The Fourteenth
Amendment enjoins 'the equal protection of the laws,' and laws are not abstract
propositions. They do not relate to abstract units A, B and C, but are expressions of policy
arising out of specific difficulties, address to the attainment of specific ends by the use of
specific remedies. The Constitution does not require things which are different in fact or
opinion to be treated in law as though they were the same." 21 Hence the constant
reiteration of the view that classification if rational in character is allowable. As a matter of
fact, in a leading case of Lutz V. Araneta, 22 this Court, through Justice J.B.L. Reyes, went so
far as to hold "at any rate, it is inherent in the power to tax that a state be free to select
the subjects of taxation, and it has been repeatedly held that 'inequalities which result
from a singling out of one particular class for taxation, or exemption infringe no
constitutional limitation.'" 23

7. Petitioner likewise invoked the kindred concept of uniformity. According to the

Constitution: "The rule of taxation shag be uniform and equitable." 24 This requirement is
met according to Justice Laurel in Philippine Trust Company v. Yatco, 25 decided in 1940,
when the tax "operates with the same force and effect in every place where the subject
may be found. " 26 He likewise added: "The rule of uniformity does not call for perfect
uniformity or perfect equality, because this is hardly attainable." 27 The problem of
classification did not present itself in that case. It did not arise until nine years later, when
the Supreme Court held: "Equality and uniformity in taxation means that all taxable
articles or kinds of property of the same class shall be taxed at the same rate. The taxing
power has the authority to make reasonable and natural classifications for purposes of
taxation, ... . 28 As clarified by Justice Tuason, where "the differentiation" complained of
"conforms to the practical dictates of justice and equity" it "is not discriminatory within the
meaning of this clause and is therefore uniform." 29 There is quite a similarity then to the
standard of equal protection for all that is required is that the tax "applies equally to all
persons, firms and corporations placed in similar situation." 30
8. Further on this point. Apparently, what misled petitioner is his failure to take into
consideration the distinction between a tax rate and a tax base. There is no legal objection
to a broader tax base or taxable income by eliminating all deductible items and at the
same time reducing the applicable tax rate. Taxpayers may be classified into different
categories. To repeat, it. is enough that the classification must rest upon substantial
distinctions that make real differences. In the case of the gross income taxation embodied
in Batas Pambansa Blg. 135, the, discernible basis of classification is the susceptibility of
the income to the application of generalized rules removing all deductible items for all
taxpayers within the class and fixing a set of reduced tax rates to be applied to all of
them. Taxpayers who are recipients of compensation income are set apart as a class. As
there is practically no overhead expense, these taxpayers are e not entitled to make
deductions for income tax purposes because they are in the same situation more or less.
On the other hand, in the case of professionals in the practice of their calling and
businessmen, there is no uniformity in the costs or expenses necessary to produce their
income. It would not be just then to disregard the disparities by giving all of them zero
deduction and indiscriminately impose on all alike the same tax rates on the basis of gross
income. There is ample justification then for the Batasang Pambansa to adopt the gross
system of income taxation to compensation income, while continuing the system of net
income taxation as regards professional and business income.
9. Nothing can be clearer, therefore, than that the petition is without merit, considering
the (1) lack of factual foundation to show the arbitrary character of the assailed
provision; 31 (2) the force of controlling doctrines on due process, equal protection, and
uniformity in taxation and (3) the reasonableness of the distinction between compensation
and taxable net income of professionals and businessman certainly not a suspect
classification,
WHEREFORE, the petition is dismissed. Costs against petitioner.

G.R. No. 163583

April 15, 2009

BRITISH AMERICAN TOBACCO, Petitioner,

vs.
JOSE ISIDRO N. CAMACHO, in his capacity as Secretary of the Department of
Finance and GUILLERMO L. PARAYNO, JR., in his capacity as Commissioner of the
Bureau of Internal Revenue, Respondents.
Philip Morris Philippines Manufacturing, Inc., fortune tobacco, corp., MIGHTY
CORPOR.A.TION, and JT InTERNATIONAL, S.A., Respondents-in-Intervention.
RESOLUTION
YNARES-SANTIAGO, J.:

On August 20, 2008, the Court rendered a Decision partially granting the petition in this
case, viz:
WHEREFORE, the petition is PARTIALLY GRANTED and the decision of the Regional Trial
Court of Makati, Branch 61, in Civil Case No. 03-1032, is AFFIRMED with MODIFICATION. As
modified, this Court declares that:
(1) Section 145 of the NIRC, as amended by Republic Act No. 9334, is
CONSTITUTIONAL; and that
(2) Section 4(B)(e)(c), 2nd paragraph of Revenue Regulations No. 1-97, as amended
by Section 2 of Revenue Regulations 9-2003, and Sections II(1)(b), II(4)(b), II(6),
II(7), III (Large Tax Payers Assistance Division II) II(b) of Revenue Memorandum
Order No. 6-2003, insofar as pertinent to cigarettes packed by machine, are INVALID
insofar as they grant the BIR the power to reclassify or update the classification of
new brands every two years or earlier.
SO ORDERED.
In its Motion for Reconsideration, petitioner insists that the assailed provisions (1) violate
the equal protection and uniformity of taxation clauses of the Constitution, (2) contravene
Section 19,1 Article XII of the Constitution on unfair competition, and (3) infringe the
constitutional provisions on regressive and inequitable taxation. Petitioner further argues
that assuming the assailed provisions are constitutional, petitioner is entitled to a
downward reclassification of Lucky Strike from the premium-priced to the high-priced tax
bracket.
The Court is not persuaded.
The assailed law does not violate the equal protection and uniformity of taxation clauses.
Petitioner argues that the classification freeze provision violates the equal protection and
uniformity of taxation clauses because Annex "D" brands are taxed based on their 1996
net retail prices while new brands are taxed based on their present day net retail prices.
Citing Ormoc Sugar Co. v. Treasurer of Ormoc City, 2 petitioner asserts that the assailed
provisions accord a special or privileged status to Annex "D" brands while at the same
time discriminate against other brands.
These contentions are without merit and a rehash of petitioners previous arguments
before this Court. As held in the assailed Decision, the instant case neither involves a
suspect classification nor impinges on a fundamental right. Consequently, the rational
basis test was properly applied to gauge the constitutionality of the assailed law in the
face of an equal protection challenge. It has been held that "in the areas of social and
economic policy, a statutory classification that neither proceeds along suspect lines nor
infringes constitutional rights must be upheld against equal protection challenge if there is
any reasonably conceivable state of facts that could provide a rational basis for the
classification."3 Under the rational basis test, it is sufficient that the legislative
classification is rationally related to achieving some legitimate State interest. As the Court
ruled in the assailed Decision, viz:

A legislative classification that is reasonable does not offend the constitutional guaranty of
the equal protection of the laws. The classification is considered valid and reasonable
provided that: (1) it rests on substantial distinctions; (2) it is germane to the purpose of
the law; (3) it applies, all things being equal, to both present and future conditions; and (4)
it applies equally to all those belonging to the same class.
The first, third and fourth requisites are satisfied. The classification freeze provision was
inserted in the law for reasons of practicality and expediency. That is, since a new brand
was not yet in existence at the time of the passage of RA 8240, then Congress needed a
uniform mechanism to fix the tax bracket of a new brand. The current net retail price,
similar to what was used to classify the brands under Annex "D" as of October 1, 1996,
was thus the logical and practical choice. Further, with the amendments introduced by RA
9334, the freezing of the tax classifications now expressly applies not just to Annex "D"
brands but to newer brands introduced after the effectivity of RA 8240 on January 1, 1997
and any new brand that will be introduced in the future. (However, as will be discussed
later, the intent to apply the freezing mechanism to newer brands was already in place
even prior to the amendments introduced by RA 9334 to RA 8240.) This does not explain,
however, why the classification is "frozen" after its determination based on current net
retail price and how this is germane to the purpose of the assailed law. An examination of
the legislative history of RA 8240 provides interesting answers to this question.
xxxx
From the foregoing, it is quite evident that the classification freeze provision could hardly
be considered arbitrary, or motivated by a hostile or oppressive attitude to unduly favor
older brands over newer brands. Congress was unequivocal in its unwillingness to
delegate the power to periodically adjust the excise tax rate and tax brackets as well as to
periodically resurvey and reclassify the cigarette brands based on the increase in the
consumer price index to the DOF and the BIR. Congress doubted the constitutionality of
such delegation of power, and likewise, considered the ethical implications thereof.
Curiously, the classification freeze provision was put in place of the periodic adjustment
and reclassification provision because of the belief that the latter would foster an anticompetitive atmosphere in the market. Yet, as it is, this same criticism is being foisted by
petitioner upon the classification freeze provision.
To our mind, the classification freeze provision was in the main the result of Congresss
earnest efforts to improve the efficiency and effectivity of the tax administration over sin
products while trying to balance the same with other State interests. In particular, the
questioned provision addressed Congresss administrative concerns regarding delegating
too much authority to the DOF and BIR as this will open the tax system to potential areas
for abuse and corruption. Congress may have reasonably conceived that a tax system
which would give the least amount of discretion to the tax implementers would address
the problems of tax avoidance and tax evasion.
To elaborate a little, Congress could have reasonably foreseen that, under the DOF
proposal and the Senate Version, the periodic reclassification of brands would tempt the
cigarette manufacturers to manipulate their price levels or bribe the tax implementers in
order to allow their brands to be classified at a lower tax bracket even if their net retail
prices have already migrated to a higher tax bracket after the adjustment of the tax

brackets to the increase in the consumer price index. Presumably, this could be done when
a resurvey and reclassification is forthcoming. As briefly touched upon in the
Congressional deliberations, the difference of the excise tax rate between the mediumpriced and the high-priced tax brackets under RA 8240, prior to its amendment, was
P3.36. For a moderately popular brand which sells around 100 million packs per year, this
easily translates to P336,000,000. The incentive for tax avoidance, if not outright tax
evasion, would clearly be present. Then again, the tax implementers may use the power to
periodically adjust the tax rate and reclassify the brands as a tool to unduly oppress the
taxpayer in order for the government to achieve its revenue targets for a given year.
Thus, Congress sought to, among others, simplify the whole tax system for sin products to
remove these potential areas of abuse and corruption from both the side of the taxpayer
and the government. Without doubt, the classification freeze provision was an integral part
of this overall plan. This is in line with one of the avowed objectives of the assailed law "to
simplify the tax administration and compliance with the tax laws that are about to unfold
in order to minimize losses arising from inefficiencies and tax avoidance scheme, if not
outright tax evasion." RA 9334 did not alter this classification freeze provision of RA 8240.
On the contrary, Congress affirmed this freezing mechanism by clarifying the wording of
the law. We can thus reasonably conclude, as the deliberations on RA 9334 readily show,
that the administrative concerns in tax administration, which moved Congress to enact the
classification freeze provision in RA 8240, were merely continued by RA 9334. Indeed,
administrative concerns may provide a legitimate, rational basis for legislative
classification. In the case at bar, these administrative concerns in the measurement and
collection of excise taxes on sin products are readily apparent as afore-discussed.
Aside from the major concern regarding the elimination of potential areas for abuse and
corruption from the tax administration of sin products, the legislative deliberations also
show that the classification freeze provision was intended to generate buoyant and stable
revenues for government. With the frozen tax classifications, the revenue inflow would
remain stable and the government would be able to predict with a greater degree of
certainty the amount of taxes that a cigarette manufacturer would pay given the trend in
its sales volume over time. The reason for this is that the previously classified cigarette
brands would be prevented from moving either upward or downward their tax brackets
despite the changes in their net retail prices in the future and, as a result, the amount of
taxes due from them would remain predictable. The classification freeze provision would,
thus, aid in the revenue planning of the government.
All in all, the classification freeze provision addressed Congresss administrative concerns
in the simplification of tax administration of sin products, elimination of potential areas for
abuse and corruption in tax collection, buoyant and stable revenue generation, and ease
of projection of revenues. Consequently, there can be no denial of the equal protection of
the laws since the rational-basis test is amply satisfied.
Moreover, petitioners contention that the assailed provisions violate the uniformity of
taxation clause is similarly unavailing. In Churchill v. Concepcion, 4 we explained that a tax
"is uniform when it operates with the same force and effect in every place where the
subject of it is found."5 It does not signify an intrinsic but simply a geographical
uniformity.6 A levy of tax is not unconstitutional because it is not intrinsically equal and

uniform in its operation.7The uniformity rule does not prohibit classification for purposes of
taxation.8 As ruled in Tan v. Del Rosario, Jr.: 9
Uniformity of taxation, like the kindred concept of equal protection, merely requires that all
subjects or objects of taxation, similarly situated, are to be treated alike both in privileges
and liabilities (citations omitted). Uniformity does not forfend classification as long as: (1)
the standards that are used therefor are substantial and not arbitrary, (2) the
categorization is germane to achieve the legislative purpose, (3) the law applies, all things
being equal, to both present and future conditions, and (4) the classification applies
equally well to all those belonging to the same class (citations omitted). 10
In the instant case, there is no question that the classification freeze provision meets the
geographical uniformity requirement because the assailed law applies to all cigarette
brands in the Philippines. And, for reasons already adverted to in our August 20, 2008
Decision, the above four-fold test has been met in the present case.
Petitioners reliance on Ormoc Sugar Co. is misplaced. In said case, the controverted
municipal ordinance specifically named and taxed only the Ormoc Sugar Company, and
excluded any subsequently established sugar central from its coverage. Thus, the
ordinance was found unconstitutional on equal protection grounds because its terms do
not apply to future conditions as well. This is not the case here. The classification freeze
provision uniformly applies to all cigarette brands whether existing or to be introduced in
the market at some future time. It does not purport to exempt any brand from its
operation nor single out a brand for the purpose of imposition of excise taxes.
At any rate, petitioners real disagreement lies with the legitimate State interests.
Although it concedes that the Court utilized the rationality test and that the classification
freeze provision was necessitated by several legitimate State interests, however, it refuses
to accept the justifications given by Congress for the classification freeze provision. As we
elucidated in our August 20, 2008 Decision, this line of argumentation revolves around the
wisdom and expediency of the assailed law which we cannot inquire into, much less
overrule. Equal protection is not a license for courts to judge the wisdom, fairness, or logic
of legislative choices.11 We reiterate, therefore, that petitioners remedy is with Congress
and not this Court.
The assailed provisions do not violate the constitutional prohibition on unfair competition.
Petitioner asserts that the Court erroneously applied the rational basis test allegedly
because this test does not apply in a constitutional challenge based on a violation of
Section 19, Article XII of the Constitution on unfair competition. Citing Tatad v. Secretary of
the Department of Energy,12 it argues that the classification freeze provision gives the
brands under Annex "D" a decisive edge because it constitutes a substantial barrier to the
entry of prospective players; that the Annex "D" provision is no different from the 4% tariff
differential which we invalidated in Tatad; that some of the new brands, like Astro,
Memphis, Capri, L&M, Bowling Green, Forbes, and Canon, which were introduced into the
market after the effectivity of the assailed law on January 1, 1997, were "killed" by Annex
"D" brands because the former brands were reclassified by the BIR to higher tax brackets;
that the finding that price is not the only factor in the market as there are other factors
like consumer preference, active ingredients, etc. is contrary to the evidence presented

and the deliberations in Congress; that the classification freeze provision will encourage
predatory pricing in contravention of the constitutional prohibition on unfair competition;
and that the cumulative effect of the operation of the classification freeze provision is to
perpetuate the oligopoly of intervenors Philip Morris and Fortune Tobacco in contravention
of the constitutional edict for the State to regulate or prohibit monopolies, and to disallow
combinations in restraint of trade and unfair competition.
The argument lacks merit. While previously arguing that the rational basis test was not
satisfied, petitioner now asserts that this test does not apply in this case and that the
proper matrix to evaluate the constitutionality of the assailed law is the prohibition on
unfair competition under Section 19, Article XII of the Constitution. It should be noted that
during the trial below, petitioner did not invoke said constitutional provision as it relied
solely on the alleged violation of the equal protection and uniformity of taxation clauses.
Well-settled is the rule that points of law, theories, issues and arguments not adequately
brought to the attention of the lower court will not be ordinarily considered by a reviewing
court as they cannot be raised for the first time on appeal. 13 At any rate, even if we were
to relax this rule, as previously stated, the evidence presented before the trial court is
insufficient to establish the alleged violation of the constitutional proscription against
unfair competition.
Indeed, in Tatad we ruled that a law which imposes substantial barriers to the entry and
exit of new players in our downstream oil industry may be struck down for being violative
of Section 19, Article XII of the Constitution. 14However, we went on to say in that case that
"if they are insignificant impediments, they need not be stricken down." 15 As we stated in
our August 20, 2008 Decision, petitioner failed to convincingly prove that there is a
substantial barrier to the entry of new brands in the cigarette market due to the
classification freeze provision. We further observed that several new brands were
introduced in the market after the assailed law went into effect thus negating petitioners
sweeping claim that the classification freeze provision is an insurmountable barrier to the
entry of new brands. We also noted that price is not the only factor affecting competition
in the market for there are other factors such as taste, brand loyalty, etc.
We see no reason to depart from these findings for the following reasons:
First, petitioner did not lay down the factual foundations, as supported by verifiable
documentary proof, which would establish, among others, the cigarette brands in
competition with each other; the current net retail prices of Annex "D" brands, as
determined through a market survey, to provide a sufficient point of comparison with
those covered by the BIRs market survey of new brands; and the causal connection with
as well as the extent of the impact on the competition in the cigarette market of the
classification freeze provision. Other than petitioners self-serving allegations and
testimonial evidence, no adequate documentary evidence was presented to substantiate
its claims. Absent ample documentary proof, we cannot accept petitioners claim that the
classification freeze provision is an insurmountable barrier to the entry of new players.
Second, we cannot lend credence to petitioners claim that it cannot produce cigarettes
that can compete with Marlboro and Philip Morris in the high-priced tax bracket. Except for
its self-serving testimonial evidence, no sufficient documentary evidence was presented to
substantiate this claim. The current net retail price, which is the basis for determining the

tax bracket of a cigarette brand, more or less consists of the costs of raw materials, labor,
advertising and profit margin. To a large extent, these factors are controllable by the
manufacturer, as such, the decision to enter which tax bracket will depend on the pricing
strategy adopted by the individual manufacturer. The same holds true for its claims that
other new brands, like Astro, Memphis, Capri, L&M, Bowling Green, Forbes, and Canon,
were "killed" by Annex "D" brands due to the effects of the operation of the classification
freeze provision over time. The evidence that petitioner presented before the trial court
failed to substantiate the basis for these claims.
Essentially, petitioner would want us to accept its conclusions of law without first laying
down the factual foundations of its arguments. This Court, which is not a trier of facts,
cannot take judicial notice of the factual premises of these arguments as petitioner now
seems to suggest. The evidence should have been presented before the trial court to allow
it to examine and determine for itself whether such factual premises, as supported by
sufficient documentary evidence, provide reasonable basis for petitioners conclusion that
there arose an unconstitutional unfair competition due to the operation of the
classification freeze provision. Petitioner should be reminded that it appealed this case
from the adverse ruling of the trial court directly to this Court on pure questions of law
instead of resorting to the Court of Appeals.
Third, Tatad is not applicable to the instant case. In Tatad, we found that the 4% tariff
differential between imported crude oil and imported refined petroleum products erects a
high barrier to the entry of new players because (1) it imposes an undue burden on new
players to spend billions of pesos to build refineries in order to compete with the old
players, and (2) new players, who opt not to build refineries, suffer from the huge
disadvantage of increasing their product cost by 4%. 16 The tariff was imposed on the raw
materials uniformly used by the players in the oil industry. Thus, the adverse effect on
competition arising from this discriminatory treatment was readily apparent. In contrast,
the excise tax under the assailed law is imposed based on the current net retail price of a
cigarette brand. As previously explained, the current net retail price is determined by the
pricing strategy of the manufacturer. This Court cannot simply speculate that the reason
why a new brand cannot enter a specific tax bracket and compete with the brands therein
was because of the classification freeze provision, rather than the manufacturers own
pricing decision or some other factor solely attributable to the manufacturer. Again, the
burden of proof in this regard is on petitioner which it failed to muster.
Fourth, the finding in our August 20, 2008 Decision that price is not the only factor which
affects consumer behavior in the cigarette market is based on petitioners own evidence.
On cross-examination, petitioners witness admitted that notwithstanding the change in
price, a cigarette smoker may prefer the old brand because of its addictive
formulation.17 As a result, even if we were to assume that the classification freeze
provision distorts the pricing scheme of the market players, it is not clear whether a
substantial barrier to the entry of new players would thereby be created because of these
other factors affecting consumer behavior.
Last, the claim that the assailed provisions encourage predatory pricing was never raised
nor substantiated before the trial court. It is merely an afterthought and cannot be given
weight.

In sum, the totality of the evidence presented by petitioner before the trial court failed to
convincingly establish the alleged violation of the constitutional prohibition on unfair
competition. It is a basic postulate that the one who challenges the constitutionality of a
law carries the heavy burden of proof for laws enjoy a strong presumption of
constitutionality as it is an act of a co-equal branch of government. Petitioner failed to
carry this burden.
The assailed law does not transgress the constitutional provisions on regressive and
inequitable taxation.
Petitioner argues that the classification freeze provision is a form of regressive and
inequitable tax system which is proscribed under Article VI, Section 28(1) 18 of the
Constitution. It claims that people in equal positions should be treated alike. The use of
different tax bases for brands under Annex "D" vis--vis new brands is discriminatory, and
thus, iniquitous. Petitioner further posits that the classification freeze provision is
regressive in character. It asserts that the harmonization of revenue flow projections and
ease of tax administration cannot override this constitutional command.
We note that the points raised by petitioner with respect to alleged inequitable taxation
perpetuated by the classification freeze provision are a mere reformulation of its equal
protection challenge. As stated earlier, the assailed provisions do not infringe the equal
protection clause because the four-fold test is satisfied. In particular, the classification
freeze provision has been found to rationally further legitimate State interests consistent
with rationality review. Petitioners repackaged argument has, therefore, no merit.
Anent the issue of regressivity, it may be conceded that the assailed law imposes an
excise tax on cigarettes which is a form of indirect tax, and thus, regressive in character.
While there was an attempt to make the imposition of the excise tax more equitable by
creating a four-tiered taxation system where higher priced cigarettes are taxed at a higher
rate, still, every consumer, whether rich or poor, of a cigarette brand within a specific tax
bracket pays the same tax rate. To this extent, the tax does not take into account the
persons ability to pay. Nevertheless, this does not mean that the assailed law may be
declared unconstitutional for being regressive in character because the Constitution does
not prohibit the imposition of indirect taxes but merely provides that Congress shall evolve
a progressive system of taxation. As we explained in Tolentino v. Secretary of
Finance:191avvphi1.zw+
[R]egressivity is not a negative standard for courts to enforce. What Congress is required
by the Constitution to do is to "evolve a progressive system of taxation." This is a directive
to Congress, just like the directive to it to give priority to the enactment of laws for the
enhancement of human dignity and the reduction of social, economic and political
inequalities [Art. XIII, Section 1] or for the promotion of the right to "quality education"
[Art. XIV, Section 1]. These provisions are put in the Constitution as moral incentives to
legislation, not as judicially enforceable rights. 20
Petitioner is not entitled to a downward reclassification of Lucky Strike.
Petitioner alleges that assuming the assailed law is constitutional, its Lucky Strike brand
should be reclassified from the premium-priced to the high-priced tax bracket. Relying on

BIR Ruling No. 018-2001 dated May 10, 2001, it claims that it timely sought redress from
the BIR to have the market survey conducted within three months from product launch, as
provided for under Section 4(B)21 of Revenue Regulations No. 1-97, in order to determine
the actual current net retail price of Lucky Strike, and thus, fix its tax classification.
Further, the upward reclassification of Lucky Strike amounts to deprivation of property
right without due process of law. The conduct of the market survey after two years from
product launch constitutes gross neglect on the part of the BIR. Consequently, for failure of
the BIR to conduct a timely market survey, Lucky Strikes classification based on its
suggested gross retail price should be deemed its official tax classification. Finally,
petitioner asserts that had the market survey been timely conducted sometime in 2001,
the current net retail price of Lucky Strike would have been found to be under the highpriced tax bracket.
These contentions are untenable and misleading.
First, BIR Ruling No. 018-2001 was requested by petitioner for the purpose of fixing Lucky
Strikes initial tax classification based on its suggested gross retail price relative to its
planned introduction of Lucky Strike in the market sometime in 2001 and not for the
conduct of the market survey within three months from product launch. In fact, the said
Ruling contained an express reservation that the tax classification of Lucky Strike set
therein "is without prejudice, however, to the subsequent conduct of a survey x x x in
order to determine if the actual gross retail price thereof is consistent with [petitioners]
suggested gross retail price." 22 In short, petitioner acknowledged that the initial tax
classification of Lucky Strike may be modified depending on the outcome of the survey
which will determine the actual current net retail price of Lucky Strike in the market.
Second, there was no upward reclassification of Lucky Strike because it was taxed based
on its suggested gross retail price from the time of its introduction in the market in 2001
until the BIR market survey in 2003. We reiterate that Lucky Strikes actual current net
retail price was surveyed for the first time in 2003 and was found to be fromP10.34
to P11.53 per pack, which is within the premium-priced tax bracket. There was, thus, no
prohibited upward reclassification of Lucky Strike by the BIR based on its current net retail
price.
Third, the failure of the BIR to conduct the market survey within the three-month period
under the revenue regulations then in force can in no way make the initial tax
classification of Lucky Strike based on its suggested gross retail price permanent.
Otherwise, this would contravene the clear mandate of the law which provides that the
basis for the tax classification of a new brand shall be the current net retail price and not
the suggested gross retail price. It is a basic principle of law that the State cannot be
estopped by the mistakes of its agents.
Last, the issue of timeliness of the market survey was never raised before the trial court
because petitioners theory of the case was wholly anchored on the alleged
unconstitutionality of the classification freeze provision. As a consequence, no
documentary evidence as to the actual net retail price of Lucky Strike in 2001, based on a
market survey at least comparable to the one mandated by law, was presented before the
trial court. Evidently, it cannot be assumed that had the BIR conducted the market survey
within three months from its product launch sometime in 2001, Lucky Strike would have

been found to fall under the high-priced tax bracket and not the premium-priced tax
bracket. To so hold would run roughshod over the States right to due process. Verily,
petitioner prosecuted its case before the trial court solely on the theory that the assailed
law is unconstitutional instead of merely challenging the timeliness of the market survey.
The rule is that a party is bound by the theory he adopts and by the cause of action he
stands on. He cannot be permitted after having lost thereon to repudiate his theory and
cause of action, and thereafter, adopt another and seek to re-litigate the matter anew
either in the same forum or on appeal. 23 Having pursued one theory and lost thereon,
petitioner may no longer pursue another inconsistent theory without thereby trifling with
court processes and burdening the courts with endless litigation.
WHEREFORE, the motion for reconsideration is DENIED.
SO ORDERED.

G.R. No. 168056 September 1, 2005

ABAKADA GURO PARTY LIST (Formerly AASJAS) OFFICERS SAMSON S.
ALCANTARA and ED VINCENT S. ALBANO, Petitioners,
vs.
THE HONORABLE EXECUTIVE SECRETARY EDUARDO ERMITA; HONORABLE
SECRETARY OF THE DEPARTMENT OF FINANCE CESAR PURISIMA; and
HONORABLE COMMISSIONER OF INTERNAL REVENUE GUILLERMO PARAYNO,
JR., Respondent.
x-------------------------x
G.R. No. 168207
AQUILINO Q. PIMENTEL, JR., LUISA P. EJERCITO-ESTRADA, JINGGOY E. ESTRADA, PANFILO M.
LACSON, ALFREDO S. LIM, JAMBY A.S. MADRIGAL, AND SERGIO R. OSMEA III, Petitioners,
vs.
EXECUTIVE SECRETARY EDUARDO R. ERMITA, CESAR V. PURISIMA, SECRETARY OF
FINANCE, GUILLERMO L. PARAYNO, JR., COMMISSIONER OF THE BUREAU OF
INTERNAL REVENUE, Respondent.
x-------------------------x
G.R. No. 168461
ASSOCIATION OF PILIPINAS SHELL DEALERS, INC. represented by its President, ROSARIO
ANTONIO; PETRON DEALERS ASSOCIATION represented by its President, RUTH E. BARBIBI;
ASSOCIATION OF CALTEX DEALERS OF THE PHILIPPINES represented by its President,

MERCEDITAS A. GARCIA; ROSARIO ANTONIO doing business under the name and style of
"ANB NORTH SHELL SERVICE STATION"; LOURDES MARTINEZ doing business under the
name and style of "SHELL GATE N. DOMINGO"; BETHZAIDA TAN doing business under the
name and style of "ADVANCE SHELL STATION"; REYNALDO P. MONTOYA doing business
under the name and style of "NEW LAMUAN SHELL SERVICE STATION"; EFREN SOTTO doing
business under the name and style of "RED FIELD SHELL SERVICE STATION"; DONICA
CORPORATION represented by its President, DESI TOMACRUZ; RUTH E. MARBIBI doing
business under the name and style of "R&R PETRON STATION"; PETER M. UNGSON doing
business under the name and style of "CLASSIC STAR GASOLINE SERVICE STATION";
MARIAN SHEILA A. LEE doing business under the name and style of "NTE GASOLINE &
SERVICE STATION"; JULIAN CESAR P. POSADAS doing business under the name and style of
"STARCARGA ENTERPRISES"; ADORACION MAEBO doing business under the name and
style of "CMA MOTORISTS CENTER"; SUSAN M. ENTRATA doing business under the name
and style of "LEONAS GASOLINE STATION and SERVICE CENTER"; CARMELITA BALDONADO
doing business under the name and style of "FIRST CHOICE SERVICE CENTER";
MERCEDITAS A. GARCIA doing business under the name and style of "LORPED SERVICE
CENTER"; RHEAMAR A. RAMOS doing business under the name and style of "RJRAM PTT
GAS STATION"; MA. ISABEL VIOLAGO doing business under the name and style of
"VIOLAGO-PTT SERVICE CENTER"; MOTORISTS HEART CORPORATION represented by its
Vice-President for Operations, JOSELITO F. FLORDELIZA; MOTORISTS HARVARD
CORPORATION represented by its Vice-President for Operations, JOSELITO F. FLORDELIZA;
MOTORISTS HERITAGE CORPORATION represented by its Vice-President for Operations,
JOSELITO F. FLORDELIZA; PHILIPPINE STANDARD OIL CORPORATION represented by its VicePresident for Operations, JOSELITO F. FLORDELIZA; ROMEO MANUEL doing business under
the name and style of "ROMMAN GASOLINE STATION"; ANTHONY ALBERT CRUZ III doing
business under the name and style of "TRUE SERVICE STATION", Petitioners,
vs.
CESAR V. PURISIMA, in his capacity as Secretary of the Department of Finance
and GUILLERMO L. PARAYNO, JR., in his capacity as Commissioner of Internal
Revenue, Respondent.
x-------------------------x
G.R. No. 168463
FRANCIS JOSEPH G. ESCUDERO, VINCENT CRISOLOGO, EMMANUEL JOEL J. VILLANUEVA,
RODOLFO G. PLAZA, DARLENE ANTONINO-CUSTODIO, OSCAR G. MALAPITAN, BENJAMIN C.
AGARAO, JR. JUAN EDGARDO M. ANGARA, JUSTIN MARC SB. CHIPECO, FLORENCIO G. NOEL,
MUJIV S. HATAMAN, RENATO B. MAGTUBO, JOSEPH A. SANTIAGO, TEOFISTO DL. GUINGONA
III, RUY ELIAS C. LOPEZ, RODOLFO Q. AGBAYANI and TEODORO A. CASIO, Petitioners,
vs.
CESAR V. PURISIMA, in his capacity as Secretary of Finance, GUILLERMO L.
PARAYNO, JR., in his capacity as Commissioner of Internal Revenue, and
EDUARDO R. ERMITA, in his capacity as Executive Secretary, Respondent.
x-------------------------x
G.R. No. 168730
BATAAN GOVERNOR ENRIQUE T. GARCIA, JR. Petitioner,
vs.
HON. EDUARDO R. ERMITA, in his capacity as the Executive Secretary; HON. MARGARITO
TEVES, in his capacity as Secretary of Finance; HON. JOSE MARIO BUNAG, in his capacity
as the OIC Commissioner of the Bureau of Internal Revenue; and HON. ALEXANDER
AREVALO, in his capacity as the OIC Commissioner of the Bureau of Customs, Respondent.

DECISION
AUSTRIA-MARTINEZ, J.:
The expenses of government, having for their object the interest of all, should be borne by
everyone, and the more man enjoys the advantages of society, the more he ought to hold
himself honored in contributing to those expenses.
-Anne Robert Jacques Turgot (1727-1781)
French statesman and economist
Mounting budget deficit, revenue generation, inadequate fiscal allocation for education,
increased emoluments for health workers, and wider coverage for full value-added tax
benefits these are the reasons why Republic Act No. 9337 (R.A. No. 9337) 1 was enacted.
Reasons, the wisdom of which, the Court even with its extensive constitutional power of
review, cannot probe. The petitioners in these cases, however, question not only the
wisdom of the law, but also perceived constitutional infirmities in its passage.
Every law enjoys in its favor the presumption of constitutionality. Their arguments
notwithstanding, petitioners failed to justify their call for the invalidity of the law. Hence,
R.A. No. 9337 is not unconstitutional.
LEGISLATIVE HISTORY
R.A. No. 9337 is a consolidation of three legislative bills namely, House Bill Nos. 3555 and
3705, and Senate Bill No. 1950.
House Bill No. 35552 was introduced on first reading on January 7, 2005. The House
Committee on Ways and Means approved the bill, in substitution of House Bill No. 1468,
which Representative (Rep.) Eric D. Singson introduced on August 8, 2004. The President
certified the bill on January 7, 2005 for immediate enactment. On January 27, 2005, the
House of Representatives approved the bill on second and third reading.
House Bill No. 37053 on the other hand, substituted House Bill No. 3105 introduced by
Rep. Salacnib F. Baterina, and House Bill No. 3381 introduced by Rep. Jacinto V. Paras. Its
"mother bill" is House Bill No. 3555. The House Committee on Ways and Means approved
the bill on February 2, 2005. The President also certified it as urgent on February 8, 2005.
The House of Representatives approved the bill on second and third reading on February
28, 2005.
Meanwhile, the Senate Committee on Ways and Means approved Senate Bill No.
19504 on March 7, 2005, "in substitution of Senate Bill Nos. 1337, 1838 and 1873, taking
into consideration House Bill Nos. 3555 and 3705." Senator Ralph G. Recto sponsored
Senate Bill No. 1337, while Senate Bill Nos. 1838 and 1873 were both sponsored by Sens.
Franklin M. Drilon, Juan M. Flavier and Francis N. Pangilinan. The President certified the bill
on March 11, 2005, and was approved by the Senate on second and third reading on April
13, 2005.
On the same date, April 13, 2005, the Senate agreed to the request of the House of
Representatives for a committee conference on the disagreeing provisions of the proposed
bills.
Before long, the Conference Committee on the Disagreeing Provisions of House Bill No.
3555, House Bill No. 3705, and Senate Bill No. 1950, "after having met and discussed in

full free and conference," recommended the approval of its report, which the Senate did
on May 10, 2005, and with the House of Representatives agreeing thereto the next day,
May 11, 2005.
On May 23, 2005, the enrolled copy of the consolidated House and Senate version was
transmitted to the President, who signed the same into law on May 24, 2005. Thus, came
R.A. No. 9337.
July 1, 2005 is the effectivity date of R.A. No. 9337. 5 When said date came, the Court
issued a temporary restraining order, effective immediately and continuing until further
orders, enjoining respondents from enforcing and implementing the law.
Oral arguments were held on July 14, 2005. Significantly, during the hearing, the Court
speaking through Mr. Justice Artemio V. Panganiban, voiced the rationale for its issuance of
the temporary restraining order on July 1, 2005, to wit:
J. PANGANIBAN : . . . But before I go into the details of your presentation, let me just tell
you a little background. You know when the law took effect on July 1, 2005, the Court
issued a TRO at about 5 oclock in the afternoon. But before that, there was a lot of
complaints aired on television and on radio. Some people in a gas station were
complaining that the gas prices went up by 10%. Some people were complaining that their
electric bill will go up by 10%. Other times people riding in domestic air carrier were
complaining that the prices that theyll have to pay would have to go up by 10%. While all
that was being aired, per your presentation and per our own understanding of the law,
thats not true. Its not true that the e-vat law necessarily increased prices by 10%
uniformly isnt it?
ATTY. BANIQUED : No, Your Honor.
J. PANGANIBAN : It is not?
ATTY. BANIQUED : Its not, because, Your Honor, there is an Executive Order that granted
the Petroleum companies some subsidy . . . interrupted
J. PANGANIBAN : Thats correct . . .
ATTY. BANIQUED : . . . and therefore that was meant to temper the impact . . . interrupted
J. PANGANIBAN : . . . mitigating measures . . .
ATTY. BANIQUED : Yes, Your Honor.
J. PANGANIBAN : As a matter of fact a part of the mitigating measures would be the
elimination of the Excise Tax and the import duties. That is why, it is not correct to say that
the VAT as to petroleum dealers increased prices by 10%.
ATTY. BANIQUED : Yes, Your Honor.
J. PANGANIBAN : And therefore, there is no justification for increasing the retail price by
10% to cover the E-Vat tax. If you consider the excise tax and the import duties, the Net
Tax would probably be in the neighborhood of 7%? We are not going into exact figures I am
just trying to deliver a point that different industries, different products, different services
are hit differently. So its not correct to say that all prices must go up by 10%.

ATTY. BANIQUED : Youre right, Your Honor.

J. PANGANIBAN : Now. For instance, Domestic Airline companies, Mr. Counsel, are at
present imposed a Sales Tax of 3%. When this E-Vat law took effect the Sales Tax was also
removed as a mitigating measure. So, therefore, there is no justification to increase the
fares by 10% at best 7%, correct?
ATTY. BANIQUED : I guess so, Your Honor, yes.
J. PANGANIBAN : There are other products that the people were complaining on that first
day, were being increased arbitrarily by 10%. And thats one reason among many others
this Court had to issue TRO because of the confusion in the implementation. Thats why
we added as an issue in this case, even if its tangentially taken up by the pleadings of the
parties, the confusion in the implementation of the E-vat. Our people were subjected to
the mercy of that confusion of an across the board increase of 10%, which you yourself
now admit and I think even the Government will admit is incorrect. In some cases, it
should be 3% only, in some cases it should be 6% depending on these mitigating
measures and the location and situation of each product, of each service, of each
company, isnt it?
ATTY. BANIQUED : Yes, Your Honor.
J. PANGANIBAN : Alright. So thats one reason why we had to issue a TRO pending the
clarification of all these and we wish the government will take time to clarify all these by
means of a more detailed implementing rules, in case the law is upheld by this Court. . . . 6
The Court also directed the parties to file their respective Memoranda.
G.R. No. 168056
Before R.A. No. 9337 took effect, petitioners ABAKADA GURO Party List, et al., filed a
petition for prohibition on May 27, 2005. They question the constitutionality of Sections 4,
5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108, respectively, of the
National Internal Revenue Code (NIRC). Section 4 imposes a 10% VAT on sale of goods and
properties, Section 5 imposes a 10% VAT on importation of goods, and Section 6 imposes a
10% VAT on sale of services and use or lease of properties. These questioned provisions
contain a uniform provisoauthorizing the President, upon recommendation of the Secretary
of Finance, to raise the VAT rate to 12%, effective January 1, 2006, after any of the
following conditions have been satisfied, to wit:
. . . That the President, upon the recommendation of the Secretary of Finance, shall,
effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after
any of the following conditions has been satisfied:
(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the
previous year exceeds two and four-fifth percent (2 4/5%); or
(ii) National government deficit as a percentage of GDP of the previous year exceeds one
and one-half percent (1 %).
Petitioners argue that the law is unconstitutional, as it constitutes abandonment by
Congress of its exclusive authority to fix the rate of taxes under Article VI, Section 28(2) of
the 1987 Philippine Constitution.
G.R. No. 168207

On June 9, 2005, Sen. Aquilino Q. Pimentel, Jr., et al., filed a petition for certiorari likewise
assailing the constitutionality of Sections 4, 5 and 6 of R.A. No. 9337.
Aside from questioning the so-called stand-by authority of the President to increase the
VAT rate to 12%, on the ground that it amounts to an undue delegation of legislative
power, petitioners also contend that the increase in the VAT rate to 12% contingent on any
of the two conditions being satisfied violates the due process clause embodied in Article
III, Section 1 of the Constitution, as it imposes an unfair and additional tax burden on the
people, in that: (1) the 12% increase is ambiguous because it does not state if the rate
would be returned to the original 10% if the conditions are no longer satisfied; (2) the rate
is unfair and unreasonable, as the people are unsure of the applicable VAT rate from year
to year; and (3) the increase in the VAT rate, which is supposed to be an incentive to the
President to raise the VAT collection to at least 2 4/5 of the GDP of the previous year, should
only be based on fiscal adequacy.
Petitioners further claim that the inclusion of a stand-by authority granted to the President
by the Bicameral Conference Committee is a violation of the "no-amendment rule" upon
last reading of a bill laid down in Article VI, Section 26(2) of the Constitution.
G.R. No. 168461
Thereafter, a petition for prohibition was filed on June 29, 2005, by the Association
of Pilipinas Shell Dealers, Inc.,et al., assailing the following provisions of R.A. No. 9337:
1) Section 8, amending Section 110 (A)(2) of the NIRC, requiring that the input tax on
depreciable goods shall be amortized over a 60-month period, if the acquisition, excluding
the VAT components, exceeds One Million Pesos (P1, 000,000.00);
2) Section 8, amending Section 110 (B) of the NIRC, imposing a 70% limit on the amount
of input tax to be credited against the output tax; and
3) Section 12, amending Section 114 (c) of the NIRC, authorizing the Government or any of
its political subdivisions, instrumentalities or agencies, including GOCCs, to deduct a 5%
final withholding tax on gross payments of goods and services, which are subject to 10%
VAT under Sections 106 (sale of goods and properties) and 108 (sale of services and use or
lease of properties) of the NIRC.
Petitioners contend that these provisions are unconstitutional for being arbitrary,
oppressive, excessive, and confiscatory.
Petitioners argument is premised on the constitutional right of non-deprivation of life,
liberty or property without due process of law under Article III, Section 1 of the
Constitution. According to petitioners, the contested sections impose limitations on the
amount of input tax that may be claimed. Petitioners also argue that the input tax
partakes the nature of a property that may not be confiscated, appropriated, or limited
without due process of law. Petitioners further contend that like any other property or
property right, the input tax credit may be transferred or disposed of, and that by limiting
the same, the government gets to tax a profit or value-added even if there is no profit or
value-added.
Petitioners also believe that these provisions violate the constitutional guarantee of equal
protection of the law under Article III, Section 1 of the Constitution, as the limitation on the
creditable input tax if: (1) the entity has a high ratio of input tax; or (2) invests in capital
equipment; or (3) has several transactions with the government, is not based on real and
substantial differences to meet a valid classification.

Lastly, petitioners contend that the 70% limit is anything but progressive, violative of
Article VI, Section 28(1) of the Constitution, and that it is the smaller businesses with
higher input tax to output tax ratio that will suffer the consequences thereof for it wipes
out whatever meager margins the petitioners make.
G.R. No. 168463
Several members of the House of Representatives led by Rep. Francis Joseph G. Escudero
filed this petition forcertiorari on June 30, 2005. They question the constitutionality of R.A.
No. 9337 on the following grounds:
1) Sections 4, 5, and 6 of R.A. No. 9337 constitute an undue delegation of legislative
power, in violation of Article VI, Section 28(2) of the Constitution;
2) The Bicameral Conference Committee acted without jurisdiction in deleting the no pass
on provisions present in Senate Bill No. 1950 and House Bill No. 3705; and
3) Insertion by the Bicameral Conference Committee of Sections 27, 28, 34, 116, 117, 119,
121, 125,7 148, 151, 236, 237 and 288, which were present in Senate Bill No. 1950,
violates Article VI, Section 24(1) of the Constitution, which provides that all appropriation,
revenue or tariff bills shall originate exclusively in the House of Representatives
G.R. No. 168730
On the eleventh hour, Governor Enrique T. Garcia filed a petition for certiorari and
prohibition on July 20, 2005, alleging unconstitutionality of the law on the ground that the
limitation on the creditable input tax in effect allows VAT-registered establishments to
retain a portion of the taxes they collect, thus violating the principle that tax collection and
revenue should be solely allocated for public purposes and expenditures. Petitioner Garcia
further claims that allowing these establishments to pass on the tax to the consumers is
inequitable, in violation of Article VI, Section 28(1) of the Constitution.
RESPONDENTS COMMENT
The Office of the Solicitor General (OSG) filed a Comment in behalf of respondents.
Preliminarily, respondents contend that R.A. No. 9337 enjoys the presumption of
constitutionality and petitioners failed to cast doubt on its validity.
Relying on the case of Tolentino vs. Secretary of Finance, 235 SCRA
630 (1994), respondents argue that the procedural issues raised by petitioners, i.e.,
legality of the bicameral proceedings, exclusive origination of revenue measures and the
power of the Senate concomitant thereto, have already been settled. With regard to the
issue of undue delegation of legislative power to the President, respondents contend that
the law is complete and leaves no discretion to the President but to increase the rate to
12% once any of the two conditions provided therein arise.
Respondents also refute petitioners argument that the increase to 12%, as well as the
70% limitation on the creditable input tax, the 60-month amortization on the purchase or
importation of capital goods exceedingP1,000,000.00, and the 5% final withholding tax by
government agencies, is arbitrary, oppressive, and confiscatory, and that it violates the
constitutional principle on progressive taxation, among others.
Finally, respondents manifest that R.A. No. 9337 is the anchor of the governments fiscal
reform agenda. A reform in the value-added system of taxation is the core revenue

measure that will tilt the balance towards a sustainable macroeconomic environment
necessary for economic growth.
ISSUES
The Court defined the issues, as follows:
PROCEDURAL ISSUE
Whether R.A. No. 9337 violates the following provisions of the Constitution:
a. Article VI, Section 24, and
b. Article VI, Section 26(2)
SUBSTANTIVE ISSUES
1. Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108 of
the NIRC, violate the following provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article VI, Section 28(2)
2. Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B) of the
NIRC; and Section 12 of R.A. No. 9337, amending Section 114(C) of the NIRC, violate the
following provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article III, Section 1
RULING OF THE COURT
As a prelude, the Court deems it apt to restate the general principles and concepts of
value-added tax (VAT), as the confusion and inevitably, litigation, breeds from a fallacious
notion of its nature.
The VAT is a tax on spending or consumption. It is levied on the sale, barter, exchange or
lease of goods or properties and services. 8 Being an indirect tax on expenditure, the seller
of goods or services may pass on the amount of tax paid to the buyer, 9 with the seller
acting merely as a tax collector. 10 The burden of VAT is intended to fall on the immediate
buyers and ultimately, the end-consumers.
In contrast, a direct tax is a tax for which a taxpayer is directly liable on the transaction or
business it engages in, without transferring the burden to someone else. 11 Examples are
individual and corporate income taxes, transfer taxes, and residence taxes. 12
In the Philippines, the value-added system of sales taxation has long been in existence,
albeit in a different mode. Prior to 1978, the system was a single-stage tax computed
under the "cost deduction method" and was payable only by the original sellers. The
single-stage system was subsequently modified, and a mixture of the "cost deduction
method" and "tax credit method" was used to determine the value-added tax

payable.13 Under the "tax credit method," an entity can credit against or subtract from the
VAT charged on its sales or outputs the VAT paid on its purchases, inputs and imports. 14
It was only in 1987, when President Corazon C. Aquino issued Executive Order No. 273,
that the VAT system was rationalized by imposing a multi-stage tax rate of 0% or 10% on
all sales using the "tax credit method." 15
E.O. No. 273 was followed by R.A. No. 7716 or the Expanded VAT Law, 16 R.A. No. 8241 or
the Improved VAT Law,17 R.A. No. 8424 or the Tax Reform Act of 1997, 18 and finally, the
presently beleaguered R.A. No. 9337, also referred to by respondents as the VAT Reform
Act.
The Court will now discuss the issues in logical sequence.
PROCEDURAL ISSUE
I.
Whether R.A. No. 9337 violates the following provisions of the Constitution:
a. Article VI, Section 24, and
b. Article VI, Section 26(2)
A. The Bicameral Conference Committee
Petitioners Escudero, et al., and Pimentel, et al., allege that the Bicameral Conference
Committee exceeded its authority by:
1) Inserting the stand-by authority in favor of the President in Sections 4, 5, and 6 of R.A.
No. 9337;
2) Deleting entirely the no pass-on provisions found in both the House and Senate bills;
3) Inserting the provision imposing a 70% limit on the amount of input tax to be credited
against the output tax; and
4) Including the amendments introduced only by Senate Bill No. 1950 regarding other
kinds of taxes in addition to the value-added tax.
Petitioners now beseech the Court to define the powers of the Bicameral Conference
Committee.
It should be borne in mind that the power of internal regulation and discipline are intrinsic
in any legislative body for, as unerringly elucidated by Justice Story, "[i]f the power did
not exist, it would be utterly impracticable to transact the business of the
nation, either at all, or at least with decency, deliberation, and order."19Thus,
Article VI, Section 16 (3) of the Constitution provides that "each House may determine the
rules of its proceedings." Pursuant to this inherent constitutional power to promulgate and
implement its own rules of procedure, the respective rules of each house of Congress
provided for the creation of a Bicameral Conference Committee.
Thus, Rule XIV, Sections 88 and 89 of the Rules of House of Representatives provides as
follows:

Sec. 88. Conference Committee. In the event that the House does not agree with the
Senate on the amendment to any bill or joint resolution, the differences may be settled by
the conference committees of both chambers.
In resolving the differences with the Senate, the House panel shall, as much as possible,
adhere to and support the House Bill. If the differences with the Senate are so substantial
that they materially impair the House Bill, the panel shall report such fact to the House for
the latters appropriate action.
Sec. 89. Conference Committee Reports. . . . Each report shall contain a detailed,
sufficiently explicit statement of the changes in or amendments to the subject measure.
...
The Chairman of the House panel may be interpellated on the Conference Committee
Report prior to the voting thereon. The House shall vote on the Conference Committee
Report in the same manner and procedure as it votes on a bill on third and final reading.
Rule XII, Section 35 of the Rules of the Senate states:
Sec. 35. In the event that the Senate does not agree with the House of Representatives on
the provision of any bill or joint resolution, the differences shall be settled by a conference
committee of both Houses which shall meet within ten (10) days after their composition.
The President shall designate the members of the Senate Panel in the conference
committee with the approval of the Senate.
Each Conference Committee Report shall contain a detailed and sufficiently explicit
statement of the changes in, or amendments to the subject measure, and shall be signed
by a majority of the members of each House panel, voting separately.
A comparative presentation of the conflicting House and Senate provisions and a
reconciled version thereof with the explanatory statement of the conference committee
shall be attached to the report.
...
The creation of such conference committee was apparently in response to a problem, not
addressed by any constitutional provision, where the two houses of Congress find
themselves in disagreement over changes or amendments introduced by the other house
in a legislative bill. Given that one of the most basic powers of the legislative branch is to
formulate and implement its own rules of proceedings and to discipline its members, may
the Court then delve into the details of how Congress complies with its internal rules or
how it conducts its business of passing legislation? Note that in the present petitions, the
issue is not whether provisions of the rules of both houses creating the bicameral
conference committee are unconstitutional, but whether the bicameral conference
committee has strictly complied with the rules of both houses, thereby
remaining within the jurisdiction conferred upon it by Congress.
In the recent case of Farias vs. The Executive Secretary,20 the Court En
Banc, unanimously reiterated and emphasized its adherence to the "enrolled bill
doctrine," thus, declining therein petitioners plea for the Court to go behind the enrolled
copy of the bill. Assailed in said case was Congresss creation of two sets of bicameral
conference committees, the lack of records of said committees proceedings, the alleged
violation of said committees of the rules of both houses, and the disappearance or deletion
of one of the provisions in the compromise bill submitted by the bicameral conference

committee. It was argued that such irregularities in the passage of the law nullified R.A.
No. 9006, or the Fair Election Act.
Striking down such argument, the Court held thus:
Under the "enrolled bill doctrine," the signing of a bill by the Speaker of the House and the
Senate President and the certification of the Secretaries of both Houses of Congress that it
was passed are conclusive of its due enactment. A review of cases reveals the Courts
consistent adherence to the rule. The Court finds no reason to deviate from the
salutary rule in this case where the irregularities alleged by the petitioners
mostly involved the internal rules of Congress, e.g., creation of the 2nd or
3rd Bicameral Conference Committee by the House. This Court is not the proper
forum for the enforcement of these internal rules of Congress, whether House or
Senate. Parliamentary rules are merely procedural and with their observance
the courts have no concern. Whatever doubts there may be as to the formal
validity of Rep. Act No. 9006 must be resolved in its favor. The Court reiterates its
ruling in Arroyo vs. De Venecia, viz.:
But the cases, both here and abroad, in varying forms of expression, all deny to
the courts the power to inquire into allegations that, in enacting a law, a House
of Congress failed to comply with its own rules, in the absence of showing that
there was a violation of a constitutional provision or the rights of private
individuals. In Osmea v. Pendatun, it was held: "At any rate, courts have declared that
the rules adopted by deliberative bodies are subject to revocation, modification or waiver
at the pleasure of the body adopting them. And it has been said that "Parliamentary
rules are merely procedural, and with their observance, the courts have no
concern. They may be waived or disregarded by the legislative body."
Consequently, "mere failure to conform to parliamentary usage will not
invalidate the action (taken by a deliberative body) when the requisite number
of members have agreed to a particular measure."21(Emphasis supplied)
The foregoing declaration is exactly in point with the present cases, where petitioners
allege irregularities committed by the conference committee in introducing changes or
deleting provisions in the House and Senate bills. Akin to the Farias case,22 the present
petitions also raise an issue regarding the actions taken by the conference committee on
matters regarding Congress compliance with its own internal rules. As stated earlier, one
of the most basic and inherent power of the legislature is the power to formulate rules for
its proceedings and the discipline of its members. Congress is the best judge of how it
should conduct its own business expeditiously and in the most orderly manner. It is also
the sole
concern of Congress to instill discipline among the members of its conference committee if
it believes that said members violated any of its rules of proceedings. Even the expanded
jurisdiction of this Court cannot apply to questions regarding only the internal operation of
Congress, thus, the Court is wont to deny a review of the internal proceedings of a coequal branch of government.
Moreover, as far back as 1994 or more than ten years ago, in the case of Tolentino vs.
Secretary of Finance,23the Court already made the pronouncement that "[i]f a change is
desired in the practice [of the Bicameral Conference Committee] it must be
sought in Congress since this question is not covered by any constitutional
provision but is only an internal rule of each house." 24 To date, Congress has not
seen it fit to make such changes adverted to by the Court. It seems, therefore, that
Congress finds the practices of the bicameral conference committee to be very useful for
purposes of prompt and efficient legislative action.

Nevertheless, just to put minds at ease that no blatant irregularities tainted the
proceedings of the bicameral conference committees, the Court deems it necessary to
dwell on the issue. The Court observes that there was a necessity for a conference
committee because a comparison of the provisions of House Bill Nos. 3555 and 3705 on
one hand, and Senate Bill No. 1950 on the other, reveals that there were indeed
disagreements. As pointed out in the petitions, said disagreements were as follows:

House Bill No. 3555

With regard to "Stand-By Authority" in favor of President

Provides for 12% VAT on every sale of goods or properties (amending Sec. 106 of NIRC); 12% VAT
sale of services and use or lease of properties (amending Sec. 108 of NIRC)

With regard to the "no pass-on" provision

No similar provision

With regard to 70% limit on input tax credit

Provides that the input tax credit for capital goods on which a VAT has been paid shall be equally
input tax credit for goods and services other than capital goods shall not exceed 5% of the tota
trading of goods, the allowable input tax credit shall not exceed 11% of the total amount of goods

With regard to amendments to be made to NIRC provisions regarding

income and excise taxes

No similar provision

No similar provision

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

The disagreements between the provisions in the House bills and the Senate bill were with
regard to (1) what rate of VAT is to be imposed; (2) whether only the VAT imposed on
electricity generation, transmission and distribution companies should not be passed on to
consumers, as proposed in the Senate bill, or both the VAT imposed on electricity

generation, transmission and distribution companies and the VAT imposed on sale of
petroleum products should not be passed on to consumers, as proposed in the House bill;
(3) in what manner input tax credits should be limited; (4) and whether the NIRC
provisions on corporate income taxes, percentage, franchise and excise taxes should be
amended.
There being differences and/or disagreements on the foregoing provisions of the House
and Senate bills, the Bicameral Conference Committee was mandated by the rules of both
houses of Congress to act on the same by settling said differences and/or disagreements.
The Bicameral Conference Committee acted on the disagreeing provisions by making the
following changes:
1. With regard to the disagreement on the rate of VAT to be imposed, it would appear from
the Conference Committee Report that the Bicameral Conference Committee tried to
bridge the gap in the difference between the 10% VAT rate proposed by the Senate, and
the various rates with 12% as the highest VAT rate proposed by the House, by striking a
compromise whereby the present 10% VAT rate would be retained until certain conditions
arise, i.e., the value-added tax collection as a percentage of gross domestic product (GDP)
of the previous year exceeds 2 4/5%, or National Government deficit as a percentage of
GDP of the previous year exceeds 1%, when the President, upon recommendation of the
Secretary of Finance shall raise the rate of VAT to 12% effective January 1, 2006.
2. With regard to the disagreement on whether only the VAT imposed on electricity
generation, transmission and distribution companies should not be passed on to
consumers or whether both the VAT imposed on electricity generation, transmission and
distribution companies and the VAT imposed on sale of petroleum products may be passed
on to consumers, the Bicameral Conference Committee chose to settle such disagreement
by altogether deleting from its Report any no pass-on provision.
3. With regard to the disagreement on whether input tax credits should be limited or not,
the Bicameral Conference Committee decided to adopt the position of the House by
putting a limitation on the amount of input tax that may be credited against the output
tax, although it crafted its own language as to the amount of the limitation on input tax
credits and the manner of computing the same by providing thus:
(A) Creditable Input Tax. . . .
...
Provided, The input tax on goods purchased or imported in a calendar month for use in
trade or business for which deduction for depreciation is allowed under this Code, shall be
spread evenly over the month of acquisition and the fifty-nine (59) succeeding months if
the aggregate acquisition cost for such goods, excluding the VAT component thereof,
exceeds one million Pesos (P1,000,000.00): PROVIDED, however, that if the estimated
useful life of the capital good is less than five (5) years, as used for depreciation purposes,
then the input VAT shall be spread over such shorter period: . . .
(B) Excess Output or Input Tax. If at the end of any taxable quarter the output tax
exceeds the input tax, the excess shall be paid by the VAT-registered person. If the input
tax exceeds the output tax, the excess shall be carried over to the succeeding quarter or
quarters: PROVIDED that the input tax inclusive of input VAT carried over from the previous
quarter that may be credited in every quarter shall not exceed seventy percent (70%) of
the output VAT: PROVIDED, HOWEVER, THAT any input tax attributable to zero-rated sales
by a VAT-registered person may at his option be refunded or credited against other internal
revenue taxes, . . .

4. With regard to the amendments to other provisions of the NIRC on corporate income
tax, franchise, percentage and excise taxes, the conference committee decided to include
such amendments and basically adopted the provisions found in Senate Bill No. 1950, with
some changes as to the rate of the tax to be imposed.
Under the provisions of both the Rules of the House of Representatives and Senate Rules,
the Bicameral Conference Committee is mandated to settle the differences between the
disagreeing provisions in the House bill and the Senate bill. The term "settle" is
synonymous to "reconcile" and "harmonize." 25 To reconcile or harmonize disagreeing
provisions, the Bicameral Conference Committee may then (a) adopt the specific
provisions of either the House bill or Senate bill, (b) decide that neither provisions in the
House bill or the provisions in the Senate bill would
be carried into the final form of the bill, and/or (c) try to arrive at a compromise between
the disagreeing provisions.
In the present case, the changes introduced by the Bicameral Conference Committee on
disagreeing provisions were meant only to reconcile and harmonize the disagreeing
provisions for it did not inject any idea or intent that is wholly foreign to the subject
embraced by the original provisions.
The so-called stand-by authority in favor of the President, whereby the rate of 10% VAT
wanted by the Senate is retained until such time that certain conditions arise when the
12% VAT wanted by the House shall be imposed, appears to be a compromise to try to
bridge the difference in the rate of VAT proposed by the two houses of Congress.
Nevertheless, such compromise is still totally within the subject of what rate of VAT should
be imposed on taxpayers.
The no pass-on provision was deleted altogether. In the transcripts of the proceedings of
the Bicameral Conference Committee held on May 10, 2005, Sen. Ralph Recto, Chairman
of the Senate Panel, explained the reason for deleting the no pass-on provision in this
wise:
. . . the thinking was just to keep the VAT law or the VAT bill simple. And we were thinking
that no sector should be a beneficiary of legislative grace, neither should any sector be
discriminated on. The VAT is an indirect tax. It is a pass on-tax. And lets keep it plain
and simple. Lets not confuse the bill and put a no pass-on provision. Two-thirds of the
world have a VAT system and in this two-thirds of the globe, I have yet to see a VAT with a
no pass-though provision. So, the thinking of the Senate is basically simple, lets keep the
VAT simple.26 (Emphasis supplied)
Rep. Teodoro Locsin further made the manifestation that the no pass-on provision "never
really enjoyed the support of either House." 27
With regard to the amount of input tax to be credited against output
Conference Committee came to a compromise on the percentage rate
cap on such input tax credit, but again, the change introduced
Conference Committee was totally within the intent of both houses to
tax that may be

tax, the Bicameral

of the limitation or
by the Bicameral
put a cap on input

credited against the output tax. From the inception of the subject revenue bill in the House
of Representatives, one of the major objectives was to "plug a glaring loophole in the tax
policy and administration by creating vital restrictions on the claiming of input VAT tax
credits . . ." and "[b]y introducing limitations on the claiming of tax credit, we are capping
a major leakage that has placed our collection efforts at an apparent disadvantage." 28

As to the amendments to NIRC provisions on taxes other than the value-added tax
proposed in Senate Bill No. 1950, since said provisions were among those referred to it,
the conference committee had to act on the same and it basically adopted the version of
the Senate.
Thus, all the changes or modifications made by the Bicameral Conference Committee were
germane to subjects of the provisions referred
to it for reconciliation. Such being the case, the Court does not see any grave abuse of
discretion amounting to lack or excess of jurisdiction committed by the Bicameral
Conference Committee. In the earlier cases of Philippine Judges Association vs.
Prado29 and Tolentino vs. Secretary of Finance, 30 the Court recognized the long-standing
legislative practice of giving said conference committee ample latitude for compromising
differences between the Senate and the House. Thus, in the Tolentino case, it was held
that:
. . . it is within the power of a conference committee to include in its report an entirely new
provision that is not found either in the House bill or in the Senate bill. If the committee
can propose an amendment consisting of one or two provisions, there is no reason why it
cannot propose several provisions, collectively considered as an "amendment in the
nature of a substitute," so long as such amendment is germane to the subject of the bills
before the committee. After all, its report was not final but needed the approval of both
houses of Congress to become valid as an act of the legislative department. The charge
that in this case the Conference Committee acted as a third legislative chamber
is thus without any basis.31 (Emphasis supplied)
B. R.A. No. 9337 Does Not Violate Article VI, Section 26(2) of the Constitution on the "NoAmendment Rule"
Article VI, Sec. 26 (2) of the Constitution, states:
No bill passed by either House shall become a law unless it has passed three readings on
separate days, and printed copies thereof in its final form have been distributed to its
Members three days before its passage, except when the President certifies to the
necessity of its immediate enactment to meet a public calamity or emergency. Upon the
last reading of a bill, no amendment thereto shall be allowed, and the vote thereon shall
be taken immediately thereafter, and the yeas and nays entered in the Journal.
Petitioners argument that the practice where a bicameral conference committee is
allowed to add or delete provisions in the House bill and the Senate bill after these had
passed three readings is in effect a circumvention of the "no amendment rule" (Sec. 26
(2), Art. VI of the 1987 Constitution), fails to convince the Court to deviate from its ruling in
the Tolentino case that:
Nor is there any reason for requiring that the Committees Report in these cases must
have undergone three readings in each of the two houses. If that be the case, there would
be no end to negotiation since each house may seek modification of the compromise
bill. . . .
Art. VI. 26 (2) must, therefore, be construed as referring only to bills
introduced for the first time in either house of Congress, not to the conference
committee report.32 (Emphasis supplied)
The Court reiterates here that the "no-amendment rule" refers only to the
procedure to be followed by each house of Congress with regard to bills

initiated in each of said respective houses, before said bill is transmitted to the
other house for its concurrence or amendment. Verily, to construe said provision in a
way as to proscribe any further changes to a bill after one house has voted on it would
lead to absurdity as this would mean that the other house of Congress would be deprived
of its constitutional power to amend or introduce changes to said bill. Thus, Art. VI, Sec. 26
(2) of the Constitution cannot be taken to mean that the introduction by the Bicameral
Conference Committee of amendments and modifications to disagreeing provisions in bills
that have been acted upon by both houses of Congress is prohibited.
C. R.A. No. 9337 Does Not Violate Article VI, Section 24 of the Constitution on Exclusive
Origination of Revenue Bills
Coming to the issue of the validity of the amendments made regarding the NIRC provisions
on corporate income taxes and percentage, excise taxes. Petitioners refer to the following
provisions, to wit:

Section 27

Rates of Income Tax on Domestic Corporation

28(A)(1)

Tax on Resident Foreign Corporation

28(B)(1)

Inter-corporate Dividends

34(B)(1)

Inter-corporate Dividends

116

Tax on Persons Exempt from VAT

117

Percentage Tax on domestic carriers and keepers of Garage

119

Tax on franchises

121

Tax on banks and Non-Bank Financial Intermediaries

148

Excise Tax on manufactured oils and other fuels

151

Excise Tax on mineral products

236

Registration requirements

237

Issuance of receipts or sales or commercial invoices

288

Disposition of Incremental Revenue

Petitioners claim that the amendments to these provisions of the NIRC did not at all
originate from the House. They aver that House Bill No. 3555 proposed amendments only
regarding Sections 106, 107, 108, 110 and 114 of the NIRC, while House Bill No. 3705
proposed amendments only to Sections 106, 107,108, 109, 110 and 111 of the NIRC; thus,
the other sections of the NIRC which the Senate amended but which amendments were
not found in the House bills are not intended to be amended by the House of
Representatives. Hence, they argue that since the proposed amendments did not originate
from the House, such amendments are a violation of Article VI, Section 24 of the
Constitution.
The argument does not hold water.
Article VI, Section 24 of the Constitution reads:
Sec. 24. All appropriation, revenue or tariff bills, bills authorizing increase of the public
debt, bills of local application, and private bills shall originate exclusively in the House of
Representatives but the Senate may propose or concur with amendments.
In the present cases, petitioners admit that it was indeed House Bill Nos. 3555 and 3705
that initiated the move for amending provisions of the NIRC dealing mainly with the valueadded tax. Upon transmittal of said House bills to the Senate, the Senate came out with
Senate Bill No. 1950 proposing amendments not only to NIRC provisions on the valueadded tax but also amendments to NIRC provisions on other kinds of taxes. Is the
introduction by the Senate of provisions not dealing directly with the value- added tax,
which is the only kind of tax being amended in the House bills, still within the purview of
the constitutional provision authorizing the Senate to propose or concur with amendments
to a revenue bill that originated from the House?
The foregoing question had been squarely answered in the Tolentino case, wherein the
Court held, thus:
. . . To begin with, it is not the law but the revenue bill which is required by the
Constitution to "originate exclusively" in the House of Representatives. It is important to
emphasize this, because a bill originating in the House may undergo such extensive
changes in the Senate that the result may be a rewriting of the whole. . . . At this point,
what is important to note is that, as a result of the Senate action, a distinct bill may be
produced. To insist that a revenue statute and not only the bill which initiated
the legislative process culminating in the enactment of the law must
substantially be the same as the House bill would be to deny the Senates
power not only to "concur with amendments" but also to "propose
amendments." It would be to violate the coequality of legislative power of the two
houses of Congress and in fact make the House superior to the Senate.

Given, then, the power of the Senate to propose amendments, the Senate can
propose its own version even with respect to bills which are required by the
Constitution to originate in the House.
...

Indeed, what the Constitution simply means is that the initiative for filing revenue, tariff or
tax bills, bills authorizing an increase of the public debt, private bills and bills of local
application must come from the House of Representatives on the theory that, elected as
they are from the districts, the members of the House can be expected to be more
sensitive to the local needs and problems. On the other hand, the senators, who
are elected at large, are expected to approach the same problems from the
national perspective. Both views are thereby made to bear on the enactment of
such laws.33 (Emphasis supplied)
Since there is no question that the revenue bill exclusively originated in the House of
Representatives, the Senate was acting within its
constitutional power to introduce amendments to the House bill when it included
provisions in Senate Bill No. 1950 amending corporate income taxes, percentage, excise
and franchise taxes. Verily, Article VI, Section 24 of the Constitution does not contain any
prohibition or limitation on the extent of the amendments that may be introduced by the
Senate to the House revenue bill.
Furthermore, the amendments introduced by the Senate to the NIRC provisions that had
not been touched in the House bills are still in furtherance of the intent of the House in
initiating the subject revenue bills. The Explanatory Note of House Bill No. 1468, the very
first House bill introduced on the floor, which was later substituted by House Bill No. 3555,
stated:
One of the challenges faced by the present administration is the urgent and daunting task
of solving the countrys serious financial problems. To do this, government expenditures
must be strictly monitored and controlled and revenues must be significantly increased.
This may be easier said than done, but our fiscal authorities are still optimistic the
government will be operating on a balanced budget by the year 2009. In fact, several
measures that will result to significant expenditure savings have been identified by the
administration. It is supported with a credible package of revenue measures that
include measures to improve tax administration and control the leakages in
revenues from income taxes and the value-added tax (VAT). (Emphasis supplied)
Rep. Eric D. Singson, in his sponsorship speech for House Bill No. 3555, declared that:
In the budget message of our President in the year 2005, she reiterated that we all
acknowledged that on top of our agenda must be the restoration of the health of our fiscal
system.
In order to considerably lower the consolidated public sector deficit and eventually achieve
a balanced budget by the year 2009, we need to seize windows of opportunities
which might seem poignant in the beginning, but in the long run prove effective
and beneficial to the overall status of our economy. One such opportunity is a
review of existing tax rates, evaluating the relevance given our present
conditions.34(Emphasis supplied)
Notably therefore, the main purpose of the bills emanating from the House of
Representatives is to bring in sizeable revenues for the government
to supplement our countrys serious financial problems, and improve tax administration
and control of the leakages in revenues from income taxes and value-added taxes. As
these house bills were transmitted to the Senate, the latter, approaching the measures
from the point of national perspective, can introduce amendments within the purposes of
those bills. It can provide for ways that would soften the impact of the VAT measure on the

consumer,i.e., by distributing the burden across all sectors instead of putting it entirely on
the shoulders of the consumers. The sponsorship speech of Sen. Ralph Recto on why the
provisions on income tax on corporation were included is worth quoting:
All in all, the proposal of the Senate Committee on Ways and Means will raise P64.3 billion
in additional revenues annually even while by mitigating prices of power, services and
petroleum products.
However, not all of this will be wrung out of VAT. In fact, only P48.7 billion amount is from
the VAT on twelve goods and services. The rest of the tab P10.5 billion- will be picked by
corporations.
What we therefore prescribe is a burden sharing between corporate Philippines and the
consumer. Why should the latter bear all the pain? Why should the fiscal salvation be only
on the burden of the consumer?
The corporate worlds equity is in form of the increase in the corporate income tax from 32
to 35 percent, but up to 2008 only. This will raise P10.5 billion a year. After that, the rate
will slide back, not to its old rate of 32 percent, but two notches lower, to 30 percent.
Clearly, we are telling those with the capacity to pay, corporations, to bear with this
emergency provision that will be in effect for 1,200 days, while we put our fiscal house in
order. This fiscal medicine will have an expiry date.
For their assistance, a reward of tax reduction awaits them. We intend to keep the length
of their sacrifice brief. We would like to assure them that not because there is a light at the
end of the tunnel, this government will keep on making the tunnel long.
The responsibility will not rest solely on the weary shoulders of the small man. Big
business will be there to share the burden. 35
As the Court has said, the Senate can propose amendments and in fact, the amendments
made on provisions in the tax on income of corporations are germane to the purpose of
the house bills which is to raise revenues for the government.
Likewise, the Court finds the sections referring to other percentage and excise taxes
germane to the reforms to the VAT system, as these sections would cushion the effects of
VAT on consumers. Considering that certain goods and services which were subject to
percentage tax and excise tax would no longer be VAT-exempt, the consumer would be
burdened more as they would be paying the VAT in addition to these taxes. Thus, there is
a need to amend these sections to soften the impact of VAT. Again, in his sponsorship
speech, Sen. Recto said:
However, for power plants that run on oil, we will reduce to zero the present excise tax on
bunker fuel, to lessen the effect of a VAT on this product.
For electric utilities like Meralco, we will wipe out the franchise tax in exchange for a VAT.
And in the case of petroleum, while we will levy the VAT on oil products, so as not to
destroy the VAT chain, we will however bring down the excise tax on socially sensitive
products such as diesel, bunker, fuel and kerosene.
...

What do all these exercises point to? These are not contortions of giving to the left hand
what was taken from the right. Rather, these sprang from our concern of softening the
impact of VAT, so that the people can cushion the blow of higher prices they will have to
pay as a result of VAT.36
The other sections amended by the Senate pertained to matters of tax administration
which are necessary for the implementation of the changes in the VAT system.
To reiterate, the sections introduced by the Senate are germane to the subject matter and
purposes of the house bills, which is to supplement our countrys fiscal deficit, among
others. Thus, the Senate acted within its power to propose those amendments.
SUBSTANTIVE ISSUES
I.
Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108 of the
NIRC, violate the following provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article VI, Section 28(2)
A. No Undue Delegation of Legislative Power
Petitioners ABAKADA GURO Party List, et al., Pimentel, Jr., et al., and Escudero, et
al. contend in common that Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106,
107 and 108, respectively, of the NIRC giving the President the stand-by authority to raise
the VAT rate from 10% to 12% when a certain condition is met, constitutes undue
delegation of the legislative power to tax.
The assailed provisions read as follows:
SEC. 4. Sec. 106 of the same Code, as amended, is hereby further amended to read as
follows:
SEC. 106. Value-Added Tax on Sale of Goods or Properties.
(A) Rate and Base of Tax. There shall be levied, assessed and collected on every sale,
barter or exchange of goods or properties, a value-added tax equivalent to ten percent
(10%) of the gross selling price or gross value in money of the goods or properties sold,
bartered or exchanged, such tax to be paid by the seller or transferor:provided, that the
President, upon the recommendation of the Secretary of Finance, shall,
effective January 1, 2006, raise the rate of value-added tax to twelve percent
(12%), after any of the following conditions has been satisfied.
(i) value-added tax collection as a percentage of Gross Domestic Product (GDP)
of the previous year exceeds two and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of the previous year
exceeds one and one-half percent (1 %).
SEC. 5. Section 107 of the same Code, as amended, is hereby further amended to read as
follows:

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

(A) In General. There shall be levied, assessed and collected on every importation of
goods a value-added tax equivalent to ten percent (10%) based on the total value used by
the Bureau of Customs in determining tariff and customs duties, plus customs duties,
excise taxes, if any, and other charges, such tax to be paid by the importer prior to the
release of such goods from customs custody: Provided, That where the customs duties are
determined on the basis of the quantity or volume of the goods, the value-added tax shall
be based on the landed cost plus excise taxes, if any: provided, further, that the
President, upon the recommendation of the Secretary of Finance, shall,
effective January 1, 2006, raise the rate of value-added tax to twelve percent
(12%) after any of the following conditions has been satisfied.
(i) value-added tax collection as a percentage of Gross Domestic Product (GDP)
of the previous year exceeds two and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of the previous year
exceeds one and one-half percent (1 %).
SEC. 6. Section 108 of the same Code, as amended, is hereby further amended to read as
follows:
SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties
(A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added
tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of
services: provided, that the President, upon the recommendation of the
Secretary of Finance, shall, effective January 1, 2006, raise the rate of valueadded tax to twelve percent (12%), after any of the following conditions has
been satisfied.
(i) value-added tax collection as a percentage of Gross Domestic Product (GDP)
of the previous year exceeds two and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of the previous year
exceeds one and one-half percent (1 %). (Emphasis supplied)
Petitioners allege that the grant of the stand-by authority to the President to increase the
VAT rate is a virtual abdication by Congress of its exclusive power to tax because such
delegation is not within the purview of Section 28 (2), Article VI of the Constitution, which
provides:
The Congress may, by law, authorize the President to fix within specified limits, and may
impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other
duties or imposts within the framework of the national development program of the
government.
They argue that the VAT is a tax levied on the sale, barter or exchange of goods and
properties as well as on the sale or exchange of services, which cannot be included within
the purview of tariffs under the exempted delegation as the latter refers to customs
duties, tolls or tribute payable upon merchandise to the government and usually imposed
on goods or merchandise imported or exported.
Petitioners ABAKADA GURO Party List, et al., further contend that delegating to the
President the legislative power to tax is contrary to republicanism. They insist that

accountability, responsibility and transparency should dictate the actions of Congress and
they should not pass to the President the decision to impose taxes. They also argue that
the law also effectively nullified the Presidents power of control, which includes the
authority to set aside and nullify the acts of her subordinates like the Secretary of Finance,
by mandating the fixing of the tax rate by the President upon the recommendation of the
Secretary of Finance.
Petitioners Pimentel, et al. aver that the President has ample powers to cause, influence or
create the conditions provided by the law to bring about either or both the conditions
precedent.
On the other hand, petitioners Escudero, et al. find bizarre and revolting the situation that
the imposition of the 12% rate would be subject to the whim of the Secretary of Finance,
an unelected bureaucrat, contrary to the principle of no taxation without representation.
They submit that the Secretary of Finance is not mandated to give a favorable
recommendation and he may not even give his recommendation. Moreover, they allege
that no guiding standards are provided in the law on what basis and as to how he will
make his recommendation. They claim, nonetheless, that any recommendation of the
Secretary of Finance can easily be brushed aside by the President since the former is a
mere alter ego of the latter, such that, ultimately, it is the President who decides whether
to impose the increased tax rate or not.
A brief discourse on the principle of non-delegation of powers is instructive.
The principle of separation of powers ordains that each of the three great branches of
government has exclusive cognizance of and is supreme in matters falling within its own
constitutionally allocated sphere.37 A logical
corollary to the doctrine of separation of powers is the principle of non-delegation of
powers, as expressed in the Latin maxim: potestas delegata non delegari potest which
means "what has been delegated, cannot be delegated." 38 This doctrine is based on the
ethical principle that such as delegated power constitutes not only a right but a duty to be
performed by the delegate through the instrumentality of his own judgment and not
through the intervening mind of another. 39
With respect to the Legislature, Section 1 of Article VI of the Constitution provides that
"the Legislative power shall be vested in the Congress of the Philippines which shall
consist of a Senate and a House of Representatives." The powers which Congress is
prohibited from delegating are those which are strictly, or inherently and exclusively,
legislative. Purely legislative power, which can never be delegated, has been described as
the authority to make a complete law complete as to the time when it shall
take effect and as to whom it shall be applicable and to determine the
expediency of its enactment.40 Thus, the rule is that in order that a court may be
justified in holding a statute unconstitutional as a delegation of legislative power, it must
appear that the power involved is purely legislative in nature that is, one appertaining
exclusively to the legislative department. It is the nature of the power, and not the liability
of its use or the manner of its exercise, which determines the validity of its delegation.
Nonetheless, the general rule barring delegation of legislative powers is subject to the
following recognized limitations or exceptions:
(1) Delegation of tariff powers to the President under Section 28 (2) of Article VI of the
Constitution;

(2) Delegation of emergency powers to the President under Section 23 (2) of Article VI of
the Constitution;
(3) Delegation to the people at large;
(4) Delegation to local governments; and
(5) Delegation to administrative bodies.
In every case of permissible delegation, there must be a showing that the delegation itself
is valid. It is valid only if the law (a) is complete in itself, setting forth therein the policy to
be executed, carried out, or implemented by the delegate; 41 and (b) fixes a standard the
limits of which are sufficiently determinate and determinable to which the delegate
must conform in the performance of his functions. 42 A sufficient standard is one which
defines legislative policy, marks its limits, maps out its boundaries and specifies the public
agency to apply it. It indicates the circumstances under which the legislative command is
to be effected.43 Both tests are intended to prevent a total transference of legislative
authority to the delegate, who is not allowed to step into the shoes of the legislature and
exercise a power essentially legislative.44
In People vs. Vera,45 the Court, through eminent Justice Jose P. Laurel, expounded on the
concept and extent of delegation of power in this wise:
In testing whether a statute constitutes an undue delegation of legislative power or not, it
is usual to inquire whether the statute was complete in all its terms and provisions when it
left the hands of the legislature so that nothing was left to the judgment of any other
appointee or delegate of the legislature.
...
The true distinction, says Judge Ranney, is between the delegation of power to
make the law, which necessarily involves a discretion as to what it shall be, and
conferring an authority or discretion as to its execution, to be exercised under
and in pursuance of the law. The first cannot be done; to the latter no valid
objection can be made.
...
It is contended, however, that a legislative act may be made to the effect as law after it
leaves the hands of the legislature. It is true that laws may be made effective on certain
contingencies, as by proclamation of the executive or the adoption by the people of a
particular community. In Wayman vs. Southard, the Supreme Court of the United States
ruled that the legislature may delegate a power not legislative which it may itself rightfully
exercise.The power to ascertain facts is such a power which may be delegated.
There is nothing essentially legislative in ascertaining the existence of facts or
conditions as the basis of the taking into effect of a law. That is a mental
process common to all branches of the government. Notwithstanding the apparent
tendency, however, to relax the rule prohibiting delegation of legislative authority on
account of the complexity arising from social and economic forces at work in this modern
industrial age, the orthodox pronouncement of Judge Cooley in his work on Constitutional
Limitations finds restatement in Prof. Willoughby's treatise on the Constitution of the
United States in the following language speaking of declaration of legislative power to
administrative agencies: The principle which permits the legislature to provide that
the administrative agent may determine when the circumstances are such as
require the application of a law is defended upon the ground that at the time

this authority is granted, the rule of public policy, which is the essence of the
legislative act, is determined by the legislature. In other words, the legislature,
as it is its duty to do, determines that, under given circumstances, certain
executive or administrative action is to be taken, and that, under other
circumstances, different or no action at all is to be taken. What is thus left to
the administrative official is not the legislative determination of what public
policy demands, but simply the ascertainment of what the facts of the case
require to be done according to the terms of the law by which he is governed.
The efficiency of an Act as a declaration of legislative will must, of course, come
from Congress, but the ascertainment of the contingency upon which the Act
shall take effect may be left to such agencies as it may designate. The
legislature, then, may provide that a law shall take effect upon the happening of
future specified contingencies leaving to some other person or body the power
to determine when the specified contingency has arisen.(Emphasis supplied).46
In Edu vs. Ericta,47 the Court reiterated:
What cannot be delegated is the authority under the Constitution to make laws and to
alter and repeal them; the test is the completeness of the statute in all its terms and
provisions when it leaves the hands of the legislature. To determine whether or not there is
an undue delegation of legislative power, the inquiry must be directed to the scope and
definiteness of the measure enacted. The legislative does not abdicate its functions
when it describes what job must be done, who is to do it, and what is the scope
of his authority. For a complex economy, that may be the only way in which the
legislative process can go forward. A distinction has rightfully been made between
delegation of power to make the laws which necessarily involves a discretion as
to what it shall be, which constitutionally may not be done, and delegation of
authority or discretion as to its execution to be exercised under and in
pursuance of the law, to which no valid objection can be made. The Constitution is
thus not to be regarded as denying the legislature the necessary resources of flexibility
and practicability. (Emphasis supplied). 48
Clearly, the legislature may delegate to executive officers or bodies the power to
determine certain facts or conditions, or the happening of contingencies, on which the
operation of a statute is, by its terms, made to depend, but the legislature must prescribe
sufficient standards, policies or limitations on their authority. 49 While the power to tax
cannot be delegated to executive agencies, details as to the enforcement and
administration of an exercise of such power may be left to them, including the power to
determine the existence of facts on which its operation depends. 50
The rationale for this is that the preliminary ascertainment of facts as basis for the
enactment of legislation is not of itself a legislative function, but is simply ancillary to
legislation. Thus, the duty of correlating information and making recommendations is the
kind of subsidiary activity which the legislature may perform through its members, or
which it may delegate to others to perform. Intelligent legislation on the complicated
problems of modern society is impossible in the absence of accurate information on the
part of the legislators, and any reasonable method of securing such information is
proper.51 The Constitution as a continuously operative charter of government does not
require that Congress find for itself
every fact upon which it desires to base legislative action or that it make for itself detailed
determinations which it has declared to be prerequisite to application of legislative policy
to particular facts and circumstances impossible for Congress itself properly to
investigate.52

In the present case, the challenged section of R.A. No. 9337 is the common proviso in
Sections 4, 5 and 6 which reads as follows:
That the President, upon the recommendation of the Secretary of Finance, shall, effective
January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of
the following conditions has been satisfied:
(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the
previous year exceeds two and four-fifth percent (2 4/5%); or
(ii) National government deficit as a percentage of GDP of the previous year exceeds one
and one-half percent (1 %).
The case before the Court is not a delegation of legislative power. It is simply a delegation
of ascertainment of facts upon which enforcement and administration of the increase rate
under the law is contingent. The legislature has made the operation of the 12% rate
effective January 1, 2006, contingent upon a specified fact or condition. It leaves the entire
operation or non-operation of the 12% rate upon factual matters outside of the control of
the executive.
No discretion would be exercised by the President. Highlighting the absence of discretion is
the fact that the wordshall is used in the common proviso. The use of the
word shall connotes a mandatory order. Its use in a statute denotes an imperative
obligation and is inconsistent with the idea of discretion. 53 Where the law is clear and
unambiguous, it must be taken to mean exactly what it says, and courts have no choice
but to see to it that the mandate is obeyed. 54
Thus, it is the ministerial duty of the President to immediately impose the 12% rate upon
the existence of any of the conditions specified by Congress. This is a duty which cannot
be evaded by the President. Inasmuch as the law specifically uses the word shall, the
exercise of discretion by the President does not come into play. It is a clear directive to
impose the 12% VAT rate when the specified conditions are present. The time of taking
into effect of the 12% VAT rate is based on the happening of a certain specified
contingency, or upon the ascertainment of certain facts or conditions by a person or body
other than the legislature itself.
The Court finds no merit to the contention of petitioners ABAKADA GURO Party List, et al.
that the law effectively nullified the Presidents power of control over the Secretary of
Finance by mandating the fixing of the tax rate by the President upon the recommendation
of the Secretary of Finance. The Court cannot also subscribe to the position of petitioners
Pimentel, et al. that the word shall should be interpreted to mean may in view of the
phrase "upon the recommendation of the Secretary of Finance." Neither does the Court
find persuasive the submission of petitioners Escudero, et al. that any recommendation by
the Secretary of Finance can easily be brushed aside by the President since the former is a
mere alter ego of the latter.
When one speaks of the Secretary of Finance as the alter ego of the President, it simply
means that as head of the Department of Finance he is the assistant and agent of the
Chief Executive. The multifarious executive and administrative functions of the Chief
Executive are performed by and through the executive departments, and the acts of the
secretaries of such departments, such as the Department of Finance, performed and
promulgated in the regular course of business, are, unless disapproved or reprobated by
the Chief Executive, presumptively the acts of the Chief Executive. The Secretary of
Finance, as such, occupies a political position and holds office in an advisory capacity, and,

in the language of Thomas Jefferson, "should be of the President's bosom confidence" and,
in the language of Attorney-General Cushing, is "subject to the direction of the
President."55
In the present case, in making his recommendation to the President on the existence of
either of the two conditions, the Secretary of Finance is not acting as the alter ego of the
President or even her subordinate. In such instance, he is not subject to the power of
control and direction of the President. He is acting as the agent of the legislative
department, to determine and declare the event upon which its expressed will is to take
effect.56The Secretary of Finance becomes the means or tool by which legislative policy is
determined and implemented, considering that he possesses all the facilities to gather
data and information and has a much broader perspective to properly evaluate them. His
function is to gather and collate statistical data and other pertinent information and verify
if any of the two conditions laid out by Congress is present. His personality in such
instance is in reality but a projection of that of Congress. Thus, being the agent of
Congress and not of the President, the President cannot alter or modify or nullify, or set
aside the findings of the Secretary of Finance and to substitute the judgment of the former
for that of the latter.
Congress simply granted the Secretary of Finance the authority to ascertain the existence
of a fact, namely, whether by December 31, 2005, the value-added tax collection as a
percentage of Gross Domestic Product (GDP) of the previous year exceeds two and fourfifth percent (24/5%) or the national government deficit as a percentage of GDP of the
previous year exceeds one and one-half percent (1%). If either of these two instances
has occurred, the Secretary of Finance, by legislative mandate, must submit such
information to the President. Then the 12% VAT rate must be imposed by the President
effective January 1, 2006. There is no undue delegation of legislative power but
only of the discretion as to the execution of a law. This is constitutionally
permissible.57 Congress does not abdicate its functions or unduly delegate power when it
describes what job must be done, who must do it, and what is the scope of his authority;
in our complex economy that is frequently the only way in which the legislative process
can go forward.58
As to the argument of petitioners ABAKADA GURO Party List, et al. that delegating to the
President the legislative power to tax is contrary to the principle of republicanism, the
same deserves scant consideration. Congress did not delegate the power to tax but the
mere implementation of the law. The intent and will to increase the VAT rate to 12% came
from Congress and the task of the President is to simply execute the legislative policy. That
Congress chose to do so in such a manner is not within the province of the Court to inquire
into, its task being to interpret the law.59
The insinuation by petitioners Pimentel, et al. that the President has ample powers to
cause, influence or create the conditions to bring about either or both the conditions
precedent does not deserve any merit as this argument is highly speculative. The Court
does not rule on allegations which are manifestly conjectural, as these may not exist at all.
The Court deals with facts, not fancies; on realities, not appearances. When the Court acts
on appearances instead of realities, justice and law will be short-lived.
B. The 12% Increase VAT Rate Does Not Impose an Unfair and Unnecessary Additional Tax
Burden
Petitioners Pimentel, et al. argue that the 12% increase in the VAT rate imposes an unfair
and additional tax burden on the people. Petitioners also argue that the 12% increase,
dependent on any of the 2 conditions set forth in the contested provisions, is ambiguous
because it does not state if the VAT rate would be returned to the original 10% if the rates

are no longer satisfied. Petitioners also argue that such rate is unfair and unreasonable, as
the people are unsure of the applicable VAT rate from year to year.
Under the common provisos of Sections 4, 5 and 6 of R.A. No. 9337, if any of the two
conditions set forth therein are satisfied, the President shall increase the VAT rate to 12%.
The provisions of the law are clear. It does not provide for a return to the 10% rate nor
does it empower the President to so revert if, after the rate is increased to 12%, the VAT
collection goes below the 24/5 of the GDP of the previous year or that the national
government deficit as a percentage of GDP of the previous year does not exceed 1%.
Therefore, no statutory construction or interpretation is needed. Neither can conditions or
limitations be introduced where none is provided for. Rewriting the law is a forbidden
ground that only Congress may tread upon. 60
Thus, in the absence of any provision providing for a return to the 10% rate, which in this
case the Court finds none, petitioners argument is, at best, purely speculative. There is no
basis for petitioners fear of a fluctuating VAT rate because the law itself does not provide
that the rate should go back to 10% if the conditions provided in Sections 4, 5 and 6 are
no longer present. The rule is that where the provision of the law is clear and
unambiguous, so that there is no occasion for the court's seeking the legislative intent, the
law must be taken as it is, devoid of judicial addition or subtraction. 61
Petitioners also contend that the increase in the VAT rate, which was allegedly an incentive
to the President to raise the VAT collection to at least 2 4/5 of the GDP of the previous year,
should be based on fiscal adequacy.
Petitioners obviously overlooked that increase in VAT collection is not the only condition.
There is another condition, i.e., the national government deficit as a percentage of GDP of
the previous year exceeds one and one-half percent (1 %).
Respondents explained the philosophy behind these alternative conditions:
1. VAT/GDP Ratio > 2.8%
The condition set for increasing VAT rate to 12% have economic or fiscal meaning. If
VAT/GDP is less than 2.8%, it means that government has weak or no capability of
implementing the VAT or that VAT is not effective in the function of the tax collection.
Therefore, there is no value to increase it to 12% because such action will also be
ineffectual.
2. Natl Govt Deficit/GDP >1.5%
The condition set for increasing VAT when deficit/GDP is 1.5% or less means the fiscal
condition of government has reached a relatively sound position or is towards the direction
of a balanced budget position. Therefore, there is no need to increase the VAT rate since
the fiscal house is in a relatively healthy position. Otherwise stated, if the ratio is more
than 1.5%, there is indeed a need to increase the VAT rate. 62
That the first condition amounts to an incentive to the President to increase the VAT
collection does not render it unconstitutional so long as there is a public purpose for which
the law was passed, which in this case, is mainly to raise revenue. In fact, fiscal
adequacy dictated the need for a raise in revenue.
The principle of fiscal adequacy as a characteristic of a sound tax system was originally
stated by Adam Smith in his Canons of Taxation (1776), as:

IV. Every tax ought to be so contrived as both to take out and to keep out of the pockets of
the people as little as possible over and above what it brings into the public treasury of the
state.63
It simply means that sources of revenues must be adequate to meet government
expenditures and their variations. 64
The dire need for revenue cannot be ignored. Our country is in a quagmire of financial
woe. During the Bicameral Conference Committee hearing, then Finance Secretary
Purisima bluntly depicted the countrys gloomy state of economic affairs, thus:
First, let me explain the position that the Philippines finds itself in right now. We are in a
position where 90 percent of our revenue is used for debt service. So, for every peso of
revenue that we currently raise, 90 goes to debt service. Thats interest plus amortization
of our debt. So clearly, this is not a sustainable situation. Thats the first fact.
The second fact is that our debt to GDP level is way out of line compared to other peer
countries that borrow money from that international financial markets. Our debt to GDP is
approximately equal to our GDP. Again, that shows you that this is not a sustainable
situation.
The third thing that Id like to point out is the environment that we are presently operating
in is not as benign as what it used to be the past five years.
What do I mean by that?
In the past five years, weve been lucky because we were operating in a period of basically
global growth and low interest rates. The past few months, we have seen an inching up, in
fact, a rapid increase in the interest rates in the leading economies of the world. And,
therefore, our ability to borrow at reasonable prices is going to be challenged. In fact,
ultimately, the question is our ability to access the financial markets.
When the President made her speech in July last year, the environment was not as bad as
it is now, at least based on the forecast of most financial institutions. So, we were
assuming that raising 80 billion would put us in a position where we can then convince
them to improve our ability to borrow at lower rates. But conditions have changed on us
because the interest rates have gone up. In fact, just within this room, we tried to access
the market for a billion dollars because for this year alone, the Philippines will have to
borrow 4 billion dollars. Of that amount, we have borrowed 1.5 billion. We issued last
January a 25-year bond at 9.7 percent cost. We were trying to access last week and the
market was not as favorable and up to now we have not accessed and we might pull back
because the conditions are not very good.
So given this situation, we at the Department of Finance believe that we really need to
front-end our deficit reduction. Because it is deficit that is causing the increase of the debt
and we are in what we call a debt spiral. The more debt you have, the more deficit you
have because interest and debt service eats and eats more of your revenue. We need to
get out of this debt spiral. And the only way, I think, we can get out of this debt spiral is
really have a front-end adjustment in our revenue base. 65
The image portrayed is chilling. Congress passed the law hoping for rescue from an
inevitable catastrophe. Whether the law is indeed sufficient to answer the states
economic dilemma is not for the Court to judge. In theFarias case, the Court refused to
consider the various arguments raised therein that dwelt on the wisdom of Section 14 of
R.A. No. 9006 (The Fair Election Act), pronouncing that:

. . . policy matters are not the concern of the Court. Government policy is within the
exclusive dominion of the political branches of the government. It is not for this Court to
look into the wisdom or propriety of legislative determination. Indeed, whether an
enactment is wise or unwise, whether it is based on sound economic theory, whether it is
the best means to achieve the desired results, whether, in short, the legislative discretion
within its prescribed limits should be exercised in a particular manner are matters for the
judgment of the legislature, and the serious conflict of opinions does not suffice to bring
them within the range of judicial cognizance. 66
In the same vein, the Court in this case will not dawdle on the purpose of Congress or the
executive policy, given that it is not for the judiciary to "pass upon questions of wisdom,
justice or expediency of legislation."67
II.
Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B) of the NIRC;
and Section 12 of R.A. No. 9337, amending Section 114(C) of the NIRC, violate the
following provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article III, Section 1
A. Due Process and Equal Protection Clauses
Petitioners Association of Pilipinas Shell Dealers, Inc., et al. argue that Section 8 of R.A. No.
9337, amending Sections 110 (A)(2), 110 (B), and Section 12 of R.A. No. 9337, amending
Section 114 (C) of the NIRC are arbitrary, oppressive, excessive and confiscatory. Their
argument is premised on the constitutional right against deprivation of life, liberty of
property without due process of law, as embodied in Article III, Section 1 of the
Constitution.
Petitioners also contend that these provisions violate the constitutional guarantee of equal
protection of the law.
The doctrine is that where the due process and equal protection clauses are invoked,
considering that they are not fixed rules but rather broad standards, there is a need for
proof of such persuasive character as would lead to such a conclusion. Absent such a
showing, the presumption of validity must prevail. 68
Section 8 of R.A. No. 9337, amending Section 110(B) of the NIRC imposes a limitation on
the amount of input tax that may be credited against the output tax. It states, in part:
"[P]rovided, that the input tax inclusive of the input VAT carried over from the previous
quarter that may be credited in every quarter shall not exceed seventy percent (70%) of
the output VAT: "
Input Tax is defined under Section 110(A) of the NIRC, as amended, as the value-added tax
due from or paid by a VAT-registered person on the importation of goods or local purchase
of good and services, including lease or use of property, in the course of trade or business,
from a VAT-registered person, and Output Tax is the value-added tax due on the sale or
lease of taxable goods or properties or services by any person registered or required to
register under the law.

Petitioners claim that the contested sections impose limitations on the amount of input tax
that may be claimed. In effect, a portion of the input tax that has already been paid
cannot now be credited against the output tax.
Petitioners argument is not absolute. It assumes that the input tax exceeds 70% of the
output tax, and therefore, the input tax in excess of 70% remains uncredited. However, to
the extent that the input tax is less than 70% of the output tax, then 100% of such input
tax is still creditable.
More importantly, the excess input tax, if any, is retained in a businesss books of accounts
and remains creditable in the succeeding quarter/s. This is explicitly allowed by Section
110(B), which provides that "if the input tax exceeds the output tax, the excess shall be
carried over to the succeeding quarter or quarters." In addition, Section 112(B) allows a
VAT-registered person to apply for the issuance of a tax credit certificate or refund for any
unused input taxes, to the extent that such input taxes have not been applied against the
output taxes. Such unused input tax may be used in payment of his other internal revenue
taxes.
The non-application of the unutilized input tax in a given quarter is not ad infinitum, as
petitioners exaggeratedly contend. Their analysis of the effect of the 70% limitation is
incomplete and one-sided. It ends at the net effect that there will be unapplied/unutilized
inputs VAT for a given quarter. It does not proceed further to the fact that such
unapplied/unutilized input tax may be credited in the subsequent periods as allowed by
the carry-over provision of Section 110(B) or that it may later on be refunded through a
tax credit certificate under Section 112(B).
Therefore, petitioners argument must be rejected.
On the other hand, it appears that petitioner Garcia failed to comprehend the operation of
the 70% limitation on the input tax. According to petitioner, the limitation on the
creditable input tax in effect allows VAT-registered establishments to retain a portion of the
taxes they collect, which violates the principle that tax collection and revenue should be
for public purposes and expenditures
As earlier stated, the input tax is the tax paid by a person, passed on to him by the seller,
when he buys goods. Output tax meanwhile is the tax due to the person when he sells
goods. In computing the VAT payable, three possible scenarios may arise:
First, if at the end of a taxable quarter the output taxes charged by the seller are equal to
the input taxes that he paid and passed on by the suppliers, then no payment is required;
Second, when the output taxes exceed the input taxes, the person shall be liable for the
excess, which has to be paid to the Bureau of Internal Revenue (BIR); 69 and
Third, if the input taxes exceed the output taxes, the excess shall be carried over to the
succeeding quarter or quarters. Should the input taxes result from zero-rated or effectively
zero-rated transactions, any excess over the output taxes shall instead be refunded to the
taxpayer or credited against other internal revenue taxes, at the taxpayers option. 70
Section 8 of R.A. No. 9337 however, imposed a 70% limitation on the input tax. Thus, a
person can credit his input tax only up to the extent of 70% of the output tax. In laymans
term, the value-added taxes that a person/taxpayer paid and passed on to him by a seller
can only be credited up to 70% of the value-added taxes that is due to him on a taxable
transaction. There is no retention of any tax collection because the person/taxpayer has
already previously paid the input tax to a seller, and the seller will subsequently remit

such input tax to the BIR. The party directly liable for the payment of the tax is the
seller.71 What only needs to be done is for the person/taxpayer to apply or credit these
input taxes, as evidenced by receipts, against his output taxes.
Petitioners Association of Pilipinas Shell Dealers, Inc., et al. also argue that the input tax
partakes the nature of a property that may not be confiscated, appropriated, or limited
without due process of law.
The input tax is not a property or a property right within the constitutional purview of the
due process clause. A VAT-registered persons entitlement to the creditable input tax is a
mere statutory privilege.
The distinction between statutory privileges and vested rights must be borne in mind for
persons have no vested rights in statutory privileges. The state may change or take away
rights, which were created by the law of the state, although it may not take away property,
which was vested by virtue of such rights. 72
Under the previous system of single-stage taxation, taxes paid at every level of
distribution are not recoverable from the taxes payable, although it becomes part of the
cost, which is deductible from the gross revenue. When Pres. Aquino issued E.O. No. 273
imposing a 10% multi-stage tax on all sales, it was then that the crediting of the input tax
paid on purchase or importation of goods and services by VAT-registered persons against
the output tax was introduced.73 This was adopted by the Expanded VAT Law (R.A. No.
7716),74 and The Tax Reform Act of 1997 (R.A. No. 8424). 75 The right to credit input tax as
against the output tax is clearly a privilege created by law, a privilege that also the law
can remove, or in this case, limit.
Petitioners also contest as arbitrary, oppressive, excessive and confiscatory, Section 8 of
R.A. No. 9337, amending Section 110(A) of the NIRC, which provides:
SEC. 110. Tax Credits.
(A) Creditable Input Tax.
Provided, That the input tax on goods purchased or imported in a calendar month for use
in trade or business for which deduction for depreciation is allowed under this Code, shall
be spread evenly over the month of acquisition and the fifty-nine (59) succeeding months
if the aggregate acquisition cost for such goods, excluding the VAT component thereof,
exceeds One million pesos (P1,000,000.00): Provided, however, That if the estimated
useful life of the capital goods is less than five (5) years, as used for depreciation
purposes, then the input VAT shall be spread over such a shorter period: Provided, finally,
That in the case of purchase of services, lease or use of properties, the input tax shall be
creditable to the purchaser, lessee or license upon payment of the compensation, rental,
royalty or fee.
The foregoing section imposes a 60-month period within which to amortize the creditable
input tax on purchase or importation of capital goods with acquisition cost of P1 Million
pesos, exclusive of the VAT component. Such spread out only poses a delay in the
crediting of the input tax. Petitioners argument is without basis because the taxpayer is
not permanently deprived of his privilege to credit the input tax.
It is worth mentioning that Congress admitted that the spread-out of the creditable input
tax in this case amounts to a 4-year interest-free loan to the government. 76 In the same
breath, Congress also justified its move by saying that the provision was designed to raise
an annual revenue of 22.6 billion. 77 The legislature also dispelled the fear that the

provision will fend off foreign investments, saying that foreign investors have other tax
incentives provided by law, and citing the case of China, where despite a 17.5% noncreditable VAT, foreign investments were not deterred. 78 Again, for whatever is the purpose
of the 60-month amortization, this involves executive economic policy and legislative
wisdom in which the Court cannot intervene.
With regard to the 5% creditable withholding tax imposed on payments made by the
government for taxable transactions, Section 12 of R.A. No. 9337, which amended Section
114 of the NIRC, reads:
SEC. 114. Return and Payment of Value-added Tax.
(C) Withholding of Value-added Tax. The Government or any of its political subdivisions,
instrumentalities or agencies, including government-owned or controlled corporations
(GOCCs) shall, before making payment on account of each purchase of goods and services
which are subject to the value-added tax imposed in Sections 106 and 108 of this Code,
deduct and withhold a final value-added tax at the rate of five percent (5%) of the gross
payment thereof: Provided, That the payment for lease or use of properties or property
rights to nonresident owners shall be subject to ten percent (10%) withholding tax at the
time of payment. For purposes of this Section, the payor or person in control of the
payment shall be considered as the withholding agent.
The value-added tax withheld under this Section shall be remitted within ten (10) days
following the end of the month the withholding was made.
Section 114(C) merely provides a method of collection, or as stated by respondents, a
more simplified VAT withholding system. The government in this case is constituted as a
withholding agent with respect to their payments for goods and services.
Prior to its amendment, Section 114(C) provided for different rates of value-added taxes to
be withheld -- 3% on gross payments for purchases of goods; 6% on gross payments for
services supplied by contractors other than by public works contractors; 8.5% on gross
payments for services supplied by public work contractors; or 10% on payment for the
lease or use of properties or property rights to nonresident owners. Under the present
Section 114(C), these different rates, except for the 10% on lease or property rights
payment to nonresidents, were deleted, and a uniform rate of 5% is applied.
The Court observes, however, that the law the used the word final. In tax usage, final, as
opposed to creditable, means full. Thus, it is provided in Section 114(C): "final value-added
tax at the rate of five percent (5%)."
In Revenue Regulations No. 02-98, implementing R.A. No. 8424 (The Tax Reform Act of
1997), the concept of final withholding tax on income was explained, to wit:
SECTION 2.57. Withholding of Tax at Source
(A) Final Withholding Tax. Under the final withholding tax system the amount of income
tax withheld by the withholding agent is constituted as full and final payment of the
income tax due from the payee on the said income. The liability for payment of the tax
rests primarily on the payor as a withholding agent. Thus, in case of his failure to withhold
the tax or in case of underwithholding, the deficiency tax shall be collected from the
payor/withholding agent.
(B) Creditable Withholding Tax. Under the creditable withholding tax system, taxes
withheld on certain income payments are intended to equal or at least approximate the

tax due of the payee on said income. Taxes withheld on income payments covered by
the expanded withholding tax (referred to in Sec. 2.57.2 of these regulations) and
compensation income (referred to in Sec. 2.78 also of these regulations) are creditable in
nature.
As applied to value-added tax, this means that taxable transactions with the government
are subject to a 5% rate, which constitutes as full payment of the tax payable on the
transaction. This represents the net VAT payable of the seller. The other 5% effectively
accounts for the standard input VAT (deemed input VAT), in lieu of the actual input VAT
directly or attributable to the taxable transaction. 79
The Court need not explore the rationale behind the provision. It is clear that Congress
intended to treat differently taxable transactions with the government. 80 This is supported
by the fact that under the old provision, the 5% tax withheld by the government remains
creditable against the tax liability of the seller or contractor, to wit:
SEC. 114. Return and Payment of Value-added Tax.
(C) Withholding of Creditable Value-added Tax. The Government or any of its
political subdivisions, instrumentalities or agencies, including government-owned or
controlled corporations (GOCCs) shall, before making payment on account of each
purchase of goods from sellers and services rendered by contractors which are subject to
the value-added tax imposed in Sections 106 and 108 of this Code, deduct and withhold
the value-added tax due at the rate of three percent (3%) of the gross payment for the
purchase of goods and six percent (6%) on gross receipts for services rendered by
contractors on every sale or installment payment which shall becreditable against the
value-added tax liability of the seller or contractor: Provided, however, That in the
case of government public works contractors, the withholding rate shall be eight and onehalf percent (8.5%): Provided, further, That the payment for lease or use of properties or
property rights to nonresident owners shall be subject to ten percent (10%) withholding
tax at the time of payment. For this purpose, the payor or person in control of the
payment shall be considered as the withholding agent.
The valued-added tax withheld under this Section shall be remitted within ten (10) days
following the end of the month the withholding was made. (Emphasis supplied)
As amended, the use of the word final and the deletion of the word creditable exhibits
Congresss intention to treat transactions with the government differently. Since it has not
been shown that the class subject to the 5% final withholding tax has been unreasonably
narrowed, there is no reason to invalidate the provision. Petitioners, as petroleum dealers,
are not the only ones subjected to the 5% final withholding tax. It applies to all those who
deal with the government.
Moreover, the actual input tax is not totally lost or uncreditable, as petitioners believe.
Revenue Regulations No. 14-2005 or the Consolidated Value-Added Tax Regulations 2005
issued by the BIR, provides that should the actual input tax exceed 5% of gross payments,
the excess may form part of the cost. Equally, should the actual input tax be less than 5%,
the difference is treated as income. 81
Petitioners also argue that by imposing a limitation on the creditable input tax, the
government gets to tax a profit or value-added even if there is no profit or value-added.
Petitioners stance is purely hypothetical, argumentative, and again, one-sided. The Court
will not engage in a legal joust where premises are what ifs, arguments, theoretical and

facts, uncertain. Any disquisition by the Court on this point will only be, as Shakespeare
describes life in Macbeth,82 "full of sound and fury, signifying nothing."
Whats more, petitioners contention assumes the proposition that there is no profit or
value-added. It need not take an astute businessman to know that it is a matter of
exception that a business will sell goods or services without profit or value-added. It
cannot be overstressed that a business is created precisely for profit.
The equal protection clause under the Constitution means that "no person or class of
persons shall be deprived of the same protection of laws which is enjoyed by other
persons or other classes in the same place and in like circumstances." 83
The power of the State to make reasonable and natural classifications for the purposes of
taxation has long been established. Whether it relates to the subject of taxation, the kind
of property, the rates to be levied, or the amounts to be raised, the methods of
assessment, valuation and collection, the States power is entitled to presumption of
validity. As a rule, the judiciary will not interfere with such power absent a clear showing of
unreasonableness, discrimination, or arbitrariness. 84
Petitioners point out that the limitation on the creditable input tax if the entity has a high
ratio of input tax, or invests in capital equipment, or has several transactions with the
government, is not based on real and substantial differences to meet a valid classification.
The argument is pedantic, if not outright baseless. The law does not make any
classification in the subject of taxation, the kind of property, the rates to be levied or the
amounts to be raised, the methods of assessment, valuation and collection. Petitioners
alleged distinctions are based on variables that bear different consequences. While the
implementation of the law may yield varying end results depending on ones profit margin
and value-added, the Court cannot go beyond what the legislature has laid down and
interfere with the affairs of business.
The equal protection clause does not require the universal application of the laws on all
persons or things without distinction. This might in fact sometimes result in unequal
protection. What the clause requires is equality among equals as determined according to
a valid classification. By classification is meant the grouping of persons or things similar to
each other in certain particulars and different from all others in these same particulars. 85
Petitioners brought to the Courts attention the introduction of Senate Bill No. 2038 by
Sens. S.R. Osmea III and Ma. Ana Consuelo A.S. Madrigal on June 6, 2005, and House
Bill No. 4493 by Rep. Eric D. Singson. The proposed legislation seeks to amend the 70%
limitation by increasing the same to 90%. This, according to petitioners, supports their
stance that the 70% limitation is arbitrary and confiscatory. On this score, suffice it to say
that these are still proposed legislations. Until Congress amends the law, and absent any
unequivocal basis for its unconstitutionality, the 70% limitation stays.
B. Uniformity and Equitability of Taxation
Article VI, Section 28(1) of the Constitution reads:
The rule of taxation shall be uniform and equitable. The Congress shall evolve a
progressive system of taxation.
Uniformity in taxation means that all taxable articles or kinds of property of the same class
shall be taxed at the same rate. Different articles may be taxed at different amounts

provided that the rate is uniform on the same class everywhere with all people at all
times.86
In this case, the tax law is uniform as it provides a standard rate of 0% or 10% (or 12%) on
all goods and services. Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107
and 108, respectively, of the NIRC, provide for a rate of 10% (or 12%) on sale of goods and
properties, importation of goods, and sale of services and use or lease of properties. These
same sections also provide for a 0% rate on certain sales and transaction.
Neither does the law make any distinction as to the type of industry or trade that will bear
the 70% limitation on the creditable input tax, 5-year amortization of input tax paid on
purchase of capital goods or the 5% final withholding tax by the government. It must be
stressed that the rule of uniform taxation does not deprive Congress of the power to
classify subjects of taxation, and only demands uniformity within the particular class. 87
R.A. No. 9337 is also equitable. The law is equipped with a threshold margin. The VAT rate
of 0% or 10% (or 12%) does not apply to sales of goods or services with gross annual sales
or receipts not exceeding P1,500,000.00.88Also, basic marine and agricultural food
products in their original state are still not subject to the tax, 89 thus ensuring that prices at
the grassroots level will remain accessible. As was stated in Kapatiran ng mga
Naglilingkod sa Pamahalaan ng Pilipinas, Inc. vs. Tan:90
The disputed sales tax is also equitable. It is imposed only on sales of goods or services by
persons
engaged
in
business
with
an
aggregate
gross
annual
sales
exceeding P200,000.00. Small corner sari-sari stores are consequently exempt from its
application. Likewise exempt from the tax are sales of farm and marine products, so that
the costs of basic food and other necessities, spared as they are from the incidence of the
VAT, are expected to be relatively lower and within the reach of the general public.
It is admitted that R.A. No. 9337 puts a premium on businesses with low profit margins,
and unduly favors those with high profit margins. Congress was not oblivious to this. Thus,
to equalize the weighty burden the law entails, the law, under Section 116, imposed a 3%
percentage tax on VAT-exempt persons under Section 109(v), i.e., transactions with gross
annual sales and/or receipts not exceeding P1.5 Million. This acts as a equalizer because in
effect, bigger businesses that qualify for VAT coverage and VAT-exempt taxpayers stand on
equal-footing.
Moreover, Congress provided mitigating measures to cushion the impact of the imposition
of the tax on those previously exempt. Excise taxes on petroleum products 91 and natural
gas92 were reduced. Percentage tax on domestic carriers was removed. 93 Power producers
are now exempt from paying franchise tax. 94
Aside from these, Congress also increased the income tax rates of corporations, in order to
distribute the burden of taxation. Domestic, foreign, and non-resident corporations are
now subject to a 35% income tax rate, from a previous 32%. 95 Intercorporate dividends of
non-resident foreign corporations are still subject to 15% final withholding tax but the tax
credit allowed on the corporations domicile was increased to 20%. 96 The Philippine
Amusement and Gaming Corporation (PAGCOR) is not exempt from income taxes
anymore.97 Even the sale by an artist of his works or services performed for the production
of such works was not spared.
All these were designed to ease, as well as spread out, the burden of taxation, which
would otherwise rest largely on the consumers. It cannot therefore be gainsaid that R.A.
No. 9337 is equitable.

C. Progressivity of Taxation
Lastly, petitioners contend that the limitation on the creditable input tax is anything but
regressive. It is the smaller business with higher input tax-output tax ratio that will suffer
the consequences.
Progressive taxation is built on the principle of the taxpayers ability to pay. This principle
was also lifted from Adam Smiths Canons of Taxation, and it states:
I. The subjects of every state ought to contribute towards the support of the government,
as nearly as possible, in proportion to their respective abilities; that is, in proportion to the
revenue which they respectively enjoy under the protection of the state.
Taxation is progressive when its rate goes up depending on the resources of the person
affected.98
The VAT is an antithesis of progressive taxation. By its very nature, it is regressive. The
principle of progressive taxation has no relation with the VAT system inasmuch as the VAT
paid by the consumer or business for every goods bought or services enjoyed is the same
regardless of income. In
other words, the VAT paid eats the same portion of an income, whether big or small. The
disparity lies in the income earned by a person or profit margin marked by a business,
such that the higher the income or profit margin, the smaller the portion of the income or
profit that is eaten by VAT. A converso, the lower the income or profit margin, the bigger
the part that the VAT eats away. At the end of the day, it is really the lower income group
or businesses with low-profit margins that is always hardest hit.
Nevertheless, the Constitution does not really prohibit the imposition of indirect taxes, like
the VAT. What it simply provides is that Congress shall "evolve a progressive system of
taxation." The Court stated in the Tolentino case, thus:
The Constitution does not really prohibit the imposition of indirect taxes which, like the
VAT, are regressive. What it simply provides is that Congress shall evolve a progressive
system of taxation. The constitutional provision has been interpreted to mean simply that
direct taxes are . . . to be preferred [and] as much as possible, indirect taxes should be
minimized. (E. FERNANDO, THE CONSTITUTION OF THE PHILIPPINES 221 (Second ed.
1977)) Indeed, the mandate to Congress is not to prescribe, but to evolve, a progressive
tax system. Otherwise, sales taxes, which perhaps are the oldest form of indirect taxes,
would have been prohibited with the proclamation of Art. VIII, 17 (1) of the 1973
Constitution from which the present Art. VI, 28 (1) was taken. Sales taxes are also
regressive.
Resort to indirect taxes should be minimized but not avoided entirely because it is difficult,
if not impossible, to avoid them by imposing such taxes according to the taxpayers' ability
to pay. In the case of the VAT, the law minimizes the regressive effects of this imposition
by providing for zero rating of certain transactions (R.A. No. 7716, 3, amending 102 (b)
of the NIRC), while granting exemptions to other transactions. (R.A. No. 7716, 4 amending
103 of the NIRC)99
CONCLUSION
It has been said that taxes are the lifeblood of the government. In this case, it is just an
enema, a first-aid measure to resuscitate an economy in distress. The Court is neither
blind nor is it turning a deaf ear on the plight of the masses. But it does not have the

panacea for the malady that the law seeks to remedy. As in other cases, the Court cannot
strike down a law as unconstitutional simply because of its yokes.
Let us not be overly influenced by the plea that for every wrong there is a remedy, and
that the judiciary should stand ready to afford relief. There are undoubtedly many wrongs
the judicature may not correct, for instance, those involving political questions. . . .
Let us likewise disabuse our minds from the notion that the judiciary is the repository of
remedies for all political or social ills; We should not forget that the Constitution has
judiciously allocated the powers of government to three distinct and separate
compartments; and that judicial interpretation has tended to the preservation of the
independence of the three, and a zealous regard of the prerogatives of each, knowing full
well that one is not the guardian of the others and that, for official wrong-doing, each may
be brought to account, either by impeachment, trial or by the ballot box. 100
The words of the Court in Vera vs. Avelino101 holds true then, as it still holds true now. All
things considered, there is no raison d'tre for the unconstitutionality of R.A. No. 9337.
WHEREFORE, Republic Act No. 9337 not being unconstitutional, the petitions in G.R. Nos.
168056, 168207, 168461, 168463, and 168730, are hereby DISMISSED.
There being no constitutional impediment to the full enforcement and implementation of
R.A. No. 9337, the temporary restraining order issued by the Court on July 1, 2005
is LIFTED upon finality of herein decision.
SO ORDERED.

G.R. No. L-29646 November 10, 1978

MAYOR ANTONIO J. VILLEGAS, petitioner,
vs.
HIU CHIONG TSAI PAO HO and JUDGE FRANCISCO ARCA, respondents.
FERNANDEZ, J.:
This is a petition for certiorari to review tile decision dated September 17, 1968 of
respondent Judge Francisco Arca of the Court of First Instance of Manila, Branch I, in Civil
Case No. 72797, the dispositive portion of winch reads.
Wherefore, judgment is hereby rendered in favor of the petitioner and against the
respondents, declaring Ordinance No. 6 37 of the City of Manila null and void. The
preliminary injunction is made permanent. No pronouncement as to cost.
SO ORDERED.
Manila, Philippines, September 17, 1968.
(SGD.) FRANCISCO
ARCA
Judge
1

The controverted Ordinance No. 6537 was passed by the Municipal Board of Manila on
February 22, 1968 and signed by the herein petitioner Mayor Antonio J. Villegas of Manila
on March 27, 1968. 2
City Ordinance No. 6537 is entitled:
AN ORDINANCE MAKING IT UNLAWFUL FOR ANY PERSON NOT A CITIZEN OF
THE PHILIPPINES TO BE EMPLOYED IN ANY PLACE OF EMPLOYMENT OR TO BE
ENGAGED IN ANY KIND OF TRADE, BUSINESS OR OCCUPATION WITHIN THE
CITY OF MANILA WITHOUT FIRST SECURING AN EMPLOYMENT PERMIT FROM
THE MAYOR OF MANILA; AND FOR OTHER PURPOSES. 3
Section 1 of said Ordinance No. 6537 4 prohibits aliens from being employed or to engage
or participate in any position or occupation or business enumerated therein, whether
permanent, temporary or casual, without first securing an employment permit from the
Mayor of Manila and paying the permit fee of P50.00 except persons employed in the

diplomatic or consular missions of foreign countries, or in the technical assistance

programs of both the Philippine Government and any foreign government, and those
working in their respective households, and members of religious orders or congregations,
sect or denomination, who are not paid monetarily or in kind.
Violations of this ordinance is punishable by an imprisonment of not less than three (3)
months to six (6) months or fine of not less than P100.00 but not more than P200.00 or
both such fine and imprisonment, upon conviction. 5
On May 4, 1968, private respondent Hiu Chiong Tsai Pao Ho who was employed in Manila,
filed a petition with the Court of First Instance of Manila, Branch I, denominated as Civil
Case No. 72797, praying for the issuance of the writ of preliminary injunction and
restraining order to stop the enforcement of Ordinance No. 6537 as well as for a judgment
declaring said Ordinance No. 6537 null and void. 6
In this petition, Hiu Chiong Tsai Pao Ho assigned the following as his grounds for wanting
the ordinance declared null and void:
1) As a revenue measure imposed on aliens employed in the City of Manila,
Ordinance No. 6537 is discriminatory and violative of the rule of the
uniformity in taxation;
2) As a police power measure, it makes no distinction between useful and
non-useful occupations, imposing a fixed P50.00 employment permit, which is
out of proportion to the cost of registration and that it fails to prescribe any
standard to guide and/or limit the action of the Mayor, thus, violating the
fundamental principle on illegal delegation of legislative powers:
3) It is arbitrary, oppressive and unreasonable, being applied only to aliens
who are thus, deprived of their rights to life, liberty and property and
therefore, violates the due process and equal protection clauses of the
Constitution. 7
On May 24, 1968, respondent Judge issued the writ of preliminary injunction and on
September 17, 1968 rendered judgment declaring Ordinance No. 6537 null and void and
making permanent the writ of preliminary injunction. 8
Contesting the aforecited decision of respondent Judge, then Mayor Antonio J. Villegas filed
the present petition on March 27, 1969. Petitioner assigned the following as errors
allegedly committed by respondent Judge in the latter's decision of September 17,1968: 9
I
THE RESPONDENT JUDGE COMMITTED A SERIOUS AND PATENT ERROR OF
LAW IN RULING THAT ORDINANCE NO. 6537 VIOLATED THE CARDINAL RULE
OF UNIFORMITY OF TAXATION.
II

RESPONDENT JUDGE LIKEWISE COMMITTED A GRAVE AND PATENT ERROR OF

LAW IN RULING THAT ORDINANCE NO. 6537 VIOLATED THE PRINCIPLE
AGAINST UNDUE DESIGNATION OF LEGISLATIVE POWER.
III
RESPONDENT JUDGE FURTHER COMMITTED A SERIOUS AND PATENT ERROR
OF LAW IN RULING THAT ORDINANCE NO. 6537 VIOLATED THE DUE PROCESS
AND EQUAL PROTECTION CLAUSES OF THE CONSTITUTION.
Petitioner Mayor Villegas argues that Ordinance No. 6537 cannot be declared null and void
on the ground that it violated the rule on uniformity of taxation because the rule on
uniformity of taxation applies only to purely tax or revenue measures and that Ordinance
No. 6537 is not a tax or revenue measure but is an exercise of the police power of the
state, it being principally a regulatory measure in nature.
The contention that Ordinance No. 6537 is not a purely tax or revenue measure because
its principal purpose is regulatory in nature has no merit. While it is true that the first part
which requires that the alien shall secure an employment permit from the Mayor involves
the exercise of discretion and judgment in the processing and approval or disapproval of
applications for employment permits and therefore is regulatory in character the second
part which requires the payment of P50.00 as employee's fee is not regulatory but a
revenue measure. There is no logic or justification in exacting P50.00 from aliens who have
been cleared for employment. It is obvious that the purpose of the ordinance is to raise
money under the guise of regulation.
The P50.00 fee is unreasonable not only because it is excessive but because it fails to
consider valid substantial differences in situation among individual aliens who are required
to pay it. Although the equal protection clause of the Constitution does not forbid
classification, it is imperative that the classification should be based on real and
substantial differences having a reasonable relation to the subject of the particular
legislation. The same amount of P50.00 is being collected from every employed alien
whether he is casual or permanent, part time or full time or whether he is a lowly
employee or a highly paid executive
Ordinance No. 6537 does not lay down any criterion or standard to guide the Mayor in the
exercise of his discretion. It has been held that where an ordinance of a municipality fails
to state any policy or to set up any standard to guide or limit the mayor's action,
expresses no purpose to be attained by requiring a permit, enumerates no conditions for
its grant or refusal, and entirely lacks standard, thus conferring upon the Mayor arbitrary
and unrestricted power to grant or deny the issuance of building permits, such ordinance
is invalid, being an undefined and unlimited delegation of power to allow or prevent an
activity per se lawful. 10
In Chinese Flour Importers Association vs. Price Stabilization Board, 11 where a law granted
a government agency power to determine the allocation of wheat flour among importers,
the Supreme Court ruled against the interpretation of uncontrolled power as it vested in
the administrative officer an arbitrary discretion to be exercised without a policy, rule, or
standard from which it can be measured or controlled.

It was also held in Primicias vs. Fugoso 12 that the authority and discretion to grant and
refuse permits of all classes conferred upon the Mayor of Manila by the Revised Charter of
Manila is not uncontrolled discretion but legal discretion to be exercised within the limits of
the law.
Ordinance No. 6537 is void because it does not contain or suggest any standard or
criterion to guide the mayor in the exercise of the power which has been granted to him
by the ordinance.
The ordinance in question violates the due process of law and equal protection rule of the
Constitution.
Requiring a person before he can be employed to get a permit from the City Mayor of
Manila who may withhold or refuse it at will is tantamount to denying him the basic right
of the people in the Philippines to engage in a means of livelihood. While it is true that the
Philippines as a State is not obliged to admit aliens within its territory, once an alien is
admitted, he cannot be deprived of life without due process of law. This guarantee
includes the means of livelihood. The shelter of protection under the due process and
equal protection clause is given to all persons, both aliens and citizens. 13
The trial court did not commit the errors assigned.
WHEREFORE, the decision appealed from is hereby affirmed, without pronouncement as to
costs.
SO ORDERED.

G.R. No. L-49336 August 31, 1981

THE PROVINCE OF ABRA, represented by LADISLAO ANCHETA, Provincial
Assessor, petitioner,
vs.
HONORABLE HAROLD M. HERNANDO, in his capacity as Presiding Judge of
Branch I, Court of First Instance Abra; THE ROMAN CATHOLIC BISHOP OF
BANGUED, INC., represented by Bishop Odilo etspueler and Reverend Felipe
Flores, respondents.
FERNANDO, C.J.:
On the face of this certiorari and mandamus petition filed by the Province of Abra, 1 it
clearly appears that the actuation of respondent Judge Harold M. Hernando of the Court of
First Instance of Abra left much to be desired. First, there was a denial of a motion to
dismiss 2 an action for declaratory relief by private respondent Roman Catholic Bishop of
Bangued desirous of being exempted from a real estate tax followed by a summary
judgment 3 granting such exemption, without even hearing the side of petitioner. In the
rather vigorous language of the Acting Provincial Fiscal, as counsel for petitioner,
respondent Judge "virtually ignored the pertinent provisions of the Rules of Court; ...
wantonly violated the rights of petitioner to due process, by giving due course to the
petition of private respondent for declaratory relief, and thereafter without allowing
petitioner to answer and without any hearing, adjudged the case; all in total disregard of
basic laws of procedure and basic provisions of due process in the constitution, thereby
indicating a failure to grasp and understand the law, which goes into the competence of
the Honorable Presiding Judge." 4
It was the submission of counsel that an action for declaratory relief would be proper only
before a breach or violation of any statute, executive order or regulation. 5 Moreover, there
being a tax assessment made by the Provincial Assessor on the properties of respondent
Roman Catholic Bishop, petitioner failed to exhaust the administrative remedies available
under Presidential Decree No. 464 before filing such court action. Further, it was pointed
out to respondent Judge that he failed to abide by the pertinent provision of such
Presidential Decree which provides as follows: "No court shall entertain any suit assailing
the validity of a tax assessed under this Code until the taxpayer, shall have paid, under
protest, the tax assessed against him nor shall any court declare any tax invalid by reason
of irregularities or informalities in the proceedings of the officers charged with the
assessment or collection of taxes, or of failure to perform their duties within this time
herein specified for their performance unless such irregularities, informalities or failure
shall have impaired the substantial rights of the taxpayer; nor shall any court declare any
portion of the tax assessed under the provisions of this Code invalid except upon condition
that the taxpayer shall pay the just amount of the tax, as determined by the court in the
pending proceeding." 6

When asked to comment, respondent Judge began with the allegation that there "is no
question that the real properties sought to be taxed by the Province of Abra are properties
of the respondent Roman Catholic Bishop of Bangued, Inc." 7 The very next sentence
assumed the very point it asked when he categorically stated: "Likewise, there is no
dispute that the properties including their procedure are actually, directly and exclusively
used by the Roman Catholic Bishop of Bangued, Inc. for religious or charitable
purposes." 8 For him then: "The proper remedy of the petitioner is appeal and not this
special civil action." 9 A more exhaustive comment was submitted by private respondent
Roman Catholic Bishop of Bangued, Inc. It was, however, unable to lessen the force of the
objection raised by petitioner Province of Abra, especially the due process aspect. it is to
be admitted that his opposition to the petition, pressed with vigor, ostensibly finds a
semblance of support from the authorities cited. It is thus impressed with a scholarly
aspect. It suffers, however, from the grave infirmity of stating that only a pure question of
law is presented when a claim for exemption is made.
The petition must be granted.
1. Respondent Judge would not have erred so grievously had he merely compared the
provisions of the present Constitution with that appearing in the 1935 Charter on the tax
exemption of "lands, buildings, and improvements." There is a marked difference. Under
the 1935 Constitution: "Cemeteries, churches, and parsonages or convents appurtenant
thereto, and all lands, buildings, and improvements used exclusively for religious,
charitable, or educational purposes shall be exempt from taxation." 10 The present
Constitution added "charitable institutions, mosques, and non-profit cemeteries" and
required that for the exemption of ":lands, buildings, and improvements," they should not
only be "exclusively" but also "actually and "directly" used for religious or charitable
purposes. 11 The Constitution is worded differently. The change should not be ignored. It
must be duly taken into consideration. Reliance on past decisions would have sufficed
were the words "actually" as well as "directly" not added. There must be proof therefore of
the actual and direct use of the lands, buildings, and improvements for religious or
charitable purposes to be exempt from taxation. According to Commissioner of Internal
Revenue v. Guerrero: 12 "From 1906, in Catholic Church v. Hastings to 1966, in Esso
Standard Eastern, Inc. v. Acting Commissioner of Customs, it has been the constant and
uniform holding that exemption from taxation is not favored and is never presumed, so
that if granted it must be strictly construed against the taxpayer. Affirmatively put, the law
frowns on exemption from taxation, hence, an exempting provision should be
construedstrictissimi juris." 13 In Manila Electric Company v. Vera, 14 a 1975 decision, such
principle was reiterated, reference being made to Republic Flour Mills, Inc. v.
Commissioner of Internal Revenue; 15 Commissioner of Customs v. Philippine Acetylene
Co. & CTA; 16 and Davao Light and Power Co., Inc. v. Commissioner of Customs. 17
2. Petitioner Province of Abra is therefore fully justified in invoking the protection of
procedural due process. If there is any case where proof is necessary to demonstrate that
there is compliance with the constitutional provision that allows an exemption, this is it.
Instead, respondent Judge accepted at its face the allegation of private respondent. All
that was alleged in the petition for declaratory relief filed by private respondents, after
mentioning certain parcels of land owned by it, are that they are used "actually, directly
and exclusively" as sources of support of the parish priest and his helpers and also of
private respondent Bishop. 18 In the motion to dismiss filed on behalf of petitioner Province

of Abra, the objection was based primarily on the lack of jurisdiction, as the validity of a
tax assessment may be questioned before the Local Board of Assessment Appeals and not
with a court. There was also mention of a lack of a cause of action, but only because, in its
view, declaratory relief is not proper, as there had been breach or violation of the right of
government to assess and collect taxes on such property. It clearly appears, therefore, that
in failing to accord a hearing to petitioner Province of Abra and deciding the case
immediately in favor of private respondent, respondent Judge failed to abide by the
constitutional command of procedural due process.
WHEREFORE, the petition is granted and the resolution of June 19, 1978 is set aside.
Respondent Judge, or who ever is acting on his behalf, is ordered to hear the case on the
merit. No costs.

G.R. No. L-23771 August 4, 1988

THE COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
LINGAYEN GULF ELECTRIC POWER CO., INC. and THE COURT OF TAX
APPEALS, respondents.

SARMIENTO, J.:
This is an appeal from the decision * of the Court of Tax Appeals (C.T.A., for brevity) dated
September 15, 1964 in C.T.A. Cases Nos. 581 and 1302, which were jointly heard upon
agreement of the parties, absolving the respondent taxpayer from liability for the
deficiency percentage, franchise, and fixed taxes and surcharge assessed against it in the
sums of P19,293.41 and P3,616.86 for the years 1946 to 1954 and 1959 to 1961,
respectively.
The respondent taxpayer, Lingayen Gulf Electric Power Co., Inc., operates an electric
power plant serving the adjoining municipalities of Lingayen and Binmaley, both in the
province of Pangasinan, pursuant to the municipal franchise granted it by their respective
municipal councils, under Resolution Nos. 14 and 25 of June 29 and July 2, 1946,
respectively. Section 10 of these franchises provide that:
...The said grantee in consideration of the franchise hereby granted, shall pay quarterly
into the Provincial Treasury of Pangasinan, one per centum of the gross earnings obtained
thru this privilege during the first twenty years and two per centum during the remaining
fifteen years of the life of said franchise.
On February 24, 1948, the President of the Philippines approved the franchises granted to
the private respondent.
On November 21, 1955, the Bureau of Internal Revenue (BIR) assessed against and
demanded from the private respondent the total amount of P19,293.41 representing
deficiency franchise taxes and surcharges for the years 1946 to 1954 applying the
franchise tax rate of 5% on gross receipts from March 1, 1948 to December 31, 1954 as
prescribed in Section 259 of the National Internal Revenue Code, instead of the lower rates
as provided in the municipal franchises. On September 29, 1956, the private respondent
requested for a reinvestigation of the case on the ground that instead of incurring a
deficiency liability, it made an overpayment of the franchise tax. On April 30, 1957, the
BIR through its regional director, denied the private respondent's request for
reinvestigation and reiterated the demand for payment of the same. In its letters dated
July 2, and August 9, 1958 to the petitioner Commissioner, the private respondent
protested the said assessment and requested for a conference with a view to settling the
liability amicably. In his letters dated July 25 and August 28, 1958, the Commissioner
denied the request of the private respondent. Thus, the appeal to the respondent Court of
Tax Appeals on September 19, 1958, docketed as C.T.A. Case No. 581.
In a letter dated August 21, 1962, the Commissioner demanded from the private
respondent the payment of P3,616.86 representing deficiency franchise tax and
surcharges for the years 1959 to 1961 again applying the franchise tax rate of 5% on
gross receipts as prescribed in Section 259 of the National Internal Revenue Code. In a
letter dated October 5, 1962, the private respondent protested the assessment and
requested reconsideration thereof The same was denied on November 9, 1962. Thus, the
appeal to the respondent Court of Appeals on November 29, 1962, docketed as C.T.A. No.
1302.

Pending the hearing of the said cases, Republic Act (R.A.) No. 3843 was passed on June 22,
1 963, granting to the private respondent a legislative franchise for the operation of the
electric light, heat, and power system in the same municipalities of Pangasinan. Section 4
thereof provides that:
In consideration of the franchise and rights hereby granted, the grantee shall pay into the
Internal Revenue office of each Municipality in which it is supplying electric current to the
public under this franchise, a tax equal to two per centum of the gross receipts from
electric current sold or supplied under this franchise. Said tax shall be due and payable
quarterly and shall be in lieu of any and all taxes and/or licenses of any kind, nature or
description levied, established, or collected by any authority whatsoever, municipal,
provincial or national, now or in the future, on its poles, wires, insulator ... and on its
franchise, rights, privileges, receipts, revenues and profits, from which taxes and/or
licenses, the grantee is hereby expressly exempted and effective further upon the date the
original franchise was granted, no other tax and/or licenses other than the franchise tax of
two per centum on the gross receipts as provided for in the original franchise shall be
collected, any provision of law to the contrary notwithstanding.
On September 15, 1964, the respondent court ruled that the provisions of R.A. No. 3843
should apply and accordingly dismissed the claim of the Commissioner of Internal
Revenue. The said ruling is now the subject of the petition at bar.
The issues raised for resolution are:
1. Whether or not the 5% franchise tax prescribed in Section 259 of the National Internal
Revenue Code assessed against the private respondent on its gross receipts realized
before the effectivity of R.A- No. 3843 is collectible.
2. Whether or not Section 4 of R.A. No. 3843 is unconstitutional for being violative of the
"uniformity and equality of taxation" clause of the Constitution.
3. If the abovementioned Section 4 of R.A. No. 3843 is valid, whether or not it could be
given retroactive effect so as to render uncollectible the taxes in question which were
assessed before its enactment.
4. Whether or not the respondent taxpayer is liable for the fixed and deficiency percentage
taxes in the amount of P3,025.96 for the period from January 1, 1946 to February 29,
1948, the period before the approval of its municipal franchises.
The first issue raised by the petitioner before us is whether or not the five percent (5%)
franchise tax prescribed in Section 259 of the National Internal Revenue Code
(Commonwealth Act No. 466 as amended by R.A. No. 39) assessed against the private
respondent on its gross receipts realized before the effectivity of R.A- No. 3843 is
collectible. It is the contention of the petitioner Commissioner of Internal Revenue that the
private respondent should have been held liable for the 5% franchise tax on gross receipts
prescribed in Section 259 of the Tax Code, instead of the lower franchise tax rates
provided in the municipal franchises (1% of gross earnings for the first twenty years and
2% for the remaining fifteen years of the life of the franchises) because Section 259 of the
Tax Code, as amended by RA No. 39 of October 1, 1946, applied to existing and future

franchises. The franchises of the private respondent were already in existence at the time
of the adoption of the said amendment, since the franchises were accepted on March 1,
1948 after approval by the President of the Philippines on February 24, 1948. The private
respondent's original franchises did not contain the proviso that the tax provided therein
"shall be in lieu of all taxes;" moreover, the franchises contained a reservation clause that
they shag be subject to amendment, alteration, or repeal, but even in the absence of such
cause, the power of the Legislature to alter, amend, or repeal any franchise is always
deemed reserved. The franchise of the private respondent have been modified or
amended by Section 259 of the Tax Code, the petitioner submits.
We find no merit in petitioner's contention. R.A. No. 3843 granted the private respondent a
legislative franchise in June, 1963, amending, altering, or even repealing the original
municipal franchises, and providing that the private respondent should pay only a 2%
franchise tax on its gross receipts, "in lieu of any and all taxes and/or licenses of any kind,
nature or description levied, established, or collected by any authority whatsoever,
municipal, provincial, or national, now or in the future ... and effective further upon
the date the original franchise was granted, no other tax and/or licenses other than the
franchise tax of two per centum on the gross receipts ... shall be collected, any provision
of law to the contrary notwithstanding." Thus, by virtue of R.A- No. 3843, the private
respondent was liable to pay only the 2% franchise tax, effective from the date the original
municipal franchise was granted.
On the question as to whether or not Section 4 of R.A. No. 3843 is unconstitutional for
being violative of the "uniformity and equality of taxation" clause of the Constitution, and,
if adjudged valid, whether or not it should be given retroactive effect, the petitioner
submits that the said law is unconstitutional insofar as it provides for the payment by the
private respondent of a franchise tax of 2% of its gross receipts, while other taxpayers
similarly situated were subject to the 5% franchise tax imposed in Section 259 of the Tax
Code, thereby discriminatory and violative of the rule on uniformity and equality of
taxation.
A tax is uniform when it operates with the same force and effect in every place where the
subject of it is found. Uniformity means that all property belonging to the same class shall
be taxed alike The Legislature has the inherent power not only to select the subjects of
taxation but to grant exemptions. Tax exemptions have never been deemed violative of
the equal protection clause. 1 It is true that the private respondents municipal franchises
were obtained under Act No. 667 2 of the Philippine Commission, but these original
franchises have been replaced by a new legislative franchise, i.e. R.A. No. 3843. As
correctly held by the respondent court, the latter was granted subject to the terms and
conditions established in Act No. 3636, 3 as amended by C.A. No. 132. These conditions
Identify the private respondent's power plant as falling within that class of power plants
created by Act No. 3636, as amended. The benefits of the tax reduction provided by law
(Act No. 3636 as amended by C.A. No. 132 and R.A. No. 3843) apply to the respondent's
power plant and others circumscribed within this class. R.A-No. 3843 merely transferred
the petitioner's power plant from that class provided for in Act No. 667, as amended, to
which it belonged until the approval of R.A- No. 3843, and placed it within the class falling
under Act No. 3636, as amended. Thus, it only effected the transfer of a taxable property
from one class to another.

We do not have the authority to inquire into the wisdom of such act. Furthermore, the 5%
franchise tax rate provided in Section 259 of the Tax Code was never intended to have a
universal application. 4 We note that the said Section 259 of the Tax Code expressly allows
the payment of taxes at rates lower than 5% when the charter granting the franchise of a
grantee, like the one granted to the private respondent under Section 4 of R.A. No. 3843,
precludes the imposition of a higher tax. R.A. No. 3843 did not only fix and specify a
franchise tax of 2% on its gross receipts, but made it "in lieu of any and all taxes, all laws
to the contrary notwithstanding," thus, leaving no room for doubt regarding the legislative
intent. "Charters or special laws granted and enacted by the Legislature are in the nature
of private contracts. They do not constitute a part of the machinery of the general
government. They are usually adopted after careful consideration of the private rights in
relation with resultant benefits to the State ... in passing a special charter the attention of
the Legislature is directed to the facts and circumstances which the act or charter is
intended to meet. The Legislature consider (sic) and make (sic) provision for all the
circumstances of a particular case." 5 In view of the foregoing, we find no reason to disturb
the respondent court's ruling upholding the constitutionality of the law in question.
Given its validity, should the said law be applied retroactively so as to render uncollectible
the taxes in question which were assessed before its enactment? The question of whether
a statute operates retrospectively or only prospectively depends on the legislative intent.
In the instant case, Act No. 3843 provides that "effective ... upon the date the original
franchise was granted, no other tax and/or licenses other than the franchise tax of two per
centum on the gross receipts ... shall be collected, any provision to the contrary
notwithstanding." Republic Act No. 3843 therefore specifically provided for the retroactive
effect of the law.
The last issue to be resolved is whether or not the private respondent is liable for the fixed
and deficiency percentage taxes in the amount of P3,025.96 (i.e. for the period from
January 1, 1946 to February 29, 1948) before the approval of its municipal franchises. As
aforestated, the franchises were approved by the President only on February 24, 1948.
Therefore, before the said date, the private respondent was liable for the payment of
percentage and fixed taxes as seller of light, heat, and power which as the petitioner
claims, amounted to P3,025.96. The legislative franchise (R.A. No. 3843) exempted the
grantee from all kinds of taxes other than the 2% tax from the date the original franchise
was granted. The exemption, therefore, did not cover the period before the franchise was
granted, i.e. before February 24, 1948. However, as pointed out by the respondent court in
its findings, during the period covered by the instant case, that is from January 1, 1946 to
December 31, 1961, the private respondent paid the amount of P34,184.36, which was
very much more than the amount rightfully due from it. Hence, the private respondent
should no longer be made to pay for the deficiency tax in the amount of P3,025.98 for the
period from January 1, 1946 to February 29, 1948.
WHEREFORE, the appealed decision of the respondent Court of Tax Appeals is hereby
AFFIRMED. No pronouncement as to costs. SO ORDERED.

G.R. No. L-4817

May 26, 1954

SILVESTER M. PUNSALAN, ET AL., plaintiffs-appellants,

vs.
THE MUNICIPAL BOARD OF THE CITY OF MANILA, ET AL., defendants-appellants.
REYES, J.:
This suit was commenced in the Court of First Instance of Manila by two lawyers, a medical
practitioner, a public accountant, a dental surgeon and a pharmacist, purportedly "in their
own behalf and in behalf of other professionals practising in the City of Manila who may
desire to join it." Object of the suit is the annulment of Ordinance No. 3398 of the City of
Manila together with the provision of the Manila charter authorizing it and the refund of
taxes collected under the ordinance but paid under protest.
The ordinance in question, which was approved by the municipal board of the City of
Manila on July 25, 1950, imposes a municipal occupation tax on persons exercising various
professions in the city and penalizes non-payment of the tax "by a fine of not more than
two hundred pesos or by imprisonment of not more than six months, or by both such fine
and imprisonment in the discretion of the court." Among the professions taxed were those
to which plaintiffs belong. The ordinance was enacted pursuant to paragraph (1) of section
18 of the Revised Charter of the City of Manila (as amended by Republic Act No. 409),
which empowers the Municipal Board of said city to impose a municipal occupation tax,
not to exceed P50 per annum, on persons engaged in the various professions above
referred to.
Having already paid their occupation tax under section 201 of the National Internal
Revenue Code, plaintiffs, upon being required to pay the additional tax prescribed in the
ordinance, paid the same under protest and then brought the present suit for the purpose
already stated. The lower court upheld the validity of the provision of law authorizing the
enactment of the ordinance but declared the ordinance itself illegal and void on the
ground that the penalty there in provided for non-payment of the tax was not legally
authorized. From this decision both parties appealed to this Court, and the only question
they have presented for our determination is whether this ruling is correct or not, for
though the decision is silent on the refund of taxes paid plaintiffs make no assignment of
error on this point.

To begin with defendants' appeal, we find that the lower court was in error in saying that
the imposition of the penalty provided for in the ordinance was without the authority of
law. The last paragraph (kk) of the very section that authorizes the enactment of this tax
ordinance (section 18 of the Manila Charter) in express terms also empowers the Municipal
Board "to fix penalties for the violation of ordinances which shall not exceed to(sic) two
hundred pesos fine or six months" imprisonment, or both such fine and imprisonment, for
a single offense." Hence, the pronouncement below that the ordinance in question is
illegal and void because it imposes a penalty not authorized by law is clearly without
basis.
As to plaintiffs' appeal, the contention in substance is that this ordinance and the law
authorizing it constitute class legislation, are unjust and oppressive, and authorize what
amounts to double taxation.
In raising the hue and cry of "class legislation", the burden of plaintiffs' complaint is not
that the professions to which they respectively belong have been singled out for the
imposition of this municipal occupation tax; and in any event, the Legislature may, in its
discretion, select what occupations shall be taxed, and in the exercise of that discretion it
may tax all, or it may select for taxation certain classes and leave the others untaxed.
(Cooley on Taxation, Vol. 4, 4th ed., pp. 3393-3395.) Plaintiffs' complaint is that while the
law has authorized the City of Manila to impose the said tax, it has withheld that authority
from other chartered cities, not to mention municipalities. We do not think it is for the
courts to judge what particular cities or municipalities should be empowered to impose
occupation taxes in addition to those imposed by the National Government. That matter is
peculiarly within the domain of the political departments and the courts would do well not
to encroach upon it. Moreover, as the seat of the National Government and with a
population and volume of trade many times that of any other Philippine city or
municipality, Manila, no doubt, offers a more lucrative field for the practice of the
professions, so that it is but fair that the professionals in Manila be made to pay a higher
occupation tax than their brethren in the provinces.
Plaintiffs brand the ordinance unjust and oppressive because they say that it creates
discrimination within a class in that while professionals with offices in Manila have to pay
the tax, outsiders who have no offices in the city but practice their profession therein are
not subject to the tax. Plaintiffs make a distinction that is not found in the ordinance. The
ordinance imposes the tax upon every person "exercising" or "pursuing" in the City of
Manila naturally any one of the occupations named, but does not say that such person
must have his office in Manila. What constitutes exercise or pursuit of a profession in the
city is a matter of judicial determination. The argument against double taxation may not
be invoked where one tax is imposed by the state and the other is imposed by the city (1
Cooley on Taxation, 4th ed., p. 492), it being widely recognized that there is nothing
inherently obnoxious in the requirement that license fees or taxes be exacted with respect
to the same occupation, calling or activity by both the state and the political subdivisions
thereof. (51 Am. Jur., 341.)
In view of the foregoing, the judgment appealed from is reversed in so far as it declares
Ordinance No. 3398 of the City of Manila illegal and void and affirmed in so far as it holds
the validity of the provision of the Manila charter authorizing it. With costs against
plaintiffs-appellants.

G.R. No. 132527. July 29, 2005

COCONUT OIL REFINERS ASSOCIATION, INC. represented by its President, JESUS
L. ARRANZA, PHILIPPINE ASSOCIATION OF MEAT PROCESSORS, INC. (PAMPI),
represented by its Secretary, ROMEO G. HIDALGO, FEDERATION OF FREE
FARMERS (FFF), represented by its President, JEREMIAS U. MONTEMAYOR, and
BUKLURAN NG MANGGAGAWANG PILIPINO (BMP), represented by its
Chairperson, FELIMON C. LAGMAN, Petitioners,

vs.
HON. RUBEN TORRES, in his capacity as Executive Secretary; BASES
CONVERSION AND DEVELOPMENT AUTHORITY, CLARK DEVELOPMENT
CORPORATION, SUBIC BAY METROPOLITAN AUTHORITY, 88 MART DUTY FREE,
FREEPORT TRADERS, PX CLUB, AMERICAN HARDWARE, ROYAL DUTY FREE
SHOPS, INC., DFS SPORTS, ASIA PACIFIC, MCI DUTY FREE DISTRIBUTOR CORP.
(formerly MCI RESOURCES, CORP.), PARK & SHOP, DUTY FREE COMMODITIES, L.
FURNISHING, SHAMBURGH, SUBIC DFS, ARGAN TRADING CORP., ASIPINE CORP.,
BEST BUY, INC., PX CLUB, CLARK TRADING, DEMAGUS TRADING CORP., D.F.S.
SPORTS UNLIMITED, INC., DUTY FREE FIRST SUPERSTORE, INC., FREEPORT, JC
MALL DUTY FREE INC. (formerly 88 Mart [Clark] Duty Free Corp.), LILLY HILL
CORP., MARSHALL, PUREGOLD DUTY FREE, INC., ROYAL DFS and ZAXXON
PHILIPPINES, INC., Respondents.
DECISION
AZCUNA, J.:
This is a Petition for Prohibition and Injunction seeking to enjoin and prohibit the Executive
Branch, through the public respondents Ruben Torres in his capacity as Executive
Secretary, the Bases Conversion Development Authority (BCDA), the Clark Development
Corporation (CDC) and the Subic Bay Metropolitan Authority (SBMA), from allowing, and
the private respondents from continuing with, the operation of tax and duty-free shops
located at the Subic Special Economic Zone (SSEZ) and the Clark Special Economic Zone
(CSEZ), and to declare the following issuances as unconstitutional, illegal, and void:
1. Section 5 of Executive Order No. 80,1 dated April 3, 1993, regarding the CSEZ.
2. Executive Order No. 97-A, dated June 19, 1993, pertaining to the SSEZ.
3. Section 4 of BCDA Board Resolution No. 93-05-034,2 dated May 18, 1993, pertaining to
the CSEZ.
Petitioners contend that the aforecited issuances are unconstitutional and void as they
constitute executive lawmaking, and that they are contrary to Republic Act No. 7227 3 and
in violation of the Constitution, particularly Section 1, Article III (equal protection clause),
Section 19, Article XII (prohibition of unfair competition and combinations in restraint of
trade), and Section 12, Article XII (preferential use of Filipino labor, domestic materials and
locally produced goods).
The facts are as follows:
On March 13, 1992, Republic Act No. 7227 was enacted, providing for, among other things,
the sound and balanced conversion of the Clark and Subic military reservations and their
extensions into alternative productive uses in the form of special economic zones in order
to promote the economic and social development of Central Luzon in particular and the
country in general. Among the salient provisions are as follows:
SECTION 12. Subic Special Economic Zone.

...
The abovementioned zone shall be subject to the following policies:
(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 ensuringfree 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;4
(c) The provision 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 Ecoomic 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 development of municipalities outside the City of Olangapo and the
Municipality of Subic, and other municipalities contiguous to the base areas.
...
SECTION 15. Clark and Other Special Economic Zones. Subject to the concurrence by
resolution of the local government units directly affected, the President is hereby
authorized to create by executive proclamation a Special Economic Zone covering the
lands occupied by the Clark military reservations and its contiguous extensions as
embraced, covered and defined by the 1947 Military Bases Agreement between the
Philippines and the United States of America, as amended, located within the territorial
jurisdiction of Angeles City, Municipalities of Mabalacat and Porac, Province of Pampanga
and the Municipality of Capas, Province of Tarlac, in accordance with the policies as herein
provided insofar as applicable to the Clark military reservations.
The governing body of the Clark Special Economic Zone shall likewise be established by
executive proclamation with such powers and functions exercised by the Export Processing
Zone Authority pursuant to Presidential Decree No. 66 as amended.
The policies to govern and regulate the Clark Special Economic Zone shall be determined
upon consultation with the inhabitants of the local government units directly affected
which shall be conducted within six (6) months upon approval of this Act.

Similarly, subject to the concurrence by resolution of the local government units directly
affected, the President shall create other Special Economic Zones, in the base areas of
Wallace Air Station in San Fernando, La Union (excluding areas designated for
communications, advance warning and radar requirements of the Philippine Air Force to be
determined by the Conversion Authority) and Camp John Hay in the City of Baguio.
Upon recommendation of the Conversion Authority, the President is likewise authorized to
create Special Economic Zones covering the Municipalities of Morong, Hermosa,
Dinalupihan, Castillejos and San Marcelino.
On April 3, 1993, President Fidel V. Ramos issued Executive Order No. 80, which declared,
among others, that Clark shall have all the applicable incentives granted to the Subic
Special Economic and Free Port Zone under Republic Act No. 7227. The pertinent provision
assailed therein is as follows:
SECTION 5. Investments Climate in the CSEZ. Pursuant to Section 5(m) and Section 15
of RA 7227, the BCDA shall promulgate all necessary policies, rules and regulations
governing the CSEZ, including investment incentives, in consultation with the local
government units and pertinent government departments for implementation by the CDC.
Among others, the CSEZ shall have all the applicable incentives in the Subic Special
Economic and Free Port Zone under RA 7227 and those applicable incentives granted in
the Export Processing Zones, the Omnibus Investments Code of 1987, the Foreign
Investments Act of 1991 and new investments laws which may hereinafter be enacted.
The CSEZ Main Zone covering the Clark Air Base proper shall have all the aforecited
investment incentives, while the CSEZ Sub-Zone covering the rest of the CSEZ shall have
limited incentives. The full incentives in the Clark SEZ Main Zone and the limited
incentives in the Clark SEZ Sub-Zone shall be determined by the BCDA.
Pursuant to the directive under Executive Order No. 80, the BCDA passed Board Resolution
No. 93-05-034 on May 18, 1993, allowing the tax and duty-free sale at retail of consumer
goods imported via Clark for consumption outside the CSEZ. The assailed provisions of
said resolution read, as follows:
Section 4. SPECIFIC INCENTIVES IN THE CSEZ MAIN ZONE. The CSEZ-registered
enterprises/businesses shall be entitled to all the incentives available under R.A. No. 7227,
E.O. No. 226 and R.A. No. 7042 which shall include, but not limited to, the following:
I. As in Subic Economic and Free Port Zone:
A. Customs:
...
4. Tax and duty-free purchase and consumption of goods/articles (duty free shopping)
within the CSEZ Main Zone.

5. For individuals, duty-free consumer goods may be brought out of the CSEZ Main Zone
into the Philippine Customs territory but not to exceed US$200.00 per month per CDCregistered person, similar to the limits imposed in the Subic SEZ. This privilege shall be
enjoyed only once a month. Any excess shall be levied taxes and duties by the Bureau of
Customs.
On June 10, 1993, the President issued Executive Order No. 97, "Clarifying the Tax and
Duty Free Incentive Within the Subic Special Economic Zone Pursuant to R.A. No. 7227."
Said issuance in part states, thus:
SECTION 1. On Import Taxes and Duties Tax and duty-free importations shall apply only
to raw materials, capital goods and equipment brought in by business enterprises into the
SSEZ. Except for these items, importations of other goods into the SSEZ, whether by
business enterprises or resident individuals, are subject to taxes and duties under relevant
Philippine laws.
The exportation or removal of tax and duty-free goods from the territory of the SSEZ to
other parts of the Philippine territory shall be subject to duties and taxes under relevant
Philippine laws.
Nine days after, on June 19, 1993, Executive Order No. 97-A was issued, "Further Clarifying
the Tax and Duty-Free Privilege Within the Subic Special Economic and Free Port Zone."
The relevant provisions read, as follows:
SECTION 1. The following guidelines shall govern the tax and duty-free privilege within the
Secured Area of the Subic Special Economic and Free Port Zone:
1.1 The Secured Area consisting of the presently fenced-in former Subic Naval Base shall
be the only completely tax and duty-free area in the SSEFPZ. Business enterprises and
individuals (Filipinos and foreigners) residing within the Secured Area are free to import
raw materials, capital goods, equipment, and consumer items tax and duty-free.
Consumption items, however, must be consumed within the Secured Area. Removal of raw
materials, capital goods, equipment and consumer items out of the Secured Area for sale
to non-SSEFPZ registered enterprises shall be subject to the usual taxes and duties, except
as may be provided herein.
1.2. Residents of the SSEFPZ living outside the Secured Area can enter the Secured Area
and consume any quantity of consumption items in hotels and restaurants within the
Secured Area. However, these residents can purchase and bring out of the Secured Area to
other parts of the Philippine territory consumer items worth not exceeding US$100 per
month per person. Only residents age 15 and over are entitled to this privilege.
1.3. Filipinos not residing within the SSEFPZ can enter the Secured Area and consume any
quantity of consumption items in hotels and restaurants within the Secured Area.
However, they can purchase and bring out [of] the Secured Area to other parts of the
Philippine territory consumer items worth not exceeding US$200 per year per person. Only
Filipinos age 15 and over are entitled to this privilege.

Petitioners assail the $100 monthly and $200 yearly tax-free shopping privileges granted
by the aforecited provisions respectively to SSEZ residents living outside the Secured Area
of the SSEZ and to Filipinos aged 15 and over residing outside the SSEZ.
On February 23, 1998, petitioners thus filed the instant petition, seeking the declaration of
nullity of the assailed issuances on the following grounds:
I.
EXECUTIVE ORDER NO. 97-A, SECTION 5 OF EXECUTIVE ORDER NO. 80, AND SECTION 4 OF
BCDA BOARD RESOLUTION NO. 93-05-034 ARE NULL AND VOID [FOR] BEING AN EXERCISE
OF EXECUTIVE LAWMAKING.
II.
EXECUTIVE ORDER NO. 97-A, SECTION 5 OF EXECUTIVE ORDER NO. 80, AND SECTION 4 OF
BCDA BOARD RESOLUTION NO. 93-05-034 ARE UNCONSTITUTIONAL FOR BEING VIOLATIVE
OF THE EQUAL PROTECTION CLAUSE AND THE PROHIBITION AGAINST UNFAIR
COMPETITION AND PRACTICES IN RESTRAINT OF TRADE.
III.
EXECUTIVE ORDER NO. 97-A, SECTION 5 OF EXECUTIVE ORDER NO. 80, AND SECTION 4 OF
BCDA BOARD RESOLUTION NO. 93-05-034 ARE NULL AND VOID [FOR] BEING VIOLATIVE OF
REPUBLIC ACT NO. 7227.
IV.
THE CONTINUED IMPLEMENTATION OF THE CHALLENGED ISSUANCES IF NOT RESTRAINED
WILL CONTINUE TO CAUSE PETITIONERS TO SUFFER GRAVE AND IRREPARABLE INJURY. 5
In their Comments, respondents point out procedural issues, alleging lack of petitioners
legal standing, the unreasonable delay in the filing of the petition, laches, and the
propriety of the remedy of prohibition.
Anent the claim on lack of legal standing, respondents argue that petitioners, being mere
suppliers of the local retailers operating outside the special economic zones, do not stand
to suffer direct injury in the enforcement of the issuances being assailed herein. Assuming
this is true, this Court has nevertheless held that in cases of paramount importance where
serious constitutional questions are involved, the standing requirements may be relaxed
and a suit may be allowed to prosper even where there is no direct injury to the party
claiming the right of judicial review.6
In the same vein, with respect to the other alleged procedural flaws, even assuming the
existence of such defects, this Court, in the exercise of its discretion, brushes aside these
technicalities and takes cognizance of the petition considering the importance to the
public of the present case and in keeping with the duty to determine whether the other
branches of the government have kept themselves within the limits of the Constitution. 7

Now, on the constitutional arguments raised:

As this Court enters upon the task of passing on the validity of an act of a co-equal and
coordinate branch of the Government, it bears emphasis that deeply ingrained in our
jurisprudence is the time-honored principle that a statute is presumed to be valid. 8 This
presumption is rooted in the doctrine of separation of powers which enjoins upon the three
coordinate departments of the Government a becoming courtesy for each others
acts.9 Hence, to doubt is to sustain. The theory is that before the act was done or the law
was enacted, earnest studies were made by Congress, or the President, or both, to insure
that the Constitution would not be breached. 10 This Court, however, may declare a law, or
portions thereof, unconstitutional where a petitioner has shown a clear and unequivocal
breach of the Constitution, not merely a doubtful or argumentative one. 11 In other words,
before a statute or a portion thereof may be declared unconstitutional, it must be shown
that the statute or issuance violates the Constitution clearly, palpably and plainly, and in
such a manner as to leave no doubt or hesitation in the mind of the Court. 12
The Issue on Executive Legislation
Petitioners claim that the assailed issuances (Executive Order No. 97-A; Section 5 of
Executive Order No. 80; and Section 4 of BCDA Board Resolution No. 93-05-034) constitute
executive legislation, in violation of the rule on separation of powers. Petitioners argue
that the Executive Department, by allowing through the questioned issuances the setting
up of tax and duty-free shops and the removal of consumer goods and items from the
zones without payment of corresponding duties and taxes, arbitrarily provided additional
exemptions to the limitations imposed by Republic Act No. 7227, which limitations
petitioners identify as follows:
(1) [Republic Act No. 7227] allowed only tax and duty-free importation of raw materials,
capital and equipment.
(2) It provides that any exportation or removal of goods from the territory of the Subic
Special Economic Zone to 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.
Anent the first alleged limitation, petitioners contend that the wording of Republic Act No.
7227 clearly limits the grant of tax incentives to the importation of raw materials, capital
and equipment only. Hence, they claim that the assailed issuances constitute executive
legislation for invalidly granting tax incentives in the importation of consumer goods such
as those being sold in the duty-free shops, in violation of the letter and intent of Republic
Act No. 7227.
A careful reading of Section 12 of Republic Act No. 7227, which pertains to the SSEZ,
would show that it does not restrict the duty-free importation only to "raw materials,
capital and equipment." Section 12 of the cited law is partly reproduced, as follows:
SECTION 12. Subic Special Economic Zone.
...

The abovementioned zone shall be subject to the following policies:

...
(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. 13
While it is true that Section 12 (b) of Republic Act No. 7227 mentions only raw materials,
capital and equipment, this does not necessarily mean that the tax and duty-free buying
privilege is limited to these types of articles to the exclusion of consumer goods. It must
be remembered that in construing statutes, the proper course is to start out and follow the
true intent of the Legislature and to adopt that sense which harmonizes best with the
context and promotes in the fullest manner the policy and objects of the Legislature. 14
In the present case, there appears to be no logic in following the narrow interpretation
petitioners urge. To limit the tax-free importation privilege of enterprises located inside the
special economic zone only to raw materials, capital and equipment clearly runs counter
to the intention of the Legislature to create a free port where the "free flow ofgoods or
capital within, into, and out of the zones" is insured.
The phrase "tax and duty-free importations of raw materials, capital and equipment" was
merely cited as an example of incentives that may be given to entities operating within
the zone. Public respondent SBMA correctly argued that the maxim expressio unius est
exclusio alterius, on which petitioners impliedly rely to support their restrictive
interpretation, does not apply when words are mentioned by way of example. 15 It is
obvious from the wording of Republic Act No. 7227, particularly the use of the phrase
"such as," that the enumeration only meant to illustrate incentives that the SSEZ is
authorized to grant, in line with its being a free port zone.
Furthermore, said legal maxim should be applied only as a means of discovering
legislative intent which is not otherwise manifest, and should not be permitted to defeat
the plainly indicated purpose of the Legislature. 16
The records of the Senate containing the discussion of the concept of "special economic
zone" in Section 12 (a) of Republic Act No. 7227 show the legislative intent that consumer
goods entering the SSEZ which satisfy the needs of the zone and are consumed
there are not subject to duties and taxes in accordance with Philippine laws, thus:
Senator Guingona. . . . The concept of Special Economic Zone is one that really includes
the concept of a free port, but it is broader. While a free port is necessarily included in the
Special Economic Zone, the reverse is not true that a free port would include a special
economic zone.

Special Economic Zone, Mr. President, would include not only the incoming and outgoing of
vessels, duty-free and tax-free, but it would involve also tourism, servicing, financing and
all the appurtenances of an investment center. So, that is the concept, Mr. President. It is
broader. It includes the free port concept and would cater to the greater needs of
Olangapo City, Subic Bay and the surrounding municipalities.
Senator Enrile. May I know then if a factory located within the jurisdiction of Morong,
Bataan that was originally a part of the Subic Naval reservation, be entitled to a free port
treatment or just a special economic zone treatment?
Senator Guingona. As far as the goods required for manufacture is concerned, Mr.
President, it would have privileges of duty-free and tax-free. But in addition, the Special
Economic Zone could embrace the needs of tourism, could embrace the needs of
servicing, could embrace the needs of financing and other investment aspects.
Senator Enrile. When a hotel is constructed, Mr. President, in this geographical unit
which we call a special economic zone, will the goods entering to be consumed by the
customers or guests of the hotel be subject to duties?
Senator Guingona. That is the concept that we are crafting, Mr. President.
Senator Enrile. No. I am asking whether those goods will be duty-free, because it is
constructed within a free port.
Senator Guingona. For as long as it services the needs of the Special Economic Zone,
yes.
Senator Enrile. For as long as the goods remain within the zone, whether we call it an
economic zone or a free port, for as long as we say in this law that all goods entering this
particular territory will be duty-free and tax-free, for as long as they remain there,
consumed there or reexported or destroyed in that place, then they are not subject to the
duties and taxes in accordance with the laws of the Philippines?
Senator Guingona. Yes.17
Petitioners rely on Committee Report No. 1206 submitted by the Ad Hoc Oversight
Committee on Bases Conversion on June 26, 1995. Petitioners put emphasis on the
reports finding that the setting up of duty-free stores never figured in the minds of the
authors of Republic Act No. 7227 in attracting foreign investors to the former military
baselands. They maintain that said law aimed to attract manufacturing and service
enterprises that will employ the dislocated former military base workers, but not investors
who would buy consumer goods from duty-free stores.
The Court is not persuaded. Indeed, it is well-established that opinions expressed in the
debates and proceedings of the Legislature, steps taken in the enactment of a law, or the
history of the passage of the law through the Legislature, may be resorted to as aids in the
interpretation of a statute with a doubtful meaning. 18 Petitioners posture, however,
overlooks the fact that the 1995 Committee Report they are referring to came into being
well after the enactment of Republic Act No. 7227 in 1993. Hence, as pointed out by

respondent Executive Secretary Torres, the aforementioned report cannot be said to form
part of Republic Act No. 7227s legislative history.
Section 12 of Republic Act No. 7227, provides in part, thus:
SEC. 12. Subic Special Economic Zone. -- . . .
The abovementioned zone shall be subject to the following policies:
(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. 19
The aforecited policy was mentioned as a basis for the issuance of Executive Order No. 97A, thus:
WHEREAS, Republic Act No. 7227 provides that 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 and Free Port Zone (SSEFPZ) 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; and
WHEREAS, a special tax and duty-free privilege within a Secured Area in the SSEFPZ
subject, to existing laws has been determined necessary to attract local and foreign
visitors to the zone.
Executive Order No. 97-A provides guidelines to govern the "tax and duty-free privileges
within the Secured Area of the Subic Special Economic and Free Port Zone." Paragraph 1.6
thereof states that "(t)he sale of tax and duty-free consumer items in the Secured Area
shall only be allowed in duly authorized duty-free shops."
The Court finds that the setting up of such commercial establishments which are the only
ones duly authorized to sell consumer items tax and duty-free is still well within the policy
enunciated in Section 12 of Republic Act No. 7227 that ". . .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." (Emphasis
supplied.)
However, the Court reiterates that the second sentences of paragraphs 1.2 and 1.3
of Executive Order No. 97-A, allowing tax and duty-free removal of goods to certain
individuals, even in a limited amount, from the Secured Area of the SSEZ, are null and
void for being contrary to Section 12 of Republic Act No. 7227. Said Section clearly
provides that "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."
On the other hand, insofar as the CSEZ is concerned, the case for an invalid exercise of
executive legislation is tenable.
In John Hay Peoples Alternative Coalition, et al. v. Victor Lim, et al.,20 this Court resolved an
issue, very much like the one herein, concerning the legality of the tax exemption benefits
given to the John Hay Economic Zone under Presidential Proclamation No. 420, Series of
1994, "CREATING AND DESIGNATING A PORTION OF THE AREA COVERED BY THE FORMER
CAMP JOHN AS THE JOHN HAY SPECIAL ECONOMIC ZONE PURSUANT TO REPUBLIC ACT NO.
7227."
In that case, among the arguments raised was that the granting of tax exemptions to John
Hay was an invalid and illegal exercise by the President of the powers granted only to the
Legislature. Petitioners therein argued that Republic Act No. 7227 expressly granted tax
exemption only to Subic and not to the other economic zones yet to be established. Thus,
the grant of tax exemption to John Hay by Presidential Proclamation contravenes the
constitutional mandate that "[n]o law granting any tax exemption shall be passed without
the concurrence of a majority of all the members of Congress." 21
This Court sustained the argument and ruled that the incentives under Republic Act No.
7227 are exclusive only to the SSEZ. The President, therefore, had no authority to extend
their application to John Hay. To quote from the Decision:
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 a 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. Other than Congress, the Constitution may
itself provide for specific tax exemptions, or local governments may pass ordinances on
exemption only from local taxes.
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. 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 of the John
Hay SEZ from taxation should be manifest and unmistakable from the language of the law
on which it is based; it must be expressly granted in a statute stated in a language too
clear to be mistaken. Tax exemption cannot be implied as it must be categorically and
unmistakably expressed.
If it were the intent of the legislature to grant to John Hay SEZ the same tax exemption
and incentives given to the Subic SEZ, it would have so expressly provided in R.A. No.
7227.22
In the present case, while Section 12 of Republic Act No. 7227 expressly provides for the
grant of incentives to the SSEZ, it fails to make any similar grant in favor of other

economic zones, including the CSEZ. Tax and duty-free incentives being in the nature of
tax exemptions, the basis thereof should be categorically and unmistakably expressed
from the language of the statute. Consequently, in the absence of any express grant of tax
and duty-free privileges to the CSEZ in Republic Act No. 7227, there would be no legal
basis to uphold the questioned portions of two issuances: Section 5 of Executive Order No.
80 and Section 4 of BCDA Board Resolution No. 93-05-034, which both pertain to the CSEZ.
Petitioners also contend that the questioned issuances constitute executive legislation for
allowing the removal of consumer goods and items from the zones without payment of
corresponding duties and taxes in violation of Republic Act No. 7227 as Section 12 thereof
provides for the taxation of goods that are exported or removed from the SSEZ to other
parts of the Philippine territory.
On September 26, 1997, Executive Order No. 444 was issued, curtailing the duty-free
shopping privileges in the SSEZ and the CSEZ "to prevent abuse of duty-free privilege and
to protect local industries from unfair competition." The pertinent provisions of said
issuance state, as follows:
SECTION 3. Special Shopping Privileges Granted During the Year-round Centennial
Anniversary Celebration in 1998. Upon effectivity of this Order and up to the Centennial
Year 1998, in addition to the permanent residents, locators and employees of the fenced-in
areas of the Subic Special Economic and Freeport Zone and the Clark Special Economic
Zone who are allowed unlimited duty free purchases, provided these are consumed within
said fenced-in areas of the Zones, the residents of the municipalities adjacent to Subic and
Clark as respectively provided in R.A. 7227 (1992) and E.O. 97-A s. 1993 shall continue to
be allowed One Hundred US Dollars (US$100) monthly shopping privilege until 31
December 1998. Domestic tourists visiting Subic and Clark shall be allowed a shopping
privilege of US$25 for consumable goods which shall be consumed only in the fenced-in
area during their visit therein.
SECTION 4. Grant of Duty Free Shopping Privileges Limited Only To Individuals Allowed by
Law. Starting 1 January 1999, only the following persons shall continue to be eligible to
shop in duty free shops/outlets with their corresponding purchase limits:
a. Tourists and Filipinos traveling to or returning from foreign destinations under E.O. 97-A
s. 1993 One Thousand US Dollars (US$1,000) but not to exceed Ten Thousand US
Dollars (US$10,000) in any given year;
b. Overseas Filipino Workers (OFWs) and Balikbayans defined under R.A. 6768 dated 3
November 1989 Two Thousand US Dollars (US$2,000);
c. Residents, eighteen (18) years old and above, of the fenced-in areas of the freeports
under R.A. 7227 (1992) and E.O. 97-A s. 1993 Unlimited purchase as long as these are
for consumption within these freeports.
The term "Residents" mentioned in item c above shall refer to individuals who, by virtue of
domicile or employment, reside on permanent basis within the freeport area. The term
excludes (1) non-residents who have entered into short- or long-term property lease inside
the freeport, (2) outsiders engaged in doing business within the freeport, and (3) members

of private clubs (e.g., yacht and golf clubs) based or located within the freeport. In this
regard, duty free privileges granted to any of the above individuals (e.g., unlimited
shopping privilege, tax-free importation of cars, etc.) are hereby revoked. 23
A perusal of the above provisions indicates that effective January 1, 1999, the grant of
duty-free shopping privileges to domestic tourists and to residents living adjacent to SSEZ
and the CSEZ had been revoked. Residents of the fenced-in area of the free port are still
allowed unlimited purchase of consumer goods, "as long as these are for consumption
within these freeports." Hence, the only individuals allowed by law to shop in the duty-free
outlets and remove consumer goods out of the free ports tax-free are tourists and Filipinos
traveling to or returning from foreign destinations, and Overseas Filipino Workers and
Balikbayans as defined under Republic Act No. 6768. 24
Subsequently, on October 20, 2000, Executive Order No. 303 was issued, amending
Executive Order No. 444. Pursuant to the limited duration of the privileges granted under
the preceding issuance, Section 2 of Executive Order No. 303 declared that "[a]ll special
shopping privileges as granted under Section 3 of Executive Order 444, s. 1997, are
hereby deemed terminated. The grant of duty free shopping privileges shall be restricted
to qualified individuals as provided by law."
It bears noting at this point that the shopping privileges currently being enjoyed by
Overseas Filipino Workers, Balikbayans, and tourists traveling to and from foreign
destinations, draw authority not from the issuances being assailed herein, but from
Executive Order No. 4625 and Republic Act No. 6768, both enacted prior to the
promulgation of Republic Act No. 7227.
From the foregoing, it appears that petitioners objection to the allowance of tax-free
removal of goods from the special economic zones as previously authorized by the
questioned issuances has become moot and academic.
In any event, Republic Act No. 7227, specifically Section 12 (b) thereof, clearly provides
that "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."
Thus, the removal of goods from the SSEZ to other parts of the Philippine territory without
payment of said customs duties and taxes is not authorized by the Act. Consequently, the
following italicized provisions found in the second sentences of paragraphs 1.2 and 1.3,
Section 1 of Executive Order No. 97-A are null and void:
1.2 Residents of the SSEFPZ living outside the Secured Area can enter and consume any
quantity of consumption items in hotels and restaurants within the Secured
Area. However, these residents can purchase and bring out of the Secured Area to other
parts of the Philippine territory consumer items worth not exceeding US $100 per month
per person. Only residents age 15 and over are entitled to this privilege.
1.3 Filipinos not residing within the SSEFPZ can enter the Secured Area and consume any
quantity of consumption items in hotels and restaurants within the Secured
Area. However, they can purchase and bring out of the Secured Area to other parts of the

Philippine territory consumer items worth not exceeding US $200 per year per person.
Only Filipinos age 15 and over are entitled to this privilege. 26
A similar provision found in paragraph 5, Section 4(A) of BCDA Board Resolution No. 93-05034 is also null and void. Said Resolution applied the incentives given to the SSEZ under
Republic Act No. 7227 to the CSEZ, which, as aforestated, is without legal basis.
Having concluded earlier that the CSEZ is excluded from the tax and duty-free incentives
provided under Republic Act No. 7227, this Court will resolve the remaining arguments
only with regard to the operations of the SSEZ. Thus, the assailed issuance that will be
discussed is solely Executive Order No. 97-A, since it is the only one among the three
questioned issuances which pertains to the SSEZ.
Equal Protection of the Laws
Petitioners argue that the assailed issuance (Executive Order No. 97-A) is violative of their
right to equal protection of the laws, as enshrined in Section 1, Article III of the
Constitution. To support this argument, they assert that private respondents operating
inside the SSEZ are not different from the retail establishments located outside, the
products sold being essentially the same. The only distinction, they claim, lies in the
products variety and source, and the fact that private respondents import their items taxfree, to the prejudice of the retailers and manufacturers located outside the zone.
Petitioners contention cannot be sustained. It is an established principle of constitutional
law that the guaranty of the equal protection of the laws is not violated by a legislation
based on a reasonable classification. 27Classification, to be valid, must (1) rest on
substantial distinction, (2) be germane to the purpose of the law, (3) not be limited to
existing conditions only, and (4) apply equally to all members of the same class. 28
Applying the foregoing test to the present case, this Court finds no violation of the right to
equal protection of the laws. First, contrary to petitioners claim, substantial distinctions lie
between the establishments inside and outside the zone, justifying the difference in their
treatment. In Tiu v. Court of Appeals,29 the constitutionality of Executive Order No. 97-A
was challenged for being violative of the equal protection clause. In that case, petitioners
claimed that Executive Order No. 97-A was discriminatory in confining the application of
Republic Act No. 7227 within a secured area of the SSEZ, to the exclusion of those outside
but are, nevertheless, still within the economic zone.
Upholding the constitutionality of Executive Order No. 97-A, this Court therein found
substantial differences between the retailers inside and outside the secured area, thereby
justifying a valid and reasonable classification:
Certainly, there are substantial differences between the big investors who are being lured
to establish and operate their industries in the so-called "secured area" and the present
business operators outside the area. On the one hand, we are talking of billion-peso
investments and thousands of new jobs. On the other hand, definitely none of such
magnitude. In the first, the economic impact will be national; in the second, only local.
Even more important, at this time the business activities outside the "secured area" are
not likely to have any impact in achieving the purpose of the law, which is to turn the

former military base to productive use for the benefit of the Philippine economy. There is,
then, hardly any reasonable basis to extend to them the benefits and incentives accorded
in R.A. 7227. Additionally, as the Court of Appeals pointed out, it will be easier to manage
and monitor the activities within the "secured area," which is already fenced off, to
prevent "fraudulent importation of merchandise" or smuggling.
It is well-settled that the equal-protection guarantee does not require territorial uniformity
of laws. As long as there are actual and material differences between territories, there is
no violation of the constitutional clause. And of course, anyone, including the petitioners,
possessing the requisite investment capital can always avail of the same benefits by
channeling his or her resources or business operations into the fenced-off free port zone. 30
The Court in Tiu found real and substantial distinctions between residents within the
secured area and those living within the economic zone but outside the fenced-off area.
Similarly, real and substantial differences exist between the establishments herein
involved. A significant distinction between the two groups is that enterprises outside the
zones maintain their businesses within Philippine customs territory, while private
respondents and the other duly-registered zone enterprises operate within the so-called
"separate customs territory." To grant the same tax incentives given to enterprises within
the zones to businesses operating outside the zones, as petitioners insist, would clearly
defeat the statutes intent to carve a territory out of the military reservations in Subic Bay
where free flow of goods and capital is maintained.
The classification is germane to the purpose of Republic Act No. 7227. As held in Tiu, the
real concern of Republic Act No. 7227 is to convert the lands formerly occupied by the US
military bases into economic or industrial areas. In furtherance of such objective, Congress
deemed it necessary to extend economic incentives to the establishments within the zone
to attract and encourage foreign and local investors. This is the very rationale behind
Republic Act No. 7227 and other similar special economic zone laws which grant a
complete package of tax incentives and other benefits.
The classification, moreover, is not limited to the existing conditions when the law was
promulgated, but to future conditions as well, inasmuch as the law envisioned the former
military reservation to ultimately develop into a self-sustaining investment center.
And, lastly, the classification applies equally to all retailers found within the "secured
area." As ruled in Tiu, the individuals and businesses within the "secured area," being in
like circumstances or contributing directly to the achievement of the end purpose of the
law, are not categorized further. They are all similarly treated, both in privileges granted
and in obligations required.
With all the four requisites for a reasonable classification present, there is no ground to
invalidate Executive Order No. 97-A for being violative of the equal protection clause.
Prohibition against Unfair Competition
and Practices in Restraint of Trade

Petitioners next argue that the grant of special tax exemptions and privileges gave the
private respondents undue advantage over local enterprises which do not operate inside
the SSEZ, thereby creating unfair competition in violation of the constitutional prohibition
against unfair competition and practices in restraint of trade.
The argument is without merit. Just how the assailed issuance is violative of the prohibition
against unfair competition and practices in restraint of trade is not clearly explained in the
petition. Republic Act No. 7227, and consequently Executive Order No. 97-A, cannot be
said to be distinctively arbitrary against the welfare of businesses outside the zones. The
mere fact that incentives and privileges are granted to certain enterprises to the exclusion
of others does not render the issuance unconstitutional for espousing unfair competition.
Said constitutional prohibition cannot hinder the Legislature from using tax incentives as a
tool to pursue its policies.
Suffice it to say that Congress had justifiable reasons in granting incentives to the private
respondents, in accordance with Republic Act No. 7227s policy of developing the SSEZ
into a self-sustaining entity that will generate employment and attract foreign and local
investment. If petitioners had wanted to avoid any alleged unfavorable consequences on
their profits, they should upgrade their standards of quality so as to effectively compete in
the market. In the alternative, if petitioners really wanted the preferential treatment
accorded to the private respondents, they could have opted to register with SSEZ in order
to operate within the special economic zone.
Preferential Use of Filipino Labor, Domestic Materials
and Locally Produced Goods
Lastly, petitioners claim that the questioned issuance (Executive Order No. 97-A) openly
violated the State policy of promoting the preferential use of Filipino labor, domestic
materials and locally produced goods and adopting measures to help make them
competitive.
Again, the argument lacks merit. This Court notes that petitioners failed to substantiate
their sweeping conclusion that the issuance has violated the State policy of giving
preference to Filipino goods and labor. The mere fact that said issuance authorizes the
importation and trade of foreign goods does not suffice to declare it unconstitutional on
this ground.
Petitioners cite Manila Prince Hotel v. GSIS31 which, however, does not apply. That case
dealt with the policy enunciated under the second paragraph of Section 10, Article XII of
the Constitution,32 applicable to the grant of rights, privileges, and concessions "covering
the national economy and patrimony," which is different from the policy invoked in this
petition, specifically that of giving preference to Filipino materials and labor found under
Section 12 of the same Article of the Constitution. (Emphasis supplied).
In Taada v. Angara,33 this Court elaborated on the meaning of Section 12, Article XII of the
Constitution in this wise:

[W]hile the Constitution indeed mandates a bias in favor of Filipino goods, services, labor
and enterprises, at the same time, it recognizes the need for business exchange with the
rest of the world on the bases of equality and reciprocity and limits protection of Filipino
enterprises only against foreign competition and trade practices that are unfair. In other
words, the Constitution did not intend to pursue an isolationist policy. It did not shut out
foreign investments, goods and services in the development of the Philippine economy.
While the Constitution does not encourage the unlimited entry of foreign goods, services
and investments into the country, it does not prohibit them either. In fact, it allows an
exchange on the basis of equality and reciprocity, frowning only on foreign competition
that is unfair.34
This Court notes that the Executive Department, with its subsequent issuance of Executive
Order Nos. 444 and 303, has provided certain measures to prevent unfair competition. In
particular, Executive Order Nos. 444 and 303 have restricted the special shopping
privileges to certain individuals.35 Executive Order No. 303 has limited the range of items
that may be sold in the duty-free outlets, 36 and imposed sanctions to curb abuses of dutyfree privileges.37 With these measures, this Court finds no reason to strike down Executive
Order No. 97-A for allegedly being prejudicial to Filipino labor, domestic materials and
locally produced goods.
WHEREFORE, the petition is PARTLY GRANTED. Section 5 of Executive Order No. 80 and
Section 4 of BCDA Board Resolution No. 93-05-034 are hereby declared NULL and VOID
and are accordingly declared of no legal force and effect. Respondents are hereby enjoined
from implementing the aforesaid void provisions. All portions of Executive Order No. 97-A
are valid and effective, except the second sentences in paragraphs 1.2 and 1.3 of said
Executive Order, which are hereby declared INVALID.
No costs.
SO ORDERED.

G.R. No. L-23794

February 17, 1968

ORMOC SUGAR COMPANY, INC., plaintiff-appellant,

vs.
THE TREASURER OF ORMOC CITY, THE MUNICIPAL BOARD OF ORMOC CITY, HON.
ESTEBAN C. CONEJOS as Mayor of Ormoc City and ORMOC CITY, defendantsappellees.
BENGZON, J.P., J.:
On January 29, 1964, the Municipal Board of Ormoc City passed 1 Ordinance No. 4,
Series of 1964, imposing "on any and all productions of centrifugal sugar milled at the
Ormoc Sugar Company, Inc., in Ormoc City a municipal tax equivalent to one per centum
(1%) per export sale to the United States of America and other foreign countries." 2
Payments for said tax were made, under protest, by Ormoc Sugar Company, Inc. on
March 20, 1964 for P7,087.50 and on April 20, 1964 for P5,000, or a total of P12,087.50.

On June 1, 1964, Ormoc Sugar Company, Inc. filed before the Court of First Instance
of Leyte, with service of a copy upon the Solicitor General, a complaint 3 against the City of
Ormoc as well as its Treasurer, Municipal Board and Mayor, alleging that the afore-stated
ordinance is unconstitutional for being violative of the equal protection clause (Sec. 1[1],
Art. III, Constitution) and the rule of uniformity of taxation (Sec. 22[1]), Art. VI,
Constitution), aside from being an export tax forbidden under Section 2287 of the Revised
Administrative Code. It further alleged that the tax is neither a production nor a license tax
which Ormoc City under Section 15-kk of its charter and under Section 2 of Republic Act
2264, otherwise known as the Local Autonomy Act, is authorized to impose; and that the
tax amounts to a customs duty, fee or charge in violation of paragraph 1 of Section 2 of
Republic Act 2264 because the tax is on both the sale and export of sugar.
Answering, the defendants asserted that the tax ordinance was within defendant
city's power to enact under the Local Autonomy Act and that the same did not violate the
afore-cited constitutional limitations. After pre-trial and submission of the case on
memoranda, the Court of First Instance, on August 6, 1964, rendered a decision that
upheld the constitutionality of the ordinance and declared the taxing power of defendant
chartered city broadened by the Local Autonomy Act to include all other forms of taxes,
licenses or fees not excluded in its charter.
Appeal therefrom was directly taken to Us by plaintiff Ormoc Sugar Company, Inc.
Appellant alleges the same statutory and constitutional violations in the aforesaid taxing
ordinance mentioned earlier.
Section 1 of the ordinance states: "There shall be paid to the City Treasurer on any
and all productions of centrifugal sugar milled at the Ormoc Sugar Company, Incorporated,
in Ormoc City, a municipal tax equivalent to one per centum (1%) per export sale to the
United States of America and other foreign countries." Though referred to as a tax on the
export of centrifugal sugar produced at Ormoc Sugar Company, Inc. For production of
sugar alone is not taxable; the only time the tax applies is when the sugar produced is
exported.
Appellant questions the authority of the defendant Municipal Board to levy such an
export tax, in view of Section 2287 of the Revised Administrative Code which denies from
municipal councils the power to impose an export tax. Section 2287 in part states: "It shall
not be in the power of the municipal council to impose a tax in any form whatever, upon
goods and merchandise carried into the municipality, or out of the same, and any attempt
to impose an import or export tax upon such goods in the guise of an unreasonable charge
for wharfage use of bridges or otherwise, shall be void."
Subsequently, however, Section 2 of Republic Act 2264 effective June 19, 1959,
gave chartered cities, municipalities and municipal districts authority to levy for public
purposes just and uniform taxes, licenses or fees. Anent the inconsistency between
Section 2287 of the Revised Administrative Code and Section 2 of Republic Act 2264, this
Court, in Nin Bay Mining Co. v. Municipality of Roxas 4 held the former to have been
repealed by the latter. And expressing Our awareness of the transcendental effects that
municipal export or import taxes or licenses will have on the national economy, due to
Section 2 of Republic Act 2264, We stated that there was no other alternative until
Congress acts to provide remedial measures to forestall any unfavorable results.

The point remains to be determined, however, whether constitutional limits on the

power of taxation, specifically the equal protection clause and rule of uniformity of
taxation, were infringed.
The Constitution in the bill of rights provides: ". . . nor shall any person be denied
the equal protection of the laws." (Sec. 1 [1], Art. III) In Felwa vs. Salas, 5 We ruled that the
equal protection clause applies only to persons or things identically situated and does not
bar a reasonable classification of the subject of legislation, and a classification is
reasonable where (1) it is based on substantial distinctions which make real differences;
(2) these are germane to the purpose of the law; (3) the classification applies not only to
present conditions but also to future conditions which are substantially identical to those
of the present; (4) the classification applies only to those who belong to the same class.
A perusal of the requisites instantly shows that the questioned ordinance does not
meet them, for it taxes only centrifugal sugar produced and exported by the Ormoc Sugar
Company, Inc. and none other. At the time of the taxing ordinance's enactment, Ormoc
Sugar Company, Inc., it is true, was the only sugar central in the city of Ormoc. Still, the
classification, to be reasonable, should be in terms applicable to future conditions as well.
The taxing ordinance should not be singular and exclusive as to exclude any subsequently
established sugar central, of the same class as plaintiff, for the coverage of the tax. As it is
now, even if later a similar company is set up, it cannot be subject to the tax because the
ordinance expressly points only to Ormoc City Sugar Company, Inc. as the entity to be
levied upon.
Appellant, however, is not entitled to interest; on the refund because the taxes were
not arbitrarily collected (Collector of Internal Revenue v. Binalbagan). 6 At the time of
collection, the ordinance provided a sufficient basis to preclude arbitrariness, the same
being then presumed constitutional until declared otherwise.
WHEREFORE, the decision appealed from is hereby reversed, the challenged
ordinance is declared unconstitutional and the defendants-appellees are hereby ordered to
refund the P12,087.50 plaintiff-appellant paid under protest. No costs. So ordered.

G.R. No. L-9637

April 30, 1957

AMERICAN BIBLE SOCIETY, plaintiff-appellant,

vs.
CITY OF MANILA, defendant-appellee.
FELIX, J.:
Plaintiff-appellant is a foreign, non-stock, non-profit, religious, missionary corporation duly
registered and doing business in the Philippines through its Philippine agency established
in Manila in November, 1898, with its principal office at 636 Isaac Peral in said City. The
defendant appellee is a municipal corporation with powers that are to be exercised in
conformity with the provisions of Republic Act No. 409, known as the Revised Charter of
the City of Manila.
In the course of its ministry, plaintiff'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. On May 29 1953,
the acting City Treasurer of the City of Manila informed plaintiff 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 Ordinance No. 3000, as
amended, and Ordinances Nos. 2529, 3028 and 3364, and required plaintiff to secure,
within three days, the corresponding permit and license fees, together with compromise
covering the period from the 4th quarter of 1945 to the 2nd quarter of 1953, in the total
sum of P5,821.45 (Annex A).
Plaintiff protested against this requirement, but the City Treasurer demanded that plaintiff
deposit and pay under protest the sum of P5,891.45, if suit was to be taken in court
regarding the same (Annex B). To avoid the closing of its business as well as further fines
and penalties in the premises on October 24, 1953, plaintiff paid to the defendant under
protest the said permit and license fees in the aforementioned amount, giving at the same
time notice to the City Treasurer that suit would be taken in court to question the legality
of the ordinances under which, the said fees were being collected (Annex C), which was
done on the same date by filing the complaint that gave rise to this action. In its complaint
plaintiff prays that judgment be rendered declaring the said Municipal Ordinance No. 3000,
as amended, and Ordinances Nos. 2529, 3028 and 3364 illegal and unconstitutional, and
that the defendant be ordered to refund to the plaintiff the sum of P5,891.45 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.

Defendant answered the complaint, maintaining in turn that said ordinances were enacted
by the Municipal Board of the City of Manila by virtue of the power granted to it by section
2444, subsection (m-2) of the Revised Administrative Code, superseded on June 18, 1949,
by section 18, subsection (1) of Republic Act No. 409, known as the Revised Charter of the
City of Manila, and praying that the complaint be dismissed, with costs against plaintiff.
This answer was replied by the plaintiff reiterating the unconstitutionality of the oftenrepeated ordinances.
Before trial the parties submitted the following stipulation of facts:
COME NOW the parties in the above-entitled case, thru their undersigned attorneys
and respectfully submit the following stipulation of facts:
1. That the plaintiff sold for the use of the purchasers at its principal office at 636
Isaac Peral, Manila, Bibles, New Testaments, bible portions and bible concordance in
English and other foreign languages imported by it from the United States as well as
Bibles, New Testaments and bible portions in the local dialects imported and/or
purchased locally; that from the fourth quarter of 1945 to the first quarter of 1953
inclusive the sales made by the plaintiff were as follows:

Quarter

Amount
Sales

4th quarter 1945

P1,244.21

1st quarter 1946

2,206.85

2nd quarter 1946

1,950.38

3rd quarter 1946

2,235.99

4th quarter 1946

3,256.04

1st quarter 1947

13,241.07

2nd quarter 1947

15,774.55

of

3rd quarter 1947

14,654.13

4th quarter 1947

12,590.94

1st quarter 1948

11,143.90

2nd quarter 1948

14,715.26

3rd quarter 1948

38,333.83

4th quarter 1948

16,179.90

1st quarter 1949

23,975.10

2nd quarter 1949

17,802.08

3rd quarter 1949

16,640.79

4th quarter 1949

15,961.38

1st quarter 1950

18,562.46

2nd quarter 1950

21,816.32

3rd quarter 1950

25,004.55

4th quarter 1950

45,287.92

1st quarter 1951

37,841.21

2nd quarter 1951

29,103.98

3rd quarter 1951

20,181.10

4th quarter 1951

22,968.91

1st quarter 1952

23,002.65

2nd quarter 1952

17,626.96

3rd quarter 1952

17,921.01

4th quarter 1952

24,180.72

1st quarter 1953

29,516.21

2. That the parties hereby reserve the right to present evidence of other facts not
herein stipulated.
WHEREFORE, it is respectfully prayed that this case be set for hearing so that the
parties may present further evidence on their behalf. (Record on Appeal, pp. 15-16).
When the case was set for hearing, plaintiff proved, among other things, that it has been
in existence in the Philippines since 1899, and that its parent society is in New York, United
States of America; that its, contiguous real properties located at Isaac Peral are exempt
from real estate taxes; and that it was never required to pay any municipal license fee or
tax before the war, nor does the American Bible Society in the United States pay any
license fee or sales tax for the sale of bible therein. Plaintiff further tried to establish that it
never made any profit from the sale of its bibles, which are disposed of for as low as one
third of the cost, and that in order to maintain its operating cost it obtains substantial
remittances from its New York office and voluntary contributions and gifts from certain
churches, both in the United States and in the Philippines, which are interested in its
missionary work. Regarding plaintiff's contention of lack of profit in the sale of bibles,
defendant retorts that the admissions of plaintiff-appellant's lone witness who testified on

cross-examination that bibles bearing the price of 70 cents each from plaintiff-appellant's
New York office are sold here by plaintiff-appellant at P1.30 each; those bearing the price
of $4.50 each are sold here at P10 each; those bearing the price of $7 each are sold here
at P15 each; and those bearing the price of $11 each are sold here at P22 each, clearly
show that plaintiff's contention that it never makes any profit from the sale of its bible, is
evidently untenable.
After hearing the Court rendered judgment, the last part of which is as follows:
As may be seen from the repealed section (m-2) of the Revised Administrative Code
and the repealing portions (o) of section 18 of Republic Act No. 409, although they
seemingly differ in the way the legislative intent is expressed, yet their meaning is
practically the same for the purpose of taxing the merchandise mentioned in said
legal provisions, and that the taxes to be levied by said ordinances is in the nature
of percentage graduated taxes (Sec. 3 of Ordinance No. 3000, as amended, and
Sec. 1, Group 2, of Ordinance No. 2529, as amended by Ordinance No. 3364).
IN VIEW OF THE FOREGOING CONSIDERATIONS, this Court is of the opinion and so
holds that this case should be dismissed, as it is hereby dismissed, for lack of
merits, with costs against the plaintiff.
Not satisfied with this verdict plaintiff took up the matter to the Court of Appeals which
certified the case to Us for the reason that the errors assigned to the lower Court involved
only questions of law.
Appellant contends that the lower Court erred:
1. In holding that Ordinances Nos. 2529 and 3000, as respectively amended, are not
unconstitutional;
2. In holding that subsection m-2 of Section 2444 of the Revised Administrative
Code under which Ordinances Nos. 2592 and 3000 were promulgated, was not
repealed by Section 18 of Republic Act No. 409;
3. In not holding that an ordinance providing for taxes based on gross sales or
receipts, in order to be valid under the new Charter of the City of Manila, must first
be approved by the President of the Philippines; and
4. In holding that, as the sales made by the plaintiff-appellant have assumed
commercial proportions, it cannot escape from the operation of said municipal
ordinances under the cloak of religious privilege.
The issues. As may be seen from the proceeding statement of the case, the issues
involved in the present controversy may be reduced to the following: (1) whether or not
the ordinances of the City of Manila, Nos. 3000, as amended, and 2529, 3028 and 3364,
are constitutional and valid; and (2) whether the provisions of said ordinances are
applicable or not to the case at bar.
Section 1, subsection (7) of Article III of the Constitution of the Republic of the Philippines,
provides that:
(7) No law shall be made respecting an establishment of religion, or prohibiting the
free exercise thereof, and the free exercise and enjoyment of religious profession
and worship, without discrimination or preference, shall forever be allowed. No
religion test shall be required for the exercise of civil or political rights.

Predicated on this constitutional mandate, plaintiff-appellant contends that Ordinances

Nos. 2529 and 3000, as respectively amended, are unconstitutional and illegal in so far as
its society is concerned, because they provide for religious censorship and restrain the free
exercise and enjoyment of its religious profession, to wit: the distribution and sale of bibles
and other religious literature to the people of the Philippines.
Before entering into a discussion of the constitutional aspect of the case, We shall first
consider the provisions of the questioned ordinances in relation to their application to the
sale of bibles, etc. by appellant. The records, show that by letter of May 29, 1953 (Annex
A), the City Treasurer required plaintiff to secure a Mayor's permit in connection with the
society's alleged business of distributing and selling bibles, etc. and to pay permit dues in
the sum of P35 for the period covered in this litigation, plus the sum of P35 for
compromise on account of plaintiff's failure to secure the permit required by Ordinance No.
3000 of the City of Manila, as amended. This Ordinance is of general application and not
particularly directed against institutions like the plaintiff, and it does not contain any
provisions whatever prescribing religious censorship nor restraining the free exercise and
enjoyment of any religious profession. Section 1 of Ordinance No. 3000 reads as follows:
SEC. 1. PERMITS NECESSARY. It shall be unlawful for any person or entity to
conduct or engage in any of the businesses, trades, or occupations enumerated in
Section 3 of this Ordinance or other businesses, trades, or occupations for which a
permit is required for the proper supervision and enforcement of existing laws and
ordinances governing the sanitation, security, and welfare of the public and the
health of the employees engaged in the business specified in said section 3
hereof, WITHOUT FIRST HAVING OBTAINED A PERMIT THEREFOR FROM THE MAYOR
AND THE NECESSARY LICENSE FROM THE CITY TREASURER.
The business, trade or occupation of the plaintiff involved in this case is not particularly
mentioned in Section 3 of the Ordinance, and the record does not show that a permit is
required therefor under existing laws and ordinances for the proper supervision and
enforcement of their provisions governing the sanitation, security and welfare of the public
and the health of the employees engaged in the business of the plaintiff. However,
sections 3 of Ordinance 3000 contains item No. 79, which reads as follows:
79.
All
other
businesses,
trades
mentioned
in
this
Ordinance,
except
City is not empowered to license or to tax P5.00

or
those

occupations
upon
which

not
the

Therefore, the necessity of the permit is made to depend upon the power of the City to
license or tax said business, trade or occupation.
As to the license fees that the Treasurer of the City of Manila required the society to pay
from the 4th quarter of 1945 to the 1st quarter of 1953 in the sum of P5,821.45, including
the sum of P50 as compromise, Ordinance No. 2529, as amended by Ordinances Nos.
2779, 2821 and 3028 prescribes the following:
SEC. 1. FEES. Subject to the provisions of section 578 of the Revised Ordinances
of the City of Manila, as amended, there shall be paid to the City Treasurer for
engaging in any of the businesses or occupations below enumerated, quarterly,
license fees based on gross sales or receipts realized during the preceding quarter
in accordance with the rates herein prescribed: PROVIDED, HOWEVER, That a
person engaged in any businesses or occupation for the first time shall pay the
initial license fee based on the probable gross sales or receipts for the first quarter
beginning from the date of the opening of the business as indicated herein for the
corresponding business or occupation.

xxx

xxx

xxx

GROUP 2. Retail dealers in new (not yet used) merchandise, which dealers are
not yet subject to the payment of any municipal tax, such as (1) retail dealers in
general merchandise; (2) retail dealers exclusively engaged in the sale of . . . books,
including stationery.
xxx

xxx

xxx

As may be seen, the license fees required to be paid quarterly in Section 1 of said
Ordinance No. 2529, as amended, are not imposed directly upon any religious institution
but upon those engaged in any of the business or occupations therein enumerated, such
as retail "dealers in general merchandise" which, it is alleged, cover the business or
occupation of selling bibles, books, etc.
Chapter 60 of the Revised Administrative Code which includes section 2444, subsection
(m-2) of said legal body, as amended by Act No. 3659, approved on December 8, 1929,
empowers the Municipal Board of the City of Manila:
(M-2) To tax and fix the license fee on (a) dealers in new automobiles or accessories
or both, and (b) retail dealers in new (not yet used) merchandise, which dealers are
not yet subject to the payment of any municipal tax.
For the purpose of taxation, these retail dealers shall be classified as (1) retail
dealers in general merchandise, and (2) retail dealers exclusively engaged in the
sale of (a) textiles . . . (e) books, including stationery, paper and office supplies, . . .:
PROVIDED, HOWEVER, That the combined total tax of any debtor or manufacturer,
or both, enumerated under these subsections (m-1) and (m-2), whether dealing in
one or all of the articles mentioned herein, SHALL NOT BE IN EXCESS OF FIVE
HUNDRED PESOS PER ANNUM.
and appellee's counsel maintains that City Ordinances Nos. 2529 and 3000, as amended,
were enacted in virtue of the power that said Act No. 3669 conferred upon the City of
Manila. Appellant, however, contends that said ordinances are longer in force and effect as
the law under which they were promulgated has been expressly repealed by Section 102
of Republic Act No. 409 passed on June 18, 1949, known as the Revised Manila Charter.
Passing upon this point the lower Court categorically stated that Republic Act No. 409
expressly repealed the provisions of Chapter 60 of the Revised Administrative Code but in
the opinion of the trial Judge, although Section 2444 (m-2) of the former Manila Charter
and section 18 (o) of the new seemingly differ in the way the legislative intent was
expressed, yet their meaning is practically the same for the purpose of taxing the
merchandise mentioned in both legal provisions and, consequently, Ordinances Nos. 2529
and 3000, as amended, are to be considered as still in full force and effect uninterruptedly
up to the present.
Often the legislature, instead of simply amending the pre-existing statute, will
repeal the old statute in its entirety and by the same enactment re-enact all or
certain portions of the preexisting law. Of course, the problem created by this sort of
legislative action involves mainly the effect of the repeal upon rights and liabilities
which accrued under the original statute. Are those rights and liabilities destroyed
or preserved? The authorities are divided as to the effect of simultaneous repeals
and re-enactments. Some adhere to the view that the rights and liabilities accrued
under the repealed act are destroyed, since the statutes from which they sprang are
actually terminated, even though for only a very short period of time. Others, and

they seem to be in the majority, refuse to accept this view of the situation, and
consequently maintain that all rights an liabilities which have accrued under the
original statute are preserved and may be enforced, since the re-enactment
neutralizes the repeal, therefore, continuing the law in force without interruption.
(Crawford-Statutory Construction, Sec. 322).
Appellant's counsel states that section 18 (o) of Republic Act No, 409 introduces a new and
wider concept of taxation and is different from the provisions of Section 2444(m-2) that
the former cannot be considered as a substantial re-enactment of the provisions of the
latter. We have quoted above the provisions of section 2444(m-2) of the Revised
Administrative Code and We shall now copy hereunder the provisions of Section 18,
subdivision (o) of Republic Act No. 409, which reads as follows:
(o) To tax and fix the license fee on dealers in general merchandise, including
importers and indentors, except those dealers who may be expressly subject to the
payment of some other municipal tax under the provisions of this section.
Dealers in general merchandise shall be classified as (a) wholesale dealers and (b)
retail dealers. For purposes of the tax on retail dealers, general merchandise shall
be classified into four main classes: namely (1) luxury articles, (2) semi-luxury
articles, (3) essential commodities, and (4) miscellaneous articles. A separate
license shall be prescribed for each class but where commodities of different classes
are sold in the same establishment, it shall not be compulsory for the owner to
secure more than one license if he pays the higher or highest rate of tax prescribed
by ordinance. Wholesale dealers shall pay the license tax as such, as may be
provided by ordinance.
For purposes of this section, the term "General merchandise" shall include poultry
and livestock, agricultural products, fish and other allied products.
The only essential difference that We find between these two provisions that may have
any bearing on the case at bar, is that, while subsection (m-2) prescribes that the
combined total tax of any dealer or manufacturer, or both, enumerated under subsections
(m-1) and (m-2), whether dealing in one or all of the articles mentioned therein,shall not
be in excess of P500 per annum, the corresponding section 18, subsection (o) of Republic
Act No. 409, does not contain any limitation as to the amount of tax or license fee that the
retail dealer has to pay per annum. Hence, and in accordance with the weight of the
authorities above referred to that maintain that "all rights and liabilities which have
accrued under the original statute are preserved and may be enforced, since the
reenactment neutralizes the repeal, therefore continuing the law in force without
interruption", We hold that the questioned ordinances of the City of Manila are still in force
and effect.
Plaintiff, however, argues that the questioned ordinances, to be valid, must first be
approved by the President of the Philippines as per section 18, subsection (ii) of Republic
Act No. 409, which reads as follows:
(ii) To tax, license and regulate any business, trade or occupation being conducted
within the City of Manila,not otherwise enumerated in the preceding subsections,
including percentage taxes based on gross sales or receipts, subject to the approval
of the PRESIDENT, except amusement taxes.
but this requirement of the President's approval was not contained in section 2444 of the
former Charter of the City of Manila under which Ordinance No. 2529 was promulgated.
Anyway, as stated by appellee's counsel, the business of "retail dealers in general

merchandise" is expressly enumerated in subsection (o), section 18 of Republic Act No.

409; hence, an ordinance prescribing a municipal tax on said business does not have to be
approved by the President to be effective, as it is not among those referred to in said
subsection (ii). Moreover, the questioned ordinances are still in force, having been
promulgated by the Municipal Board of the City of Manila under the authority granted to it
by law.
The question that now remains to be determined is whether said ordinances are
inapplicable, invalid or unconstitutional if applied to the alleged business of distribution
and sale of bibles to the people of the Philippines by a religious corporation like the
American Bible Society, plaintiff herein.
With regard to Ordinance No. 2529, as amended by Ordinances Nos. 2779, 2821 and 3028,
appellant contends that it is unconstitutional and illegal because it restrains the free
exercise and enjoyment of the religious profession and worship of appellant.
Article III, section 1, clause (7) of the Constitution of the Philippines aforequoted,
guarantees the freedom of religious profession and worship. "Religion has been spoken of
as a profession of faith to an active power that binds and elevates man to its Creator"
(Aglipay vs. Ruiz, 64 Phil., 201).It has reference to one's views of his relations to His
Creator and to the obligations they impose of reverence to His being and character, and
obedience to His Will (Davis vs. Beason, 133 U.S., 342). The constitutional guaranty of the
free exercise and enjoyment of religious profession and worship carries with it the right to
disseminate religious information. Any restraints of such right can only be justified like
other restraints of freedom of expression on the grounds that there is a clear and present
danger of any substantive evil which the State has the right to prevent". (Taada and
Fernando on the Constitution of the Philippines, Vol. 1, 4th ed., p. 297). In the case at bar
the license fee herein involved is imposed upon appellant for its distribution and sale of
bibles and other religious literature:
In the case of Murdock vs. Pennsylvania, it was held that an ordinance requiring that
a license be obtained before a person could canvass or solicit orders for goods,
paintings, pictures, wares or merchandise cannot be made to apply to members of
Jehovah's Witnesses who went about from door to door distributing literature and
soliciting people to "purchase" certain religious books and pamphlets, all published
by the Watch Tower Bible & Tract Society. The "price" of the books was twenty-five
cents each, the "price" of the pamphlets five cents each. It was shown that in
making the solicitations there was a request for additional "contribution" of twentyfive cents each for the books and five cents each for the pamphlets. Lesser sum
were accepted, however, and books were even donated in case interested persons
were without funds.
On the above facts the Supreme Court held that it could not be said that petitioners
were engaged in commercial rather than a religious venture. Their activities could
not be described as embraced in the occupation of selling books and pamphlets.
Then the Court continued:
"We do not mean to say that religious groups and the press are free from all
financial burdens of government. See Grosjean vs. American Press Co., 297 U.S.,
233, 250, 80 L. ed. 660, 668, 56 S. Ct. 444. We have here something quite different,
for example, from a tax on the income of one who engages in religious activities or
a tax on property used or employed in connection with activities. It is one thing to
impose a tax on the income or property of a preacher. It is quite another to exact a
tax from him for the privilege of delivering a sermon. The tax imposed by the City of
Jeannette is a flat license tax, payment of which is a condition of the exercise of

these constitutional privileges. The power to tax the exercise of a privilege is the
power to control or suppress its enjoyment. . . . Those who can tax the exercise of
this religious practice can make its exercise so costly as to deprive it of the
resources necessary for its maintenance. Those who can tax the privilege of
engaging in this form of missionary evangelism can close all its doors to all those
who do not have a full purse. Spreading religious beliefs in this ancient and
honorable manner would thus be denied the needy. . . .
It is contended however that the fact that the license tax can suppress or control
this activity is unimportant if it does not do so. But that is to disregard the nature of
this tax. It is a license tax a flat tax imposed on the exercise of a privilege
granted by the Bill of Rights . . . The power to impose a license tax on the exercise
of these freedom is indeed as potent as the power of censorship which this Court
has repeatedly struck down. . . . It is not a nominal fee imposed as a regulatory
measure to defray the expenses of policing the activities in question. It is in no way
apportioned. It is flat license tax levied and collected as a condition to the pursuit of
activities whose enjoyment is guaranteed by the constitutional liberties of press and
religion and inevitably tends to suppress their exercise. That is almost uniformly
recognized as the inherent vice and evil of this flat license tax."
Nor could dissemination of religious information be conditioned upon the approval
of an official or manager even if the town were owned by a corporation as held in
the case of Marsh vs. State of Alabama (326 U.S. 501), or by the United States itself
as held in the case of Tucker vs. Texas (326 U.S. 517). In the former case the
Supreme Court expressed the opinion that the right to enjoy freedom of the press
and religion occupies a preferred position as against the constitutional right of
property owners.
"When we balance the constitutional rights of owners of property against those of
the people to enjoy freedom of press and religion, as we must here, we remain
mindful of the fact that the latter occupy a preferred position. . . . In our view the
circumstance that the property rights to the premises where the deprivation of
property here involved, took place, were held by others than the public, is not
sufficient to justify the State's permitting a corporation to govern a community of
citizens so as to restrict their fundamental liberties and the enforcement of such
restraint by the application of a State statute." (Taada and Fernando on the
Constitution of the Philippines, Vol. 1, 4th ed., p. 304-306).
Section 27 of Commonwealth Act No. 466, otherwise known as the National Internal
Revenue Code, provides:
SEC. 27. EXEMPTIONS FROM TAX ON CORPORATIONS. The following organizations
shall not be taxed under this Title in respect to income received by them as such
(e) Corporations or associations organized and operated exclusively for religious,
charitable, . . . or educational purposes, . . .: Provided, however, That the income of
whatever kind and character from any of its properties, real or personal, or from any
activity conducted for profit, regardless of the disposition made of such income,
shall be liable to the tax imposed under this Code;
Appellant's counsel claims that the Collector of Internal Revenue has exempted the
plaintiff from this tax and says that such exemption clearly indicates that the act of
distributing and selling bibles, etc. is purely religious and does not fall under the above
legal provisions.

It may be true that in the case at bar 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 this reason We believe 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.
With respect to Ordinance No. 3000, as amended, which requires the obtention the
Mayor's permit before any person can engage in any of the businesses, trades or
occupations enumerated therein, We do not find that it imposes any charge upon the
enjoyment of a right granted by the Constitution, nor tax the exercise of religious
practices. In the case of Coleman vs. City of Griffin, 189 S.E. 427, this point was elucidated
as follows:
An ordinance by the City of Griffin, declaring that the practice of distributing either
by hand or otherwise, circulars, handbooks, advertising, or literature of any kind,
whether said articles are being delivered free, or whether same are being sold
within the city limits of the City of Griffin, without first obtaining written permission
from the city manager of the City of Griffin, shall be deemed a nuisance and
punishable as an offense against the City of Griffin, does not deprive defendant of
his constitutional right of the free exercise and enjoyment of religious profession
and worship, even though it prohibits him from introducing and carrying out a
scheme or purpose which he sees fit to claim as a part of his religious system.
It seems clear, therefore, that Ordinance No. 3000 cannot be considered unconstitutional,
even if applied to plaintiff Society. But as Ordinance No. 2529 of the City of Manila, as
amended, is not applicable to plaintiff-appellant and defendant-appellee is powerless to
license or tax the business of plaintiff Society involved herein for, as stated before, it
would impair plaintiff's right to the free exercise and enjoyment of its religious profession
and worship, as well as its rights of dissemination of religious beliefs, We find that
Ordinance No. 3000, as amended is also inapplicable to said business, trade or occupation
of the plaintiff.
Wherefore, and on the strength of the foregoing considerations, We hereby reverse the
decision appealed from, sentencing defendant return to plaintiff the sum of P5,891.45
unduly collected from it. Without pronouncement as to costs. It is so ordered.
PAL v. Sec of Finance
GR No. 115852; 30 October 1995
F A C T S: The Value-Added Tax [VAT] is levied on the sale, barter or exchange of goods
and properties as well as on the sale or exchange of services. It is equivalent to 10% of the
gross selling price or gross value in money of goods or properties sold, bartered or
exchanged or of the gross receipts from the sale or exchange of services. Republic Act No.
7716 seeks to widen the tax base of the existing VAT system and enhance its
administration by amending the National Internal Revenue Code.
These are various suits for certiorari and prohibition challenging the constitutionality of RA
7716:

In the case at bar, PAL attacks the formal validity of Republic Act No. 7716. PAL contends
that it violates Art. VI, Section 26[1] which provides that "Every bill passed by Congress
shall embrace only one subject which shall be expressed in the title thereof." It is
contended that neither H. No. 11197 nor S. No. 1630 provided for removal of exemption of
PAL transactions from the payment of the VAT and that this was made only in the
Conference Committee bill which became Republic Act No. 7716 without reflecting this fact
in its title.
The title of Republic Act No. 7716 is:
AN ACT RESTRUCTURING THE VALUE-ADDED TAX [VAT] SYSTEM, WIDENING ITS TAX BASE
AND ENHANCING ITS ADMINISTRATION, AND FOR THESE PURPOSES AMENDING AND
REPEALING THE RELEVANT PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS
AMENDED, AND FOR OTHER PURPOSES.
Furthermore, section 103 of RA 7716 states the following:
Section 103. Exempt Transactions.- The following shall be exempt from the value-added
tax:
[q] Transactions which are exempt under special laws, except those granted under
Presidential Decree Nos. 66, 529, 972, 1491, 1590.
The effect of the amendment is to remove the exemption granted to PAL, as far as the VAT
is concerned.
Philippine Airlines [PAL] claims that its franchise under P.D. No. 1590 which makes it liable
for a franchise tax of only 2% of gross revenues "in lieu of all the other fees and charges of
any kind, nature or description, imposed, levied, established, assessed or collected by any
municipal, city, provincial, or national authority or government agency, now or in the
future," cannot be amended by Rep. Act No. 7716 as to make it [PAL] liable for a 10%
value-added tax on revenues, because Sec. 24 of P.D. No. 1590 provides that PAL's
franchise can only be amended, modified or repealed by a special law specifically for that
purpose.
I S S U E: Whether or not this amendment of Section 103 of the NIRC is fairly embraced in
the title of Republic Act No. 7716, although no mention is made therein of P. D. No. 1590
H E L D: The court ruled in in the affirmative. The title states that the purpose of the
statute is to expand the VAT system, and one way of doing this is to widen its base by
withdrawing some of the exemptions granted before. To insist that P. D. No. 1590 be
mentioned in the title of the law, in addition to Section 103 of the NIRC, in which it is
specifically referred to, would be to insist that the title of a bill should be a complete index
of its content.

The constitutional requirement that every bill passed by Congress shall embrace only one
subject which shall be expressed in its title is intended to prevent surprise upon the
members of Congress and to inform the people of pending legislation so that, if they wish
to, they can be heard regarding it. If, in the case at bar, petitioner did not know before that
its exemption had been withdrawn, it is not because of any defect in the title but perhaps
for the same reason other statutes, although published, pass unnoticed until some event
somehow calls attention to their existence.
Republic Act No. 7716 expressly amends PAL's franchise [P. D. No. 1590] by specifically
excepting from the grant of exemptions from the VAT PAL's exemption under P. D. No.
1590. This is within the power of Congress to do under Art. XII, Section 11 of the
Constitution, which provides that the grant of a franchise for the operation of a public
utility is subject to amendment, alteration or repeal by Congress when the common good
so requires.
G.R. No. L-60126 September 25, 1985
CAGAYAN ELECTRIC POWER & LIGHT CO., INC., petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF APPEALS, respondents.
Quasha, De Guzman Makalintal & Barot for petitioner.
AQUINO, J.:
This is about the liability of petitioner Cagayan Electric Power & Light Co., Inc. for income
tax amounting to P75,149.73 for the more than seven-month period of the year 1969 in
addition to franchise tax.
The petitioner is the holder of a legislative franchise, Republic Act No. 3247, under which
its payment of 3% tax on its gross earnings from the sale of electric current is "in lieu of all
taxes and assessments of whatever authority upon privileges, earnings, income, franchise,
and poles, wires, transformers, and insulators of the grantee, from which taxes and
assessments the grantee is hereby expressly exempted" (Sec. 3).
On June 27, 1968, Republic Act No. 5431 amended section 24 of the Tax Code by making
liable for income tax all corporate taxpayers not specifically exempt under paragraph (c)
(1) of said section and section 27 of the Tax Code notwithstanding the "provisions of
existing special or general laws to the contrary". Thus, franchise companies were
subjected to income tax in addition to franchise tax.
However, in petitioner's case, its franchise was amended by Republic Act No. 6020,
effective August 4, 1969, by authorizing the petitioner to furnish electricity to the
municipalities of Villanueva and Jasaan, Misamis Oriental in addition to Cagayan de Oro
City and the municipalities of Tagoloan and Opol. The amendment reenacted the tax

exemption in its original charter or neutralized the modification made by Republic Act No.
5431 more than a year before.
By reason of the amendment to section 24 of the Tax Code, the Commissioner of Internal
Revenue in a demand letter dated February 15, 1973 required the petitioner to pay
deficiency income taxes for 1968-to 1971. The petitioner contested the assessments. The
Commissioner cancelled the assessments for 1970 and 1971 but insisted on those for
1968 and 1969.
The petitioner filed a petition for review with the Tax Court, which on February 26, 1982
held the petitioner liable only for the income tax for the period from January 1 to August 3,
1969 or before the passage of Republic Act No. 6020 which reiterated its tax exemption.
The petitioner appealed to this Court.
It contends that the Tax Court erred (1) in not holding that the franchise tax paid by the
petitioner is a commutative tax which already includes the income tax; (2) in holding that
Republic Act No. 5431 as amended, altered or repealed petitioner's franchise; (3) in
holding that petitioner's franchise is a contract which can be impaired by an implied repeal
and (4) in not holding that section 24(d) of the Tax Code should be construed strictly
against the Government.
We hold that Congress could impair petitioner's legislative franchise by making it liable for
income tax from which heretofore it was exempted by virtue of the exemption provided for
in section 3 of its franchise.
The Constitution provides that a franchise is subject to amendment, alteration or repeal by
the Congress when the public interest so requires (Sec. 8, Art. XIV, 1935 Constitution; Sec.
5, Art. XIV, 1973 Constitution),
Section 1 of petitioner's franchise, Republic Act No. 3247, provides that it is subject to the
provisions of the Constitution and to the terms and conditions established in Act No. 3636
whose section 12 provides that the franchise is subject to amendment, alteration or repeal
by Congress.
Republic Act No. 5431, in amending section 24 of the Tax Code by subjecting to income tax
all corporate taxpayers not expressly exempted therein and in section 27 of the Code, had
the effect of withdrawing petitioner's exemption from income tax.
The Tax Court acted correctly in holding that the exemption was restored by the
subsequent enactment on August 4, 1969 of Republic Act No. 6020 which reenacted the
said tax exemption. Hence, the petitioner is liable only for the income tax for the period
from January 1 to August 3, 1969 when its tax exemption was modified by Republic Act No.
5431.
It is relevant to note that franchise companies, like the Philippine Long Distance Telephone
Company, have been paying income tax in addition to the franchise tax.
However, it cannot be denied that the said 1969 assessment appears to be highly
controversial. The Commissioner at the outset was not certain as to petitioner's income

tax liability. It had reason not to pay income tax because of the tax exemption in its
franchise.
For this reason, it should be liable only for tax proper and should not be held liable for the
surcharge and interest. (Advertising Associates, Inc. vs. Commissioner of Internal Revenue
and Court of Tax Appeals, G. R. No. 59758, December 26, 1984,133 SCRA 765; Imus
Electric Co., Inc. vs. Commissioner of Internal Revenue, 125 Phil. 1024; C.M. Hoskins & Co.,
Inc. vs. Commissioner of Internal Revenue, L-28383, June 22, 1976, 71 SCRA 511.)
WHEREFORE, the judgment of the Tax Court is affirmed with the modification that the
petitioner is liable only for the tax proper and that it should not pay the delinquency
penalties. No costs.
SO ORDERED.
.R. No. L-39086 June 15, 1988
ABRA VALLEY COLLEGE, INC., represented by PEDRO V. BORGONIA, petitioner,
vs.
HON. JUAN P. AQUINO, Judge, Court of First Instance, Abra; ARMIN M. CARIAGA,
Provincial Treasurer, Abra; GASPAR V. BOSQUE, Municipal Treasurer, Bangued,
Abra; HEIRS OF PATERNO MILLARE,respondents.

PARAS, J.:
This is a petition for review on certiorari of the decision * of the defunct Court of First
Instance of Abra, Branch I, dated June 14, 1974, rendered in Civil Case No. 656, entitled
"Abra Valley Junior College, Inc., represented by Pedro V. Borgonia, plaintiff vs. Armin M.
Cariaga as Provincial Treasurer of Abra, Gaspar V. Bosque as Municipal Treasurer of
Bangued, Abra and Paterno Millare, defendants," the decretal portion of which reads:
IN VIEW OF ALL THE FOREGOING, the Court hereby declares:
That the distraint seizure and sale by the Municipal Treasurer of Bangued,
Abra, the Provincial Treasurer of said province against the lot and building of
the Abra Valley Junior College, Inc., represented by Director Pedro Borgonia
located at Bangued, Abra, is valid;
That since the school is not exempt from paying taxes, it should therefore pay
all back taxes in the amount of P5,140.31 and back taxes and penalties from
the promulgation of this decision;
That the amount deposited by the plaintaff him the sum of P60,000.00 before
the trial, be confiscated to apply for the payment of the back taxes and for
the redemption of the property in question, if the amount is less than
P6,000.00, the remainder must be returned to the Director of Pedro Borgonia,
who represents the plaintiff herein;

That the deposit of the Municipal Treasurer in the amount of P6,000.00 also
before the trial must be returned to said Municipal Treasurer of Bangued,
Abra;
And finally the case is hereby ordered dismissed with costs against the
plaintiff.
SO ORDERED. (Rollo, pp. 22-23)
Petitioner, an educational corporation and institution of higher learning duly incorporated
with the Securities and Exchange Commission in 1948, filed a complaint (Annex "1" of
Answer by the respondents Heirs of Paterno Millare; Rollo, pp. 95-97) on July 10, 1972 in
the court a quo to annul and declare void the "Notice of Seizure' and the "Notice of Sale"
of its lot and building located at Bangued, Abra, for non-payment of real estate taxes and
penalties amounting to P5,140.31. Said "Notice of Seizure" of the college lot and building
covered by Original Certificate of Title No. Q-83 duly registered in the name of petitioner,
plaintiff below, on July 6, 1972, by respondents Municipal Treasurer and Provincial
Treasurer, defendants below, was issued for the satisfaction of the said taxes thereon. The
"Notice of Sale" was caused to be served upon the petitioner by the respondent treasurers
on July 8, 1972 for the sale at public auction of said college lot and building, which sale
was held on the same date. Dr. Paterno Millare, then Municipal Mayor of Bangued, Abra,
offered the highest bid of P6,000.00 which was duly accepted. The certificate of sale was
correspondingly issued to him.
On August 10, 1972, the respondent Paterno Millare (now deceased) filed through counstel
a motion to dismiss the complaint.
On August 23, 1972, the respondent Provincial Treasurer and Municipal Treasurer, through
then Provincial Fiscal Loreto C. Roldan, filed their answer (Annex "2" of Answer by the
respondents Heirs of Patemo Millare; Rollo, pp. 98-100) to the complaint. This was followed
by an amended answer (Annex "3," ibid, Rollo, pp. 101-103) on August 31, 1972.
On September 1, 1972 the respondent Paterno Millare filed his answer (Annex "5," ibid;
Rollo, pp. 106-108).
On October 12, 1972, with the aforesaid sale of the school premises at public auction, the
respondent Judge, Hon. Juan P. Aquino of the Court of First Instance of Abra, Branch I,
ordered (Annex "6," ibid; Rollo, pp. 109-110) the respondents provincial and municipal
treasurers to deliver to the Clerk of Court the proceeds of the auction sale. Hence, on
December 14, 1972, petitioner, through Director Borgonia, deposited with the trial court
the sum of P6,000.00 evidenced by PNB Check No. 904369.
On April 12, 1973, the parties entered into a stipulation of facts adopted and embodied by
the trial court in its questioned decision. Said Stipulations reads:
STIPULATION OF FACTS
COME NOW the parties, assisted by counsels, and to this Honorable Court
respectfully enter into the following agreed stipulation of facts:

1. That the personal circumstances of the parties as stated in paragraph 1 of

the complaint is admitted; but the particular person of Mr. Armin M. Cariaga is
to be substituted, however, by anyone who is actually holding the position of
Provincial Treasurer of the Province of Abra;
2. That the plaintiff Abra Valley Junior College, Inc. is the owner of the lot and
buildings thereon located in Bangued, Abra under Original Certificate of Title
No. 0-83;
3. That the defendant Gaspar V. Bosque, as Municipal treasurer of Bangued,
Abra caused to be served upon the Abra Valley Junior College, Inc. a Notice of
Seizure on the property of said school under Original Certificate of Title No. 083 for the satisfaction of real property taxes thereon, amounting to
P5,140.31; the Notice of Seizure being the one attached to the complaint as
Exhibit A;
4. That on June 8, 1972 the above properties of the Abra Valley Junior College,
Inc. was sold at public auction for the satisfaction of the unpaid real property
taxes thereon and the same was sold to defendant Paterno Millare who
offered the highest bid of P6,000.00 and a Certificate of Sale in his favor was
issued by the defendant Municipal Treasurer.
5. That all other matters not particularly and specially covered by this
stipulation of facts will be the subject of evidence by the parties.
WHEREFORE, it is respectfully prayed of the Honorable Court to consider and
admit this stipulation of facts on the point agreed upon by the parties.
Bangued, Abra, April 12, 1973.
Sgd.
Agripino
Brillantes
Typ
AGRIPINO
BRILLANTES
Attorney for
Plaintiff
Sgd. Loreto
Roldan
Typ LORETO
ROLDAN
Provincial
Fiscal
Counsel for
Defendants
Provincial
Treasurer of

Abra and the

Municipal
Treasurer of
Bangued,
Abra
Sgd.
Demetrio V.
Pre
Typ.
DEMETRIO V.
PRE
Attorney for
Defendant
Paterno
Millare
(Rollo, pp.
17-18)
Aside from the Stipulation of Facts, the trial court among others, found the following: (a)
that the school is recognized by the government and is offering Primary, High School and
College Courses, and has a school population of more than one thousand students all in
all; (b) that it is located right in the heart of the town of Bangued, a few meters from the
plaza and about 120 meters from the Court of First Instance building; (c) that the
elementary pupils are housed in a two-storey building across the street; (d) that the high
school and college students are housed in the main building; (e) that the Director with his
family is in the second floor of the main building; and (f) that the annual gross income of
the school reaches more than one hundred thousand pesos.
From all the foregoing, the only issue left for the Court to determine and as agreed by the
parties, is whether or not the lot and building in question are used exclusively for
educational purposes. (Rollo, p. 20)
The succeeding Provincial Fiscal, Hon. Jose A. Solomon and his Assistant, Hon. Eustaquio Z.
Montero, filed a Memorandum for the Government on March 25, 1974, and a Supplemental
Memorandum on May 7, 1974, wherein they opined "that based on the evidence, the laws
applicable, court decisions and jurisprudence, the school building and school lot used for
educational purposes of the Abra Valley College, Inc., are exempted from the payment of
taxes." (Annexes "B," "B-1" of Petition; Rollo, pp. 24-49; 44 and 49).
Nonetheless, the trial court disagreed because of the use of the second floor by the
Director of petitioner school for residential purposes. He thus ruled for the government
and rendered the assailed decision.
After having been granted by the trial court ten (10) days from August 6, 1974 within
which to perfect its appeal (Per Order dated August 6, 1974; Annex "G" of Petition; Rollo,
p. 57) petitioner instead availed of the instant petition for review on certiorari with prayer
for preliminary injunction before this Court, which petition was filed on August 17, 1974
(Rollo, p.2).

In the resolution dated August 16, 1974, this Court resolved to give DUE COURSE to the
petition (Rollo, p. 58). Respondents were required to answer said petition (Rollo, p. 74).
Petitioner raised the following assignments of error:
I
THE COURT A QUO ERRED IN SUSTAINING AS VALID THE SEIZURE AND SALE OF THE
COLLEGE LOT AND BUILDING USED FOR EDUCATIONAL PURPOSES OF THE PETITIONER.
II
THE COURT A QUO ERRED IN DECLARING THAT THE COLLEGE LOT AND BUILDING OF THE
PETITIONER ARE NOT USED EXCLUSIVELY FOR EDUCATIONAL PURPOSES MERELY BECAUSE
THE COLLEGE PRESIDENT RESIDES IN ONE ROOM OF THE COLLEGE BUILDING.
III
THE COURT A QUO ERRED IN DECLARING THAT THE COLLEGE LOT AND BUILDING OF THE
PETITIONER ARE NOT EXEMPT FROM PROPERTY TAXES AND IN ORDERING PETITIONER TO
PAY P5,140.31 AS REALTY TAXES.
IV
THE COURT A QUO ERRED IN ORDERING THE CONFISCATION OF THE P6,000.00 DEPOSIT
MADE IN THE COURT BY PETITIONER AS PAYMENT OF THE P5,140.31 REALTY TAXES. (See
Brief for the Petitioner, pp. 1-2)
The main issue in this case is the proper interpretation of the phrase "used exclusively for
educational purposes."
Petitioner contends that the primary use of the lot and building for educational purposes,
and not the incidental use thereof, determines and exemption from property taxes under
Section 22 (3), Article VI of the 1935 Constitution. Hence, the seizure and sale of subject
college lot and building, which are contrary thereto as well as to the provision of
Commonwealth Act No. 470, otherwise known as the Assessment Law, are without legal
basis and therefore void.
On the other hand, private respondents maintain that the college lot and building in
question which were subjected to seizure and sale to answer for the unpaid tax are used:
(1) for the educational purposes of the college; (2) as the permanent residence of the
President and Director thereof, Mr. Pedro V. Borgonia, and his family including the in-laws
and grandchildren; and (3) for commercial purposes because the ground floor of the
college building is being used and rented by a commercial establishment, the Northern
Marketing Corporation (See photograph attached as Annex "8" (Comment; Rollo, p. 90]).
Due to its time frame, the constitutional provision which finds application in the case at
bar is Section 22, paragraph 3, Article VI, of the then 1935 Philippine Constitution, which
expressly grants exemption from realty taxes for "Cemeteries, churches and parsonages or

convents appurtenant thereto, and all lands, buildings, and improvements used
exclusively for religious, charitable or educational purposes ...
Relative thereto, Section 54, paragraph c, Commonwealth Act No. 470 as amended by
Republic Act No. 409, otherwise known as the Assessment Law, provides:
The following are exempted from real property tax under the Assessment
Law:
xxx xxx xxx
(c) churches and parsonages or convents appurtenant thereto, and all lands,
buildings, and improvements used exclusively for religious, charitable,
scientific or educational purposes.
xxx xxx xxx
In this regard petitioner argues that the primary use of the school lot and building is the
basic and controlling guide, norm and standard to determine tax exemption, and not the
mere incidental use thereof.
As early as 1916 in YMCA of Manila vs. Collector of lnternal Revenue, 33 Phil. 217 [1916],
this Court ruled that while it may be true that the YMCA keeps a lodging and a boarding
house and maintains a restaurant for its members, still these do not constitute business in
the ordinary acceptance of the word, but an institution used exclusively for religious,
charitable and educational purposes, and as such, it is entitled to be exempted from
taxation.
In the case of Bishop of Nueva Segovia v. Provincial Board of Ilocos Norte, 51 Phil. 352
[1972], this Court included in the exemption a vegetable garden in an adjacent lot and
another lot formerly used as a cemetery. It was clarified that the term "used exclusively"
considers incidental use also. Thus, the exemption from payment of land tax in favor of the
convent includes, not only the land actually occupied by the building but also the adjacent
garden devoted to the incidental use of the parish priest. The lot which is not used for
commercial purposes but serves solely as a sort of lodging place, also qualifies for
exemption because this constitutes incidental use in religious functions.
The phrase "exclusively used for educational purposes" was further clarified by this Court
in the cases of Herrera vs. Quezon City Board of assessment Appeals, 3 SCRA 186 [1961]
and Commissioner of Internal Revenue vs. Bishop of the Missionary District, 14 SCRA 991
[1965], thus
Moreover, the exemption in favor of property used exclusively for charitable
or educational purposes is 'not limited to property actually indispensable'
therefor (Cooley on Taxation, Vol. 2, p. 1430), but extends to facilities which
are incidental to and reasonably necessary for the accomplishment of said
purposes, such as in the case of hospitals, "a school for training nurses, a
nurses' home, property use to provide housing facilities for interns, resident
doctors, superintendents, and other members of the hospital staff, and

recreational facilities for student nurses, interns, and residents' (84 CJS 6621),
such as "Athletic fields" including "a firm used for the inmates of the
institution. (Cooley on Taxation, Vol. 2, p. 1430).
The test of exemption from taxation is the use of the property for purposes mentioned in
the Constitution (Apostolic Prefect v. City Treasurer of Baguio, 71 Phil, 547 [1941]).
It must be stressed however, that while this Court allows a more liberal and non-restrictive
interpretation of the phrase "exclusively used for educational purposes" as provided for in
Article VI, Section 22, paragraph 3 of the 1935 Philippine Constitution, reasonable
emphasis has always been made that exemption extends to facilities which are incidental
to and reasonably necessary for the accomplishment of the main purposes. Otherwise
stated, the use of the school building or lot for commercial purposes is neither
contemplated by law, nor by jurisprudence. Thus, while the use of the second floor of the
main building in the case at bar for residential purposes of the Director and his family,
may find justification under the concept of incidental use, which is complimentary to the
main or primary purposeeducational, the lease of the first floor thereof to the Northern
Marketing Corporation cannot by any stretch of the imagination be considered incidental
to the purpose of education.
It will be noted however that the aforementioned lease appears to have been raised for
the first time in this Court. That the matter was not taken up in the to court is really
apparent in the decision of respondent Judge. No mention thereof was made in the
stipulation of facts, not even in the description of the school building by the trial judge,
both embodied in the decision nor as one of the issues to resolve in order to determine
whether or not said properly may be exempted from payment of real estate taxes (Rollo,
pp. 17-23). On the other hand, it is noteworthy that such fact was not disputed even after
it was raised in this Court.
Indeed, it is axiomatic that facts not raised in the lower court cannot be taken up for the
first time on appeal. Nonetheless, as an exception to the rule, this Court has held that
although a factual issue is not squarely raised below, still in the interest of substantial
justice, this Court is not prevented from considering a pivotal factual matter. "The
Supreme Court is clothed with ample authority to review palpable errors not assigned as
such if it finds that their consideration is necessary in arriving at a just decision." (Perez vs.
Court of Appeals, 127 SCRA 645 [1984]).
Under the 1935 Constitution, the trial court correctly arrived at the conclusion that the
school building as well as the lot where it is built, should be taxed, not because the second
floor of the same is being used by the Director and his family for residential purposes, but
because the first floor thereof is being used for commercial purposes. However, since only
a portion is used for purposes of commerce, it is only fair that half of the assessed tax be
returned to the school involved.
PREMISES CONSIDERED, the decision of the Court of First Instance of Abra, Branch I, is
hereby AFFIRMED subject to the modification that half of the assessed tax be returned to
the petitioner.
SO ORDERED.

G.R. No. L-27588 December 31, 1927

THE ROMAN CATHOLIC BISHOP OF NUEVA SEGOVIA, as representative of the
Roman Catholic Apostolic Church, plaintiff-appellant,
vs.
THE PROVINCIAL BOARD OF ILOCOS NORTE, ET AL., defendants-appellants.
Vicente Llanes and Proceso Coloma for plaintiff-appellant.
Provincial Fiscal Santos for defendant-appellants.

AVANCEA, J.:
The plaintiff, the Roman Catholic Apostolic Church, represented by the Bishop of Nueva
Segovia, possesses and is the owner of a parcel of land in the municipality of San Nicolas,
Ilocos Norte, all four sides of which face on public streets. On the south side is a part of the
churchyard, the convent and an adjacent lot used for a vegetable garden, containing an
area off 1,624 square meters, in which there is a stable and a well for the use of the
convent. In the center is the remainder of the churchyard and the church. On the north is
an old cemetery with two of its walls still standing, and a portion where formerly stood a
tower, the base of which still be seen, containing a total area of 8,955 square meters.
As required by the defendants, on July 3, 1925 the plaintiff paid, under protest, the land
tax on the lot adjoining the convent and the lot which formerly was the cemetery with the
portion where the tower stood.
The plaintiff filed this action for the recovery of the sum paid by to the defendants by way
of land tax, alleging that the collection of this tax is illegal. The lower court absolved the
defendants from the complaint in regard to the lot adjoining convent and declared that the
tax collected on the lot, which formerly was the cemetery and on the portion where the
lower stood, was illegal. Both parties appealed from this judgment.
The exemption in favor of the convent in the payment of the land tax (sec. 344 [c]
Administrative Code) refers to the home of the parties who presides over the church and
who has to take care of himself in order to discharge his duties. In therefore must, in the
sense, include not only the land actually occupied by the church, but also the adjacent
ground destined to the ordinary incidental uses of man. Except in large cities where the
density of the population and the development of commerce require the use of larger
tracts of land for buildings, a vegetable garden belongs to a house and, in the case of a
convent, it use is limited to the necessities of the priest, which comes under the
exemption.lawphi1.net
In regard to the lot which formerly was the cemetery, while it is no longer used as such,
neither is it used for commercial purposes and, according to the evidence, is now being
used as a lodging house by the people who participate in religious festivities, which
constitutes an incidental use in religious functions, which also comes within the
exemption.

The judgment appealed from is reversed in all it parts and it is held that both lots are
exempt from land tax and the defendants are ordered to refund to plaintiff whatever was
paid as such tax, without any special pronouncement as to costs. So ordered.
G.R. No. L-19445

August 31, 1965

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
BISHOP OF THE MISSIONARY DISTRICT OF THE PHILIPPINE ISLANDS OF THE
PROTESTANT EPISCOPAL CHURCH IN THE U.S.A. and THE COURT OF TAX
APPEALS, respondents.
Office of the Solicitor General for petitioner.
Ross, Selph and Carrascoso for respondents.
REGALA, J.:
This is an appeal taken from the Commissioner of Internal Revenue from a decision of the
Court of Tax Appeals ordering him to refund to the Bishop of the Missionary District of the
Philippines Islands of the Protestant Episcopal in the U.S.A. the sum of P118,847 which the
latter had paid by way of compensating tax.
Respondent Bishop of the Missionary District of the Philippines Islands of the Protestant,
Episcopal Church in the U.S.A. is a corporation sole duly registered with the Securities and
Exchange Commission. He is in charge of the administration of the temporalities and the
management of the estates and properties in the Philippines of the Domestic and Foreign
Missionary Society of the Protestant Episcopal Church in the United States (hereinafter
referred to as Missionary Society). On the other hand, the Missionary District of the
Philippine Islands of the Protestant Episcopal Church the U.S.A. (hereinafter referred to as
Missionary District) is a duly incorporated and established religious society. It owns and
operates the St. Luke's Hospital in Quezon City, the Brent Hospital in Zamboanga City and
the St. Stephen's High School in Manila.
On different dates in 1957, 1958 and 1959, the Missionary District in the Philippines
received from the Missionary Society in the United States various shipments of materials,
supplies, equipment and other articles intended for use in the construction and operation
of the new St. Luke's Hospital in Quezon City and the Brent Hospital and St. Stephen's High
School. The Missionary District also received from a certain William Minnis of Canada a
stove for the use of the Brent Hospital.
On these shipments, the Commissioner of Internal Revenue levied and collected the total
amount of P118,847 as compensating tax.
The Bishop of the Missionary District filed claims for refund of the amount he had paid on
the ground that under Republic Act No. 1916, the materials and articles received by him
were exempt from the payment of compensating tax. As the two-year period for recovery
of tax was about to expire, the Bishop of the Missionary District filed a petition for review
in the Court of Tax Appeals, without awaiting action on his claim for refund. Subsequently,

he also filed two supplemental petitions for review covering other shipments received by
him and on which he had paid compensating taxes.
On August 21, 1959, the petitioner, the Commissioner of Internal Revenue denied
respondent's claim for refund on the ground that St. Luke's Hospital was not a charitable
institution and, therefore, was not exempt under the law. This is also the position he
maintained in his answer to the first supplemental petition for review in the Tax Court.
After trial, the Tax Court rendered a decision holding the shipments exempt from taxation
ordering the petitioner to refund to the respondent the amount of P118,847. It denied a
motion for reconsideration of its decision, prompting petitioner to interpose this appeal.
Petitioner makes the following assignment of errors:
1. The shipments cannot be considered donations because the Missionary District is
merely a branch of the Missionary Society. The two hold identical interests.
2. The Tax Court's holding that the real donors are the people who contributed money to
the Missionary Society in America is based on the uncorroborated testimony of Robert
Meyer, Treasurer of the Missionary District in the Philippines, who did not have personal
knowledge of the alleged contribution. The alleged contributors were not even identified.
3. The St. Luke's Hospital is not a charitable institution and, therefore, is not exempt from
taxation because its admits pay patients. The Secretary of Finance states in his Dept.
Order No. 18 that hospitals admitting pay patients and charity patients are not charitable
institutions.
This order was issued pursuant to the power given him by the last proviso of Republic Act
No. 1916 which provides:
SECTION 1. The provisions of existing laws to the contrary notwithstanding, all
donations in any form and all articles imported into the Philippines, consigned to a
duly incorporated or established international civic organization, religious or
charitable society or institution for civic, religious or charitable purposes shall be
exempt from the payment of all taxes and duties upon proof satisfactory to the
Commissioner of Customs and/or Collector of Internal Revenue that such donations
in any form and articles so imported are donations for its use or for free distribution
and not for barter, sale or hire: Provided, however, That in case such are
subsequently conveyed or transferred to other parties for a consideration, taxes and
duties shall be collected thereon at double the rate provided under existing laws
payable by the transferor: Provided, further, That rules and regulation, shall be
promulgated by the Department of Finance for the implementation of this Act.
This Court has already held that the following requisites must concur in order that a
taxpayer may claim exemption under the law (1) the imported articles must have been
donated; (2) the donee must be a duly incorporated or established international civic
organization, religious or charitable society, or institution for civic religious or charitable
purposes; and (3) the articles so imported must have been donated for the use of the

organization, society or institution or for free distribution and not for barter, sale or hire.
(Commissioner v. Church of Jesus Christ "New Jerusalem," G.R. No. L-15772, Oct. 31, 1961)
In this appeal, the petitioner contends that the importations in question cannot be
considered "donations" because the Missionary Society, which made the shipments, and
the Missionary District in the Philippines are not different persons but rather are one and
the same, the latter being a mere branch of the former.
It should be enough to point out that by stipulation of the parties, the respondent Bishop is
admitted to be a corporation sole duly registered with the Securities and Exchange
Commission and that the Missionary District is a "duly incorporated and established
religious society." They are, therefore, entities separate and distinct from the Missionary
Society whose address is at 281 Fourth South, New York 10, N.Y., U.S.A. The fact that the
Missionary District, of which respondent is the Bishop, is a branch of the Missionary
Society is of no moment. For that matter, so is the Roman Catholic Church in the
Philippines a branch of the Universal Roman Catholic Apostolic Church, but it is a branch
only in religious matters, in matters of faith and dogma. In other respects, it is
independent. (Roman Catholic Apostolic Administrator v. Land Registration Commissioner,
G.R. No. L-8451, December 20, 1957)
The Tax Court's finding that the materials and supplies were purchased by the Missionary
Society with money obtained from contributions from other people who should be
considered the real donors is also assailed as being based on the uncorroborated
testimony of Robert Meyer, Treasurer of the Missionary District, who it is said, did not have
personal knowledge of the matter testified to by him. This is not so. As respondent points
out, the various deeds of donation state in paragraph 3 that the "Missionary Society is a
non-profit organization and derives its support from voluntary contributions."
Petitioner's other point is that St. Luke's Hospital is not a charitable institution considering
that it admits paying patients. Indeed, it was on this ground that petitioner denied
respondent's claim for refund. It is argued that pursuant to the last proviso of Republic Act
No. 1916, the Secretary of Finance issued Department Order No. 18 on October 20, 1958,
stating that
Hospitals that admit pay patients and charity patients ... are not charitable
institutions for purposes of Republic Act No 1916.
Again, it should be enough to point out that the admission of pay patients does not detract
from the charitable character of a hospital, if, as in the case of St. Luke's Hospital, its funds
are devoted exclusively to the Maintenance of the institution (Cf., e.g., Herrera v. Quezon
City Board of Assessment Appeals, G.R. No. 15270, September 30, 1961). The Secretary of
Finance cannot limit or otherwise qualify the enjoyment of this exemption granted under
Republic Act No. 1916 in implementing the law.
WHEREFORE, the decision appealed from is hereby affirmed with costs.
G.R. No. 124043 October 14, 1998

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
COURT OF APPEALS, COURT OF TAX APPEALS and YOUNG MEN'S CHRISTIAN
ASSOCIATION OF THE PHILIPPINES, INC., respondents.

PANGANIBAN, J.:
Is the income derived from rentals of real property owned by the Young Men's Christian
Association of the Philippines, Inc. (YMCA) established as "a welfare, educational and
charitable non-profit corporation" subject to income tax under the National Internal
Revenue Code (NIRC) and the Constitution?
The Case
This is the main question raised before us in this petition for review
on certiorari challenging two Resolutions issued by the Court of Appeals 1 on September
28, 1995 2 and February 29, 1996 3 in CA-GR SP No. 32007. Both Resolutions affirmed the
Decision of the Court of Tax Appeals (CTA) allowing the YMCA to claim tax exemption on
the latter's income from the lease of its real property.
The Facts
The facts are undisputed. 4 Private Respondent YMCA is a non-stock, non-profit institution,
which conducts various programs and activities that are beneficial to the public, especially
the young people, pursuant to its religious, educational and charitable objectives.
In 1980, private respondent earned, among others, an income of P676,829.80 from leasing
out a portion of its premises to small shop owners, like restaurants and canteen operators,
and P44,259.00 from parking fees collected from non-members. On July 2, 1984, the
commissioner of internal revenue (CIR) issued an assessment to private respondent, in the
total amount of P415,615.01 including surcharge and interest, for deficiency income tax,
deficiency expanded withholding taxes on rentals and professional fees and deficiency
withholding tax on wages. Private respondent formally protested the assessment and, as a
supplement to its basic protest, filed a letter dated October 8, 1985. In reply, the CIR
denied the claims of YMCA.
Contesting the denial of its protest, the YMCA filed a petition for review at the Court of Tax
Appeals (CTA) on March 14, 1989. In due course, the CTA issued this ruling in favor of the
YMCA:
. . . [T]he leasing of [private respondent's] facilities to small shop owners, to
restaurant and canteen operators and the operation of the parking lot are
reasonably incidental to and reasonably necessary for the accomplishment of
the objectives of the [private respondents]. It appears from the testimonies of
the witnesses for the [private respondent] particularly Mr. James C. Delote,
former accountant of YMCA, that these facilities were leased to members and
that they have to service the needs of its members and their guests. The

rentals were minimal as for example, the barbershop was only charged P300
per month. He also testified that there was actually no lot devoted for parking
space but the parking was done at the sides of the building. The parking was
primarily for members with stickers on the windshields of their cars and they
charged P.50 for non-members. The rentals and parking fees were just
enough to cover the costs of operation and maintenance only. The earning[s]
from these rentals and parking charges including those from lodging and
other charges for the use of the recreational facilities constitute [the] bulk of
its income which [is] channeled to support its many activities and attainment
of its objectives. As pointed out earlier, the membership dues are very
insufficient to support its program. We find it reasonably necessary therefore
for [private respondent] to make [the] most out [of] its existing facilities to
earn some income. It would have been different if under the circumstances,
[private respondent] will purchase a lot and convert it to a parking lot to cater
to the needs of the general public for a fee, or construct a building and lease
it out to the highest bidder or at the market rate for commercial purposes, or
should it invest its funds in the buy and sell of properties, real or personal.
Under these circumstances, we could conclude that the activities are already
profit oriented, not incidental and reasonably necessary to the pursuit of the
objectives of the association and therefore, will fall under the last paragraph
of Section 27 of the Tax Code and any income derived therefrom shall be
taxable.
Considering our findings that [private respondent] was not engaged in the
business of operating or contracting [a] parking lot, we find no legal basis
also for the imposition of [a] deficiency fixed tax and [a] contractor's tax in
the amount[s] of P353.15 and P3,129.73, respectively.
xxx xxx xxx
WHEREFORE, in view of all the foregoing, the following assessments are
hereby dismissed for lack of merit:
1980 Deficiency Fixed Tax P353,15;
1980 Deficiency Contractor's Tax P3,129.23;
1980 Deficiency Income Tax P372,578.20.
While the following assessments are hereby sustained:
1980 Deficiency Expanded Withholding Tax P1,798.93;
1980 Deficiency Withholding Tax on Wages P33,058.82
plus 10% surcharge and 20% interest per annum from July 2, 1984 until fully
paid but not to exceed three (3) years pursuant to Section 51(e)(2) & (3) of
the National Internal Revenue Code effective as of 1984. 5

Dissatisfied with the CTA ruling, the CIR elevated the case to the Court of Appeals (CA). In
its Decision of February 16, 1994, the CA 6 initially decided in favor of the CIR and disposed
of the appeal in the following manner:
Following the ruling in the afore-cited cases of Province of Abra vs.
Hernando and Abra Valley College Inc. vs. Aquino, the ruling of the
respondent Court of Tax Appeals that "the leasing of petitioner's (herein
respondent's) facilities to small shop owners, to restaurant and canteen
operators and the operation of the parking lot are reasonably incidental to
and reasonably necessary for the accomplishment of the objectives of the
petitioners, and the income derived therefrom are tax exempt, must be
reversed.
WHEREFORE, the appealed decision is hereby REVERSED in so far as it
dismissed the assessment for:
1980 Deficiency Income Tax P 353.15
1980 Deficiency Contractor's Tax P 3,129.23, &
1980 Deficiency Income Tax P 372,578.20
but the same is AFFIRMED in all other respect.

Aggrieved, the YMCA asked for reconsideration based on the following grounds:
I
The findings of facts of the Public Respondent Court of Tax Appeals being
supported by substantial evidence [are] final and conclusive.
II
The conclusions of law of [p]ublic [r]espondent exempting [p]rivate
[r]espondent from the income on rentals of small shops and parking fees
[are] in accord with the applicable law and jurisprudence. 8
Finding merit in the Motion for Reconsideration filed by the YMCA, the CA reversed itself
and promulgated on September 28, 1995 its first assailed Resolution which, in part, reads:
The Court cannot depart from the CTA's findings of fact, as they are
supported by evidence beyond what is considered as substantial.
xxx xxx xxx
The second ground raised is that the respondent CTA did not err in saying
that the rental from small shops and parking fees do not result in the loss of
the exemption. Not even the petitioner would hazard the suggestion that
YMCA is designed for profit. Consequently, the little income from small shops

and parking fees help[s] to keep its head above the water, so to speak, and
allow it to continue with its laudable work.
The Court, therefore, finds the second ground of the motion to be meritorious
and in accord with law and jurisprudence.
WHEREFORE, the motion for reconsideration is GRANTED; the respondent
CTA's decision is AFFIRMED in toto. 9
The internal revenue commissioner's own Motion for Reconsideration was denied by
Respondent Court in its second assailed Resolution of February 29, 1996. Hence, this
petition for review under Rule 45 of the Rules of Court. 10
The Issues
Before us, petitioner imputes to the Court of Appeals the following errors:
I
In holding that it had departed from the findings of fact of Respondent Court
of Tax Appeals when it rendered its Decision dated February 16, 1994; and
II
In affirming the conclusion of Respondent Court of Tax Appeals that the
income of private respondent from rentals of small shops and parking fees
[is] exempt from taxation. 11
This Court's Ruling
The petition is meritorious.
First Issue:
Factual Findings of the CTA
Private respondent contends that the February 16, 1994 CA Decision reversed the factual
findings of the CTA. On the other hand, petitioner argues that the CA merely reversed the
"ruling of the CTA that the leasing of private respondent's facilities to small shop owners,
to restaurant and canteen operators and the operation of parking lots are reasonably
incidental to and reasonably necessary for the accomplishment of the objectives of the
private respondent and that the income derived therefrom are tax exempt." 12 Petitioner
insists that what the appellate court reversed was the legal conclusion, not the factual
finding, of the CTA. 13 The commissioner has a point.
Indeed, it is a basic rule in taxation that the factual findings of the CTA, when supported by
substantial evidence, will be disturbed on appeal unless it is shown that the said court
committed gross error in the appreciation of facts. 14 In the present case, this Court finds
that the February 16, 1994 Decision of the CA did not deviate from this rule. The latter
merely applied the law to the facts as found by the CTA and ruled on the issue raised by

the CIR: "Whether or not the collection or earnings of rental income from the lease of
certain premises and income earned from parking fees shall fall under the last paragraph
of Section 27 of the National Internal Revenue Code of 1977, as amended." 15
Clearly, the CA did not alter any fact or evidence. It merely resolved the aforementioned
issue, as indeed it was expected to. That it did so in a manner different from that of the
CTA did not necessarily imply a reversal of factual findings.
The distinction between a question of law and a question of fact is clear-cut. It has been
held that "[t]here is a question of law in a given case when the doubt or difference arises
as to what the law is on a certain state of facts; there is a question of fact when the doubt
or difference arises as to the truth or falsehood of alleged facts." 16 In the present case,
the CA did not doubt, much less change, the facts narrated by the CTA. It merely applied
the law to the facts. That its interpretation or conclusion is different from that of the CTA is
not irregular or abnormal.
Second Issue:
Is the Rental Income of the YMCA Taxable?
We now come to the crucial issue: Is the rental income of the YMCA from its real estate
subject to tax? At the outset, we set forth the relevant provision of the NIRC:
Sec. 27. Exemptions from tax on corporations. The following organizations
shall not be taxed under this Title in respect to income received by them as
such
xxx xxx xxx
(g) Civic league or organization not organized for profit but operated
exclusively for the promotion of social welfare;
(h) Club organized and operated exclusively for pleasure, recreation, and
other non-profitable purposes, no part of the net income of which inures to
the benefit of any private stockholder or member;
xxx xxx xxx
Notwithstanding the provisions in the preceding paragraphs, the income of
whatever kind and character of the foregoing organizations from any of their
properties, real or personal, or from any of their activities conducted for
profit, regardless of the disposition made of such income, shall be subject to
the tax imposed under this Code. (as amended by Pres. Decree No. 1457)
Petitioner argues that while the income received by the organizations enumerated in
Section 27 (now Section 26) of the NIRC is, as a rule, exempted from the payment of tax
"in respect to income received by them as such," the exemption does not apply to income
derived ". . . from any of their properties, real or personal, or from any of their activities
conducted for profit, regardless of the disposition made of such income . . . ."

Petitioner adds that "rental income derived by a tax-exempt organization from the lease of
its properties, real or personal, [is] not, therefore, exempt from income taxation, even if
such income [is] exclusively used for the accomplishment of its objectives." 17 We agree
with the commissioner.
Because taxes are the lifeblood of the nation, the Court has always applied the doctrine of
strict in interpretation in construing tax exemptions. 18 Furthermore, a claim of statutory
exemption from taxation should be manifest. and unmistakable from the language of the
law on which it is based. Thus, the claimed exemption "must expressly be granted in a
statute stated in a language too clear to be mistaken." 19
In the instant case, the exemption claimed by the YMCA is expressly disallowed by the
very wording of the last paragraph of then Section 27 of the NIRC which mandates that the
income of exempt organizations (such as the YMCA) from any of their properties, real or
personal, be subject to the tax imposed by the same Code. Because the last paragraph of
said section unequivocally subjects to tax the rent income of the YMCA from its real
property,20 the Court is duty-bound to abide strictly by its literal meaning and to refrain
from resorting to any convoluted attempt at construction.
It is axiomatic that where the language of the law is clear and unambiguous, its express
terms must be applied. 21Parenthetically, a consideration of the question of construction
must not even begin, particularly when such question is on whether to apply a strict
construction or a liberal one on statutes that grant tax exemptions to "religious, charitable
and educational propert[ies] or institutions." 22
The last paragraph of Section 27, the YMCA argues, should be "subject to the qualification
that the income from the properties must arise from activities 'conducted for profit' before
it may be considered taxable." 23 This argument is erroneous. As previously stated, a
reading of said paragraph ineludibly shows that the income from any property of exempt
organizations, as well as that arising from any activity it conducts for profit, is taxable. The
phrase "any of their activities conducted for profit" does not qualify the word "properties."
This makes from the property of the organization taxable, regardless of how that income is
used whether for profit or for lofty non-profit purposes.
Verba legis non est recedendum. Hence, Respondent Court of Appeals committed
reversible error when it allowed, on reconsideration, the tax exemption claimed by YMCA
on income it derived from renting out its real property, on the solitary but unconvincing
ground that the said income is not collected for profit but is merely incidental to its
operation. The law does not make a distinction. The rental income is taxable regardless of
whence such income is derived and how it is used or disposed of. Where the law does not
distinguish, neither should we.
Constitutional Provisions
On Taxation
Invoking not only the NIRC but also the fundamental law, private respondent submits that
Article VI, Section 28 of par. 3 of the 1987 Constitution, 24 exempts "charitable institutions"
from the payment not only of property taxes but also of income tax from any source. 25 In

support of its novel theory, it compares the use of the words "charitable institutions,"
"actually" and "directly" in the 1973 and the 1987 Constitutions, on the one hand; and in
Article VI, Section 22, par. 3 of the 1935 Constitution, on the other hand. 26
Private respondent enunciates three points. First, the present provision is divisible into two
categories: (1) "[c]haritable institutions, churches and parsonages or convents
appurtenant thereto, mosques and non-profit cemeteries," the incomes of which are, from
whatever source, all tax-exempt; 27 and (2) "[a]ll lands, buildings and improvements
actually and directly used for religious, charitable or educational purposes," which are
exempt only from property taxes. 28 Second, Lladoc v. Commissioner of Internal
Revenue, 29 which limited the exemption only to the payment of property taxes, referred to
the provision of the 1935 Constitution and not to its counterparts in the 1973 and the
1987 Constitutions. 30 Third, the phrase "actually, directly and exclusively used for
religious, charitable or educational purposes" refers not only to "all lands, buildings and
improvements," but also to the above-quoted first category which includes charitable
institutions like the private respondent. 31
The Court is not persuaded. The debates, interpellations and expressions of opinion of the
framers of the Constitution reveal their intent which, in turn, may have guided the people
in ratifying the Charter. 32 Such intent must be effectuated.
Accordingly, Justice Hilario G. Davide, Jr., a former constitutional commissioner, who is now
a member of this Court, stressed during the Concom debates that ". . . what is exempted is
not the institution itself . . .; those exempted from real estate taxes are lands, buildings
and improvements actually, directly and exclusively used for religious, charitable or
educational
purposes." 33 Father Joaquin G. Bernas, an eminent authority on the Constitution and also a
member of the Concom, adhered to the same view that the exemption created by said
provision pertained only to property taxes. 34
In his treatise on taxation, Mr. Justice Jose C. Vitug concurs, stating that "[t]he tax
exemption covers property taxes only." 35 Indeed, the income tax exemption claimed by
private respondent finds no basis in Article VI, Section 26, par. 3 of the Constitution.
Private respondent also invokes Article XIV, Section 4, par. 3 of the Character, 36 claiming
that the YMCA "is a non-stock, non-profit educational institution whose revenues and
assets are used actually, directly and exclusively for educational purposes so it is exempt
from taxes on its properties and income." 37 We reiterate that private respondent is
exempt from the payment of property tax, but not income tax on the rentals from its
property. The bare allegation alone that it is a non-stock, non-profit educational institution
is insufficient to justify its exemption from the payment of income tax.
As previously discussed, laws allowing tax exemption are construed strictissimi juris.
Hence, for the YMCA to be granted the exemption it claims under the aforecited provision,
it must prove with substantial evidence that (1) it falls under the classification non-stock,
non-profit educational institution; and (2) the income it seeks to be exempted from
taxation is used actually, directly, and exclusively for educational purposes. However, the
Court notes that not a scintilla of evidence was submitted by private respondent to prove
that it met the said requisites.

Is the YMCA an educational institution within the purview of Article XIV, Section 4, par. 3 of
the Constitution? We rule that it is not. The term "educational institution" or "institution of
learning" has acquired a well-known technical meaning, of which the members of the
Constitutional Commission are deemed cognizant. 38 Under the Education Act of 1982,
such term refers to schools. 39 The school system is synonymous with formal
education, 40 which "refers to the hierarchically structured and chronologically graded
learnings organized and provided by the formal school system and for which certification is
required in order for the learner to progress through the grades or move to the higher
levels." 41 The Court has examined the "Amended Articles of Incorporation" and "ByLaws" 43 of the YMCA, but found nothing in them that even hints that it is a school or an
educational institution. 44
Furthermore, under the Education Act of 1982, even non-formal education is understood to
be school-based and "private auspices such as foundations and civic-spirited
organizations" are ruled out. 45 It is settled that the term "educational institution," when
used in laws granting tax exemptions, refers to a ". . . school seminary, college or
educational establishment . . . ." 46 Therefore, the private respondent cannot be deemed
one of the educational institutions covered by the constitutional provision under
consideration.
. . . Words used in the Constitution are to be taken in their ordinary
acceptation. While in its broadest and best sense education embraces all
forms and phases of instruction, improvement and development of mind and
body, and as well of religious and moral sentiments, yet in the common
understanding and application it means a place where systematic instruction
in any or all of the useful branches of learning is given by methods common
to schools and institutions of learning. That we conceive to be the true intent
and scope of the term [educational institutions,] as used in the
Constitution. 47
Moreover, without conceding that Private Respondent YMCA is an educational institution,
the Court also notes that the former did not submit proof of the proportionate amount of
the subject income that was actually, directly and exclusively used for educational
purposes. Article XIII, Section 5 of the YMCA by-laws, which formed part of the evidence
submitted, is patently insufficient, since the same merely signified that "[t]he net income
derived from the rentals of the commercial buildings shall be apportioned to the
Federation and Member Associations as the National Board may decide." 48 In sum, we find
no basis for granting the YMCA exemption from income tax under the constitutional
provision invoked.
Cases Cited by Private
Respondent Inapplicable
The cases 49 relied on by private respondent do not support its cause. YMCA of Manila v.
Collector of Internal Revenue 50and Abra Valley College, Inc. v. Aquino 51 are not
applicable, because the controversy in both cases involved exemption from the payment
of property tax, not income tax. Hospital de San Juan de Dios, Inc. v. Pasay City 52 is not in
point either, because it involves a claim for exemption from the payment of regulatory

fees, specifically electrical inspection fees, imposed by an ordinance of Pasay City an

issue not at all related to that involved in a claimed exemption from the payment of
income taxes imposed on property leases. In Jesus Sacred Heart College v. Com. of
Internal Revenue, 53 the party therein, which claimed an exemption from the payment of
income tax, was an educational institution which submitted substantial evidence that the
income subject of the controversy had been devoted or used solely for educational
purposes. On the other hand, the private respondent in the present case has not given any
proof that it is an educational institution, or that part of its rent income is actually, directly
and exclusively used for educational purposes.
Epilogue
In deliberating on this petition, the Court expresses its sympathy with private respondent.
It appreciates the nobility of its cause. However, the Court's power and function are limited
merely to applying the law fairly and objectively. It cannot change the law or bend it to suit
its sympathies and appreciations. Otherwise, it would be overspilling its role and invading
the realm of legislation.
We concede that private respondent deserves the help and the encouragement of the
government. It needs laws that can facilitate, and not frustrate, its humanitarian tasks. But
the Court regrets that, given its limited constitutional authority, it cannot rule on the
wisdom or propriety of legislation. That prerogative belongs to the political departments of
government. Indeed, some of the members of the Court may even believe in the wisdom
and prudence of granting more tax exemptions to private respondent. But such belief,
however well-meaning and sincere, cannot bestow upon the Court the power to change or
amend the law.
WHEREFORE, the petition is GRANTED. The Resolutions of the Court of Appeals dated
September 28, 1995 and February 29, 1996 are hereby REVERSED and SET ASIDE. The
Decision of the Court of Appeals dated February 16, 1995 is REINSTATED, insofar as it
ruled that the income derived by petitioner from rentals of its real property is subject to
income tax. No pronouncement as to costs.
SO ORDERED.
Davide, Jr., Vitug and Quisumbing, JJ., concur.
Bellosillo, J., Please see Dissenting Opinion.

Separate Opinions

BELLOSILLO, J., dissenting;

I vote to deny the petition. The basic rule is that the factual findings of the Court of Tax
Appeals when supported by substantial evidence will not be disturbed on appeal unless it
is shown that the court committed grave error in the appreciation of facts. 1 In the instant
case, there is no dispute as to the validity of the findings of the Court of Tax Appeals that
private respondent Young Men's Christian Association (YMCA) is an association organized
and operated exclusively for the promotion of social welfare and other non-profitable
purposes, particularly the physical and character development of the youth. 2 The
enduring objectives of respondent YMCA as reflected in its Constitution and By-laws are:
(a) To develop well-balanced Christian personality, mission in life, usefulness
of individuals, and the promotion of unity among Christians and
understanding among peoples of all faiths, to the end that the Brotherhood of
Man under the Fatherhood of God may be fostered in an atmosphere of
mutual respect and understanding;
(b) To promote on equal basis the physical, mental, and spiritual welfare of
the youth, with emphasis on reverence for God, social discipline,
responsibility for the common good, respect for human dignity, and the
observance of the Golden Rule;
(c) To encourage members of the Young Men's Christian Associations in the
Philippines to participate loyally in the life of their respective churches; to
bring these churches closer together; and to participate in the effort to realize
the church Universal;
(d) To strengthen and coordinate the work of the Young Men's Christian
Associations in the Philippines and to foster the extension of the Youth Men's
Christian Associations to new areas;
(e) To help its Member Associations develop and adopt their programs to the
needs of the youth;
(f) To assist the Member Associations in developing and maintaining a high
standard of management, operation and practice; and
(g) To undertake and sponsor national and international programs and
activities in pursuance of its purposes and objectives. 3
Pursuant to these objectives, YMCA has continuously organized and undertaken
throughout the country various programs for the youth through actual workshops,
seminars, training, sports and summer camps, conferences on the cultivation of Christian
moral values, drug addiction, out-of-school youth, those with handicap and physical
defects and youth alcoholism. To fulfill these multifarious projects and attain the laudable
objectives of YMCA, fund raising has become an indispensable and integral part of the
activities of the Association. YMCA derives its funds from various sources such as
membership dues, charges on the use of facilities like bowling and billiards, lodging,
interest income, parking fees, restaurant and canteen. Since the membership dues are

very minimal, the Association derives funds from rentals of small shops, restaurant,
canteen and parking fees. For the taxable year ending December 1980, YMCA earned
gross rental income of P676,829.00 and P44,259.00 from parking fees which became the
subject of the questioned assessment by petitioner.
The majority of this Court upheld the findings of the Court of Tax Appeals that the leasing
of petitioner's facilities to small shop owners and to restaurant and canteen operators in
addition to the operation of a parking lot are reasonably necessary for and incidental to
the accomplishment of the objectives of YMCA. 4 In fact, these facilities are leased to
members in order to service their needs and those of their guests. The rentals are
minimal, such as, the rent of P300.00 for the barbershop. With regard to parking space,
there is no lot actually devoted therefor and the parking is done only along the sides of the
building. The parking is primarily for members with car stickers but to non-members,
parking fee is P0.50 only. The rentals and parking fees are just enough to cover the
operation and maintenance costs of these facilities. The earnings which YMCA derives
from these rentals and parking fees, together with the charges for lodging and use of
recreational facilities, constitute the bulk or majority of its income used to support its
programs and activities.
In its decision of 16 February 1994, the Court of Appeals thus committed grave error in
departing from the findings of the Court of Tax Appeals by declaring that the leasing of
YMCA's facilities to shop owners and restaurant operators and the operation of a parking
lot are used for commercial purposes or for profit, which fact takes YMCA outside the
coverage of tax exemption. In later granting the motion for reconsideration filed by
respondent YMCA, the Court of Appeals correctly reversed its earlier decision and upheld
the findings of the Court of Tax Appeals by ruling that YMCA is not designed for profit and
the little income it derives from rentals and parking fees helps maintain its noble existence
for the fulfillment of its goals for the Christian development of the youth.
Respondent YMCA is undoubtedly exempt from corporate income tax under the provisions
of Sec. 27, pars. (g) and (h), of the National Internal Revenue Code, to wit:
Sec. 27. Exemptions from tax on corporations. The following organizations
shall not be taxed under this Title in respect to income received by them as
such . . . (g) civic league or organization not organized for profit but
operated exclusively for the promotion of social welfare; (h) club organized
and operated exclusively for pleasure, recreation and other non-profitable
purposes, no part of the net income of which inures to the benefit of any
private stockholder or member . . . . 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.
The majority of the Court accepted petitioner's view that while the income of organizations
enumerated in Sec. 27 are exempt from income tax, such exemption does not however
extend to their income of whatever kind or character from any of their properties real or
personal regardless of the disposition made of such income; that based on the wording of
the law which is plain and simple and does not need any interpretation, any income of a

tax exempt entity from any of its properties is a taxable income; hence, the rental income
derived by a tax exempt organization from the lease of its properties is not therefore
exempt from income taxation even if such income is exclusively used for the
accomplishment of its objectives.
Income derived from its property by a tax exempt organization is not absolutely taxable.
Taken in solitude, a word or phrase such as, in this case, "the income of whatever kind and
character . . . from any of their properties" might easily convey a meaning quite different
from the one actually intended and evident when a word or phrase is considered with
those with which it is associated. 5 It is a rule in statutory construction that every part of
the statute must be interpreted with reference to the context, that every part of the
statute must be considered together with the other parts and kept subservient to the
general intent of the whole enactment. 6 A close reading of the last paragraph of Sec. 27 of
the National Internal Revenue Code, in relation to the whole section on tax exemption of
the organizations enumerated therein, shows that the phrase "conducted for profit" in the
last paragraph of Sec. 27 qualifies, limits and describes "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" in order to make such income taxable. It is the exception to
Sec. 27 pars. (g) and (h) providing for the tax exemptions of the income of said
organizations. Hence, if such income from property or any other property is not conducted
for profit, then it is not taxable.
Even taken alone and understood according to its plain, simple and literal meaning, the
word "income" which is derived from property, real or personal, provided in the last
paragraph of Sec. 27 means the amount of money coming to a person or corporation
within a specified time as profit from investment; the return in money from one's business
or capital invested. 7 Income from property also means gains and profits derived from the
sale or other disposition of capital assets; the money which any person or corporation
periodically receives either as profits from business, or as returns from investments 8 The
word "income" as used in tax statutes is to be taken in its ordinary sense as gain or
profit. 9
Clearly, therefore, income derived from property whether real or personal connotes profit
from business or from investment of the same. If we are to apply the ordinary meaning of
income from property as profit to the language of the last paragraph of Sec. 27 of the
NIRC, then only those profits arising from business and investment involving property are
taxable. In the instant case, there is no question that in leasing its facilities to small shop
owners and in operating parking spaces, YMCA does not engage in any profit-making
business. Both the Court of Tax Appeals, and the Court of Appeals in its resolution of 25
September 1995, categorically found that these activities conducted on YMCA's property
were aimed not only at fulfilling the needs and requirements of its members as part of
YMCA's youth program but, more importantly, at raising funds to finance the multifarious
projects of the Association.
As the Court has ruled in one case, the fact that an educational institution charges tuition
fees and other fees for the different services it renders to the students does not in itself
make the school a profit-making enterprise that would place it beyond the purview of the
law exempting it from taxation. The mere realization of profits out of its operation does not
automatically result in the loss of an educational institution's exemption from income tax

as long as no part of its profits inures to the benefit of any stockholder or individual. 10 In
order to claim exemption from income tax, a corporation or association must show that it
is organized and operated exclusively for religious, charitable, scientific, athletic, cultural
or educational purposes or for the rehabilitation of veterans, and that no part of its income
inures to the benefit of any private stockholder or individual. 11 The main evidence of the
purpose of a corporation should be its articles of incorporation and by-laws, for such
purpose is required by statute to be stated in the articles of incorporation, and the by-laws
outline the administrative organization of the corporation which, in turn, is supposed to
insure or facilitate the accomplishment of said purpose. 12
The foregoing principle applies to income derived by tax exempt corporations from their
property. The criterion or test in order to make such income taxable is when it arises from
purely profit-making business. Otherwise, when the income derived from use of property is
reasonable and incidental to the charitable, benevolent, educational or religious purpose
for which the corporation or association is created, such income should be tax-exempt.
In Hospital de San Juan de Dios, Inc. v. Pasay City

13

we held

In this connection, it should be noted that respondent therein is a corporation

organized for "charitable, educational and religious purposes"; that no part of
its net income inures to the benefit of any private individual; that it is exempt
from paying income tax; that it operates a hospital in which MEDICAL
assistance is given to destitute persons free of charge; that it maintains a
pharmacy department within the premises of said hospital, to supply drugs
and medicines only to charity and paying patients confined therein; and that
only the paying patients are required to pay the medicines supplied to them,
for which they are charged the cost of the medicines, plus an additional 10%
thereof, to partly offset the cost of medicines supplied free of charge to
charity patients. Under these facts we are of the opinion and so hold that the
Hospital may not be regarded as engaged in "business" by reason of said sale
of medicines to its paying patients . . . (W)e held that the UST Hospital was
not established for profit-making purposes, despite the fact that it had 140
paying beds, because the same were maintained only to partly finance the
expenses of the free wards containing 203 beds for charity patients.
In YMCA of Manila v. Collector of Internal Revenue,

14

this Court explained

It is claimed however that the institution is run as a business in that it keeps

a lodging and boarding house. It may be admitted that there are 64 persons
occupying rooms in the main building as lodgers or roomers and that they
take their meals at the restaurant below. These facts however are far from
constituting a business in the ordinary acceptation of the word. In the first
place, no profit is realized by the association in any sense. In the second
place it is undoubted, as it is undisputed, that the purpose of the association
is not primarily to obtain the money which comes from the lodgers and
boarders. The real purpose is to keep the membership continually within the
sphere of influence of the institution; and thereby to prevent, as far as
possible, the opportunities which vice presents to young men in foreign
countries who lack home or other similar influences.

The majority, if not all, of the income of the organizations covered by the exemption
provided in Sec. 27, pars. (g) and (h), of the NIRC are derived from their properties, real or
personal. If we are to interpret the last paragraph of Sec. 27 to the effect that all income of
whatever kind from the properties of said organization, real or personal, are taxable, even
if not conducted for profit, then Sec. 27, pars. (g) and (h), would be rendered ineffective
and nugatory. As this Court elucidated in Jesus Sacred Heart College v. Collector of Internal
Revenue, 15 every responsible organization must be so run as to at least insure its
existence by operating within the limits of its own resources, especially its regular income.
It should always strive whenever possible to have a surplus. If the benefits of the
exemption would be limited to institutions which do not hope or propose to have such
surplus, then the exemption would apply only to schools which are on the verge of
bankruptcy. Unlike the United States where a substantial number of institutions of learning
are dependent upon voluntary contributions and still enjoy economic stability, such as
Harvard, the trust fund of which has been steadily increasing with the years, there are and
there have always been very few educational enterprises in the Philippines which are
supported by donations, and these organizations usually have a very precarious
existence. 16
Finally, the non-taxability of all income and properties of educational institutions finds
enduring support in Art. XIV, Sec. 4, par. 3, of the 1987 Constitution
(3) All revenues and assets of non-stock, non-profit educational institutions
used actually, directly and exclusively for educational purposes shall be
exempt from taxes and duties. Upon the dissolution or cessation of the
corporate existence of such institutions, their assets shall be disposed of in
the manner provided by law.
In YMCA of Manila v. Collector of Internal Revenue 17 this Court categorically held and
found YMCA to be an educational institution exclusively devoted to educational and
charitable purposes and not operated for profit. The purposes of the Association as set
forth in its charter and constitution are "to develop the Christian character and usefulness
of its members, to improve the spiritual, intellectual, social and physical condition of
young men and to acquire, hold, mortgage and dispose of the necessary lands, buildings
and personal property for the use of said corporation exclusively for religious, charitable
and educational purposes, and not for investment or profit." YMCA has an educational
department, the aim of which is to furnish, at much less than cost, instructions on subjects
that will greatly increase the mental efficiency and wage-earning capacity of young men,
prepare them in special lines of business and offer them special lines of study. We ruled
therein that YMCA cannot be said to be an institution used exclusively for religious
purposes or an institution devoted exclusively for charitable purposes or an institution
devoted exclusively to educational purposes, but it can be truthfully said that it is an
institution used exclusively for all three purposes and that, as such, it is entitled to be
exempted from taxation.
Separate Opinions
BELLOSILLO, J., dissenting;

I vote to deny the petition. The basic rule is that the factual findings of the Court of Tax
Appeals when supported by substantial evidence will not be disturbed on appeal unless it
is shown that the court committed grave error in the appreciation of facts. 1 In the instant
case, there is no dispute as to the validity of the findings of the Court of Tax Appeals that
private respondent Young Men's Christian Association (YMCA) is an association organized
and operated exclusively for the promotion of social welfare and other non-profitable
purposes, particularly the physical and character development of the youth. 2 The
enduring objectives of respondent YMCA as reflected in its Constitution and By-laws are:
(a) To develop well-balanced Christian personality, mission in life, usefulness
of individuals, and the promotion of unity among Christians and
understanding among peoples of all faiths, to the end that the Brotherhood of
Man under the Fatherhood of God may be fostered in an atmosphere of
mutual respect and understanding;
(b) To promote on equal basis the physical, mental, and spiritual welfare of
the youth, with emphasis on reverence for God, social discipline,
responsibility for the common good, respect for human dignity, and the
observance of the Golden Rule;
(c) To encourage members of the Young Men's Christian Associations in the
Philippines to participate loyally in the life of their respective churches; to
bring these churches closer together; and to participate in the effort to realize
the church Universal;
(d) To strengthen and coordinate the work of the Young Men's Christian
Associations in the Philippines and to foster the extension of the Youth Men's
Christian Associations to new areas;
(e) To help its Member Associations develop and adopt their programs to the
needs of the youth;
(f) To assist the Member Associations in developing and maintaining a high
standard of management, operation and practice; and
(g) To undertake and sponsor national and international programs and
activities in pursuance of its purposes and objectives. 3
Pursuant to these objectives, YMCA has continuously organized and undertaken
throughout the country various programs for the youth through actual workshops,
seminars, training, sports and summer camps, conferences on the cultivation of Christian
moral values, drug addiction, out-of-school youth, those with handicap and physical
defects and youth alcoholism. To fulfill these multifarious projects and attain the laudable
objectives of YMCA, fund raising has become an indispensable and integral part of the
activities of the Association. YMCA derives its funds from various sources such as
membership dues, charges on the use of facilities like bowling and billiards, lodging,
interest income, parking fees, restaurant and canteen. Since the membership dues are
very minimal, the Association derives funds from rentals of small shops, restaurant,
canteen and parking fees. For the taxable year ending December 1980, YMCA earned

gross rental income of P676,829.00 and P44,259.00 from parking fees which became the
subject of the questioned assessment by petitioner.
The majority of this Court upheld the findings of the Court of Tax Appeals that the leasing
of petitioner's facilities to small shop owners and to restaurant and canteen operators in
addition to the operation of a parking lot are reasonably necessary for and incidental to
the accomplishment of the objectives of YMCA. 4 In fact, these facilities are leased to
members in order to service their needs and those of their guests. The rentals are
minimal, such as, the rent of P300.00 for the barbershop. With regard to parking space,
there is no lot actually devoted therefor and the parking is done only along the sides of the
building. The parking is primarily for members with car stickers but to non-members,
parking fee is P0.50 only. The rentals and parking fees are just enough to cover the
operation and maintenance costs of these facilities. The earnings which YMCA derives
from these rentals and parking fees, together with the charges for lodging and use of
recreational facilities, constitute the bulk or majority of its income used to support its
programs and activities.
In its decision of 16 February 1994, the Court of Appeals thus committed grave error in
departing from the findings of the Court of Tax Appeals by declaring that the leasing of
YMCA's facilities to shop owners and restaurant operators and the operation of a parking
lot are used for commercial purposes or for profit, which fact takes YMCA outside the
coverage of tax exemption. In later granting the motion for reconsideration filed by
respondent YMCA, the Court of Appeals correctly reversed its earlier decision and upheld
the findings of the Court of Tax Appeals by ruling that YMCA is not designed for profit and
the little income it derives from rentals and parking fees helps maintain its noble existence
for the fulfillment of its goals for the Christian development of the youth.
Respondent YMCA is undoubtedly exempt from corporate income tax under the provisions
of Sec. 27, pars. (g) and (h), of the National Internal Revenue Code, to wit:
Sec. 27. Exemptions from tax on corporations. The following organizations
shall not be taxed under this Title in respect to income received by them as
such . . . (g) civic league or organization not organized for profit but
operated exclusively for the promotion of social welfare; (h) club organized
and operated exclusively for pleasure, recreation and other non-profitable
purposes, no part of the net income of which inures to the benefit of any
private stockholder or member . . . . 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.
The majority of the Court accepted petitioner's view that while the income of organizations
enumerated in Sec. 27 are exempt from income tax, such exemption does not however
extend to their income of whatever kind or character from any of their properties real or
personal regardless of the disposition made of such income; that based on the wording of
the law which is plain and simple and does not need any interpretation, any income of a
tax exempt entity from any of its properties is a taxable income; hence, the rental income
derived by a tax exempt organization from the lease of its properties is not therefore

exempt from income taxation even if such income is exclusively used for the
accomplishment of its objectives.
Income derived from its property by a tax exempt organization is not absolutely taxable.
Taken in solitude, a word or phrase such as, in this case, "the income of whatever kind and
character . . . from any of their properties" might easily convey a meaning quite different
from the one actually intended and evident when a word or phrase is considered with
those with which it is associated. 5 It is a rule in statutory construction that every part of
the statute must be interpreted with reference to the context, that every part of the
statute must be considered together with the other parts and kept subservient to the
general intent of the whole enactment. 6 A close reading of the last paragraph of Sec. 27 of
the National Internal Revenue Code, in relation to the whole section on tax exemption of
the organizations enumerated therein, shows that the phrase "conducted for profit" in the
last paragraph of Sec. 27 qualifies, limits and describes "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" in order to make such income taxable. It is the exception to
Sec. 27 pars. (g) and (h) providing for the tax exemptions of the income of said
organizations. Hence, if such income from property or any other property is not conducted
for profit, then it is not taxable.
Even taken alone and understood according to its plain, simple and literal meaning, the
word "income" which is derived from property, real or personal, provided in the last
paragraph of Sec. 27 means the amount of money coming to a person or corporation
within a specified time as profit from investment; the return in money from one's business
or capital invested. 7 Income from property also means gains and profits derived from the
sale or other disposition of capital assets; the money which any person or corporation
periodically receives either as profits from business, or as returns from investments 8 The
word "income" as used in tax statutes is to be taken in its ordinary sense as gain or
profit. 9
Clearly, therefore, income derived from property whether real or personal connotes profit
from business or from investment of the same. If we are to apply the ordinary meaning of
income from property as profit to the language of the last paragraph of Sec. 27 of the
NIRC, then only those profits arising from business and investment involving property are
taxable. In the instant case, there is no question that in leasing its facilities to small shop
owners and in operating parking spaces, YMCA does not engage in any profit-making
business. Both the Court of Tax Appeals, and the Court of Appeals in its resolution of 25
September 1995, categorically found that these activities conducted on YMCA's property
were aimed not only at fulfilling the needs and requirements of its members as part of
YMCA's youth program but, more importantly, at raising funds to finance the multifarious
projects of the Association.
As the Court has ruled in one case, the fact that an educational institution charges tuition
fees and other fees for the different services it renders to the students does not in itself
make the school a profit-making enterprise that would place it beyond the purview of the
law exempting it from taxation. The mere realization of profits out of its operation does not
automatically result in the loss of an educational institution's exemption from income tax
as long as no part of its profits inures to the benefit of any stockholder or individual. 10 In
order to claim exemption from income tax, a corporation or association must show that it

is organized and operated exclusively for religious, charitable, scientific, athletic, cultural
or educational purposes or for the rehabilitation of veterans, and that no part of its income
inures to the benefit of any private stockholder or individual. 11 The main evidence of the
purpose of a corporation should be its articles of incorporation and by-laws, for such
purpose is required by statute to be stated in the articles of incorporation, and the by-laws
outline the administrative organization of the corporation which, in turn, is supposed to
insure or facilitate the accomplishment of said purpose. 12
The foregoing principle applies to income derived by tax exempt corporations from their
property. The criterion or test in order to make such income taxable is when it arises from
purely profit-making business. Otherwise, when the income derived from use of property is
reasonable and incidental to the charitable, benevolent, educational or religious purpose
for which the corporation or association is created, such income should be tax-exempt.
In Hospital de San Juan de Dios, Inc. v. Pasay City

13

we held

In this connection, it should be noted that respondent therein is a corporation

organized for "charitable, educational and religious purposes"; that no part of
its net income inures to the benefit of any private individual; that it is exempt
from paying income tax; that it operates a hospital in which MEDICAL
assistance is given to destitute persons free of charge; that it maintains a
pharmacy department within the premises of said hospital, to supply drugs
and medicines only to charity and paying patients confined therein; and that
only the paying patients are required to pay the medicines supplied to them,
for which they are charged the cost of the medicines, plus an additional 10%
thereof, to partly offset the cost of medicines supplied free of charge to
charity patients. Under these facts we are of the opinion and so hold that the
Hospital may not be regarded as engaged in "business" by reason of said sale
of medicines to its paying patients . . . (W)e held that the UST Hospital was
not established for profit-making purposes, despite the fact that it had 140
paying beds, because the same were maintained only to partly finance the
expenses of the free wards containing 203 beds for charity patients.
In YMCA of Manila v. Collector of Internal Revenue,

14

this Court explained

It is claimed however that the institution is run as a business in that it keeps

a lodging and boarding house. It may be admitted that there are 64 persons
occupying rooms in the main building as lodgers or roomers and that they
take their meals at the restaurant below. These facts however are far from
constituting a business in the ordinary acceptation of the word. In the first
place, no profit is realized by the association in any sense. In the second
place it is undoubted, as it is undisputed, that the purpose of the association
is not primarily to obtain the money which comes from the lodgers and
boarders. The real purpose is to keep the membership continually within the
sphere of influence of the institution; and thereby to prevent, as far as
possible, the opportunities which vice presents to young men in foreign
countries who lack home or other similar influences.

The majority, if not all, of the income of the organizations covered by the exemption
provided in Sec. 27, pars. (g) and (h), of the NIRC are derived from their properties, real or
personal. If we are to interpret the last paragraph of Sec. 27 to the effect that all income of
whatever kind from the properties of said organization, real or personal, are taxable, even
if not conducted for profit, then Sec. 27, pars. (g) and (h), would be rendered ineffective
and nugatory. As this Court elucidated in Jesus Sacred Heart College v. Collector of Internal
Revenue, 15 every responsible organization must be so run as to at least insure its
existence by operating within the limits of its own resources, especially its regular income.
It should always strive whenever possible to have a surplus. If the benefits of the
exemption would be limited to institutions which do not hope or propose to have such
surplus, then the exemption would apply only to schools which are on the verge of
bankruptcy. Unlike the United States where a substantial number of institutions of learning
are dependent upon voluntary contributions and still enjoy economic stability, such as
Harvard, the trust fund of which has been steadily increasing with the years, there are and
there have always been very few educational enterprises in the Philippines which are
supported by donations, and these organizations usually have a very precarious
existence. 16
Finally, the non-taxability of all income and properties of educational institutions finds
enduring support in Art. XIV, Sec. 4, par. 3, of the 1987 Constitution
(3) All revenues and assets of non-stock, non-profit educational institutions
used actually, directly and exclusively for educational purposes shall be
exempt from taxes and duties. Upon the dissolution or cessation of the
corporate existence of such institutions, their assets shall be disposed of in
the manner provided by law.
In YMCA of Manila v. Collector of Internal Revenue 17 this Court categorically held and
found YMCA to be an educational institution exclusively devoted to educational and
charitable purposes and not operated for profit. The purposes of the Association as set
forth in its charter and constitution are "to develop the Christian character and usefulness
of its members, to improve the spiritual, intellectual, social and physical condition of
young men and to acquire, hold, mortgage and dispose of the necessary lands, buildings
and personal property for the use of said corporation exclusively for religious, charitable
and educational purposes, and not for investment or profit." YMCA has an educational
department, the aim of which is to furnish, at much less than cost, instructions on subjects
that will greatly increase the mental efficiency and wage-earning capacity of young men,
prepare them in special lines of business and offer them special lines of study. We ruled
therein that YMCA cannot be said to be an institution used exclusively for religious
purposes or an institution devoted exclusively for charitable purposes or an institution
devoted exclusively to educational purposes, but it can be truthfully said that it is an
institution used exclusively for all three purposes and that, as such, it is entitled to be
exempted from taxation.
SMART COMMUNICATIONS, INC., Petitioner, versus THE CITY OF DAVAO, represented herein
by its Mayor HON. RODRIGO R. DUTERTE, and the SANGGUNIANG PANLUNGSOD OF DAVAO
CITY, Respondents.

G.R. No. 155491 | 2008-09-16

Tagged under keywords

DECISION

NACHURA, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court filed by Smart
Communications, Inc. (Smart) against the City of Davao, represented by its Mayor, Hon.
Rodrigo R. Duterte, and the Sangguniang Panlungsod of Davao City, to annul the
Decision[1] dated July 19, 2002 of the Regional Trial Court (RTC) and its Order[2] dated
September 26, 2002 in Sp. Civil Case No. 28,976-2002.
The Facts
On February 18, 2002, Smart filed a special civil action for declaratory relief[3] under Rule
63 of the Rules of Court, for the ascertainment of its rights and obligations under the Tax
Code of the City of Davao,[4] particularly Section 1, Article 10 thereof, the pertinent
portion of which reads:
Notwithstanding any exemption granted by any law or other special law, there is hereby
imposed a tax on businesses enjoying a franchise, at a rate of seventy-five percent (75%)
of one percent (1%) of the gross annual receipts for the preceding calendar year based on
the income or receipts realized within the territorial jurisdiction of Davao City.
Smart contends that its telecenter in Davao City is exempt from payment of franchise tax
to the City, on the following grounds: (a) the issuance of its franchise under Republic Act
(R.A.) No. 7294[5] subsequent to R.A. No. 7160 shows the clear legislative intent to
exempt it from the provisions of R.A. 7160;[6] (b) Section 137 of R.A. No. 7160 can only
apply to exemptions already existing at the time of its effectivity and not to future
exemptions; (c) the power of the City of Davao to impose a franchise tax is subject to
statutory limitations such as the "in lieu of all taxes" clause found in Section 9 of R.A. No.
7294; and (d) the imposition of franchise tax by the City of Davao would amount to a
violation of the constitutional provision against impairment of contracts.[7]
On March 2, 2002, respondents filed their Answer[8] in which they contested the tax
exemption claimed by Smart. They invoked the power granted by the Constitution to local
government units to create their own sources of revenue.[9]
On May 17, 2002, a pre-trial conference was held. Inasmuch as only legal issues were
involved in the case, the RTC issued an order requiring the parties to submit their
respective memoranda and, thereafter, the case would be deemed submitted for
resolution.[10]

On July 19, 2002, the RTC rendered its Decision[11] denying the petition. The trial court
noted that the ambiguity of the "in lieu of all taxes" provision in R.A. No. 7294, on whether
it covers both national and local taxes, must be resolved against the taxpayer.[12] The RTC
ratiocinated that tax exemptions are construed in strictissimi juris against the taxpayer
and liberally in favor of the taxing authority and, thus, those who assert a tax exemption
must justify it with words too plain to be mistaken and too categorical not to be
misinterpreted.[13] On the issue of violation of the non-impairment clause of the
Constitution, the trial court cited Mactan Cebu International Airport Authority v. Marcos,
[14] and declared that the city's power to tax is based not merely on a valid delegation of
legislative power but on the direct authority granted to it by the fundamental law. It added
that while such power may be subject to restrictions or conditions imposed by Congress,
any such legislated limitation must be consistent with the basic policy of local autonomy.
[15]
Smart filed a motion for reconsideration which was denied by the trial court in an
Order[16] dated September 26, 2002.
Thus, the instant case.
Smart assigns the following errors:
[a.] THE LOWER COURT ERRED IN NOT HOLDING THAT UNDER PETITIONER'S FRANCHISE
(REPUBLIC ACT NO. 7294), WHICH CONTAINS THE "IN LIEU OF ALL TAXES" CLAUSE, AND
WHICH IS A SPECIAL LAW ENACTED SUBSEQUENT TO THE LOCAL GOVERNMENT CODE, NO
FRANCHISE TAX MAY BE IMPOSED ON PETITIONER BY RESPONDENT CITY.
[b.] THE LOWER COURT ERRED IN HOLDING THAT PETITIONER'S FRANCHISE IS A GENERAL
LAW AND DID NOT REPEAL RELEVANT PROVISIONS REGARDING FRANCHISE TAX OF THE
LOCAL GOVERNMENT CODE, WHICH ACCORDING TO THE COURT IS A SPECIAL LAW.
[c.] THE LOWER COURT ERRED IN NOT HOLDING THAT SECTION 137 OF THE LOCAL
GOVERNMENT CODE, WHICH, IN RELATION TO SECTION 151 THEREOF, ALLOWS
RESPONDENT CITY TO IMPOSE THE FRANCHISE TAX, AND SECTION 193 OF THE CODE,
WHICH PROVIDES FOR WITHDRAWAL OF TAX EXEMPTION PRIVILEGES, ARE NOT
APPLICABLE TO THIS CASE.
[d.] THE LOWER COURT ERRED IN NOT HOLDING THAT SECTIONS 137 AND 193 OF THE
LOCAL GOVERNMENT CODE REFER ONLY TO EXEMPTIONS ALREADY EXISTING AT THE TIME
OF ITS ENACTMENT BUT NOT TO FUTURE EXEMPTIONS.
[e.] THE LOWER COURT ERRED IN APPLYING THE RULE OF STATUTORY CONSTRUCTION
THAT TAX EXEMPTIONS ARE CONSTRUED STRICTLY AGAINST THE TAXPAYER.
[f.] THE LOWER COURT ERRED IN NOT HOLDING THAT PETITIONER'S FRANCHISE (REPUBLIC
ACT NO. 7294) HAS BEEN AMENDED AND EXPANDED BY SECTION 23 OF REPUBLIC ACT NO.
7925, "THE PUBLIC TELECOMMUNICATIONS POLICY ACT," TAKING INTO ACCOUNT THE
FRANCHISE OF GLOBE TELECOM, INC. (GLOBE) (REPUBLIC ACT NO. 7229), WHICH ARE
SPECIAL PROVISIONS AND WERE ENACTED SUBSEQUENT TO THE LOCAL GOVERNMENT

CODE, THEREBY PROVIDING AN ADDITIONAL GROUND WHY NO FRANCHISE TAX MAY BE

IMPOSED ON PETITIONER BY RESPONDENT CITY.
[g.] THE LOWER COURT ERRED IN DISREGARDING THE RULING OF THE DEPARTMENT OF
FINANCE, THROUGH ITS BUREAU OF LOCAL GOVERNMENT FINANCE, THAT PETITIONER IS
EXEMPT FROM THE PAYMENT OF THE FRANCHISE TAX IMPOSABLE BY LOCAL GOVERNMENT
UNITS UNDER THE LOCAL GOVERNMENT CODE.
[h.] THE LOWER COURT ERRED IN NOT HOLDING THAT THE IMPOSITION OF THE LOCAL
FRANCHISE TAX ON PETITIONER WOULD VIOLATE THE CONSTITUTIONAL PROHIBITION
AGAINST IMPAIRMENT OF CONTRACTS.
[i.] THE LOWER COURT ERRED IN DENYING THE PETITION BELOW.[17]
The Issue
In sum, the pivotal issue in this case is whether Smart is liable to pay the franchise tax
imposed by the City of Davao.
The Ruling of the Court
We rule in the affirmative.
I. Prospective Effect of R.A. No. 7160
On March 27, 1992, Smart's legislative franchise (R.A. No. 7294) took effect. Section 9
thereof, quoted hereunder, is at the heart of the present controversy:
Section 9. Tax provisions. - The grantee, its successors or assigns shall be liable to pay the
same taxes on their real estate buildings and personal property, exclusive of' this
franchise, as other persons or corporations which are now or hereafter may be required by
law to pay. In addition thereto, the grantee, its successors or assigns shall pay a franchise
tax equivalent to three percent (3%) of all gross receipts of the business transacted under
this franchise by the grantee, its successors or assigns and the said percentage shall be in
lieu of all taxes on this franchise or earnings thereof: Provided, That the grantee, its
successors or assigns shall continue to be liable for income taxes payable under Title II of
the National Internal Revenue Code pursuant to Section 2 of Executive Order No. 72 unless
the latter enactment is amended or repealed, in which case the amendment or repeal
shall be applicable thereto.
The grantee shall file the return with and pay the tax due thereon to the Commissioner of
Internal Revenue or his duly authorized representative in accordance with the National
Internal Revenue Code and the return shall be subject to audit by the Bureau of Internal
Revenue. (Emphasis supplied.)
Smart alleges that the "in lieu of all taxes" clause in Section 9 of its franchise exempts it
from all taxes, both local and national, except the national franchise tax (now VAT), income
tax, and real property tax.[18]

On January 1, 1992, two months ahead of Smart's franchise, the Local Government Code
(R.A. No. 7160) took effect. Section 137, in relation to Section 151 of R.A. No. 7160,
allowed the imposition of franchise tax by the local government units; while Section 193
thereof provided for the withdrawal of tax exemption privileges granted prior to the
issuance of R.A. No. 7160 except for those expressly mentioned therein, viz.:
Section 137. Franchise Tax. - Notwithstanding any exemption granted by any law or other
special law, the province may impose a tax on businesses enjoying a franchise, at the rate
not exceeding fifty percent (50%) of one percent (1%) of the gross annual receipts for the
preceding calendar year based on the incoming receipt, or realized, within its territorial
jurisdiction.
In the case of a newly started business, the tax shall not exceed one-twentieth (1/20) of
one percent (1%) of the capital investment. In the succeeding calendar year, regardless of
when the business started to operate, the tax shall be based on the gross receipts for the
preceding calendar year, or any fraction thereon, as provided herein.
Section 151. Scope of Taxing Powers. - Except as otherwise provided in this Code, the city
may levy the taxes, fees, and charges which the province or municipality may impose:
Provided, however, That the taxes, fees and charges levied and collected by highly
urbanized and independent component cities shall accrue to them and distributed in
accordance with the provisions of this Code.
The rates of taxes that the city may levy may exceed the maximum rates allowed for the
province or municipality by not more than fifty percent (50%) except the rates of
professional and amusement taxes.
Section 193. Withdrawal of Tax Exemption Privileges. - Unless otherwise provided in this
Code, tax exemptions or incentives granted to, or presently enjoyed by all persons,
whether natural or juridical, including government-owned or controlled corporations,
except local water districts, cooperatives duly registered under RA No. 6938, non-stock
and non-profit hospitals and educational institutions, are hereby withdrawn upon the
effectivity of this Code. (Emphasis supplied.)
Smart argues that it is not covered by Section 137, in relation to Section 151 of R.A. No.
7160, because its franchise was granted after the effectivity of the said law. We agree with
Smart's contention on this matter. The withdrawal of tax exemptions or incentives
provided in R.A. No. 7160 can only affect those franchises granted prior to the effectivity of
the law. The intention of the legislature to remove all tax exemptions or incentives granted
prior to the said law is evident in the language of Section 193 of R.A. No. 7160. No
interpretation is necessary.
II. The "in lieu of all taxes" Clause in R.A. No. 7294
The "in lieu of all taxes" clause in Smart's franchise is put in issue before the Court. In
order to ascertain its meaning, consistent with fundamentals of statutory construction, all
the words in the statute must be considered. The grant of tax exemption by R.A. No. 7294

is not to be interpreted from a consideration of a single portion or of isolated words or

clauses, but from a general view of the act as a whole. Every part of the statute must be
construed with reference to the context.[19]
Smart is of the view that the only taxes it may be made to bear under its franchise are the
national franchise tax (now VAT), income tax, and real property tax.[20] It claims
exemption from the local franchise tax because the "in lieu of taxes" clause in its franchise
does not distinguish between national and local taxes.[21]
We pay heed that R.A. No. 7294 is not definite in granting exemption to Smart from local
taxation. Section 9 of R.A. No. 7294 imposes on Smart a franchise tax equivalent to three
percent (3%) of all gross receipts of the business transacted under the franchise and the
said percentage shall be in lieu of all taxes on the franchise or earnings thereof. R.A. No
7294 does not expressly provide what kind of taxes Smart is exempted from. It is not clear
whether the "in lieu of all taxes" provision in the franchise of Smart would include
exemption from local or national taxation. What is clear is that Smart shall pay franchise
tax equivalent to three percent (3%) of all gross receipts of the business transacted under
its franchise. But whether the franchise tax exemption would include exemption from
exactions by both the local and the national government is not unequivocal.
The uncertainty in the "in lieu of all taxes" clause in R.A. No. 7294 on whether Smart is
exempted from both local and national franchise tax must be construed strictly against
Smart which claims the exemption. Smart has the burden of proving that, aside from the
imposed 3% franchise tax, Congress intended it to be exempt from all kinds of franchise
taxes - whether local or national. However, Smart failed in this regard.
Tax exemptions are never presumed and are strictly construed against the taxpayer and
liberally in favor of the taxing authority.[22] They can only be given force when the grant is
clear and categorical.[23] The surrender of the power to tax, when claimed, must be
clearly shown by a language that will admit of no reasonable construction consistent with
the reservation of the power. If the intention of the legislature is open to doubt, then the
intention of the legislature must be resolved in favor of the State.[24]
In this case, the doubt must be resolved in favor of the City of Davao. The "in lieu of all
taxes" clause applies only to national internal revenue taxes and not to local taxes. As
appropriately pointed out in the separate opinion of Justice Antonio T. Carpio in a similar
case[25] involving a demand for exemption from local franchise taxes:
[T]he "in lieu of all taxes" clause in Smart's franchise refers only to taxes, other than
income tax, imposed under the National Internal Revenue Code. The "in lieu of all taxes"
clause does not apply to local taxes. The proviso in the first paragraph of Section 9 of
Smart's franchise states that the grantee shall "continue to be liable for income taxes
payable under Title II of the National Internal Revenue Code." Also, the second paragraph
of Section 9 speaks of tax returns filed and taxes paid to the "Commissioner of Internal
Revenue or his duly authorized representative in accordance with the National Internal
Revenue Code." Moreover, the same paragraph declares that the tax returns "shall be
subject to audit by the Bureau of Internal Revenue." Nothing is mentioned in Section 9
about local taxes. The clear intent is for the "in lieu of all taxes" clause to apply only to
taxes under the National Internal Revenue Code and not to local taxes. Even with respect

to national internal revenue taxes, the "in lieu of all taxes" clause does not apply to
income tax.
If Congress intended the "in lieu of all taxes" clause in Smart's franchise to also apply to
local taxes, Congress would have expressly mentioned the exemption from municipal and
provincial taxes. Congress could have used the language in Section 9(b) of Clavecilla's old
franchise, as follows:
x x x in lieu of any and all taxes of any kind, nature or description levied, established or
collected by any authority whatsoever, municipal, provincial or national, from which the
grantee is hereby expressly exempted, x x x. (Emphasis supplied).
However, Congress did not expressly exempt Smart from local taxes. Congress used the
"in lieu of all taxes" clause only in reference to national internal revenue taxes. The only
interpretation, under the rule on strict construction of tax exemptions, is that the "in lieu
of all taxes" clause in Smart's franchise refers only to national and not to local taxes.
It should be noted that the "in lieu of all taxes" clause in R.A. No. 7294 has become functus
officio with the abolition of the franchise tax on telecommunications companies.[26] As
admitted by Smart in its pleadings, it is no longer paying the 3% franchise tax mandated
in its franchise. Currently, Smart along with other telecommunications companies pays the
uniform 10% value-added tax.[27]
The VAT on sale of services of telephone franchise grantees is equivalent to 10% of gross
receipts derived from the sale or exchange of services.[28] R.A. No. 7716, as amended by
the Expanded Value Added Tax Law (R.A. No. 8241), the pertinent portion of which is
hereunder quoted, amended Section 9 of R.A. No. 7294:
SEC. 102. Value-added tax on sale of services and use or lease of properties. - (a) Rate and
base of tax. - There shall be levied assessed and collected, a value-added tax equivalent
to ten percent (10%) of gross receipts derived from the sale or exchange of services,
including the use or lease of properties.
The phrase "sale or exchange of services" means the performance of all kinds of services
in the Philippines for others for a fee, remuneration or consideration, including those
performed or rendered by construction and service contractors; stock, real estate,
commercial, customs and immigration brokers; lessors of property, whether personal or
real; warehousing services; lessors or distributors of cinematographic films; persons
engaged in milling, processing, manufacturing or repacking goods for others; proprietors,
operators or keepers of hotels, motels, rest houses, pension houses, inns, resorts;
proprietors or operators of restaurants, refreshment parlors, cafes and other eating places,
including clubs and caterers; dealers in securities; lending investors; transportation
contractors on their transport of goods or cargoes, including persons who transport goods
or cargoes for hire and other domestic common carriers by land, air, and water relative to
their transport of goods or cargoes; services of
franchise grantees of telephone and telegraph, radio and television broadcasting and all
other franchise grantees except those under Section 117 of this Code; services of banks,
non-bank financial intermediaries and finance companies; and non-life insurance

companies (except their crop insurances) including surety, fidelity, indemnity and bonding
companies; and similar services regardless of whether or not the performance thereof calls
for the exercise or use of the physical or mental faculties. x x x.[29]
R.A. No. 7716, specifically Section 20 thereof, expressly repealed the provisions of all
special laws relative to the rate of franchise taxes. It also repealed, amended, or modified
all other laws, orders, issuances, rules and regulations, or parts thereof which are
inconsistent with it.[30] In effect, the "in lieu of all taxes" clause in R.A. No. 7294 was
rendered ineffective by the advent of the VAT Law.[31]
However, the franchise tax that the City of Davao may impose must comply with Sections
137 and 151 of R.A. No. 7160. Thus, the local franchise tax that may be imposed by the
City must not exceed 50% of 1% of the gross annual receipts for the preceding calendar
year based on the income on receipts realized within the territorial jurisdiction of Davao.
III. Opinion of the Bureau of Local Government Finance (BLGF)
In support of its argument that the "in lieu of all taxes" clause is to be construed as an
exemption from local franchise taxes, Smart submits the opinion of the Department of
Finance, through the BLGF, dated August 13, 1998 and February 24, 1998, regarding the
franchises of Smart and Globe, respectively.[32] Smart presents the same arguments as
the Philippine Long Distance Telephone Company in the previous cases already decided by
this Court.[33] As previously held by the Court, the findings of the BLGF are not conclusive
on the courts:
[T]he BLGF opined that 23 of R.A. No. 7925 amended the franchise of petitioner and in
effect restored its exemptions from local taxes. Petitioner contends that courts should not
set aside conclusions reached by the BLGF because its function is precisely the study of
local tax problems and it has necessarily developed an expertise on the subject.
To be sure, the BLGF is not an administrative agency whose findings on questions of fact
are given weight and deference in the courts. The authorities cited by petitioner pertain to
the Court of Tax Appeals, a highly specialized court which performs judicial functions as it
was created for the review of tax cases. In contrast, the BLGF was created merely to
provide consultative services and technical assistance to local governments and the
general public on local taxation, real property assessment, and other related matters,
among others. The question raised by petitioner is a legal question, to wit, the
interpretation of 23 of R.A. No. 7925. There is, therefore, no basis for claiming expertise
for the BLGF that administrative agencies are said to possess in their respective fields.
Petitioner likewise argues that the BLGF enjoys the presumption of regularity in the
performance of its duty. It does enjoy this presumption, but this has nothing to do with the
question in this case. This case does not concern the regularity of performance of the
BLGF in the exercise of its duties, but the correctness of its interpretation of a provision of
law.[34]
IV. Tax Exclusion/Tax Exemption

Smart gives another perspective of the "in lieu of all taxes" clause in Section 9 of R.A. No.
7294 in order to avoid the payment of local franchise tax. It says that, viewed from
another angle, the "in lieu of all taxes" clause partakes of the nature of a tax exclusion and
not a tax exemption. A tax exemption means that the taxpayer does not pay any tax at all.
Smart pays VAT, income tax, and real property tax. Thus, what it enjoys is more accurately
a tax exclusion.[35]
However, as previously held by the Court, both in their nature and effect, there is no
essential difference between a tax exemption and a tax exclusion. An exemption is an
immunity or a privilege; it is the freedom from a charge or burden to which others are
subjected. An exclusion, on the other hand, is the removal of otherwise taxable items from
the reach of taxation, e.g., exclusions from gross income and allowable deductions. An
exclusion is, thus, also an immunity or privilege which frees a taxpayer from a charge to
which others are subjected. Consequently, the rule that a tax exemption should be applied
in strictissimi juris against the taxpayer and liberally in favor of the government applies
equally to tax exclusions.[36]
V. Section 23 of R.A. No. 7925
To further its claim, Smart invokes Section 23 of the Public Telecommunications Policy Act
(R.A. No. 7925):
SECTION 23. Equality of Treatment in the Telecommunications Industry. - Any advantage,
favor, privilege, exemption, or immunity granted under existing franchises, or may
hereafter be granted, shall ipso facto become part of previously granted
telecommunications franchise and shall be accorded immediately and unconditionally to
the grantees of such franchises: Provided, however, That the foregoing shall neither apply
to nor affect provisions of telecommunications franchises concerning territory covered by
the franchise, the life span of the franchise, or the type of service authorized by the
franchise. (Emphasis supplied.)
In sum, Smart wants us to interpret anew Section 23 of R.A. No. 7925, in connection with
the franchise of Globe (R.A. No. 7227),[37] which was enacted on March 19, 1992.
Allegedly, by virtue of Section 23 of R.A. No. 7925, otherwise known as the "most favored
treatment clause" or the "equality clause," the provision in the franchise of Globe
exempting it from local taxes is automatically incorporated in the franchise of Smart.[38]
Smart posits that, since the franchise of Globe contains a provision exempting it from
municipal or local franchise tax, this provision should also benefit Smart by virtue of
Section 23 of R.A. No. 7925. The provision in Globe's franchise invoked by Smart reads:
(b) The grantee shall further pay to the Treasurer of the Philippines each year after the
audit and approval of the accounts as prescribed in this Act, one and one-half per centum
of all gross receipts from business transacted under this franchise by the said grantee in
the Philippines, in lieu of any and all taxes of any kind, nature or description levied,
established or collected by any authority whatsoever, municipal, provincial or national,
from which the grantee is hereby expressly exempted, effective from the date of the
approval of Republic Act Numbered Sixteen hundred eighteen.[39]

We find no reason to disturb the previous pronouncements of this Court regarding the
interpretation of Section 23 of R.A. No. 7925. As aptly explained in the en banc decision of
this Court in Philippine Long Distance Telephone Company, Inc. v. City of Davao,[40] and
recently in Digital Telecommunications Philippines, Inc. (Digitel) v. Province of Pangasinan,
[41] Congress, in approving Section 23 of R.A. No. 7925, did not intend it to operate as a
blanket tax exemption to all telecommunications entities.[42] The language of Section 23
of R.A. No. 7925 and the proceedings of both Houses of Congress are bereft of anything
that would signify the grant of tax exemptions to all telecommunications entities, including
those whose exemptions had been withdrawn by R.A. No. 7160.[43] The term "exemption"
in Section 23 of R.A. No. 7925 does not mean tax exemption. The term refers to exemption
from certain regulations and requirements imposed by the National Telecommunications
Commission.[44]
Furthermore, in the franchise of Globe (R.A. No. 7229), the legislature incontrovertibly
stated that it will be liable for one and one-half per centum of all gross receipts from
business transacted under the franchise, in lieu of any and all taxes of any kind, nature, or
description levied, established, or collected by any authority whatsoever, municipal,
provincial, or national, from which the grantee is hereby expressly exempted.[45] The
grant of exemption from municipal, provincial, or national is clear and categorical - that
aside from the franchise tax collected by virtue of R.A. No. 7229, no other franchise tax
may be collected from Globe regardless of who the taxing power is. No such provision is
found in the franchise of Smart; the kind of tax from which it is exempted is not clearly
specified.
As previously explained by the Court, the stance of Smart would lead to absurd
consequences.
The acceptance of petitioner's theory would result in absurd consequences. To illustrate: In
its franchise, Globe is required to pay a franchise tax of only one and one-half percentum
(1%) of all gross receipts from its transactions while Smart is required to pay a tax of
three percent (3%) on all gross receipts from business transacted. Petitioner's theory
would require that, to level the playing field, any "advantage, favor, privilege, exemption,
or immunity" granted to Globe must be extended to all telecommunications companies,
including Smart. If, later, Congress again grants a franchise to another
telecommunications company imposing, say, one percent (1%) franchise tax, then all
other telecommunications franchises will have to be adjusted to "level the playing field" so
to speak. This could not have been the intent of Congress in enacting 23 of Rep. Act
7925. Petitioner's theory will leave the Government with the burden of having to keep
track of all granted telecommunications franchises, lest some
companies be treated unequally. It is different if Congress enacts a law specifically
granting uniform advantages, favor, privilege, exemption, or immunity to all
telecommunications entities.[46]
VI. Non-impairment Clause of the Constitution
Another argument of Smart is that the imposition of the local franchise tax by the City of
Davao would violate the constitutional prohibition against impairment of contracts. The

franchise, according to petitioner, is in the nature of a contract between the government

and Smart.[47]
However, we find that there is no violation of Article III, Section 10 of the 1987 Philippine
Constitution. As previously discussed, the franchise of Smart does not expressly provide
for exemption from local taxes. Absent the express provision on such exemption under the
franchise, we are constrained to rule against it. The "in lieu of all taxes" clause in Section 9
of R.A. No. 7294 leaves much room for interpretation. Due to this ambiguity in the law, the
doubt must be resolved against the grant of tax exemption.
Moreover, Smart's franchise was granted with the express condition that it is subject to
amendment, alteration, or repeal.[48] As held in Tolentino v. Secretary of Finance: [49]
It is enough to say that the parties to a contract cannot, through the exercise of prophetic
discernment, fetter the exercise of the taxing power of the State. For not only are existing
laws read into contracts in order to fix obligations as between parties, but the reservation
of essential attributes of sovereign power is also read into contracts as a basic postulate of
the legal order. The policy of protecting contracts against impairment presupposes the
maintenance of a government which retains adequate authority to secure the peace and
good order of society.
In truth, the Contract Clause has never been thought as a limitation on the exercise of the
State's power of taxation save only where a tax exemption has been granted for a valid
consideration. x x x.
WHEREFORE, the instant petition is DENIED for lack of merit. Costs against petitioner.
SO ORDERED.
ANTONIO EDUARDO B. NACHURA
Associate Justice
WE CONCUR:
CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson
MA. ALICIA AUSTRIA-MARTINEZ
Associate Justice
MINITA V. CHICO-NAZARIO
Associate Justice
RUBEN T. REYES
Associate Justice
ATTESTATION

I attest that the conclusions in the above Decision were reached in consultation before the
case was assigned to the writer of the opinion of the Court's Division.
CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson, Third Division
CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson's
Attestation, I certify that the conclusions in the above Decision had been reached in
consultation before the case was assigned to the writer of the opinion of the Court's
Division.
REYNATO S. PUNO
Chief Justice