1

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION

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.
OSMEÑA, 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 19952 denying 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
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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.
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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 government-owned or controlled
corporation it is mandated to perform functions in the same category as an instrumentality of
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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 all government corporations." For it is clear from Section 133, in relation to Section 234, of the LGC
 5

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 Constitution10 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.14 So 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.16 But 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
 6

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 other acquisitions mortis causa, except as otherwise
provided herein
(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;
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(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 used for pollution control and environmental protection.
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.
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(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
 9

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.
 10

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:
 11

(a) Real property owned by the Republic of the Philippines or any of its political subdivisions and any
government-owned 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 governments33 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.
 12

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 Corporation39 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.
Narvasa, C.J., Melo, Francisco and Panganiban, JJ., concur.
Footnotes

1 Rollo, 27-29. Per Judge Ferdinand J. Marcos.

2 Id., 30-31.

3 Rollo, 10-13.

4 Supra note 1.

5 Rollo, 28-29.

6 Citing Gonzales vs. Hechanova, 118 Phil. 1065 [1963].

7 Citing Section 3, R.A. No. 6958.

8 Citing Section 2, Id.

9 197 SCRA 52 [1991].

10 Section 5, Article X, 1987 Constitution.

11 Section 14, R.A. No. 6958.

12 Manila International Airport Authority (MIAA) vs. Commission on Audit, 238 SCRA 714 [1994].

13 COOLEY on Constitutional Law, 4th ed. [1931], 62.

 13

14 Section 28(1), Article VI, 1987 Constitution.

15 Chief Justice Marshall in McCulloch vs. Maryland, 4 Wheat, 316, 4 L. ed. 579, 607. Later Justice Holmes brushed this aside
by declaring in Panhandle Oil Co. vs. Mississippi (277 U.S. 218) that "the power to tax is not the power to destroy while this
Court sits." Justice Frankfurter in Graves vs. New York (306 U.S. 466) also remarked that Justice Marshall's statement was a
"mere flourish of rhetoric" and a product of the "intellectual fashion of the times to indulge in a free case of absolutes." (See
SINCO, Philippine Political Law [1954], 577-578).

16 AGPALO, RUBEN E., Statutory Construction [1990 ed], 216. See also SANDS, DALLAS C., Statutes and Statutory
Construction, vol. 3 [1974] 179.

17 Justice Holmes in his dissent in Compania General vs. Collector of Internal Revenue, 275 U.S. 87, 100[1927].

18 AGPALO, op. cit., 217 SANDS, op. cit., 207.

19 SINCO, op. cit., 587.

20 SANDS, op. cit., 207

21 Maceda vs. Macaraig, Jr. 197 SCRA 771, 799 [1991]; citing 2 COOLEY on the Law on Taxation, 4th ed. [1927], 1414, and
SANDS, op. cit., 207.

22 CRUZ, ISAGANI, Constitutional Law [1991], 84.

23 Id., 91-92; SINCO, op. cit., 587.

24 Section 131(l), Local Government Code of 1991.

25 Section 131(g), id.

26 PIMENTEL, AQUILINO JR., The Local Government Code of 1991 — The Key to National Development [1933], 329.

27 Section 2(1), Introductory Provisions, Administrative Code of 1987.

28 Section 1, Article X, 1987 Constitution.

29 Section 2(2), Introductory Provisions, Administrative Code of 1987.

30 Bacani vs. National Coconut Corporation, 100 Phil. 468, 472 [1956].

31 Section 2(4), Introductory Provisions, Administrative Code of 1987.

32 Section 2(10), Id., Id.

33 Section 25, Article II, and Section 2, Article X, Constitution.

34 Section 2(a), Local Government Code of 1991.

35 P.D. No. 1931.

36 Section 3, R.A. No. 6958.

37 Section 18, Id.,

38 Section 9(b), Id.

39 Supra note 9.
 14

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION

G.R. No. 127937 July 28, 1999

NATIONAL TELECOMMUNICATIONS COMMISSION, petitioner,
vs.
HONORABLE COURT OF APPEALS and PHILIPPINE LONG DISTANCE TELEPHONE
COMPANY, respondents.

PURISIMA, J.:
At bar is a Petition for Review on Certiorari under Rule 45 of the Revised Rules of Court seeking to
modify the October 30, 1996 Decision 1 and the January 27, 1997 Resolution 2 of the Court of
Appeals 3 in CA-G.R. SP No. 34063.1âwphi1.nêt
The antecedent facts that matter can be culled as follows:
Sometime in 1988, the National Telecommunications Commission (NTC) served on the Philippine Long
Distance Telephone Company (PLDT) the following assessment notices and demands for payment:
1. the amount of P7,495,161.00 as supervision and regulation fee under Section 40 (e) of the PSA for the
said year, 1988, computed at P0.50 per P100.00 of the Protestant's (PLDT) outstanding capital stock as at
December 31, 1987 which then consisted of Serial Preferred Stock amounting to P1,277,934,390.00
(Billion) and Common Stock of P221,097,785 (Million) or a total of P1,499,032,175.00 (Billion).
2. the amount of P9.0 Million as permit fee under Section 40 (f) of the PSA for the approval of the
protestant's increase of its authorized capital stock from P2.7 Billion to P4.5 Billion; and
3. the amounts of P12,261,600.00 and P33,472,030.00 as permit fees under Section 40 (g) of the PSA in
connection with the Commission's decisions in NTC Cases Nos. 86-13 and 87-008 respectively,
approving the Protestant's equity participation in the Fiber Optic Interpacific Cable systems and X-5
Service Improvement and Expansion Program. 4
In its two letter-protests 5 dated February 23, 1988 and July 14, 1988, and position papers 6 dated
November 8, 1990 and March 12, 1991, respectively, the PLDT challenged the aforesaid assessments,
theorizing inter alia that:
(a) The assessments were being made to raise revenues and not as mere reimbursements for actual
regulatory expenses in violation of the doctrine in PLDT vs. PSC, 66 SCRA 341 [1975];
(b) The assessment under Section 40 (e) should only have been on the basis of the par values of private
respondent's outstanding capital stock;
(c) Petitioner has no authority to compel private respondents payment of the assessed fees under Section
40 (f) for the increase of its authorized capital stock since petitioner did not render any supervisory or
regulatory activity and incurred no expenses in relation thereto.
 15

xxx xxx xxx 7

On September 29, 1993, the NTC rendered a Decision 8 in NTC Case No. 90-223, denying the protest of
PLDT and disposing thus:
FOR ALL THE FOREGOING, finding PLDT's protest to be without merit, the Commission has no
alternative but to uphold the law and DENIES the protest of PLDT. Unless otherwise restrained by a
competent court of law, the Common Carrier Authorization Department (CCAD) is hereby directed to
update its assessments and collections on PLDT and all public telecommunications carriers for the
payment of the fees in accordance with the provisions of Section 40 (e) (f) and (g) of the Revised NTC
Schedule of Fees and Charges.
This decision takes effect immediately.
SO ORDERED.
On October 22, 1993, PLDT interposed a Motion for Reconsideration, 9 which was denied by NTC in an
Order 10 issued on May 3, 1994.
On May 12, 1994, PLDT appealed the aforesaid Decision to the Court of Appeals, which came out with
its questioned Decision of October 30, 1996, modifying the disposition of NTC as follows:
WHEREFORE, the assailed decision and order of the respondent Commission dated September 29, 1993
and May 03, 1994, respectively, in NTC Case No. 90-223 are hereby MODIFIED. The Commission is
ordered to recompute its assessments and demands for payment from petitioner PLDT as follows.
A. For annual supervision and regulation fees (SRF) under Section 40 (e) of the Public Service Act, as
amended, they should be computed at fifty centavos for each one hundred pesos or fraction thereof of the
par value of the capital stock subscribed or paid excluding stock dividends, premiums or capital in excess
of par.
B. For permit fees for the approval of petitioner's increase of authorized capital stock under Section 40 (f)
of the same Act, they should be computed at fifty for each one hundred pesos or fraction thereof,
regardless of any regulatory service or expense incurred by respondent.
On November 20, 1996, NTC moved for partial reconsideration of the abovementioned Decision, with
respect to the basis of the assessment under Section 40 (e), i.e., par value of the subscribed capital stock.
It also sought a partial reconsideration of the fee of fifty (P0.50) centavos for the issuance or increasing of
the capital stock under Section 40 (f). 11
With the denial of its motions for reconsideration by the Resolution of the Court of Appeals dated January
27, 1997, petitioner found its way to this Court via the present Petition; posing as sole issue:
WHETHER THE COURT OF APPEALS ERRED IN HOLDING THAT THE COMPUTATION OF
SUPERVISION AND REGULATION FEES UNDER SECTION 40 (F) OF THE PUBLIC SERVICE
ACT SHOULD BE BASED ON THE PAR VALUE OF THE SUBSCRIBED CAPITAL STOCK.
Simply put, the submission of NTC is that the fee under Section 40 (e) should be based on the market
value of PLDT's outstanding capital stock inclusive of stock dividends and premium, and not on the par
value of PLDT's capital stock excluding stock dividends and premium, as contended by PLDT.
Succinct and clear is the ruling of this Court in the case of Philippine Long Distance Telephone Company
vs. Public Service Commission, 66 SCRA 341, that the basis for computation of the fee to be charged by
 16

NTC on PLDT, is " the capital stock subscribed or paid and not, alternatively, the property and
equipment."
The law in point is clear and categorical. There is no room for construction. It simply calls for application.
To repeat, the fee in question is based on the capital stock subscribed or paid, nothing less nothing more.
It bears stressing that it is not the NTC that imposed such a fee. It is the legislature itself. Since Congress
has the power to exercise the State inherent powers of Police Power, Eminent Domain and Taxation, the
distinction between police power and the power to tax, which could be significant if the exercising
authority were mere political subdivisions (since delegation by it to such political subdivisions of one
power does not necessarily include the other), would not be of any moment when, as in the case under
consideration, Congress itself exercises the power. All that is to be done would be to apply and enforce
the law when sufficiently definitive and not constitutional infirm.
The term "capital" and other terms used to describe the capital structure of a corporation are of universal
acceptance, and their usages have long been established in jurisprudence. Briefly, capital refers to the
value of the property or assets of a corporation. The capital subscribed is the total amount of the capital
that persons (subscribers or shareholders) have agreed to take and pay for, which need not necessarily be,
and can be more than, the par value of the shares. In fine, it is the amount that the corporation receives,
inclusive of the premiums if any, in consideration of the original issuance of the shares. In the case of
stock dividends, it is the amount that the corporation transfers from its surplus profit account to its capital
account. It is the same amount that can loosely be termed as the "trust fund" of the corporation. The
"Trust Fund" doctrine considers this subscribed capital as a trust fund for the payment of the debts of the
corporation, to which the creditors may look for satisfaction. Until the liquidation of the corporation, no
part of the subscribed capital may be returned or released to the stockholder (except in the redemption of
redeemable shares) without violating this principle. Thus, dividends must never impair the subscribed
capital; subscription commitments cannot be condoned or remitted; nor can the corporation buy its own
shares using the subscribed capital as the consideration therefor. 12
In the same way that the Court in PLDT vs. PSC has rejected the "value of the property and equipment"
as being the proper basis for the fee imposed by Section 40(e) of the Public Service Act, as amended by
Republic Act No. 3792, so also must the Court disallow the idea of computing the fee on "the par value of
[PLDT's] capital stock subscribed or paid excluding stock dividends, premiums, or capital in excess of
par." Neither, however, is the assessment made by the National Telecommunications Commission on the
basis of the market value of the subscribed or paid-in capital stock acceptable since it is itself a deviation
from the explicit language of the law.
From the pleadings on hand, it can be gleaned that the assessment for supervision and regulation fee
under Section 40(e) made by NTC for 1988, computed at P0.50 per 100 of PLDT's outstanding capital
stock as of December 31, 1987, amounted to P7,495,161.00. The same was based on the amount of
P1,277,934,390.00 of serial preferred stocks and P221,097,785.00 of common stocks or a total of
P1,499,032,175.00. The assessment was reported to include stock dividends, premium on issued common
shares and premium on preferred shares converted into common stock. 13 The actual capital paid or the
amount of capital stock paid and for which PLDT received actual payments were not disclosed or extant
in the records before the Court. The only other item available is the amount assessed by petitioner from
PLDT, which had been based on market value of the outstanding capital stock on given dates. 14
All things studiedly considered, and mindful of the aforesaid ruling of this Court in the case of Philippine
Long Distance Telephone Company vs. Public Service Commission, it should be reiterated that the proper
basis for the computation of subject fee under Section 40(e) of the Public Service Act, as amended by
 17

Republic Act No. 3792, is "the capital stock subscribed or paid and not, alternatively, the property and
equipment.1âwphi1.nêt
WHEREFORE, the decision of the Court of Appeals, dated October 30, 1996, and its Resolution, dated
January 27, 1997, in CA G.R. SP No. 34063, as well as the decision of the National Telecommunication
Commission, dated September 29, 1993, and Order, dated May 3, 1994, in NTC case No. 90-223, are
hereby SET ASIDE and the National Telecommunication Commission is hereby ordered to make a re-
computation of the fee to be imposed on Philippine Long Distance Telephone Company on the basis of
the latter's capital stock subscribed or paid and strictly in accordance with the foregoing disquisition and
conclusion.
No pronouncement as to costs.
SO ORDERED.
Romero, Vitug and Gonzaga-Reyes, JJ., concur.
Panganiban, J., no part. Former counsel of a party.
Footnotes
1 Rollo, pp. 30-52.
2 Rollo, pp. 54-55.
3 Special Thirteenth Division composed of Justices F.A. Martin. Jr., (Chairman); Ma. Alicia Austria-
Martinez (Member); and Ruben T. Reyes (Ponente).
4 Petition, p. 3, Rollo, p. 11.
5 Annexes "G" and "H," Petition; Rollo, pp. 59-71.
6 Annexes "I" and "J," Petition, Rollo, pp. 72; 92-93.
7 Petition, p. 5; Rollo, p. 13.
8 Annex "K," Petition; Rollo, pp. 94-106.
9 Annex "M," Petition, Rollo, pp. 120-125.
10 NTC's Order, "Annex" N, "Petition; Rollo, pp. 126-136.
11 See Annex "V," Petition ; Rollo, pp. 231-236.
12 See Sec. 122, Corporation Code.
13 Rollo, p. 158.
14 Rollo, pp. 108-109; pp. 139-140.
 18

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-7859 December 22, 1955
WALTER LUTZ, as Judicial Administrator of the Intestate Estate of the deceased Antonio Jayme
Ledesma, plaintiff-appellant,
vs.
J. ANTONIO ARANETA, as the Collector of Internal Revenue, defendant-appellee.
Ernesto J. Gonzaga for appellant.
Office of the Solicitor General Ambrosio Padilla, First Assistant Solicitor General Guillermo E. Torres
and Solicitor Felicisimo R. Rosete for appellee.

REYES, J.B L., J.:

This case was initiated in the Court of First Instance of Negros Occidental to test the legality of the taxes
imposed by Commonwealth Act No. 567, otherwise known as the Sugar Adjustment Act.
Promulgated in 1940, the law in question opens (section 1) with a declaration of emergency, due to the
threat to our industry by the imminent imposition of export taxes upon sugar as provided in the Tydings-
McDuffe Act, and the "eventual loss of its preferential position in the United States market"; wherefore,
the national policy was expressed "to obtain a readjustment of the benefits derived from the sugar
industry by the component elements thereof" and "to stabilize the sugar industry so as to prepare it for the
eventuality of the loss of its preferential position in the United States market and the imposition of the
export taxes."
In section 2, Commonwealth Act 567 provides for an increase of the existing tax on the manufacture of
sugar, on a graduated basis, on each picul of sugar manufactured; while section 3 levies on owners or
persons in control of lands devoted to the cultivation of sugar cane and ceded to others for a
consideration, on lease or otherwise —
a tax equivalent to the difference between the money value of the rental or consideration collected and the
amount representing 12 per centum of the assessed value of such land.
According to section 6 of the law —
SEC. 6. All collections made under this Act shall accrue to a special fund in the Philippine Treasury, to be
known as the 'Sugar Adjustment and Stabilization Fund,' and shall be paid out only for any or all of the
following purposes or to attain any or all of the following objectives, as may be provided by law.
First, to place the sugar industry in a position to maintain itself, despite the gradual loss of the preferntial
position of the Philippine sugar in the United States market, and ultimately to insure its continued
existence notwithstanding the loss of that market and the consequent necessity of meeting competition in
the free markets of the world;
 19

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 —
 20

The protection of a large industry constituting one of the great sources of the state's wealth and therefore
directly or indirectly affecting the welfare of so great a portion of the population of the State is affected to
such an extent by public interests as to be within the police power of the sovereign. (128 Sp. 857).
Once it is conceded, as it must, that the protection and promotion of the sugar industry is a matter of
public concern, it follows that the Legislature may determine within reasonable bounds what is necessary
for its protection and expedient for its promotion. Here, the legislative discretion must be allowed fully
play, subject only to the test of reasonableness; and it is not contended that the means provided in section
6 of the law (above quoted) bear no relation to the objective pursued or are oppressive in character. If
objective and methods are alike constitutionally valid, no reason is seen why the state may not levy taxes
to raise funds for their prosecution and attainment. Taxation may be made the implement of the state's
police power (Great Atl. & Pac. Tea Co. vs. Grosjean, 301 U. S. 412, 81 L. Ed. 1193; U. S. vs. Butler,
297 U. S. 1, 80 L. Ed. 477; M'Culloch vs. Maryland, 4 Wheat. 316, 4 L. Ed. 579).
That the tax to be levied should burden the sugar producers themselves can hardly be a ground of
complaint; indeed, it appears rational that the tax be obtained precisely from those who are to be benefited
from the expenditure of the funds derived from it. At any rate, it is inherent in the power to tax that a state
be free to select the subjects of taxation, and it has been repeatedly held that "inequalities which result
from a singling out of one particular class for taxation, or exemption infringe no constitutional limitation"
(Carmichael vs. Southern Coal & Coke Co., 301 U. S. 495, 81 L. Ed. 1245, citing numerous authorities,
at p. 1251).
From the point of view we have taken it appears of no moment that the funds raised under the Sugar
Stabilization Act, now in question, should be exclusively spent in aid of the sugar industry, since it is that
very enterprise that is being protected. It may be that other industries are also in need of similar
protection; that the legislature is not required by the Constitution to adhere to a policy of "all or none." As
ruled in Minnesota ex rel. Pearson vs. Probate Court, 309 U. S. 270, 84 L. Ed. 744, "if the law presumably
hits the evil where it is most felt, it is not to be overthrown because there are other instances to which it
might have been applied;" and that "the legislative authority, exerted within its proper field, need not
embrace all the evils within its reach" (N. L. R. B. vs. Jones & Laughlin Steel Corp. 301 U. S. 1, 81 L.
Ed. 893).
Even from the standpoint that the Act is a pure tax measure, it cannot be said that the devotion of tax
money to experimental stations to seek increase of efficiency in sugar production, utilization of by-
products and solution of allied problems, as well as to the improvements of living and working conditions
in sugar mills or plantations, without any part of such money being channeled directly to private persons,
constitutes expenditure of tax money for private purposes, (compare Everson vs. Board of Education, 91
L. Ed. 472, 168 ALR 1392, 1400).
The decision appealed from is affirmed, with costs against appellant. So ordered.
Paras, C. J., Bengzon, Padilla, Reyes, A., Jugo, Bautista Angelo, Labrador, and Concepcion, JJ., concur.
 21

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-77194 March 15, 1988
VIRGILIO GASTON, HORTENCIA STARKE, ROMEO GUANZON, OSCAR VILLANUEVA, JOSE
ABELLO, REMO RAMOS, CAROLINA LOPEZ, JESUS ISASI, MANUEL LACSON, JAVIER
LACSON, TITO TAGARAO, EDUARDO SUATENGCO, AUGUSTO LLAMAS, RODOLFO
SIASON, PACIFICO MAGHARI, JR., JOSE JAMANDRE, AURELIO GAMBOA, ET AL., petitioners,
vs.
REPUBLIC PLANTERS BANK, PHILIPPINE SUGAR COMMISSION, and SUGAR REGULATORY
ADMINISTRATION, respondents, ANGEL H. SEVERINO, JR., GLICERIO JAVELLANA, GLORIA
P. DE LA PAZ, JOEY P. DE LA PAZ, ET AL., and NATIONAL FEDERATION OF SUGARCANE
PLANTERS, intervenors.

MELENCIO-HERRERA, J.:
Petitioners are sugar producers, sugarcane planters and millers, who have come to this Court in their
individual capacities and in representation of other sugar producers, planters and millers, said to be so
numerous that it is impracticable to bring them all before the Court although the subject matter of the
present controversy is of common interest to all sugar producers, whether parties in this action or not.
Respondent Philippine Sugar Commission (PHILSUCOM, for short) was formerly the government office
tasked with the function of regulating and supervising the sugar industry until it was superseded by its co-
respondent Sugar Regulatory Administration (SRA, for brevity) under Executive Order No. 18 on May
28, 1986. Although said Executive Order abolished the PHILSUCOM, its existence as a juridical entity
was mandated to continue for three (3) more years "for the purpose of prosecuting and defending suits by
or against it and enables it to settle and close its affairs, to dispose of and convey its property and to
distribute its assets."
Respondent Republic Planters Bank (briefly, the Bank) is a commercial banking corporation.
Angel H. Severino, Jr., et al., who are sugarcane planters planting and milling their sugarcane in different
mill districts of Negros Occidental, were allowed to intervene by the Court, since they have common
cause with petitioners and respondents having interposed no objection to their intervention. Subsequently,
on January 14,1988, the National Federation of Sugar Planters (NFSP) also moved to intervene, which the
Court allowed on February 16,1988.
Petitioners and Intervenors have come to this Court praying for a Writ of mandamus commanding
respondents:
TO IMPLEMENT AND ACCOMPLISH THE PRIVATIZATION OF REPUBLIC PLANTERS BANK
BY THE TRANSFER AND DISTRIBUTION OF THE SHARES OF STOCK IN THE SAID BANK;
NOW HELD BY AND STILL CARRIED IN THE NAME OF THE PHILIPPINE SUGAR
COMMISSION, TO THE SUGAR PRODUCERS, PLANTERS AND MILLERS, WHO ARE THE
TRUE BENEFICIAL OWNERS OF THE 761,416 COMMON SHARES VALUED AT P36,548.000.00,
AND 53,005,045 PREFERRED SHARES (A, B & C) WITH A TOTAL PAR VALUE OF
 22

P254,424,224.72, OR A TOTAL INVESTMENT OF P290,972,224.72, THE SAID INVESTMENT

HAVING BEEN FUNDED BY THE DEDUCTION OF Pl.00 PER PICUL FROM SUGAR PROCEEDS
OF THE SUGAR PRODUCERS COMMENCING THE YEAR 1978-79 UNTIL THE PRESENT AS
STABILIZATION FUND PURSUANT TO P.D. # 388.
Respondent Bank does not take issue with either petitioners or its correspondents as it has no beneficial or
equitable interest that may be affected by the ruling in this Petition, but welcomes the filing of the Petition
since it will settle finally the issue of legal ownership of the questioned shares of stock.
Respondents PHILSUCOM and SRA, for their part, squarely traverse the petition arguing that no trust
results from Section 7 of P.D. No. 388; that the stabilization fees collected are considered government
funds under the Government Auditing Code; that the transfer of shares of stock from PHILSUCOM to the
sugar producers would be irregular, if not illegal; and that this suit is barred by laches.
The Solicitor General aptly summarizes the basic issues thus: (1) whether the stabilization fees collected
from sugar planters and millers pursuant to Section 7 of P.D. No. 388 are funds in trust for them, or
public funds; and (2) whether shares of stock in respondent Bank paid for with said stabilization fees
belong to the PHILSUCOM or to the different sugar planters and millers from whom the fees were
collected or levied.
P. D. No. 388, promulgated on February 2,1974, which created the PHILSUCOM, provided for the
collection of a Stabilization Fund as follows:
SEC. 7. Capitalization, Special Fund of the Commission, Development and Stabilization Fund. — There
is hereby established a fund for the commission for the purpose of financing the growth and development
of the sugar industry and all its components, stabilization of the domestic market including the foreign
market to be administered in trust by the Commission and deposited in the Philippine National Bank
derived in the manner herein below cited from the following sources:
a. Stabilization fund shall be collected as provided for in the various provisions of this Decree.
b. Stabilization fees shall be collected from planters and millers in the amount of Two (P2.00) Pesos for
every picul produced and milled for a period of five years from the approval of this Decree and One
(Pl.00) Peso for every picul produced and milled every year thereafter.
Provided: That fifty (P0.50) centavos per picul of the amount levied on planters, millers and traders under
Section 4(c) of this Decree will be used for the payment of salaries and wages of personnel, fringe
benefits and allowances of officers and employees for the purpose of accomplishing and employees for
the purpose of accomplishing the efficient performance of the duties of the Commission.
Provided, further: That said amount shall constitute a lien on the sugar quedan and/or warehouse receipts
and shall be paid immediately by the planters and mill companies, sugar centrals and refineries to the
Commission. (paragraphing and bold supplied).
Section 7 of P.D. No. 388 does provide that the stabilization fees collected "shall be administered in trust
by the Commission." However, while the element of an intent to create a trust is present, a resulting trust
in favor of the sugar producers, millers and planters cannot be said to have ensued because the
presumptive intention of the parties is not reasonably ascertainable from the language of the statute itself.
The doctrine of resulting trusts is founded on the presumed intention of the parties; and as a general rule,
it arises where, and only where such may be reasonably presumed to be the intention of the parties, as
 23

determined from the facts and circumstances existing at the time of the transaction out of which it is
sought to be established (89 C.J.S. 947).
No implied trust in favor of the sugar producers either can be deduced from the imposition of the levy.
"The essential Idea of an implied trust involves a certain antagonism between the cestui que trust and the
trustee even when the trust has not arisen out of fraud nor out of any transaction of a fraudulent or
immoral character (65 CJ 222). It is not clearly shown from the statute itself that the PHILSUCOM
imposed on itself the obligation of holding the stabilization fund for the benefit of the sugar producers. It
must be categorically demonstrated that the very administrative agency which is the source of such
regulation would place a burden on itself (Batchelder v. Central Bank of the Philippines, L-25071, July
29,1972,46 SCRA 102, citing People v. Que Po Lay, 94 Phil. 640 [1954]).
Neither can petitioners place reliance on the history of respondents Bank. They recite that at the
beginning, the Bank was owned by the Roman-Rojas Group. Because it underwent difficulties early in the
year 1978, Mr. Roberto S. Benedicto, then Chairman of the PHILSUCOM, submitted a proposal to the
Central Bank for the rehabilitation of the Bank. The Central Bank acted favorably on the proposal at the
meeting of the Monetary Board on March 31, 1978 subject to the infusion of fresh capital by the
Benedicto Group. Petitioners maintain that this infusion of fresh capital was accomplished, not by any
capital investment by Mr. Benedicto, but by PHILSUCOM, which set aside the proceeds of the P1.00 per
picul stabilization fund to pay for its subscription in shares of stock of respondent Bank. It is petitioners'
submission that all shares were placed in PHILSUCOM's name only out of convenience and necessity and
that they are the true and beneficial owners thereof.
In point of fact, we cannot see our way clear to upholding petitioners' position that the investment of the
proceeds from the stabilization fund in subscriptions to the capital stock of the Bank were being made for
and on their behalf. That could have been clarified by the Trust Agreement, dated May 28, 1986, entered
into between PHILSUCOM, as "Trustor" acting through Mr. Fred J. Elizalde as Officer-in-Charge, and
respondent RPB- Trust Department' as "Trustee," acknowledging that PHILSUCOM holds said shares for
and in behalf of the sugar producers," the latter "being the true and beneficial owners thereof." The
Agreement, however, did not get off the ground because it failed to receive the approval of the
PHILSUCOM Board of Commissioners as required in the Agreement itself.
The SRA, which succeeded PHILSUCOM, neither approved the Agreement because of the adverse
opinion of the SRA, Resident Auditor, dated June 25,1986, which was aimed by the Chairman of the
Commission on Audit, on January 26,1987.
On February 19, 1987, the SRA, resolved to revoke the Trust Agreement "in the light of the ruling of the
Commission on Audit that the aforementioned Agreement is of doubtful validity."
From the legal standpoint, we find basis for the opinion of the Commission on Audit reading:
That the government, PHILSUCOM or its successor-in-interest, Sugar Regulatory Administration, in
particular, owns and stocks. While it is true that the collected stabilization fees were set aside by
PHILSUCOM to pay its subscription to RPB, it did not collect said fees for the account of the sugar
producers. That stabilization fees are charges/levies on sugar produced and milled which accrued to
PHILSUCOM under PD 338, as amended. ...
The stabilization fees collected are in the nature of a tax, which is within the power of the State to impose
for the promotion of the sugar industry (Lutz vs. Araneta, 98 Phil. 148). They constitute sugar liens (Sec.
7[b], P.D. No. 388). The collections made accrue to a "Special Fund," a "Development and Stabilization
 24

Fund," almost Identical to the "Sugar Adjustment and Stabilization Fund" created under Section 6 of
Commonwealth Act 567. 1 The tax collected is not in a pure exercise of the taxing power. It is levied with
a regulatory purpose, to provide means for the stabilization of the sugar industry. The levy is primarily in
the exercise of the police power of the State (Lutz vs. Araneta, supra.).
The protection of a large industry constituting one of the great sources of the 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. (Johnson vs. State ex
rel. Marey, 128 So. 857, cited in Lutz vs. Araneta, supra).
The stabilization fees in question are levied by the State upon sugar millers, planters and producers for a
special purpose — that of "financing the growth and development of the sugar industry and all its
components, stabilization of the domestic market including the foreign market the fact that the State has
taken possession of moneys pursuant to law is sufficient to constitute them state funds, even though they
are held for a special purpose (Lawrence vs. American Surety Co., 263 Mich 586, 249 ALR 535, cited in
42 Am. Jur. Sec. 2, p. 718). Having been levied for a special purpose, the revenues collected are to be
treated as a special fund, to be, in the language of the statute, "administered in trust' for the purpose
intended. Once the purpose has been fulfilled or abandoned, the balance, if any, is to be transferred to the
general funds of the Government. That is the essence of the trust intended (See 1987 Constitution, Article
VI, Sec. 29(3), lifted from the 1935 Constitution, Article VI, Sec. 23(l]). 2
The character of the Stabilization Fund as a special fund is emphasized by the fact that the funds are
deposited in the Philippine National Bank and not in the Philippine Treasury, moneys from which may be
paid out only in pursuance of an appropriation made by law (1987) Constitution, Article VI, Sec.
29[1],1973 Constitution, Article VIII, Sec. 18[l]).
That the fees were collected from sugar producers, planters and millers, and that the funds were channeled
to the purchase of shares of stock in respondent Bank do not convert the funds into a trust fired for their
benefit nor make them the beneficial owners of the shares so purchased. It is but rational that the fees be
collected from them since it is also they who are to be benefited from the expenditure of the funds derived
from it. The investment in shares of respondent Bank is not alien to the purpose intended because of the
Bank's character as a commodity bank for sugar conceived for the industry's growth and development.
Furthermore, of note is the fact that one-half, (1/2) or PO.50 per picul, of the amount levied under P.D.
No. 388 is to be utilized for the "payment of salaries and wages of personnel, fringe benefits and
allowances of officers and employees of PHILSUCOM" thereby immediately negating the claim that the
entire amount levied is in trust for sugar, producers, planters and millers.
To rule in petitioners' favor would contravene the general principle that revenues derived from taxes
cannot be used for purely private purposes or for the exclusive benefit of private persons. The
Stabilization Fund is to be utilized for the benefit of the entire sugar industry, "and all its components,
stabilization of the domestic market," including the foreign market the industry being of vital importance
to the country's economy and to national interest.
WHEREFORE, the Writ of mandamus is denied and the Petition hereby dismissed. No costs.
This Decision is immediately executory.
SO ORDERED.
Teehankee, C.J., Yap, Narvasa, Gutierrez, Jr., Cruz, Paras, Feliciano, Gancayco, Padilla, Bidin,
Sarmiento, Cortes and Griño-Aquino, JJ., concur.
 25

Fernan, J., took no part.

Footnotes
1 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.
xxx xxx xxx
2 (5) All money collected on any tax levied for a special purpose shall be treated as a special fund and
paid out for such purpose only. If the purpose for which a special fund was created has been fulfilled or
abandoned, the balance, if any, shall be transferred to the general funds of the Government." (1987
Constitution, Art. VI, Sec. 28[3]).
 26

THIRD DIVISION
G.R. No. 175651, September 14, 2016
PILMICO-MAURI FOODS CORP., Petitioner, v. COMMISSIONER OF INTERNAL
REVENUE, Respondent.
RESOLUTION
REYES, J.:
Before the Court is a petition for review on certiorari1 under Rule 45 of the Rules of Court pursuant to
Republic Act (R.A.) No. 1125,2 Section 19,3 as amended by R.A. No. 9282,4 Section 12.5 The petition
filed by Pilmico-Mauri Foods Corp. (PMFC) against the Commissioner of Internal Revenue (CIR) assails
the Decision6 and Resolution7 of the Court of Appeals (CTA) en banc, dated August 29, 2006 and
December 4, 2006, respectively, in C.T.A. EB No. 97.
Antecedents

The CTA aptly summed up the facts of the case as follows:ChanRoblesVirtualawlibrary

[PMFC] is a corporation, organized and existing under the laws of the Philippines, with principal place of
business at Aboitiz Corporate Center, Banilad, Cebu City.

The books of accounts of [PMFC] pertaining to 1996 were examined by the [CIR] thru Revenue Officer
Eugenio D. Maestrado of Revenue District No. 81 (Cebu City North District) for deficiency income,
value-added [tax] (VAT) and withholding tax liabilities.

As a result of the investigation, the following assessment notices were issued against [PMFC]:

chanRoblesvirtualLawlibrary

(a) Assessment Notice No. 81-WT-13-96-98-11-126, dated November 26, 1998, demanding
payment for deficiency withholding taxes for the year 1996 in the sum of P384,925.05 (inclusive
of interest and other penalties);

(b) Assessment Notice No. 81-VAT-13-96-98-11-127, dated November 26, 1998, demanding
payment of deficiency value-added tax in the sum of P5,017,778.01 (inclusive of interest and
other penalties); [and]

(c) Assessment Notice No. 81-IT-13-96[-]98-11-128, dated November 26, 1998, demanding
payment of. deficiency income tax for the year 1996 in the sum of P4,359,046.96 (inclusive of
interest and other penalties).

The foregoing Assessment Notices were all received by [PMFC] on December 1, 1998. On December 29,
1998, [PMFC] filed a protest letter against the aforementioned deficiency tax assessments through the
 27

Regional Director, Revenue Region No. 13, Cebu City.

In a final decision of the [CIR] on the disputed assessments dated July 3, 2000, the deficiency tax
liabilities of [PMFC] were reduced from P9,761,750.02 to P3,020,259.30, broken down as follows:

chanRoblesvirtualLawlibrarya) Deficiency withholding tax from P384,925.05 to P197,780.67;

b) Deficiency value-added tax from P5,017,778.01 to P1,642,145.79; and
c) Deficiency Income Tax from P4,359,046.96 to P1,180,332.84.

xxxx
On the basis of the foregoing facts[, PMFC] filed its Petition for Review on August 9, 2000. In the "Joint
Stipulation of Facts" filed on March 7, 2001, the parties have agreed that the following are the issues to be
resolved:ChanRoblesVirtualawlibrary
Whether or not [PMFC] is liable for the payment of deficiency income, value-added, expanded
withholding, final withholding and withholding tax (on compensation).
On the P1,180,382.84 deficiency income tax
Whether or not the P5,895,694.66 purchases of raw materials are unsupported[;]
Whether or not the cancelled invoices and expenses for taxes, repairs and freight are unsupported[;]
Whether or not commission, storage and trucking charges claimed are deductible[; and]
Whether or not the alleged deficiency income tax for the year 1996 was correctly computed.
xxxx

V. Whether or not [CIR's] decision on the 1996 internal revenue tax liabilities of [PMFC] is contrary
to law and the facts.

After trial on the merits, the [CTA] in Division rendered the assailed Decision affirming the assessments
but in the reduced amount of P2,804,920.36 (inclusive of surcharge and deficiency interest) representing
[PMFC's] Income, VAT and Withholding Tax deficiencies for the taxable year 1996 plus 20%
delinquency interest per annum until fully paid. The [CTA] in Division ruled as
follows:ChanRoblesVirtualawlibrary
"However, [PMFC's] contention that the NIRC of 1977 did not impose substantiation requirements on
deductions from gross income is bereft of merit. Section 238 of the 1977 Tax Code [now Section 237 of
the National Internal Revenue Code of 1997] provides:ChanRoblesVirtualawlibrary
SEC. 238. Issuance of receipts or sales or commercial invoices. - All persons, subject to an internal
revenue tax shall for each sale or transfer of merchandise or for services rendered valued at P25.00 or
more, issue receipts or sales or commercial invoices, prepared at least in duplicate, showing the date of
transaction, quantity, unit cost and description of merchandise or nature of service: Provided, That in the
case of sales, receipts or transfers in the amount of P100.00 or more, or, regardless of amount, where the
sale or transfer is made by persons subject to value-added tax to other persons, also subject to value-added
tax; or, where the receipt is issued to cover payment made as rentals, commissions, compensations or
 28

fees, receipts or invoices shall be issued which shall show the name, business style, if any, and address of
the purchaser, customer, or client. The original of each receipt or invoice shall be issued to the purchaser,
customer or client at the time the transaction is effected, who, if engaged in business or in the exercise of
profession, shall keep and preserve the same in his place of business for a period of three (3) years from
the close of the taxable year in which such invoice or receipt was issued, while the duplicate shall be kept
and preserved by the issuer, also in his place of business for a like period. x x x
From the foregoing provision of law, a person who is subject to an internal revenue tax shall issue
receipts, sales or commercial invoices, prepared at least in duplicate. The provision likewise imposed a
responsibility upon the purchaser to keep and preserve the original copy of the invoice or receipt for a
period of three years from the close of the taxable year in which such invoice or receipt was issued. The
rationale behind the latter requirement is the duty of the taxpayer to keep adequate records of each and
every transaction entered into in the conduct of its business. So that when their books of accounts are
subjected to a tax audit examination, all entries therein, could be shown as adequately supported and
proven as legitimate business transactions. Hence, [PMFC's] claim that the NIRC of 1977 did not require
substantiation requirements is erroneous.

In fact, in its effort to prove the above-mentioned purchases of raw materials, [PMFC] presented the
following sales invoices:

chanRoblesvirtualLawlibrary

Exhibit Number Invoice No. Date Gross Amount 10% VAT Net Amount

B-3 2072 04/18/96 P2,312,670.00 P210,242.73 P2,102,427.27

B-7,

B-11 2026 Undated 2,762,099.10 251,099.92 2,510,999.18

P5,074,769.10 P461,342.65 P4,613,426.45

The mere fact that [PMFC] submitted the foregoing sales invoices belies [its] claim that the NIRC of
1977 did not require that deductions must be substantiated by adequate records.

From the total purchases of P5,893,694.64 which have been disallowed, it seems that a portion thereof
amounting to P1,280,268.19 (729,663.64 + 550,604.55) has no supporting sales invoices because of
[PMFC's] failure to present said invoices.

A scrutiny of the invoices supporting the remaining balance of P4,613,426.45 (P5,893,694.64 less
P1,280,268.19) revealed the following:

chanRoblesvirtualLawlibrary
 29

a) In Sales Invoice No. 2072 marked as Exhibit B-3, the name Pilmico Foods Corporation was
erased and on top of it the name [PMFC] was inserted but with a counter signature therein;

b) For undated Sales Invoice No. 2026, [PMFC] presented two exhibits marked as Exhibits B-7 and
B-11. Exhibit B-11 is the original sales invoice whereas Exhibit B-7 is a photocopy thereof. Both
exhibits contained the word Mauri which was inserted on top and between the words Pilmico and
Foods. The only difference is that in the original copy (Exhibit B-11), there was a counter
signature although the ink used was different from that used in the rest of the writings in the said
invoice; while in the photocopied invoice (Exhibit B-7), no such counter signature appeared.
[PMFC] did not explain why the said countersignature did not appear in the photocopied invoice
considering it was just a mere reproduction of the original copy.

The sales invoices contain alterations particularly in the name of the purchaser giving rise to serious
doubts regarding their authenticity and if they were really issued to [PMFC]. Exhibit B-11 does not even
have any date indicated therein, which is a clear violation of Section 238 of the NIRC of 1977 which
required that the official receipts must show the date of the transaction.

Furthermore, [PMFC] should have presented documentary evidence establishing that Pilmico Foods
Corporation did not claim the subject purchases as deduction from its gross income. After all, the records
revealed that both [PMFC] and its parent company, Pilmico Foods Corporation, have the same AVP
Comptroller in the person of Mr. Eugenio Gozon, who is in-charge of the financial records of both entities
x x x.

Similarly, the official receipts presented by [PMFC] x x x, cannot be considered as valid proof of
[PMFC's] claimed deduction for raw materials purchases. The said receipts did not conform to the
requirements provided for under Section 238 of the NIRC of 1977, as amended. First the official receipts
were not in the name of [PMFC] but in the name of Golden Restaurant. And second, these receipts were
issued by PFC and not the alleged seller, JTE.

Likewise, [PMFC's] allegations regarding the offsetting of accounts between [PMFC], PFC and JTE is
untenable. The following circumstances contradict [PMFC's] proposition: 1) the Credit Agreement itself
does not provide for the offsetting arrangement; 2) [PMFC] was not even a party to the credit agreement;
and 3) the official receipts in question pertained to the year 1996 whereas the Credit Agreement (Exhibit
M) and the Real Estate Mortgage Agreement (Exhibit N) submitted by [PMFC] to prove the fact of the
offsetting of accounts, were both executed only in 1997.

Besides, in order to support its claim, [PMFC] should have presented the following vital documents,
namely, 1) Written Offsetting Agreement; 2) proof of payment by [PMFC] to Pilmico Foods Corporation;
and 3) Financial Statements for the year 1996 of Pilmico Foods Corporation to establish the fact that
Pilmico Foods Corporation did not deduct the amount of raw materials being claimed by [PMFC].

Considering that the official receipts and sales invoices presented by [PMFC] failed to comply with the
requirements of Section 238 of the NIRC of 1977, the disallowance by the [CIR] of the claimed deduction
for raw materials is proper.
 30

[PMFC] filed a Motion for Partial Consideration on January 21, 2005 x x x but x x x [PMFC's] Motion
for Reconsideration was denied in a Resolution dated May 19, 2005 for lack of merit, x x x.8 (Citation
omitted, italics ours and emphasis in the original)
Unperturbed, PMFC then filed a petition for review before the CTA en banc, which adopted the CTA
First Division's ruling and ratiocinations. Additionally, the CTA en banc declared
that:ChanRoblesVirtualawlibrary
The language of [Section 238] of the 1977 NIRC, as amended, is clear. It requires that for each sale
valued at P100.00 or more, the name, business style and address of the purchaser, customer or client shall
be indicated and that the purchaser is required to keep and preserve the same in his place of business. The
purpose of the law in requiring the preservation by the purchaser of the official receipts or sales invoices
for a period of three years is two-fold: 1) to enable said purchaser to substantiate his claimed deductions
from the gross income, and 2) to enable the Bureau of Internal Revenue to verify the accuracy of the gross
income of the seller from external sources such as the customers of said seller. Hence, [PMFC's]
argument that there was no substantiation requirement under the 1977 NIRC is without basis.

Moreover, the Supreme Court had ruled that in claiming deductions for business expenses [,] it is not
enough to prove the business test but a claimant must substantially prove by evidence or records the
deductions claimed under the law, thus:ChanRoblesVirtualawlibrary
The principle is recognized that when a taxpayer claims a deduction, he must point to some specific
provision of the statute in which that deduction is authorized and must be able to prove that he is entitled
to the deduction which the law allows. As previously adverted to, the law allowing expenses as deduction
from gross income for purposes of the income tax is Section 30 (a) (l) of the National Internal Revenue
which allows a deduction of "all the ordinary and necessary expenses paid or incurred during the taxable
year in carrying on any trade or business.["] An item of expenditure, in order to be deductible under this
section of the statute must fall squarely within its language.

We come, then, to the statutory test of deductibility where it is axiomatic that to be deductible as a
business expense, three conditions are imposed, namely: (1) the expense must be ordinary and necessary;
(2) it must be paid or incurred within the taxable year, and (3) it must be paid or incurred in carrying on a
trade or business. In addition, not only must the taxpayer meet the business test, he must substantially
prove by evidence or records the deductions claimed under the law, otherwise, the same will be
disallowed. The mere allegation of the taxpayer that an item of expense is ordinary and necessary does
not justify its deduction. x x x
And in proving claimed deductions from gross income, the Supreme Court held that invoices and official
receipts are the best evidence to substantiate deductible business expenses. x x x

xxxx

The irregularities found on the official receipts and sales invoices submitted in evidence by [PMFC], i.e.
not having been issued in the name of [PMFC] as the purchaser and the fact that the same were not issued
by the alleged seller himself directly to the purchaser, rendered the same of no probative value.

Parenthetically, the "Cohan Rule" which according to [PMFC] was adopted by the Supreme Court in the
case of Visayan Cebu Terminal v. Collector, x x x, is not applicable because in both of these cases[,] there
were natural calamities that prevented the taxpayers therein to fully substantiate their claimed deductions.
 31

In the Visayan Cebu Terminal case, there was a fire that destroyed some of the supporting documents for
the claimed expenses. There is no such circumstance in [PMFC's] case, hence, the ruling therein is not
applicable. It is noteworthy that notwithstanding the destruction of some of the supporting documents in
the aforementioned Visayan Cebu Terminal case, the Supreme Court[,] in denying the appeal[,] issued the
following caveat noting the violation of the provision of the Tax Code committed by [PMFC]
therein:ChanRoblesVirtualawlibrary
"It may not be amiss to note that the explanation to the effect that the supporting paper of some of those
expenses had been destroyed when the house of the treasurer was burned, can hardly be regarded as
satisfactory, for appellant's records are supposed to be kept in its offices, not in the residence of one of its
officers." x x x
From the above-quoted portion of the Supreme Court's Decision, it is clear that compliance with the
mandatory record-keeping requirements of the National Internal Revenue Code should not be taken
lightly. Raw materials are indeed deductible provided they are duly supported by official receipts or sales
invoices prepared and issued in accordance with the invoicing requirements of the National Internal
Revenue Code. x x x [PMFC] failed to show compliance with the requirements of Section 238 of the
1977 NIRC as shown by the fact that the sales invoices presented by [it] were not in its name but in the
name of Pilmico Foods Corporation.

xxxx

In the Joint Stipulation of Facts filed on March 7, 2001, the parties have agreed that with respect to the
deficiency income tax assessment, the following are the issues to be resolved:
Whether or not the P5,895,694.66 purchases of raw materials are unsupported;
xxxx

Clearly, the issue of proper substantiation of the deduction from gross income pertaining to the purchases
of raw materials was properly raised even before [PMFC] began presenting its evidence. [PMFC] was
aware that the [CIR] issued the assessment from the standpoint of lack of supporting documents for the
claimed deduction and the fact that the assessments were not based on the deductibility of the cost of raw
materials. There is no difference in the basis of the assessment and the issue presented to the [CTA] in
Division for resolution since both pertain to the issue of proper supporting documents for ordinary and
necessary business expenses.9 (Citation omitted, italics ours and emphasis in the original)
PMFC moved for reconsideration. Pending its resolution, the CIR issued Revenue Regulation (RR) No.
15-2006,10 the abatement program of which was availed by PMFC on October 27, 2006. Out of the total
amount of P2,804,920.36 assessed as income, value-added tax (VAT) and withholding tax deficiencies,
plus surcharges and deficiency interests, PMFC paid the CIR P1,101,539.63 as basic deficiency tax. The
PMFC, thus, awaits the CIR's approval of the abatement, which can render moot the resolution of the
instant petition.11chanrobleslaw

Meanwhile, the CTA en banc denied the motion for reconsideration12 of PMFC, in its
Resolution13 dated December 4, 2006.
Issues
 32

In the instant petition, what is essentially being assailed is the CTA en banc's concurrence with the CTA
First Division's ruling, which affirmed but reduced the CIR's income deficiency tax assessment against
PMFC. More specifically, the following errors are ascribed to the CTA:ChanRoblesVirtualawlibrary
I

The Honorable CTA First Division deprived PMFC of due process of law and the CTA assumed an
executive function when it substituted a legal basis other than that stated in the assessment and pleading
of the CIR, contrary to law.
II

The decision of the Honorable CTA First Division must conform to the pleadings and the theory of the
action under which the case was tried. A judgment going outside the issues and purporting to adjudicate
something on which the parties were not heard is invalid. Since the legal basis cited by the CTA
supporting the validity of the assessment was never raised by the CIR, PMFC was deprived of its
constitutional right to be apprised of the legal basis of the assessment.
III

The nature of evidence required to prove an ordinary expense like raw materials is governed by Section
2914 of the 1977 National Internal Revenue Code (NIRC) and not by Section 238 as found by the
CTA.15chanroblesvirtuallawlibrary
In support of the instant petition, PMFC claims that the deficiency income tax assessment issued against it
was anchored on Sect on 34(A)(l)(b)16 of the 1997 NIRC. In disallowing the deduction of the purchase of
raw materials from PMFC's gross income, the CIR never m any reference to Section 238 of the 1977
NIRC relative to the mandatory requirement of keeping records of official receipts, upon which the CTA
had misplaced reliance. Had substantiation requirements under Section 23 the 1977 NIRC been made an
issue during the trial, PMFC could have presented official receipts or invoices, or could have compelled
its suppliers to issue the same.17chanrobleslaw

PMFC further argues that in determining the deductibility of the purchase of raw materials from gross
income, Section 29 of the 1977 NIRC is the applicable provision. According to the said section, for the
deduction to be allowed, the expenses must be (a) both ordinary and necessary; (b) incurred in carrying on
a trade or business; and (c) paid or incurred within the taxable year. PMFC, thus, claims that prior to the
promulgation of the 1997 NIRC, the law does not require the production of official receipts to prove an
expense.18chanrobleslaw

In its Comment,19 the Office of the Solicitor General (OSG) counters that the arguments advanced by
PMFC are mere reiterations of those raised in the proceedings below. Further, PMFC was fully apprised
of the assailed tax assessments and had all the opportunities to prove its claims.20chanrobleslaw

The OSG also avers that in the Joint Stipulation of Facts filed before the CTA First Division on March 7,
2001, it was stated that one of the issues for resolution was "whether or not the Php5,895,694.66
purchases of raw materials are unsupported." Hence, PMFC was aware that the CIR issued the
 33

assessments due to lack of supporting documents for the deductions claimed. Essentially then, even in the
proceedings before the CIR, the primary issue has always been the lack or inadequacy of supporting
documents for ordinary and necessary business expenses.21chanrobleslaw

The OSG likewise points out that PMFC failed to satisfactorily discharge the burden of proving the
propriety of the tax deductions claimed. Further, there were discrepancies in the names of the sellers and
purchasers i indicated in the receipts casting doubts on their authenticity.22chanrobleslaw
Ruling of the Court

The Court affirms but modifies the herein assailed decision and resolution.

Preliminary matters

On December 19, 2006, PMFC filed before the Court a motion for extension of time to file a petition for
review.23 In the said motion, PMFC informed the Court that it had availed of the CIR's tax abatement
program, the details of which were provided for in RR No. 15-2006. PMFC paid the CIR the amount of
P1,101,539.63 as basic deficiency tax. PMFC manifested that if the abatement application would be
approved by the CIR, the instant petition filed before the Court may be rendered superfluous.

According to Section 4 of RR No. 15-2006, after the taxpayer's payment of the assessed basic deficiency
tax, the docket of the case shall forwarded to the CIR, thru the Deputy Commissioner for Operations
Group, for issuance of a termination letter. However, as of this Resolution's writing, none of the parties
have presented the said termination letter. Hence, the Court cannot outrightly dismiss the instant petition
on the ground of mootness.

On the procedural issues raised by PMFC

The first and second issues presented by PMFC are procedural in nature. They both pertain to the alleged
omission of due process of law by the CTA since in its rulings, it invoked Section 238 of the 1977 NIRC,
while in the proceedings below, the CIR's tax deficiency assessments issued against PMFC were instead
anchored on Section 34 of the 1997 NIRC.

Due process was not violated.

In CIR v. Puregold Duty Free, Inc.,24 the Court is emphatic that:ChanRoblesVirtualawlibrary

It is well settled that matters that were neither alleged in the pleadings nor raised during the proceedings
below cannot be ventilated for the first time on appeal and are barred by estoppel. To allow the contrary
would constitute a violation of the other party's right to due process, and is contrary to the principle of fair
play. x x x
x x x Points of law, theories, issues, and arguments not brought to the attention of the trial court ought not
to be considered by a reviewing court, as these cannot be raised for the first time on appeal. To consider
the alleged facts and arguments belatedly raised would amount to trampling on the basic principles of fair
play, justice, and due process.25cralawred (Citations omitted)
 34

In the case at bar, the CIR issued assessment notices against PMFC for deficiency income, VAT and
withholding tax for the year 1996. PMFC assailed the assessments before the Bureau of Internal Revenue
and late before the CTA.

In the Joint Stipulation of Facts, dated March 7, 2001, filed before CTA First Division, the CIR and
PMFC both agreed that among the issues for resolution was "whether or not the P5,895,694.66 purchases
of raw materials are unsupported."26 Estoppel, thus, operates against PMFC anent its argument that the
issue of lack or inadequacy of documents to justify the costs of purchase of raw materials as deductions
from the gross income had not been presented in the proceedings below, hence, barred for being belatedly
raised only on appeal.

Further, in issuing the assessments, the CIR had stated the material facts and the law upon which they
were based. In the petition for review filed by PMFC before the CTA, it was the former's burden to
properly invoke the applicable legal provisions in pursuit of its goal to reduce its tax liabilities. The CTA,
on the other hand, is not bound to rule solely on the basis of the laws cited by the CIR. Were it otherwise,
the tax court's appellate power of review shall be rendered useless. An absurd situation would arise
leaving the CTA with only two options, to wit: (a) affirming the CIR's legal findings; or (b) altogether
absolving the taxpayer from liability if the CIR relied on misplaced legal provisions. The foregoing is not
what the law intends.

To reiterate, PMFC was at the outset aware that the lack or inadequacy of supporting documents to justify
the deductions claimed from the gross income was among the issues raised for resolution before the CTA.
With PMFC's acquiescence to the Joint Stipulation of Facts filed before the CTA and thenceforth, the
former's participation in the proceedings with all opportunities it was afforded to ventilate its claims, the
alleged deprivation of due process is bereft of basis.

On the applicability of Section 29 of the 1977 NIRC

The third issue raised by PMFC is substantive in nature. At its core is the alleged application of Section
29 of the 1977 NIRC as regards the deductibility from the gross income of the cost of raw materials
purchased by PMFC.

It bears noting that while the CIR issued the assessments on the basis of Section 34 of the 1997 NIRC, the
CTA and PMFC are in agreement that the 1977 NIRC finds application.

However, while the CTA ruled on the basis of Section 238 of the 1977 NIRC, PMFC now insists that
Section 29 of the same code should be applied instead. Citing Atlas Consolidated Mining and
Development Corporation v. CIR,27 PMFC argues that Section 29 imposes less stringent requirements
and the presentation of official receipts as evidence of the claimed deductions dispensable. PMFC further
posits that the mandatory nature of the submission of official receipts as proof is a mere innovation in the
19 NIRC, which cannot be applied retroactively.28chanrobleslaw

PMFC's argument fails.

The Court finds that the alleged differences between the requirements of Section 29 of the 1977 NIRC
invoked by PMFC, on one hand, and Section 238 relied upon by the CTA, on the other, are more
imagined than real.
 35

In CIR v. Pilipinas Shell Petroleum Corporation,29 the Count enunciated

that:ChanRoblesVirtualawlibrary
It is a rule in statutory construction that every part of the statute must be interpreted with reference to the
context, i.e., 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. The law must not be read in truncated parts, its
provisions must be read in relation to the whole law. The particular words, clauses and phrases should not
be studied as detached and isolated expression, but the whole and every part of the statute must be
considered in fixing the meaning of any of its parts and in order to produce a harmonious
whole.30 (Citations omitted)
The law, thus, intends for Sections 29 and 238 of the 1977 NIRC to be read together, and not for one
provision to be accorded preference over the other.

It is undisputed that among the evidence adduced by PMFC on it behalf are the official receipts of alleged
purchases of raw materials. Thus, the CTA cannot be faulted for making references to the same, and for
applying Section 238 of the 1977 NIRC in rendering its judgment. Required or not, the official receipts
were submitted by PMFC as evidence. Inevitably, the said receipts were subjected to scrutiny, and the
CTA exhaustively explained why it had found them wanting.

PMFC cites Atlas31 to contend that the statutory test, as provided in Section 29 of the 1977 NIRC, is
sufficient to allow the deductibility of a business expense from the gross income. As long as the expense
is: (a) both ordinary and necessary; (b) incurred in carrying a business or trade; and (c) paid or incurred
within the taxable year, then, it shall be allowed as a deduction from the gross income.32chanrobleslaw

Let it, however, be noted that in Atlas, the Court likewise declared that:ChanRoblesVirtualawlibrary
In addition, not only must the taxpayer meet the business test, he must substantially prove by evidence or
records the deductions claimed under the law, otherwise, the same will be disallowed. The mere
allegation of the taxpayer that an item of expense is ordinary and necessary does not justify its
deduction.33 (Citation omitted and italics ours)
It is, thus, clear that Section 29 of the 1977 NIRC does not exempt the taxpayer from substantiating
claims for deductions. While official receipts are not the only pieces of evidence which can prove
deductible expenses, if presented, they shall be subjected to examination. PMFC submitted official
receipts as among its evidence, and the CTA doubted their veracity. PMFC was, however, unable to
persuasively explain and prove through other documents the discrepancies in the said receipts.
Consequently, the CTA disallowed the deductions claimed, and in its ruling, invoked Section 238 of the
1977 NIRC considering that official receipts are matters provided for in the said section.

Conclusion

The Court recognizes that the CTA, which by the very nature of its function is dedicated exclusively to
the consideration of tax problems, has necessarily developed an expertise on the subject, and its
conclusions will not be overturned unless there has been an abuse or improvident exercise of authority.
Such findings can only be disturbed on appeal if they are not supported by substantial evidence or there is
a showing of gross error or abuse on the part of the tax court. In the absence of any clear and convincing
proof to the contrary, the Court must presume that the CTA rendered a decision which is valid in every
 36

respect.34chanrobleslaw

Further, revenue laws are not intended to be liberally construed. Taxes are the lifeblood of the
government and in Holmes' memorable metaphor, the price we pay for civilization; hence, laws relative
thereto must be faithfully and strictly implemented.35 While the 1977 NIRC required substantiation
requirements for claimed deductions to be allowed, PMFC insists on leniency, which is not warranted
under the circumstances.

Lastly, the Court notes too that PMFC's tax liabilities have been me than substantially reduced to
P2,804,920.36 from the CIR's initial assessment of P9,761,750.02.36chanrobleslaw

In precis, the affirmation of the herein assailed decision and resolution is in order.

However, the Court finds it proper to modify the herein assail decision and resolution to conform to the
interest rates prescribed in Nacar v. Gallery Frames, et al.37 The total amount of P2,804,920.36 to be paid
PMFC to the CIR shall be subject to an interest of six percent (6%) per annum to be computed from the
finality of this Resolution until full payment.

WHEREFORE, the instant petition is DENIED. The Decision dated August 29, 2006 and Resolution
dated December 4, 2006 of the Court of Tax Appeals en banc in C.T.A. EB No. 97 are AFFIRMED.
However, MODIFICATION thereof, the legal interest of six percent (6%) per annum reckoned from the
finality of this Resolution until full satisfaction, is here imposed upon the amount of P2,804,920.36 to be
paid by Pilmico-Mauri Foods Corporation to the Commissioner of Internal Revenue.

SO ORDERED.chanRoblesvirtualLawlibrary

Velasco, Jr., (Chairperson), Peralta, Perez, and Jardeleza, JJ., concur.

Endnotes:

1Rollo, pp. 37-69.

2 AN ACT CREATING THE COURT OF TAX APPEALS. Approved on June 16, 1954.

3Sec. 19. Review by certiorari. - Any ruling, order or decision of the Court of Tax Appeals may likewise
be reviewed by the Supreme Court upon a writ of certiorari in proper cases. Proceedings in the Supreme
Court upon a writ of certiorari or a petition for review, as the case may be, shall be in accordance with the
provisions of the Rules of Court or such rules as the Supreme Court may prescribe.

4 AN ACT EXPANDING THE JURISDICTION OF THE COURT OF TAX APPEALS (CTA),

ELEVATING ITS RANK TO THE LEVEL OF A COLLEGIATE COURT WITH SPECIAL
JURISDICTION AND ENLARGING ITS MEMBERSHIP, AMENDING FOR THE PURPOSE
CERTAIN SECTIONS OF REPUBLIC ACT NO. 1125, AS AMENDED, OTHERWISE KNOWN AS
THE LAW CREATING THE COURT OF TAX APPEALS, AND FOR OTHER PURPOSES. Approved
on March 30, 2004.
 37

5 Sec. 12. Section 19 of the same Act is hereby amended as follows:

chanRoblesvirtualLawlibrarySec. 19. Review by Certiorari. - A party adversely affected by a decision or

ruling of the CTA en banc may file with the Supreme Court a verified petition for review
on certiorari pursuant to Rule 45 of the 1997 Rules of Civil Procedure.

6 Penned by Associate Justice Juanito C. Castañeda, Jr., with Presiding Justice Ernesto D. and Associate
Justices Erlinda P. Uy, Caesar A. Casanova and Olga Palanca-Enriquez concurring and Associate Justice
Lovell R. Bautista dissenting; rollo, pp. 108-127.

7 Id. at 71-79.

8 Id. at 109-114.

9 Id. at 122-126.

10 Prescribes the guidelines on the implementation of one-time administrative abatement of all

penalties/surcharges and interest on delinquent accounts and assessments (preliminary or final, disputed
or not) as of June 30, 2006, published on September 28, 2006.

11Rollo, pp. 3-4.

12 Id. at 84-106.

13 Id. at 71-79.

14Sec. 29. Deductions from gross income. - In computing taxable income subject to tax under Sections 21
(a), 24 (a), (b) and (c); and 25 (a) (l), there shall be allowed as deductions the items specified in
paragraphs (a) to (i) of this section; Provided, however, That in computing taxable income subject to tax
under Section 21 (f) in the case of individuals engaged in business or practice of profession, only the
following direct costs shall be allowed as deductions:

chanRoblesvirtualLawlibrary(a) Raw materials, supplies and direct labor;

xxxx

For individuals whose cost of goods sold and direct costs are difficult to determine, a maximum of forty
per cent (40%) of their gross receipts shall be allowed as deductions to answer for business or
professional expenses as the case may be. (As amended by Republic Act No. 7496, May 18, 1992)

xxxx

(a) Expenses. — (1) Business expenses. — (A) In general. — All 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; travelling expenses while away
from home in the pursuit of a trade profession or business, rentals or other payments required to be made
as a condition to the continued use or possession, for the purpose of the trade, profession or business, of
 38

property to which the taxpayer has not taken or is not taking title or in which he has no equity.

x x x x (Underscoring ours)

15Rollo, p. 44.

16SEC. 34. Deductions from Gross Income. - Except for taxpayers earning compensation income arising
from personal services rendered under an employer-employee relationship where no deductions shall be
allowed under this Section other than under subsection (M) hereof, in computing taxable income subject
to income tax under Sections 24 (A); 25 (A); 26; 27 (A), (B) and (C); and 28 (A) (1), there shall be
allowed the following deductions from gross income;

(A) Expenses. -

(1) Ordinary and Necessary Trade, Business or Professional Expenses. -

(b) Substantiation Requirements. - No deduction from gross income shall be allowed under Subsection
(A) hereof unless the taxpayer shall substantiate with sufficient evidence, such as official receipts or other
adequate records: (i) the amount of the expense being deducted, and (ii) the direct connection or relation
of the expense being deducted to the development, management, operation and/or conduct of the trade,
business or profession of the taxpayer. (Underscoring ours)

17Rollo, pp. 46-49.

18 Id. at 56-57.

19 Id. at 193-207.

20 Id. at 205.

21 Id. at 200-201.

22 Id. at 201, 205.

23 Id. at 3-6.

24 G.R. No. 202789, June 22, 2015.

25cralawred Id.

26Rollo, p. 110.

27 190 Phil. 195 (1981).

28Rollo, pp. 56-58.

29 G.R. No. 192398, September 29, 2014, 736 SCRA 623.

 39

30 Id. at 637.

31 Supra note 27.

32Rollo, p. 56.

33Atlas Consolidated Mining and Development Corporation v. CIR, supra note 27, at 204.

34CIR v. Puregold Duty Free, Inc., supra note 24, citing Toshiba Information Equipment (Phils.), Inc. v.
CIR, 628 Phil. 430, 468 (2010).

35CIR v. Acosta, 556 Phil. 31, 39-40 (2007).

36Rollo, pp. 110-111.

37 716 Phil. 267 (2013).

 40

Republic of the Philippines

SUPREME COURT
Baguio City
THIRD DIVISION
G.R. No. 197117 April 10, 2013
FIRST LEPANTO TAISHO INSURANCE CORPORATION, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
MENDOZA, J.:
Before the Court is a petition for review on certiorari1 under Rule 45 of the 1997 Rules of Civil
Procedure filed by First Lepanto Taisho Corporation, now FLT Prime Insurance Corporation (petitioner),
assailing the March l, 2011 Decision2 and the May 27, 2011 Resolution3 of the Court of Tax Appeals
(CTA) En Bane, in CTA E.B. No. 563, which affirmed the May 21, 2009 Decision of the CTA-Second
Division.
The Facts:
Petitioner is a non-lire insurance corporation and considered as a "Large Taxpayer under Revenue
Regulations No. 6-85, as amended by Revenue Regulations No. 12-94 effective 1994."4 After submitting
its corporate income tax return for taxable year ending December 31, 1997, petitioner received a Letter of
Authority, dated October 30, 1998, from respondent Commissioner of Internal Revenue (CIR) to allow it
to examine their books of account and other accounting records for 1997 and other unverified prior years.
On December 29, 1999, CIR issued internal revenue tax assessments for deficiency income, withholding,
expanded withholding, final withholding, value-added, and documentary stamp taxes for taxable year
1997.
On February 24, 2000, petitioner protested the said tax assessments.
During the pendency of the case, particularly on February 15, 2008, petitioner filed its Motion for Partial
Withdrawal of Petition for Review of Assessment Notice Nos. ST-INC-97-0220-99; ST-VAT-97-0222-99
and ST-DST-97-0217-00, in view of the tax amnesty program it had availed. The CTA Second Division
granted the said motion in a Resolution,5 dated March 31, 2008.
Consequently, on May 21, 2009, the CTA Second Division partially granted the petition.6 It directed
petitioner to pay CIR a reduced tax liability of ₱1,994,390.86. The dispositive portion reads:
WHEREFORE, in view of the foregoing considerations, the instant Petition for Review is hereby
PARTIALLY GRANTED. Accordingly, petitioner is hereby ORDERED TO PAY deficiency
withholding tax on compensation, expanded withholding tax and final tax in the reduced amount of
₱1,994,390.86, computed as follows:

Basic Surcharges Interest Total

Tax
 41

Deficiency ₱774,200.55 ₱193,550.14 ₱312.227.34 ₱1,279,978.03

Withholding
Tax on
Compensation
ST-WC-97-0221-99

Deficiency 132,724.02 33,181.01 53,526.27 219,431.30

Expanded
Withholding
Tax ST-EWT-97-
0218-99

Deficiency 299,391.84 74,847.96 120,741.73 494,981.53

Final
Withholding
Tax ST-FT-97-0219-
99

TOTALS ₱1,206,316.41 ₱301,579.11 ₱486,495.34 ₱1,994,390.86

Petitioner’s Motion for Partial Reconsideration7 was likewise denied by the CTA Second Division in its
October 29, 2009 Resolution.8
Unsatisfied, petitioner filed a Petition for Review before the CTA En Banc.9
On March 1, 2011, the CTA En Banc affirmed the decision of the CTA Second Division.10
Petitioner contended that it was not liable to pay Withholding Tax on Compensation on the ₱500,000.00
Director’s Bonus to their directors, specifically, Rodolfo Bausa, Voltaire Gonzales, Felipe Yap, and
Catalino Macaraig, Jr., because they were not employees and the amount was already subjected to
Expanded Withholding Tax. The CTA En Banc, however, ruled that Section 5 of Revenue Regulation No.
12-86 expressly identified a director to be an employee.
 42

As to transportation, subsistence and lodging, and representation expenses, the expenses would not be
subject to withholding tax only if the same were reimbursement for actual expenses of the company. In
the present case, the CTA En Banc declared that petitioner failed to prove that they were so.
As to deficiency expanded withholding taxes on compensation, petitioner failed to substantiate that the
commissions earned totaling ₱905,428.36, came from reinsurance activities and should not be subject to
withholding tax. Petitioner likewise failed to prove its direct loss expense, occupancy cost and
service/contractors and purchases.
As to deficiency final withholding taxes, "petitioner failed to present proof of remittance to establish that
it had remitted the final tax on dividends paid as well as the payments for services rendered by the
Malaysian entity."11
As to the imposition of delinquency interest under Section 249 (c) (3) of the 1997 National Internal
Revenue Code (NIRC), records reveal that petitioner failed to pay the deficiency taxes within thirty (30)
days from receipt of the demand letter, thus, delinquency interest accrued from such non-payment.
Petitioner moved for partial reconsideration, but the CTA En Banc denied the same in its May 27, 2011
Resolution.12
Hence, this petition.13
The principal issue in this case is whether the CTA En Banc erred in holding petitioner liable for:
a. deficiency withholding taxes on compensation on directors’ bonuses under Assessment No. ST-WC-
97-0021-99;
b. deficiency expanded withholding taxes on transportation, subsistence and lodging, and representation
expense; commission expense; direct loss expense; occupancy cost; and service/contractor and purchases
under Assessment No. ST-EWT-97-0218-99;
c. deficiency final withholding taxes on payment of dividends and computerization expenses to foreign
entities under Assessment No. ST-FT-97-0219-99; and
d. delinquency interest under Section 249 (c) (3) of the NIRC.
The Court finds no merit in the petition.
For taxation purposes, a director is considered an employee under Section 5 of Revenue Regulation No.
12-86,14 to wit:
An individual, performing services for a corporation, whether as an officer and director or merely as a
director whose duties are confined to attendance at and participation in the meetings of the Board of
Directors, is an employee.
The non-inclusion of the names of some of petitioner’s directors in the company’s Alpha List does not
ipso facto create a presumption that they are not employees of the corporation, because the imposition of
withholding tax on compensation hinges upon the nature of work performed by such individuals in the
company. Moreover, contrary to petitioner’s attestations, Revenue Regulation No. 2-98,15 specifically,
Section 2.57.2. A (9) thereof,16 cannot be applied to this case as the latter is a later regulation while the
accounting books examined were for taxable year 1997.
 43

As to the deficiency withholding tax assessment on transportation, subsistence and lodging, and
representation expense, commission expense, direct loss expense, occupancy cost, service/contractor and
purchases, the Court finds no cogent reason to deviate from the findings of the CTA En Banc. As
correctly observed by the CTA Second Division and the CTA En Banc, petitioner was not able to
sufficiently establish that the transportation expenses reflected in their books were reimbursement from
actual transportation expenses incurred by its employees in connection with their duties as the only
document presented was a Schedule of Transportation
Expenses without pertinent supporting documents. Without said documents, such as but not limited to,
receipts, transportation-related vouchers and/or invoices, there is no way of ascertaining whether the
amounts reflected in the schedule of expenses were disbursed for transportation.
With regard to commission expense, no additional documentary evidence, like the reinsurance agreements
contracts, was presented to support petitioner’s allegation that the expenditure originated from
reinsurance activities that gave rise to reinsurance commissions, not subject to withholding tax. As to
occupancy costs, records reveal that petitioner failed to compute the correct total occupancy cost that
should be subjected to withholding tax, hence, petitioner is liable for the deficiency.
As to service/contractors and purchases, petitioner contends that both parties already stipulated that it
correctly withheld the taxes due. Thus, petitioner is of the belief that it is no longer required to present
evidence to prove the correct payment of taxes withheld. As correctly ruled by the CTA Second Division
and En Bane, however, stipulations cannot defeat the right of the State to collect the correct taxes due on
an individual or juridical person because taxes are the lifeblood of our nation so its collection should be
actively pursued without unnecessary impediment.
As to the deficiency final withholding tax assessments for payments of dividends and computerization
expenses incurred by petitioner to foreign entities, particularly Matsui Marine & Fire Insurance Co. Ltd.
(Matsui),17 the Court agrees with CIR that petitioner failed to present evidence to show the supposed
remittance to Matsui.
The Court likewise holds the imposition of delinquency interest under Section 249 (c) (3) of the 1997
NIRC to be proper, because failure to pay the deficiency tax assessed within the time prescribed for its
payment justifies the imposition of interest at the rate of twenty percent (20%) per annum, which interest
shall be assessed and collected from the date prescribed for its payment until full payment is made.
It is worthy to note that tax revenue statutes are not generally intended to be liberally
construed.18 Moreover, the CTA being a highly specialized court particularly created for the purpose of
reviewing tax and customs cases, it is settled that its findings and conclusions are accorded great respect
and are generally upheld by this Court, unless there is a clear showing of a reversible error or an
improvident exercise of authority.19 Absent such errors, the challenged decision should be maintained.
WHEREFORE, the petition is DENIED. The March 1, 2011 Decision and the May 27, 2011 Resolution
of the Court of Tax Appeals En Bane, in CTA E.B. No. 563, are AFFIRMED.
SO ORDERED.
JOSE CATRAL MENDOZA
Associate Justice
WE CONCUR:
 44

PRESBITERO J. VELASCO, JR.

Associate Justice
Chairperson

DIOSDADO M. PERALTA ROBERTO A. ABAD

Associate Justice Associate Justice

MARVIC MARIO VICTOR F. LEONEN

Associate Justice
ATTESTATION
I attest that the conclusions in the above Decision had been reached in consultation before the case was
assigned to the writer of the opinion of the Court's Division.
PRESBITERO J. VELASCO, JR.
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.
MARIA LOURDES P. A. SERENO
Chief Justice

Footnotes
1 Rollo, pp. 12-51.
2 Id. at 52-82. Penned by Associate Justice Esperanza R. Fabon- Victorino, with Presiding Justice Ernesto
D. Acosta and Associate Justices Juanito C. Castañeda, Jr., Lovell R. Bautista, Erlinda P. Uy, Caesar A.
Casanova, Olga Palancil-Enriquez, Cielito N. Mindaro-Grulla and Amelia R. Cotangco-Manak
concurring.
3 Id. at 84-86.
4 Id. at 53.
5 Id. at 125-126.
6 Id. at 128-152. Penned by Associate Justice Erlinda P. Uy, with Associate Justices Juanito C.
Castañeda, Jr. and Olga Palanca-Enriquez, concurring.
7 Id. at 157-170.
8 Id. at 172-178.
9 Id. at 109-123.
 45

10 Id. at 52-82. Penned by Associate Justice Esperanza R. Fabon-Victorino, with Presiding Justice
Ernesto D. Acosta and Associate Justices Juanito C.Castañeda, Jr., Lovell R. Bautista, Erlinda P. Uy,
Caesar A. Casanova, Olga Palanca-Enriquez, Cielito N. Mindaro-Grulla and Amelia R. Cotangco-Manak
concurring.
11 Id. at 77.
12 Id. at 84-86.
13 Id. at 12-51.
14 Dated August 1, 1986.
15 Dated April 17, 1998.
16 (9) Fees of directors who are not employees of the company paying such fees, whose duties are
confined to attendance at and participation in the meetings of the board of directors.
17 Petitioner's Non-Resident Foreign corporation stockholder.
18 Commissioner of Internal Revenue v. Acosta, G.R. No. 154068, August 3, 2007, 529 SCRA 177, 186.
19 Chevron Philippines, Inc. v. Commissioner of the Bureau of Customs, G.R. No. 178759, August II,
2008, 561 SCRA 710, 742.
 46

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-22734 September 15, 1967
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
MANUEL B. PINEDA, as one of the heirs of deceased ATANASIO PINEDA, respondent.
Office of the Solicitor General for petitioner.
Manuel B. Pineda for and in his own behalf as respondent.

BENGZON, J.P., J.:

On May 23, 1945 Atanasio Pineda died, survived by his wife, Felicisima Bagtas, and 15 children, the
eldest of whom is Manuel B. Pineda, a lawyer. Estate proceedings were had in the Court of First Instance
of Manila (Case No. 71129) wherein the surviving widow was appointed administratrix. The estate was
divided among and awarded to the heirs and the proceedings terminated on June 8, 1948. Manuel B.
Pineda's share amounted to about P2,500.00.
After the estate proceedings were closed, the Bureau of Internal Revenue investigated the income tax
liability of the estate for the years 1945, 1946, 1947 and 1948 and it found that the corresponding income
tax returns were not filed. Thereupon, the representative of the Collector of Internal Revenue filed said
returns for the estate on the basis of information and data obtained from the aforesaid estate proceedings
and issued an assessment for the following:

1. Deficiency income tax

1945 P135.83

1946 436.95

1947 1,206.91 P1,779.69

Add: 5% surcharge 88.98

1% monthly interest
from November 30, 1953
to April 15, 1957 720.77

Compromise for late

filing 80.00

Compromise for late

payment 40.00
 47

Total amount due P2,707.44

===========

Additional residence tax for P14.50

2.
1945 ===========

3. Real Estate dealer's tax for the

fourth quarter of 1946 and the P207.50
whole year of 1947 ===========

Manuel B. Pineda, who received the assessment, contested the same. Subsequently, he appealed to the
Court of Tax Appeals alleging that he was appealing "only that proportionate part or portion pertaining to
him as one of the heirs."
After hearing the parties, the Court of Tax Appeals rendered judgment reversing the decision of the
Commissioner on the ground that his right to assess and collect the tax has prescribed. The Commissioner
appealed and this Court affirmed the findings of the Tax Court in respect to the assessment for income tax
for the year 1947 but held that the right to assess and collect the taxes for 1945 and 1946 has not
prescribed. For 1945 and 1946 the returns were filed on August 24, 1953; assessments for both taxable
years were made within five years therefrom or on October 19, 1953; and the action to collect the tax was
filed within five years from the latter date, on August 7, 1957. For taxable year 1947, however, the return
was filed on March 1, 1948; the assessment was made on October 19, 1953, more than five years from the
date the return was filed; hence, the right to assess income tax for 1947 had prescribed. Accordingly, We
remanded the case to the Tax Court for further appropriate proceedings.1
In the Tax Court, the parties submitted the case for decision without additional evidence.
On November 29, 1963 the Court of Tax Appeals rendered judgment holding Manuel B. Pineda liable for
the payment corresponding to his share of the following taxes:
Deficiency income tax

P135.8
1945
3

1946 436.95

Real estate dealer's

fixed tax 4th quarter of
1946 and whole year
of 1947 P187.50

The Commissioner of Internal Revenue has appealed to Us and has proposed to hold Manuel B. Pineda
liable for the payment of all the taxes found by the Tax Court to be due from the estate in the total amount
of P760.28 instead of only for the amount of taxes corresponding to his share in the estate.1awphîl.nèt
Manuel B. Pineda opposes the proposition on the ground that as an heir he is liable for unpaid income tax
due the estate only up to the extent of and in proportion to any share he received. He relies
on Government of the Philippine Islands v. Pamintuan2 where We held that "after the partition of an
 48

estate, heirs and distributees are liable individually for the payment of all lawful outstanding claims
against the estate in proportion to the amount or value of the property they have respectively received
from the estate."
We hold that the Government can require Manuel B. Pineda to pay the full amount of the taxes assessed.
Pineda is liable for the assessment as an heir and as a holder-transferee of property belonging to the
estate/taxpayer. As an heir he is individually answerable for the part of the tax proportionate to the share
he received from the inheritance.3 His liability, however, cannot exceed the amount of his share.4
As a holder of property belonging to the estate, Pineda is liable for he tax up to the amount of the property
in his possession. The reason is that the Government has a lien on the P2,500.00 received by him from the
estate as his share in the inheritance, for unpaid income taxes4a for which said estate is liable, pursuant to
the last paragraph of Section 315 of the Tax Code, which we quote hereunder:
If any person, corporation, partnership, joint-account (cuenta en participacion), association, or insurance
company liable to pay the income tax, neglects or refuses to pay the same after demand, the amount shall
be a lien in favor of the Government of the Philippines from the time when the assessment was made by
the Commissioner of Internal Revenue until paid with interest, penalties, and costs that may accrue in
addition thereto upon all property and rights to property belonging to the taxpayer: . . .
By virtue of such lien, the Government has the right to subject the property in Pineda's possession, i.e.,
the P2,500.00, to satisfy the income tax assessment in the sum of P760.28. After such payment, Pineda
will have a right of contribution from his co-heirs,5 to achieve an adjustment of the proper share of each
heir in the distributable estate.
All told, the Government has two ways of collecting the tax in question. One, by going after all the heirs
and collecting from each one of them the amount of the tax proportionate to the inheritance received. This
remedy was adopted in Government of the Philippine Islands v. Pamintuan, supra. In said case, the
Government filed an action against all the heirs for the collection of the tax. This action rests on the
concept that hereditary property consists only of that part which remains after the settlement of all lawful
claims against the estate, for the settlement of which the entire estate is first liable.6 The reason why in
case suit is filed against all the heirs the tax due from the estate is levied proportionately against them is to
achieve thereby two results: first, payment of the tax; and second, adjustment of the shares of each heir in
the distributed estate as lessened by the tax.
Another remedy, pursuant to the lien created by Section 315 of the Tax Code upon all property and rights
to property belonging to the taxpayer for unpaid income tax, is by subjecting said property of the estate
which is in the hands of an heir or transferee to the payment of the tax due, the estate. This second remedy
is the very avenue the Government took in this case to collect the tax. The Bureau of Internal Revenue
should be given, in instances like the case at bar, the necessary discretion to avail itself of the most
expeditious way to collect the tax as may be envisioned in the particular provision of the Tax Code above
quoted, because taxes are the lifeblood of government and their prompt and certain availability is an
imperious need.7 And as afore-stated in this case the suit seeks to achieve only one objective: payment of
the tax. The adjustment of the respective shares due to the heirs from the inheritance, as lessened by the
tax, is left to await the suit for contribution by the heir from whom the Government recovered said tax.
WHEREFORE, the decision appealed from is modified. Manuel B. Pineda is hereby ordered to pay to the
Commissioner of Internal Revenue the sum of P760.28 as deficiency income tax for 1945 and 1946, and
 49

real estate dealer's fixed tax for the fourth quarter of 1946 and for the whole year 1947, without prejudice
to his right of contribution for his co-heirs. No costs. So ordered.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Angeles and Fernando,
JJ., concur.

Footnotes
1Collector of Internal Revenue v. Manuel B. Pineda as one of the heirs of the deceased Atanasio Pineda,
L-14522, May 31, 1961.
255 Phil. 13.
3Government of the Philippine Islands v. Santos, 56 Phil. 827.
4Art. 1311, Civil Code of the Philippines.
4aReal estate dealer's fixed tax is subject to the same lien pursuant to the first paragraph of Sec. 355, Tax
Code.
5Government of the Philippine Islands v. Santos, G.R. No. 34152, Dec. 15, 1931, 56 Phil. 827.
6Lopez v. Enriquez, 16 Phil. 336.
7Bull v. United States, 295 U.S. 247, 15 AFTR 1069, 1073.
 50

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-28896 February 17, 1988
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.
CRUZ, J.:
Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance On
the other hand, such collection should be made in accordance with law as any arbitrariness will negate the
very reason for government itself. It is therefore necessary to reconcile the apparently conflicting interests
of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the
common good, may be achieved.
The main issue in this case is whether or not the Collector of Internal Revenue correctly disallowed the
P75,000.00 deduction claimed by private respondent Algue as legitimate business expenses in its income
tax returns. The corollary issue is whether or not the appeal of the private respondent from the decision of
the Collector of Internal Revenue was made on time and in accordance with law.
We deal first with the procedural question.
The record shows that on January 14, 1965, the private respondent, a domestic corporation engaged in
engineering, construction and other allied activities, received a letter from the petitioner assessing it in the
total amount of P83,183.85 as delinquency income taxes for the years 1958 and 1959.1 On January 18,
1965, Algue flied a letter of protest or request for reconsideration, which letter was stamp received on the
same day in the office of the petitioner. 2 On March 12, 1965, a warrant of distraint and levy was
presented to the private respondent, through its counsel, Atty. Alberto Guevara, Jr., who refused to
receive it on the ground of the pending protest. 3 A search of the protest in the dockets of the case proved
fruitless. Atty. Guevara produced his file copy and gave a photostat to BIR agent Ramon Reyes, who
deferred service of the warrant. 4 On April 7, 1965, Atty. Guevara was finally informed that the BIR was
not taking any action on the protest and it was only then that he accepted the warrant of distraint and levy
earlier sought to be served.5 Sixteen days later, on April 23, 1965, Algue filed a petition for review of the
decision of the Commissioner of Internal Revenue with the Court of Tax Appeals.6
The above chronology shows that the petition was filed seasonably. According to Rep. Act No. 1125, the
appeal may be made within thirty days after receipt of the decision or ruling challenged.7 It is true that as
a rule the warrant of distraint and levy is "proof of the finality of the assessment" 8 and renders hopeless a
request for reconsideration," 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
 51

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
 52

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. 21 After 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
 53

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.
Teehankee, C.J., Narvasa, Gancayco and Griño-Aquino, JJ., concur.

Footnotes
1 Rollo, pp. 28-29.
2 Ibid., pp. 29; 42.
3 Id., p. 29.
4 Respondent's Brief, p. 11.
5 Id., p. 29.
6 Id,
7 Sec. 11.
8 Phil. Planters Investment Co. Inc. v. Comm. of Internal Revenue, CTA Case No. 1266, Nov. 11, 1962;
Rollo, p. 30.
9 Vicente Hilado v. Comm. of Internal Revenue, CTA Case No. 1266, Oct. 22,1962; Rollo, p. 30.
10 Ibid.
11 Penned by Associate Judge Estanislao R. Alvarez, concurred by Presiding Judge Ramon M. Umali and
Associate Judge Ramon L. Avanceña.
12 Rollo, p. 33.
13 Ibid., pp. 7-8; Petition, pp. 2-3. 11 Id., p. 37.
 54

15 Id.
16 Id.
17 Id.
18 Id.
19 Respondents Brief, pp. 25-32.
20 Ibid., pp. 30-32.
21 Rollo, p. 37.
22 Now Sec. 30, (a)(1)-(A.), National Internal Revenue Code.
23 Respondent's Brief, p. 35.
 55

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-22074 April 30, 1965
THE PHILIPPINE GUARANTY CO., INC., petitioner,
vs.
THE COMMISSIONER OF INTERNAL REVENUE and THE COURT OF TAX
APPEALS, respondents.
Josue H. Gustilo and Ramirez and Ortigas for petitioner.
Office of the Solicitor General and Attorney V.G. Saldajena for respondents.
BENGZON, J.P., J.:
The Philippine Guaranty Co., Inc., a domestic insurance company, entered into reinsurance contracts, on
various dates, with foreign insurance companies not doing business in the Philippines namely: Imperio
Compañia de Seguros, La Union y El Fenix Español, Overseas Assurance Corp., Ltd., Socieded Anonima
de Reaseguros Alianza, Tokio Marino & Fire Insurance Co., Ltd., Union Assurance Society Ltd., Swiss
Reinsurance Company and Tariff Reinsurance Limited. Philippine Guaranty Co., Inc., thereby agreed to
cede to the foreign reinsurers a portion of the premiums on insurance it has originally underwritten in the
Philippines, in consideration for the assumption by the latter of liability on an equivalent portion of the
risks insured. Said reinsurrance contracts were signed by Philippine Guaranty Co., Inc. in Manila and by
the foreign reinsurers outside the Philippines, except the contract with Swiss Reinsurance Company,
which was signed by both parties in Switzerland.
The reinsurance contracts made the commencement of the reinsurers' liability simultaneous with that of
Philippine Guaranty Co., Inc. under the original insurance. Philippine Guaranty Co., Inc. was required to
keep a register in Manila where the risks ceded to the foreign reinsurers where entered, and entry therein
was binding upon the reinsurers. A proportionate amount of taxes on insurance premiums not recovered
from the original assured were to be paid for by the foreign reinsurers. The foreign reinsurers further
agreed, in consideration for managing or administering their affairs in the Philippines, to compensate the
Philippine Guaranty Co., Inc., in an amount equal to 5% of the reinsurance premiums. Conflicts and/or
differences between the parties under the reinsurance contracts were to be arbitrated in Manila. Philippine
Guaranty Co., Inc. and Swiss Reinsurance Company stipulated that their contract shall be construed by
the laws of the Philippines.
Pursuant to the aforesaid reinsurance contracts, Philippine Guaranty Co., Inc. ceded to the foreign
reinsurers the following premiums:

1953 . . . . . . . . . . . . . . . . . . . . . P842,466.71

1954 . . . . . . . . . . . . . . . . . . . . . 721,471.85

Said premiums were excluded by Philippine Guaranty Co., Inc. from its gross income when it file its
income tax returns for 1953 and 1954. Furthermore, it did not withhold or pay tax on them. Consequently,
 56

per letter dated April 13, 1959, the Commissioner of Internal Revenue assessed against Philippine
Guaranty Co., Inc. withholding tax on the ceded reinsurance premiums, thus:

1953

Gross premium per investigation . . . . . . . . . . P768,580.00

Withholding tax due thereon at 24% . . . . . . . . P184,459.00

25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . . 46,114.00

Compromise for non-filing of withholding

100.00
income tax return . . . . . . . . . . . . . . . . . . . . . . . . .

TOTAL AMOUNT DUE & COLLECTIBLE . . . . P230,673.00

==========

1954

Gross premium per investigation . . . . . . . . . . P780.880.68

Withholding tax due thereon at 24% . . . . . . . . P184,411.00

25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . . P184,411.00

Compromise for non-filing of withholding

100.00
income tax return . . . . . . . . . . . . . . . . . . . . . . . . .

TOTAL AMOUNT DUE & COLLECTIBLE . . . . P234,364.00

==========

Philippine Guaranty Co., Inc., protested the assessment on the ground that reinsurance premiums ceded to
foreign reinsurers not doing business in the Philippines are not subject to withholding tax. Its protest was
denied and it appealed to the Court of Tax Appeals.
On July 6, 1963, the Court of Tax Appeals rendered judgment with this dispositive portion:
IN VIEW OF THE FOREGOING CONSIDERATIONS, petitioner Philippine Guaranty Co., Inc. is
hereby ordered to pay to the Commissioner of Internal Revenue the respective sums of P202,192.00 and
P173,153.00 or the total sum of P375,345.00 as withholding income taxes for the years 1953 and 1954,
plus the statutory delinquency penalties thereon. With costs against petitioner.
 57

Philippine Guaranty Co, Inc. has appealed, questioning the legality of the Commissioner of Internal
Revenue's assessment for withholding tax on the reinsurance premiums ceded in 1953 and 1954 to the
foreign reinsurers.
Petitioner maintain that the reinsurance premiums in question did not constitute income from sources
within the Philippines because the foreign reinsurers did not engage in business in the Philippines, nor did
they have office here.
The reinsurance contracts, however, show that the transactions or activities that constituted the
undertaking to reinsure Philippine Guaranty Co., Inc. against loses arising from the original insurances in
the Philippines were performed in the Philippines. The liability of the foreign reinsurers commenced
simultaneously with the liability of Philippine Guaranty Co., Inc. under the original insurances. Philippine
Guaranty Co., Inc. kept in Manila a register of the risks ceded to the foreign reinsurers. Entries made in
such register bound the foreign resinsurers, localizing in the Philippines the actual cession of the risks and
premiums and assumption of the reinsurance undertaking by the foreign reinsurers. Taxes on premiums
imposed by Section 259 of the Tax Code for the privilege of doing insurance business in the Philippines
were payable by the foreign reinsurers when the same were not recoverable from the original assured. The
foreign reinsurers paid Philippine Guaranty Co., Inc. an amount equivalent to 5% of the ceded premiums,
in consideration for administration and management by the latter of the affairs of the former in the
Philippines in regard to their reinsurance activities here. Disputes and differences between the parties
were subject to arbitration in the City of Manila. All the reinsurance contracts, except that with Swiss
Reinsurance Company, were signed by Philippine Guaranty Co., Inc. in the Philippines and later signed
by the foreign reinsurers abroad. Although the contract between Philippine Guaranty Co., Inc. and Swiss
Reinsurance Company was signed by both parties in Switzerland, the same specifically provided that its
provision shall be construed according to the laws of the Philippines, thereby manifesting a clear intention
of the parties to subject themselves to Philippine law.
Section 24 of the Tax Code subjects foreign corporations to tax on their income from sources within the
Philippines. The word "sources" has been interpreted as the activity, property or service giving rise to the
income. 1 The reinsurance premiums were income created from the undertaking of the foreign
reinsurance companies to reinsure Philippine Guaranty Co., Inc., against liability for loss under original
insurances. Such undertaking, as explained above, took place in the Philippines. These insurance
premiums, therefore, came from sources within the Philippines and, hence, are subject to corporate
income tax.
The foreign insurers' place of business should not be confused with their place of
activity. Business should not be continuity and progression of transactions 2 while activity may consist of
only a single transaction. An activity may occur outside the place of business. Section 24 of the Tax Code
does not require a foreign corporation to engage in business in the Philippines in subjecting its income to
tax. It suffices that the activity creating the income is performed or done in the Philippines. What is
controlling, therefore, is not the place of business but the place of activity that created an income.
Petitioner further contends that the reinsurance premiums are not income from sources within the
Philippines because they are not specifically mentioned in Section 37 of the Tax Code. Section 37 is not
an all-inclusive enumeration, for it merely directs that the kinds of income mentioned therein should be
treated as income from sources within the Philippines but it does not require that other kinds of income
should not be considered likewise.1äwphï1.ñët
The power to tax is an attribute of sovereignty. It is a power emanating from necessity. It is a necessary
burden to preserve the State's sovereignty and a means to give the citizenry an army to resist an
 58

aggression, a navy to defend its shores from invasion, a corps of civil servants to serve, public
improvement designed for the enjoyment of the citizenry and those which come within the State's
territory, and facilities and protection which a government is supposed to provide. Considering that the
reinsurance premiums in question were afforded protection by the government and the recipient foreign
reinsurers exercised rights and privileges guaranteed by our laws, such reinsurance premiums and
reinsurers should share the burden of maintaining the state.
Petitioner would wish to stress that its reliance in good faith on the rulings of the Commissioner of
Internal Revenue requiring no withholding of the tax due on the reinsurance premiums in question
relieved it of the duty to pay the corresponding withholding tax thereon. This defense of petitioner may
free if from the payment of surcharges or penalties imposed for failure to pay the corresponding
withholding tax, but it certainly would not exculpate if from liability to pay such withholding tax The
Government is not estopped from collecting taxes by the mistakes or errors of its agents.3
In respect to the question of whether or not reinsurance premiums ceded to foreign reinsurers not doing
business in the Philippines are subject to withholding tax under Section 53 and 54 of the Tax Code,
suffice it to state that this question has already been answered in the affirmative in Alexander Howden &
Co., Ltd. vs. Collector of Internal Revenue, L-19393, April 14, 1965.
Finally, petitioner contends that the withholding tax should be computed from the amount actually
remitted to the foreign reinsurers instead of from the total amount ceded. And since it did not remit any
amount to its foreign insurers in 1953 and 1954, no withholding tax was due.
The pertinent section of the Tax Code States:
Sec. 54. Payment of corporation income tax at source. — In the case of foreign corporations subject to
taxation under this Title not engaged in trade or business within the Philippines and not having any office
or place of business therein, there shall be deducted and withheld at the source in the same manner and
upon the same items as is provided in Section fifty-three a tax equal to twenty-four per centum thereof,
and such tax shall be returned and paid in the same manner and subject to the same conditions as provided
in that section.
The applicable portion of Section 53 provides:
(b) Nonresident aliens. — All persons, corporations and general copartnerships (compañias colectivas), in
what ever capacity acting, including lessees or mortgagors of real or personal property, trustees acting in
any trust capacity, executors, administrators, receivers, conservators, fiduciaries, employers, and all
officers and employees of the Government of the Philippines having the control, receipt, custody,
disposal, or payment of interest, dividends, rents, salaries, wages, premiums, annuities, compensation,
remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and income
of any nonresident alien individual, not engaged in trade or business within the Philippines and not having
any office or place of business therein, shall (except in the case provided for in subsection [a] of this
section) deduct and withhold from such annual or periodical gains, profits, and income a tax equal to
twelve per centum thereof: Provided That no deductions or withholding shall be required in the case of
dividends paid by a foreign corporation unless (1) such corporation is engaged in trade or business within
the Philippines or has an office or place of business therein, and (2) more than eighty-five per centum of
the gross income of such corporation for the three-year period ending with the close of its taxable year
preceding the declaration of such dividends (or for such part of such period as the corporation has been in
existence)was derived from sources within the Philippines as determined under the provisions of section
thirty-seven: Provided, further, That the Collector of Internal Revenue may authorize such tax to be
 59

deducted and withheld from the interest upon any securities the owners of which are not known to the
withholding agent.
The above-quoted provisions allow no deduction from the income therein enumerated in determining the
amount to be withheld. According, in computing the withholding tax due on the reinsurance premium in
question, no deduction shall be recognized.
WHEREFORE, in affirming the decision appealed from, the Philippine Guaranty Co., Inc. is hereby
ordered to pay to the Commissioner of Internal Revenue the sums of P202,192.00 and P173,153.00, or a
total amount of P375,345.00, as withholding tax for the years 1953 and 1954, respectively. If the amount
of P375,345.00 is not paid within 30 days from the date this judgement becomes final, there shall be
collected a surcharged of 5% on the amount unpaid, plus interest at the rate of 1% a month from the date
of delinquency to the date of payment, provided that the maximum amount that may be collected as
interest shall not exceed the amount corresponding to a period of three (3) years. With costs againsts
petitioner.
Bengzon, C.J., Bautista Angelo, Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon and Regala, JJ.,
concur.
Makalintal and Zaldivar, JJ., took no part.
Footnotes
1Mertens, Jr., Jacob, Law On Federal Income Taxation, Vol. 8, Section 45.27.
2Imperial v. Collector of Internal Revenue, L-7924, September 30, 1955.
3Hilado v. Collector of Internal Revenue, 53 O.G. 2471; Koppel (Philippines), Inc. v. Collector of
Internal Revenues, L-10550, September 19, 1961; Compañia General de Tabacos de Filipinas v. City of
Manila, L-16619, June 29, 1963.
 60

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
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,1 and Rule 18 of the Rules and Regulations (IRR)2 which seeks to implement the
said imposition, be declared unconstitutional. Petitioners also pray that the Universal Charge imposed
upon the consumers be refunded and that a preliminary injunction and/or temporary restraining order
(TRO) be issued directing the respondents to refrain from implementing, charging, and collecting the said
charge.3 The assailed provision of law reads:
SECTION 34. Universal Charge. — Within one (1) year from the effectivity of this Act, a universal
charge to be determined, fixed and approved by the ERC, shall be imposed on all electricity end-users for
the following purposes:
(a) Payment for the stranded debts4 in excess of the amount assumed by the National Government and
stranded contract costs of NPC5 and as well as qualified stranded contract costs of distribution utilities
resulting from the restructuring of the industry;
(b) Missionary electrification;6
(c) The equalization of the taxes and royalties applied to indigenous or renewable sources of energy vis-à-
vis imported energy fuels;
(d) An environmental charge equivalent to one-fourth of one centavo per kilowatt-hour (₱0.0025/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
 61

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 ₱0.0025 per kilowatt-
hour (/kWh), or a total of ₱119,488,847.59, be approved for withdrawal from the Special Trust Fund
(STF) managed by respondent Power Sector Assets and
Liabilities Management Group (PSALM)10 for the rehabilitation and management of watershed areas.11
On December 20, 2002, the ERC issued an Order12 in ERC Case No. 2002-165 provisionally approving
the computed amount of ₱0.0168/kWh as the share of the NPC-SPUG from the Universal Charge for
Missionary Electrification and authorizing the National Transmission Corporation (TRANSCO) and
Distribution Utilities to collect the same from its end-users on a monthly basis.
On June 26, 2003, the ERC rendered its Decision13 (for ERC Case No. 2002-165) modifying its Order of
December 20, 2002, thus:
WHEREFORE, the foregoing premises considered, the provisional authority granted to petitioner
National Power Corporation-Strategic Power Utilities Group (NPC-SPUG) in the Order dated December
20, 2002 is hereby modified to the effect that an additional amount of ₱0.0205 per kilowatt-hour should
be added to the ₱0.0168 per kilowatt-hour provisionally authorized by the Commission in the said Order.
Accordingly, a total amount of ₱0.0373 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 ₱0.0373 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.
 62

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 to
₱70,000,000.00 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 cases19 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 funds20 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
 63

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. 4624 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
 64

the ERC or any of the public respondents, in order for the Court to consider it as a petition for certiorari or
prohibition.
Article VIII, Section 5(1) and (2) of the 1987 Constitution27 categorically provides that:
SECTION 5. The Supreme Court shall have the following powers:
1. Exercise original jurisdiction over cases affecting ambassadors, other public ministers and consuls, and
over petitions for certiorari, prohibition, mandamus, quo warranto, and habeas corpus.
2. Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or the rules of court may
provide, final judgments and orders of lower courts in:
(a) All cases in which the constitutionality or validity of any treaty, international or executive
agreement, law, presidential decree, proclamation, order, instruction, ordinance, or regulation is in
question.
But this Court's jurisdiction to issue writs of certiorari, prohibition, mandamus, quo warranto, and habeas
corpus, while concurrent with that of the regional trial courts and the Court of Appeals, does not give
litigants unrestrained freedom of choice of forum from which to seek such relief.28 It has long been
established that this Court will not entertain direct resort to it unless the redress desired cannot be
obtained in the appropriate courts, or where exceptional and compelling circumstances justify availment
of a remedy within and call for the exercise of our primary jurisdiction.29 This circumstance alone
warrants the outright dismissal of the present action.
This procedural infirmity notwithstanding, we opt to resolve the constitutional issue raised herein. We are
aware that if the constitutionality of Sec. 34 of the EPIRA is not resolved now, the issue will certainly
resurface in the near future, resulting in a repeat of this litigation, and probably involving the same
parties. In the public interest and to avoid unnecessary delay, this Court renders its ruling now.
The instant complaint is bereft of merit.
The First Issue
To resolve the first issue, it is necessary to distinguish the State’s 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,
 65

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 imposed37 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 In Valmonte v. Energy Regulatory Board, et al.39 and in Gaston v. Republic Planters
Bank,40 this Court held that the Oil Price Stabilization Fund (OPSF) and the Sugar Stabilization Fund
(SSF) were exactions made in the exercise of the police power. The doctrine was reiterated in Osmeña 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
 66

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.
 67

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
 68

and regulation of medical education;"57 and "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 ERC’s
power to formulate the IRR. These are sufficient standards.
It may be noted that this is not the first time that the ERC's conferred powers were challenged.
In Freedom from Debt Coalition v. Energy Regulatory Commission,61 the Court had occasion to say:
In determining the extent of powers possessed by the ERC, the provisions of the EPIRA must not be read
in separate parts. Rather, the law must be read in its entirety, because a statute is passed as a whole, and is
animated by one general purpose and intent. Its meaning cannot to be extracted from any single part
thereof but from a general consideration of the statute as a whole. Considering the intent of Congress in
enacting the EPIRA and reading the statute in its entirety, it is plain to see that the law has expanded the
jurisdiction of the regulatory body, the ERC in this case, to enable the latter to implement the reforms
sought to be accomplished by the EPIRA. When the legislators decided to broaden the jurisdiction of the
ERC, they did not intend to abolish or reduce the powers already conferred upon ERC's predecessors. To
sustain the view that the ERC possesses only the powers and functions listed under Section 43 of the
EPIRA is to frustrate the objectives of the law.
In his Concurring and Dissenting Opinion62 in the same case, then Associate Justice, now Chief Justice,
Reynato S. Puno described the immensity of police power in relation to the delegation of powers to the
ERC and its regulatory functions over electric power as a vital public utility, to wit:
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.
 69

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.68 Indubitably, 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.
ANTONIO EDUARDO B. NACHURA
Associate Justice
WE CONCUR:
REYNATO S. PUNO
Chief Justice

LEONARDO A. QUISUMBING CONSUELO YNARES-SANTIAGO

Associate Justice Associate Justice
 70

ANGELINA SANDOVAL-GUTIERREZ ANTONIO T. CARPIO

Associate Justice Associate Justice

MA. ALICIA AUSTRIA-MARTINEZ RENATO C. CORONA

Associate Justice Associate Justice

CONCHITA CARPIO MORALES ADOLFO S. AZCUNA

Associate Justice Associate Justice

DANTE O. TINGA MINITA V. CHICO-NAZARIO

Associate Justice Associate Justice

CANCIO C. GARCIA PRESBITERO J. VELASCO, JR.

Associate Justice Associate Justice

CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution, 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.
REYNATO S. PUNO
Chief Justice

Footnotes
1 Sec. 4 (ddd) of the EPIRA provides that the Universal Charge refers to the charge, if any, imposed for
the recovery of the stranded cost and other purposes pursuant to Section 34 hereof.
2 Rules and Regulations to Implement Republic Act No. 9136, entitled "Electric Power Industry Reform
Act of 2001, (IRR) approved on February 27, 2002, particularly Rule 4 (rrrr) provides that the "Universal
Charge" refers to the charge, if any, imposed for the recovery of the Stranded Debts, Stranded Contract
Costs of NPC, and Stranded Contract Costs of Eligible Contracts of Distribution Utilities and other
purposes pursuant to Section 34 of the EPIRA.
3 Particularly denominated as Complaint dated September 15, 2003; rollo, pp. 3-15.
4 Sec. 4 [vv] of the EPIRA provides that Stranded Debts of NPC refer to any unpaid financial obligations
of NPC which have not been liquidated by the proceeds from the sales and privatization of NPC assets.
5 Sec. 4 [uu] of the EPIRA also provides that Stranded contract costs of NPC or distribution utility refer
to the excess of the contracted cost of electricity under eligible contracts over the actual selling price of
the contracted energy output of such contracts in the market. Such contracts shall have been approved by
the ERB as of December 31, 2000.
 71

6 Rule 4 (ddd) of the IRR provides that Missionary Electrification refers to the provision of basic
electricity service in Unviable Areas with the ultimate aim of bringing the operations in these areas to
viability levels.
7 Manila Electric Company, Inc. v. Lualhati, G.R. Nos. 166769 and 166818, December 6, 2006.
8 IRR, Rule 4 (bbbb) states that Small Power Utilities Group or SPUG refers to the functional unit of
NPC created to pursue Missionary Electrification function.
9 ERC Record for ERC Case No. 2002-165, pp. 1-7.
10 PSALM is a government-owned and controlled corporation created under Sec. 49 of the EPIRA,
which shall take ownership of all existing NPC generation assets, liabilities, IPP contracts, real estate and
all other disposable assets. All outstanding obligations of the NPC arising from loans, issuances of bonds,
securities and other instruments of indebtedness shall be transferred to and assumed by the PSALM.
11 ERC Record for ERC Case No. 2002-194, pp. 1-5.
12 Supra note 9, at 110-122.
13 Id. at 215-224.
14 NPC-SPUG's Motion for Reconsideration dated August 13, 2003 also prayed that it be allowed (1) to
have flexibility in the utilization of UC-ME considering its mandate to implement the MEDP responsive
to the needs and constraints of missionary electrification; (2) to authorize it to re-prioritize its CAPEX and
its OPEX to the extent possible, for CY 2003; and (3) to give it the flexibility to reallocate available UC-
ME funds among the revised priority activities/projects for CY 2003, Id. at 225-236.
15 Id. at 237-239.
16 Supra note 11, at 110-122.
17 Rollo, p. 8.
18 Supra note 3.
19 Osmeña v. Orbos, G.R. No. 99886, March 31, 1993, 220 SCRA 703; Valmonte v. Energy Regulatory
Board, G.R. Nos. L-79601-03, June 23, 1988, 162 SCRA 521; and Gaston v. Republic Planters Bank, No.
L-77194, March 15, 1988, 158 SCRA 626.
20 These funds are the Oil Price Stabilization Fund (OPSF) and Sugar Stabilization Fund (SSF).
21 Petitioners' Memorandum dated October 6, 2004; rollo, pp. 123-138.
22 PSALM's Memorandum dated December 8, 2004; id. at 154-167.
23 OSG's Memorandum dated January 4, 2005; id. at 168-187.
24 SECTION 46. Fines and Penalties. — The fines and penalties that shall be imposed by the ERC for
any violation of or non-compliance with this Act or the IRR shall range from a minimum of Fifty
thousand pesos (₱50,000.00) to a maximum of Fifty million pesos (₱50,000,000.00).
Any person who is found guilty of any of the prohibited acts pursuant to Section 45 hereof shall suffer the
penalty of prision mayor and a fine ranging from Ten thousand pesos (₱10,000.00) to Ten million pesos
(₱10,000.000.00), or both, at the discretion of the court.
 72

The members of the Board of Directors of the juridical companies participating in or covered in the
generation companies, the distribution utilities, the TRANSCO or its concessionaire or supplier who
violate the provisions of this Act may be fined by an amount not exceeding double the amount of
damages caused by the offender or by imprisonment of one (1) year or two (2) years or both at the
discretion of the court. This rule shall apply to the members of the Board who knowingly or by neglect
allows the commission or omission under the law.
If the offender is a government official or employee, he shall, in addition, be dismissed from the
government service with prejudice to reinstatement and with perpetual or temporary disqualification from
holding any elective or appointive office.
If the offender is an alien, he may, in addition to the penalties prescribed, be deported without further
proceedings after service of sentence.
Any case which involves question of fact shall be appealable to the Court of Appeals and those which
involve question of law shall be directly appealable to the Supreme Court.
The administrative sanction that may be imposed by the ERC shall be without prejudice to the filing of a
criminal action, if warranted.
To ensure compliance with this Act, the penalty of prision correccional or a fine ranging from Five
thousand pesos (₱5,000.00) to Five million pesos (₱5,000,000.00), or both, at the discretion of the court,
shall be imposed on any person, including but not limited to the president, member of the Board, Chief
Executive Officer or Chief Operating Officer of the corporation, partnership, or any other entity involved,
found guilty of violating or refusing to comply with any provision of this Act or its IRR, other than those
provided herein.
Any party to an administrative proceeding may, at any time, make an offer to the ERC, conditionally or
otherwise, for a consented decree, voluntary compliance or desistance and other settlement of the case.
The offer and any or all of the ultimate facts upon which the offer is based shall be considered for
settlement purposes only and shall not be used as evidence against any party for any other purpose and
shall not constitute an admission by the party making the offer of any violation of the laws, rules,
regulations, orders and resolutions of the ERC, nor as a waiver to file any warranted criminal actions.
In addition, Congress may, upon recommendation of the DOE and/or ERC, revoke such franchise or
privilege granted to the party who violated the provisions of this Act.
25 PECO's Memorandum dated April 18, 2005; rollo, pp. 205-210.
26 Supra note 21, at 125.
27 Emphasis supplied.
28 Francisco, Jr. v. Fernando, G.R. No. 166501, November 16, 2006, citing People v. Cuaresma, 172
SCRA 415, 423-424 (1989).
29 Lacson Hermanas, Inc. v. Heirs of Cenon Ignacio, G.R. No. 165973, June 29, 2005, 462 SCRA 290,
294 and Santiago v. Vasquez, G.R. Nos. 99289-90, January 27, 1993, 217 SCRA 633, 652.
30 Mactan Cebu International Airport Authority v. Marcos, 330 Phil. 392, 404 (1996).
31 Proton Pilipinas Corporation v. Republic of the Philippines, G.R. No. 165027, October 16, 2006,
citing Province of Tarlac v. Alcantara, 216 SCRA 790, 798 (1992).
 73

32 National Power Corporation v. City of Cabanatuan, 449 Phil. 233, 248 (2003).
33 Didipio Earth-Savers' Multi-Purpose Association, Inc. (DESAMA) v. Gozun, G.R. No. 157882, March
30, 2006, 485 SCRA 586, 604, citing U.S. v. Torribio, 15 Phil. 85, 93 (1910) and Rubi v. The Provincial
Board of Mindoro, 39 Phil. 660, 708 (1919).
34 JMM Promotion and Management, Inc. v. Court of Appeals, G.R. No. 120095, August 5, 1996, 260
SCRA 319, 324.
35 Philippine Association of Service Exporters, Inc. v. Hon. Ruben D. Torres, G.R. No. 101279, August
6, 1992, 212 SCRA 298, 304, citing Philippine Communications Satellite Corporation v. Alcuaz, 180
SCRA 218 (1989).
36 Progressive Development Corporation vs. Quezon City, G.R. No. 36081, April 24, 1989, 172 SCRA
629, 635, citing Manila Electric Company v. El Auditor General y La Comision de Servicios Publicos, 73
Phil. 133 (1941); Republic v. Philippine Rabbit Lines, 143 Phil. 158, 163 (1970).
37 The purposes are:
(a) Payment for the stranded debts in excess of the amount assumed by the National Government and
stranded contract costs of NPC and as well as qualified stranded contract costs of distribution utilities
resulting from the restructuring of the industry;
(b) Missionary electrification;
(c) The equalization of the taxes and royalties applied to indigenous or renewable sources of energy vis-à-
vis imported energy fuels;
(d) An environmental charge equivalent to one-fourth of one centavo per kilowatt-hour (₱0.0025/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.
38 Osmeña v. Orbos, supra note 19, at 710, Gaston v. Republic Planters Bank, supra note 19, at 632, Tio
v. Videogram Regulatory Board, No. L-75697, June 18, 1987, 151 SCRA 208, 216, and Lutz v. Araneta,
98 Phil. 148 (1955).
39 Supra note 19, at 539; Decided jointly with Citizen's Alliance for Consumer Protection v. Energy
Regulatory Board., G.R. Nos. L-78888-90, and Kilusang Mayo Uno Labor Center v. Energy Regulatory,
Board., G.R. Nos. L-79690-92.
40 Supra note 19, at 632-633.
41 Id. at 710-711.
42 Last paragraph, Sec. 34, EPIRA provides: 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.
IRR of the EPIRA, Rule 18, SECTION 6, also provides:
 74

(a) Pursuant to the last paragraph of Section 34 of the Act, PSALM shall act as the administrator of the
funds generated from the Universal Charge. For this purpose, the PSALM shall create a STF to be
established in the Bureau of Treasury (BTr) or in a Government Financing Institution (GFI) that is
acceptable to the DOF. Separate STFs shall be established for each of the intended purposes of the
Universal Charge. Funds shall be disbursed in an open and transparent manner and shall only be used for
the intended purposes specified in Section 3 of this Rule.
43 EPIRA, Sec. 33, last paragraph and IRR, Sec. 5 (f), Rule 17.
44 IRR, Sec. 6 (f), Rule 18.
45 IRR, Sec. 4, Rule 21.
46 Supra note 23, at 177-178, citing Osmeña v. Orbos, supra note 19.
47 Abakada Guro Party List v. Ermita, G.R. Nos. 168056, 168207, 168461, 168463 and 168730,
September 1, 2005, 469 SCRA 10, 115-116.
48 The recognized exceptions to the general principle are as follows:
(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. Abakada Guro Party List v. Ermita, supra note 47, at 117 and
Santiago v. Comelec, 336 Phil. 848, 897-898 (1997), citing People v. Vera, 65 Phil. 56 (1937).
49 Equi-Asia Placement, Inc. v. DFA, G.R. No. 152214, September 19, 2006, citing Beltran v. Secretary
of Health, 476 SCRA 168, 191 (2005); The Conference of Maritime Manning Agencies v. Philippine
Overseas Employment Agency, 313 Phil. 592, 606 (1995); and Eastern Shipping Lines, Inc. v. Philippine
Overseas Employment Agency, G.R. No. L-76633, October 18, 1998, 166 SCRA 533, 543.
50 Emphasis supplied.
51 Rubi v. Provincial Board of Mindoro, supra note 33, at 706.
52 Philippine Association of Colleges and University v. Secretary of Education, 97 Phil. 806, 814 (1955).
53 People v. Rosenthal, 68 Phil. 328, 342 (1939).
54 Antamok Gold Fields v. CIR, 70 Phil. 340 (1940).
55 Calalang v. Williams, 70 Phil. 726, 733 (1940).
56 Cervantes v. Auditor General, 91 Phil 359, 364 (1952).
57 Tablarin v. Gutierrez, No. L-78164, July 31, 1987, 152 SCRA 731.
58 The Conference of Maritime Manning Agencies, Inc. v. Philippine Overseas Employment
Administration, supra note 49.
 75

59 Sec. 2(a) and (b), Declaration of Policies of the EPIRA.

60 Supra note 37.
61 G.R. No. 161113, June 15, 2004, 432 SCRA 157, 182.
62 Id. at 219-220 (Emphasis supplied).
63 G.R. No. 163935, February 2, 2006, 481 SCRA 480, 515-516, citing Freedom from Debt Coalition v.
Energy Regulatory Commission, supra note 61.
64 Rollo, pp. 108-109
65 Republic v. Kalaw, G.R. No. 155138, June 8, 2004, 431 SCRA 401, 406.
66 Lopez v. City of Manila, G.R. No. 127139, February 19, 1999, 303 SCRA 448, 460, citing Ty v.
Trampe, 250 SCRA 500 (1995).
67 Freedom from Debt Coalition v. Energy Regulatory Commission, supra note 61, at 171-172.
68 Arceta v. Mangrobang, G.R. Nos. 152895 & 153151, June 15, 2004, 432 SCRA 136, 142,
citing Lacson v. The Executive Secretary, 361 Phil. 251, 263 (1999).
 76

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. 76778 June 6, 1990
FRANCISCO I. CHAVEZ, petitioner,
vs.
JAIME B. ONGPIN, in his capacity as Minister of Finance and FIDELINA CRUZ, in her capacity as
Acting Municipal Treasurer of the Municipality of Las Piñas, respondents, REALTY OWNERS
ASSOCIATION OF THE PHILIPPINES, INC., petitioner-intervenor.
Brotherhood of Nationalistic, Involved and Free Attorneys to Combat Injustice and Oppression
(Bonifacio) for petitioner.
Ambrosia Padilla, Mempin and Reyes Law Offices for movant Realty Owners Association.

MEDIALDEA, J.:
The petition seeks to declare unconstitutional Executive Order No. 73 dated November 25, 1986, which
We quote in full, as follows (78 O.G. 5861):
EXECUTIVE ORDER No. 73
PROVIDING FOR THE COLLECTION OF REAL PROPERTY TAXES BASED ON THE 1984 REAL
PROPERTY VALUES, AS PROVIDED FOR UNDER SECTION 21 OF THE REAL PROPERTY TAX
CODE, AS AMENDED
WHEREAS, the collection of real property taxes is still based on the 1978 revision of property values;
WHEREAS, the latest general revision of real property assessments completed in 1984 has rendered the
1978 revised values obsolete;
WHEREAS, the collection of real property taxes based on the 1984 real property values was deferred to
take effect on January 1, 1988 instead of January 1, 1985, thus depriving the local government units of an
additional source of revenue;
WHEREAS, there is an urgent need for local governments to augment their financial resources to meet
the rising cost of rendering effective services to the people;
NOW, THEREFORE, I. CORAZON C. AQUINO, President of the Philippines, do hereby order:
SECTION 1. Real property values as of December 31, 1984 as determined by the local assessors during
the latest general revision of assessments shall take effect beginning January 1, 1987 for purposes of real
property tax collection.
SEC. 2. The Minister of Finance shall promulgate the necessary rules and regulations to implement this
Executive Order.
SEC. 3. Executive Order No. 1019, dated April 18, 1985, is hereby repealed.
 77

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. (emphasis supplied)
The general revision of assessments completed in 1984 is based on Section 21 of Presidential Decree No.
464 which provides, as follows:
SEC. 21. General Revision of Assessments. — Beginning with the assessor shall make a calendar year
1978, the provincial or city general revision of real property assessments in the province or city to take
effect January 1, 1979, and once every five years thereafter: Provided; however, That if property values in
a province or city, or in any municipality, have greatly changed since the last general revision, the
provincial or city assesor may, with the approval of the Secretary of Finance or upon bis direction,
undertake a general revision of assessments in the province or city, or in any municipality before the fifth
year from the effectivity of the last general revision.
 78

Thus, We agree with the Office of the Solicitor General that the attack on Executive Order No. 73 has no
legal basis as the general revision of assessments is a continuing process mandated by Section 21 of
Presidential Decree No. 464. If at all, it is Presidential Decree No. 464 which should be challenged as
constitutionally infirm. However, Chavez failed to raise any objection against said decree. It was ROAP
which questioned the constitutionality thereof. Furthermore, Presidential Decree No. 464 furnishes the
procedure by which a tax assessment may be questioned:
SEC. 30. Local Board of Assessment Appeals. — Any owner who is not satisfied with the action of the
provincial or city assessor in the assessment of his property may, within sixty days from the date of
receipt by him of the written notice of assessment as provided in this Code, appeal to the Board of
Assessment Appeals of the province or city, by filing with it a petition under oath using the form
prescribed for the purpose, together with copies of the tax declarations and such affidavit or documents
submitted in support of the appeal.
xxx xxx xxx
SEC. 34. Action by the Local Board of assessment Appeals. — The Local Board of Assessment Appeals
shall decide the appeal within one hundred and twenty days from the date of receipt of such appeal. The
decision rendered must be based on substantial evidence presented at the hearing or at least contained in
the record and disclosed to the parties or such relevant evidence as a reasonable mind might accept as
adequate to support the conclusion.
In the exercise of its appellate jurisdiction, the Board shall have the power to summon witnesses,
administer oaths, conduct ocular inspection, take depositions, and issue subpoena and 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.
 79

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.
1621, shall be collected beginning January 1, 1988 instead of January 1, 1985 in order to enable the
Ministry of Finance and the Ministry of Local Government to establish the new systems of tax collection
and assessment provided herein and in order to alleviate the condition of the people, including real
property owners, as a result of temporary economic difficulties. (emphasis supplied)
The issuance of Executive Order No. 73 which changed the date of implementation of the increase in real
property taxes from January 1, 1988 to January 1, 1987 and therefore repealed Executive Order No. 1019,
also finds ample justification in its "whereas' clauses, as follows:
WHEREAS, the collection of real property taxes based on the 1984 real property values was deferred to
take effect on January 1, 1988 instead of January 1, 1985, thus depriving the local government units of an
additional source of revenue;
WHEREAS, there is an urgent need for local governments to augment their financial resources to meet
the rising cost of rendering effective services to the people; (emphasis supplied)
xxx xxx xxx
The other allegation of ROAP that Presidential Decree No. 464 is unconstitutional, is not proper to be
resolved in the present petition. As stated at the outset, the issue here is limited to the constitutionality of
Executive Order No. 73. Intervention is not an independent proceeding, but an ancillary and supplemental
one which, in the nature of things, unless otherwise provided for by legislation (or Rules of Court), must
 80

be in subordination to the main proceeding, and it may be laid down as a general rule that an intervention
is limited to the field of litigation open to the original parties (59 Am. Jur. 950. Garcia, etc., et al. v.
David, et al., 67 Phil. 279).
We agree with the observation of the Office of the Solicitor General that without Executive Order No. 73,
the basis for collection of real property taxes win still be the 1978 revision of property values. Certainly,
to continue collecting real property taxes based on valuations arrived at several years ago, in disregard of
the increases in the value of real properties that have occurred since then, is not in consonance with a
sound tax system. Fiscal adequacy, which is one of the characteristics of a sound tax system, requires that
sources of revenues must be adequate to meet government expenditures and their variations.
ACCORDINGLY, the petition and the petition-in-intervention are hereby DISMISSED.
SO ORDERED.
Fernan, C.J., Narvasa, Melencio-Herrera, Gutierrez, Jr., Cruz, Paras, Feliciano, Gancayco, Bidin,
Sarmiento, Cortes and Regalado, JJ., concur.
Padilla, J., took no part.
Griño-Aquino, J., is 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.
 81

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. 193007 July 19, 2011
RENATO V. DIAZ and AURORA MA. F. TIMBOL, Petitioners,
vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL
REVENUE, Respondents.
DECISION
ABAD, J.:
May toll fees collected by tollway operators be subjected to value- added tax?
The Facts and the Case
Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed this petition for declaratory
relief1 assailing the validity of the impending imposition of value-added tax (VAT) by the Bureau of
Internal Revenue (BIR) on the collections of tollway operators.
Petitioners claim that, since the VAT would result in increased toll fees, they have an interest as regular
users of tollways in stopping the BIR action. Additionally, Diaz claims that he sponsored the approval of
Republic Act 7716 (the 1994 Expanded VAT Law or EVAT Law) and Republic Act 8424 (the 1997
National Internal Revenue Code or the NIRC) at the House of Representatives. Timbol, on the other hand,
claims that she served as Assistant Secretary of the Department of Trade and Industry and consultant of
the Toll Regulatory Board (TRB) in the past administration.
Petitioners allege that the BIR attempted during the administration of President Gloria Macapagal-Arroyo
to impose VAT on toll fees. The imposition was deferred, however, in view of the consistent opposition
of Diaz and other sectors to such move. But, upon President Benigno C. Aquino III’s assumption of office
in 2010, the BIR revived the idea and would impose the challenged tax on toll fees beginning August 16,
2010 unless judicially enjoined.
Petitioners hold the view that Congress did not, when it enacted the NIRC, intend to include toll fees
within the meaning of "sale of services" that are subject to VAT; that a toll fee is a "user’s tax," not a sale
of services; that to impose VAT on toll fees would amount to a tax on public service; and that, since VAT
was never factored into the formula for computing toll fees, its imposition would violate the non-
impairment clause of the constitution.
On August 13, 2010 the Court issued a temporary restraining order (TRO), enjoining the implementation
of the VAT. The Court required the government, represented by respondents Cesar V. Purisima, Secretary
of the Department of Finance, and Kim S. Jacinto-Henares, Commissioner of Internal Revenue, to
comment on the petition within 10 days from notice.2 Later, the Court issued another resolution treating
the petition as one for prohibition.3
On August 23, 2010 the Office of the Solicitor General filed the government’s comment.4 The
government avers that the NIRC imposes VAT on all kinds of services of franchise grantees, including
 82

tollway operations, except where the law provides otherwise; that the Court should seek the meaning and
intent of the law from the words used in the statute; and that the imposition of VAT on tollway operations
has been the subject as early as 2003 of several BIR rulings and circulars.5
The government also argues that petitioners have no right to invoke the non-impairment of contracts
clause since they clearly have no personal interest in existing toll operating agreements (TOAs) between
the government and tollway operators. At any rate, the non-impairment clause cannot limit the State’s
sovereign taxing power which is generally read into contracts.
Finally, the government contends that the non-inclusion of VAT in the parametric formula for computing
toll rates cannot exempt tollway operators from VAT. In any event, it cannot be claimed that the rights of
tollway operators to a reasonable rate of return will be impaired by the VAT since this is imposed on top
of the toll rate. Further, the imposition of VAT on toll fees would have very minimal effect on motorists
using the tollways.
In their reply6 to the government’s comment, petitioners point out that tollway operators cannot be
regarded as franchise grantees under the NIRC since they do not hold legislative franchises. Further, the
BIR intends to collect the VAT by rounding off the toll rate and putting any excess collection in an
escrow account. But this would be illegal since only the Congress can modify VAT rates and authorize its
disbursement. Finally, BIR Revenue Memorandum Circular 63-2010 (BIR RMC 63-2010), which directs
toll companies to record an accumulated input VAT of zero balance in their books as of August 16, 2010,
contravenes Section 111 of the NIRC which grants entities that first become liable to VAT a transitional
input tax credit of 2% on beginning inventory. For this reason, the VAT on toll fees cannot be
implemented.
The Issues Presented
The case presents two procedural issues:
1. Whether or not the Court may treat the petition for declaratory relief as one for prohibition; and
2. Whether or not petitioners Diaz and Timbol have legal standing to file the action.
The case also presents two substantive issues:
1. Whether or not the government is unlawfully expanding VAT coverage by including tollway operators
and tollway operations in the terms "franchise grantees" and "sale of services" under Section 108 of the
Code; and
2. Whether or not the imposition of VAT on tollway operators a) amounts to a tax on tax and not a tax on
services; b) will impair the tollway operators’ right to a reasonable return of investment under their
TOAs; and c) is not administratively feasible and cannot be implemented.
The Court’s Rulings
A. On the Procedural Issues:
On August 24, 2010 the Court issued a resolution, treating the petition as one for prohibition rather than
one for declaratory relief, the characterization that petitioners Diaz and Timbol gave their action. The
government has sought reconsideration of the Court’s resolution,7 however, arguing that petitioners’
allegations clearly made out a case for declaratory relief, an action over which the Court has no original
jurisdiction. The government adds, moreover, that the petition does not meet the requirements of Rule 65
 83

for actions for prohibition since the BIR did not exercise judicial, quasi-judicial, or ministerial functions
when it sought to impose VAT on toll fees. Besides, petitioners Diaz and Timbol has a plain, speedy, and
adequate remedy in the ordinary course of law against the BIR action in the form of an appeal to the
Secretary of Finance.
But there are precedents for treating a petition for declaratory relief as one for prohibition if the case has
far-reaching implications and raises questions that need to be resolved for the public good.8 The Court
has also held that a petition for prohibition is a proper remedy to prohibit or nullify acts of executive
officials that amount to usurpation of legislative authority.9
Here, the imposition of VAT on toll fees has far-reaching implications. Its imposition would impact, not
only on the more than half a million motorists who use the tollways everyday, but more so on the
government’s effort to raise revenue for funding various projects and for reducing budgetary deficits.
To dismiss the petition and resolve the issues later, after the challenged VAT has been imposed, could
cause more mischief both to the tax-paying public and the government. A belated declaration of nullity of
the BIR action would make any attempt to refund to the motorists what they paid an administrative
nightmare with no solution. Consequently, it is not only the right, but the duty of the Court to take
cognizance of and resolve the issues that the petition raises.
Although the petition does not strictly comply with the requirements of Rule 65, the Court has ample
power to waive such technical requirements when the legal questions to be resolved are of great
importance to the public. The same may be said of the requirement of locus standi which is a mere
procedural requisite.10
B. On the Substantive Issues:
One. The relevant law in this case is Section 108 of the NIRC, as amended. VAT is levied, assessed, and
collected, according to Section 108, on the gross receipts derived from the sale or exchange of services as
well as from the use or lease of properties. The third paragraph of Section 108 defines "sale or exchange
of services" as follows:
The phrase ‘sale or exchange of services’ means the performance of all kinds of services in the
Philippines for others for a fee, remuneration or consideration, including those performed or rendered by
construction and service contractors; stock, real estate, commercial, customs and immigration brokers;
lessors of property, whether personal or real; warehousing services; lessors or distributors of
cinematographic films; persons engaged in milling, processing, manufacturing or repacking goods for
others; proprietors, operators or keepers of hotels, motels, resthouses, pension houses, inns, resorts;
proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including clubs
and caterers; dealers in securities; lending investors; transportation contractors on their transport of goods
or cargoes, including persons who transport goods or cargoes for hire and other domestic common
carriers by land relative to their transport of goods or cargoes; common carriers by air and sea relative to
their transport of passengers, goods or cargoes from one place in the Philippines to another place in the
Philippines; sales of electricity by generation companies, transmission, and distribution
companies; services of franchise grantees of electric utilities, telephone and telegraph, radio and
television broadcasting and all other franchise grantees except those under Section 119 of this Code and
non-life insurance companies (except their crop insurances), including surety, fidelity, indemnity and
bonding companies; and similar services regardless of whether or not the performance thereof calls for
the exercise or use of the physical or mental faculties. (Underscoring supplied)
 84

It is plain from the above that the law imposes VAT on "all kinds of services" rendered in the Philippines
for a fee, including those specified in the list. The enumeration of affected services is not exclusive.11 By
qualifying "services" with the words "all kinds," Congress has given the term "services" an all-
encompassing meaning. The listing of specific services are intended to illustrate how pervasive and broad
is the VAT’s reach rather than establish concrete limits to its application. Thus, every activity that can be
imagined as a form of "service" rendered for a fee should be deemed included unless some provision of
law especially excludes it.
Now, do tollway operators render services for a fee? Presidential Decree (P.D.) 1112 or the Toll
Operation Decree establishes the legal basis for the services that tollway operators render. Essentially,
tollway operators construct, maintain, and operate expressways, also called tollways, at the operators’
expense. Tollways serve as alternatives to regular public highways that meander through populated areas
and branch out to local roads. Traffic in the regular public highways is for this reason slow-moving. In
consideration for constructing tollways at their expense, the operators are allowed to collect government-
approved fees from motorists using the tollways until such operators could fully recover their expenses
and earn reasonable returns from their investments.
When a tollway operator takes a toll fee from a motorist, the fee is in effect for the latter’s use of the
tollway facilities over which the operator enjoys private proprietary rights12 that its contract and the law
recognize. In this sense, the tollway operator is no different from the following service providers under
Section 108 who allow others to use their properties or facilities for a fee:
1. Lessors of property, whether personal or real;
2. Warehousing service operators;
3. Lessors or distributors of cinematographic films;
4. Proprietors, operators or keepers of hotels, motels, resthouses, pension houses, inns, resorts;
5. Lending investors (for use of money);
6. Transportation contractors on their transport of goods or cargoes, including persons who transport
goods or cargoes for hire and other domestic common carriers by land relative to their transport of goods
or cargoes; and
7. Common carriers by air and sea relative to their transport of passengers, goods or cargoes from one
place in the Philippines to another place in the Philippines.
It does not help petitioners’ cause that Section 108 subjects to VAT "all kinds of services" rendered for a
fee "regardless of whether or not the performance thereof calls for the exercise or use of the physical or
mental faculties." This means that "services" to be subject to VAT need not fall under the traditional
concept of services, the personal or professional kinds that require the use of human knowledge and skills.
And not only do tollway operators come under the broad term "all kinds of services," they also come
under the specific class described in Section 108 as "all other franchise grantees" who are subject to VAT,
"except those under Section 119 of this Code."
Tollway operators are franchise grantees and they do not belong to exceptions (the low-income radio
and/or television broadcasting companies with gross annual incomes of less than ₱10 million and gas and
water utilities) that Section 11913 spares from the payment of VAT. The word "franchise" broadly covers
government grants of a special right to do an act or series of acts of public concern.14
 85

Petitioners of course contend that tollway operators cannot be considered "franchise grantees" under
Section 108 since they do not hold legislative franchises. But nothing in Section 108 indicates that the
"franchise grantees" it speaks of are those who hold legislative franchises. Petitioners give no reason, and
the Court cannot surmise any, for making a distinction between franchises granted by Congress and
franchises granted by some other government agency. The latter, properly constituted, may grant
franchises. Indeed, franchises conferred or granted by local authorities, as agents of the state, constitute as
much a legislative franchise as though the grant had been made by Congress itself.15 The term
"franchise" has been broadly construed as referring, not only to authorizations that Congress directly
issues in the form of a special law, but also to those granted by administrative agencies to which the
power to grant franchises has been delegated by Congress.16
Tollway operators are, owing to the nature and object of their business, "franchise grantees." The
construction, operation, and maintenance of toll facilities on public improvements are activities of public
consequence that necessarily require a special grant of authority from the state. Indeed, Congress granted
special franchise for the operation of tollways to the Philippine National Construction Company, the
former tollway concessionaire for the North and South Luzon Expressways. Apart from Congress,
tollway franchises may also be granted by the TRB, pursuant to the exercise of its delegated powers under
P.D. 1112.17 The franchise in this case is evidenced by a "Toll Operation Certificate."18
Petitioners contend that the public nature of the services rendered by tollway operators excludes such
services from the term "sale of services" under Section 108 of the Code. But, again, nothing in Section
108 supports this contention. The reverse is true. In specifically including by way of example electric
utilities, telephone, telegraph, and broadcasting companies in its list of VAT-covered businesses, Section
108 opens other companies rendering public service for a fee to the imposition of VAT. Businesses of a
public nature such as public utilities and the collection of tolls or charges for its use or service is a
franchise.19
Nor can petitioners cite as binding on the Court statements made by certain lawmakers in the course of
congressional deliberations of the would-be law. As the Court said in South African Airways v.
Commissioner of Internal Revenue,20 "statements made by individual members of Congress in the
consideration of a bill do not necessarily reflect the sense of that body and are, consequently, not
controlling in the interpretation of law." The congressional will is ultimately determined by the language
of the law that the lawmakers voted on. Consequently, the meaning and intention of the law must first be
sought "in the words of the statute itself, read and considered in their natural, ordinary, commonly
accepted and most obvious significations, according to good and approved usage and without resorting to
forced or subtle construction."
Two. Petitioners argue that a toll fee is a "user’s tax" and to impose VAT on toll fees is tantamount to
taxing a tax.21 Actually, petitioners base this argument on the following discussion in Manila
International Airport Authority (MIAA) v. Court of Appeals:22
No one can dispute that properties of public dominion mentioned in Article 420 of the Civil Code, like
"roads, canals, rivers, torrents, ports and bridges constructed by the State," are owned by the State. The
term "ports" includes seaports and airports. The MIAA Airport Lands and Buildings constitute a "port"
constructed by the State. Under Article 420 of the Civil Code, the MIAA Airport Lands and Buildings are
properties of public dominion and thus owned by the State or the Republic of the Philippines.
x x x The operation by the government of a tollway does not change the character of the road as one for
public use. Someone must pay for the maintenance of the road, either the public indirectly through the
taxes they pay the government, or only those among the public who actually use the road through the toll
 86

fees they pay upon using the road. The tollway system is even a more efficient and equitable manner of
taxing the public for the maintenance of public roads.
The charging of fees to the public does not determine the character of the property whether it is for public
dominion or not. Article 420 of the Civil Code defines property of public dominion as "one intended for
public use." Even if the government collects toll fees, the road is still "intended for public use" if anyone
can use the road under the same terms and conditions as the rest of the public. The charging of fees, the
limitation on the kind of vehicles that can use the road, the speed restrictions and other conditions for the
use of the road do not affect the public character of the road.
The terminal fees MIAA charges to passengers, as well as the landing fees MIAA charges to airlines,
constitute the bulk of the income that maintains the operations of MIAA. The collection of such fees does
not change the character of MIAA as an airport for public use. Such fees are often termed user’s tax. This
means taxing those among the public who actually use a public facility instead of taxing all the public
including those who never use the particular public facility. A user’s tax is more equitable – a principle of
taxation mandated in the 1987 Constitution."23 (Underscoring supplied)
Petitioners assume that what the Court said above, equating terminal fees to a "user’s tax" must also
pertain to tollway fees. But the main issue in the MIAA case was whether or not Parañaque City could
sell airport lands and buildings under MIAA administration at public auction to satisfy unpaid real estate
taxes. Since local governments have no power to tax the national government, the Court held that the City
could not proceed with the auction sale. MIAA forms part of the national government although not
integrated in the department framework."24 Thus, its airport lands and buildings are properties of public
dominion beyond the commerce of man under Article 420(1)25 of the Civil Code and could not be sold at
public auction.
As can be seen, the discussion in the MIAA case on toll roads and toll fees was made, not to establish a
rule that tollway fees are user’s tax, but to make the point that airport lands and buildings are properties of
public dominion and that the collection of terminal fees for their use does not make them private
properties. Tollway fees are not taxes. Indeed, they are not assessed and collected by the BIR and do not
go to the general coffers of the government.
It would of course be another matter if Congress enacts a law imposing a user’s tax, collectible from
motorists, for the construction and maintenance of certain roadways. The tax in such a case goes directly
to the government for the replenishment of resources it spends for the roadways. This is not the case here.
What the government seeks to tax here are fees collected from tollways that are constructed, maintained,
and operated by private tollway operators at their own expense under the build, operate, and transfer
scheme that the government has adopted for expressways.26 Except for a fraction given to the
government, the toll fees essentially end up as earnings of the tollway operators.
In sum, fees paid by the public to tollway operators for use of the tollways, are not taxes in any sense. A
tax is imposed under the taxing power of the government principally for the purpose of raising revenues
to fund public expenditures.27 Toll fees, on the other hand, are collected by private tollway operators as
reimbursement for the costs and expenses incurred in the construction, maintenance and operation of the
tollways, as well as to assure them a reasonable margin of income. Although toll fees are charged for the
use of public facilities, therefore, they are not government exactions that can be properly treated as a tax.
Taxes may be imposed only by the government under its sovereign authority, toll fees may be demanded
by either the government or private individuals or entities, as an attribute of ownership.28
 87

Parenthetically, VAT on tollway operations cannot be deemed a tax on tax due to the nature of VAT as an
indirect tax. In indirect taxation, a distinction is made between the liability for the tax and burden of the
tax. The seller who is liable for the VAT may shift or pass on the amount of VAT it paid on goods,
properties or services to the buyer. In such a case, what is transferred is not the seller’s liability but
merely the burden of the VAT.29
Thus, the seller remains directly and legally liable for payment of the VAT, but the buyer bears its burden
since the amount of VAT paid by the former is added to the selling price. Once shifted, the VAT ceases to
be a tax30 and simply becomes part of the cost that the buyer must pay in order to purchase the good,
property or service.
Consequently, VAT on tollway operations is not really a tax on the tollway user, but on the tollway
operator. Under Section 105 of the Code, 31 VAT is imposed on any person who, in the course of trade or
business, sells or renders services for a fee. In other words, the seller of services, who in this case is the
tollway operator, is the person liable for VAT. The latter merely shifts the burden of VAT to the tollway
user as part of the toll fees.
For this reason, VAT on tollway operations cannot be a tax on tax even if toll fees were deemed as a
"user’s tax." VAT is assessed against the tollway operator’s gross receipts and not necessarily on the toll
fees. Although the tollway operator may shift the VAT burden to the tollway user, it will not make the
latter directly liable for the VAT. The shifted VAT burden simply becomes part of the toll fees that one
has to pay in order to use the tollways.32
Three. Petitioner Timbol has no personality to invoke the non-impairment of contract clause on behalf of
private investors in the tollway projects. She will neither be prejudiced by nor be affected by the alleged
diminution in return of investments that may result from the VAT imposition. She has no interest at all in
the profits to be earned under the TOAs. The interest in and right to recover investments solely belongs to
the private tollway investors.
Besides, her allegation that the private investors’ rate of recovery will be adversely affected by imposing
VAT on tollway operations is purely speculative. Equally presumptuous is her assertion that a stipulation
in the TOAs known as the Material Adverse Grantor Action will be activated if VAT is thus imposed.
The Court cannot rule on matters that are manifestly conjectural. Neither can it prohibit the State from
exercising its sovereign taxing power based on uncertain, prophetic grounds.
Four. Finally, petitioners assert that the substantiation requirements for claiming input VAT make the
VAT on tollway operations impractical and incapable of implementation. They cite the fact that, in order
to claim input VAT, the name, address and tax identification number of the tollway user must be
indicated in the VAT receipt or invoice. The manner by which the BIR intends to implement the VAT –
by rounding off the toll rate and putting any excess collection in an escrow account – is also illegal, while
the alternative of giving "change" to thousands of motorists in order to meet the exact toll rate would be a
logistical nightmare. Thus, according to them, the VAT on tollway operations is not administratively
feasible.33
Administrative feasibility is one of the canons of a sound tax system. It simply means that the tax system
should be capable of being effectively administered and enforced with the least inconvenience to the
taxpayer. Non-observance of the canon, however, will not render a tax imposition invalid "except to the
extent that specific constitutional or statutory limitations are impaired."34 Thus, even if the imposition of
VAT on tollway operations may seem burdensome to implement, it is not necessarily invalid unless some
aspect of it is shown to violate any law or the Constitution.
 88

Here, it remains to be seen how the taxing authority will actually implement the VAT on tollway
operations. Any declaration by the Court that the manner of its implementation is illegal or
unconstitutional would be premature. Although the transcript of the August 12, 2010 Senate hearing
provides some clue as to how the BIR intends to go about it,35 the facts pertaining to the matter are not
sufficiently established for the Court to pass judgment on. Besides, any concern about how the VAT on
tollway operations will be enforced must first be addressed to the BIR on whom the task of implementing
tax laws primarily and exclusively rests. The Court cannot preempt the BIR’s discretion on the matter,
absent any clear violation of law or the Constitution.
For the same reason, the Court cannot prematurely declare as illegal, BIR RMC 63-2010 which directs
toll companies to record an accumulated input VAT of zero balance in their books as of August 16, 2010,
the date when the VAT imposition was supposed to take effect. The issuance allegedly violates Section
111(A)36 of the Code which grants first time VAT payers a transitional input VAT of 2% on beginning
inventory.
In this connection, the BIR explained that BIR RMC 63-2010 is actually the product of negotiations with
tollway operators who have been assessed VAT as early as 2005, but failed to charge VAT-inclusive toll
fees which by now can no longer be collected. The tollway operators agreed to waive the 2% transitional
input VAT, in exchange for cancellation of their past due VAT liabilities. Notably, the right to claim the
2% transitional input VAT belongs to the tollway operators who have not questioned the circular’s
validity. They are thus the ones who have a right to challenge the circular in a direct and proper action
brought for the purpose.
Conclusion
In fine, the Commissioner of Internal Revenue did not usurp legislative prerogative or expand the VAT
law’s coverage when she sought to impose VAT on tollway operations. Section 108(A) of the Code
clearly states that services of all other franchise grantees are subject to VAT, except as may be provided
under Section 119 of the Code. Tollway operators are not among the franchise grantees subject to
franchise tax under the latter provision. Neither are their services among the VAT-exempt transactions
under Section 109 of the Code.
If the legislative intent was to exempt tollway operations from VAT, as petitioners so strongly allege, then
it would have been well for the law to clearly say so. Tax exemptions must be justified by clear statutory
grant and based on language in the law too plain to be mistaken.37 But as the law is written, no such
exemption obtains for tollway operators. The Court is thus duty-bound to simply apply the law as it is
found.1avvphi1
Lastly, the grant of tax exemption is a matter of legislative policy that is within the exclusive prerogative
of Congress. The Court’s role is to merely uphold this legislative policy, as reflected first and foremost in
the language of the tax statute. Thus, any unwarranted burden that may be perceived to result from
enforcing such policy must be properly referred to Congress. The Court has no discretion on the matter
but simply applies the law.
The VAT on franchise grantees has been in the statute books since 1994 when R.A. 7716 or the Expanded
Value-Added Tax law was passed. It is only now, however, that the executive has earnestly pursued the
VAT imposition against tollway operators. The executive exercises exclusive discretion in matters
pertaining to the implementation and execution of tax laws. Consequently, the executive is more properly
suited to deal with the immediate and practical consequences of the VAT imposition.
 89

WHEREFORE, the Court DENIES respondents Secretary of Finance and Commissioner of Internal
Revenue’s motion for reconsideration of its August 24, 2010 resolution, DISMISSES the petitioners
Renato V. Diaz and Aurora Ma. F. Timbol’s petition for lack of merit, and SETS ASIDE the Court’s
temporary restraining order dated August 13, 2010.
SO ORDERED.
ROBERTO A. ABAD
Associate Justice
WE CONCUR:
RENATO C. CORONA
Chief Justice

ANTONIO T. CARPIO PRESBITERO J. VELASCO, JR.

Associate Justice Associate Justice

TERESITA J. LEONARDO-DE CASTRO ARTURO D. BRION

Associate Justice Associate Justice

(On Leave)
DIOSDADO M. PERALTA
LUCAS P. BERSAMIN*
Associate Justice
Associate Justice

MARIANO C. DEL CASTILLO MARTIN S. VILLARAMA, JR.

Associate Justice Associate Justice

JOSE PORTUGAL PEREZ JOSE CATRAL MENDOZA

Associate Justice Associate Justice

(On Official Leave)

MARIA LOURDES P. A. SERENO**
Associate Justice
CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified 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.
RENATO C. CORONA
Chief Justice
 90

Footnotes
* On leave.
** On official leave.
1 Rollo, pp. 3-14.
2 Id. at 63-64.
3 Id. at 143-144.
4 Id. at 73-135.
5 The OSG cites VAT Ruling 045-03 (October 13, 2003) issued by then Deputy Commissioner Jose
Mario Bunag in response to a query by the Philippine National Construction Corporation (PNCC) on its
VAT liability as operator of the South and North Luzon expressways. PNCC was informed "that with the
promulgation of R.A. 7716 restructuring the VAT system, services of all franchise grantees, x x x are
already subject to VAT." The ruling was apparently clarified and reiterated in BIR Revenue
Memorandum Circulars 52-2005 (September 28, 2005), 72-2009 (December 21, 2009) and 30-2010
(March 26, 2010).
6 Rollo, pp. 153-201.
7 Id. at 457-476.
8 Macasiano v. National Housing Authority, G.R. No. 107921, July 1, 1993, 224 SCRA 236, 243.
9 See Ernesto B. Francisco, Jr. and Jose Ma. O. Hizon v. Toll Regulatory Board, G.R. No. 166910,
October 19, 2010.
10 Id.
11 Commissioner of Internal Revenue v. SM Primeholdings, Inc., G.R. No. 183505, February 26, 2010,
613 SCRA 774, 788.
12 See North Negros Sugar Co. v. Hidalgo, 63 Phil. 664, 690 (1936).
13 SEC. 119. Tax on Franchises. – Any provision of general or special law to the contrary
notwithstanding, there shall be levied, assessed and collected in respect to all franchises on radio and/or
television broadcasting companies whose annual gross receipts of the preceding year do not exceed Ten
million pesos (₱10,000,000), subject to Section 236 of this Code, a tax of three percent (3%) and on
electric, gas and water utilities, a tax of two percent (2%) on the gross receipts derived from the business
covered by the law granting the franchise: Provided, however, That radio and television broadcasting
companies referred to in this Section shall have an option to be registered as a value-added taxpayer and
pay the tax due thereon; Provided, further, That once the option is exercised, said option shall be
irrevocable.
14 Associated Communications & Wireless Services v. National Telecommunications Commission, 445
Phil. 621, 641 (2003).
15 Philippine Airlines, Inc. v. Civil Aeronautics Board, 337 Phil. 254, 265 (1997).
16 Metropolitan Cebu Water District v. Adala, G.R. No. 168914, July 4, 2007, 526 SCRA 465, 476.
 91

17 Supra note 9.
18 Section 3(e), P.D. 1112.
19 36 Am Jur 2d S3.
20 G.R. No. 180356, February 16, 2010, 612 SCRA 665, 676.
21 Rollo, p. 517.
22 G.R. No. 155650, July 20, 2006, 495 SCRA 591.
23 Id. at 622-623.
24 Id. at 618.
25 Art. 420. The following things are property of public dominion:
(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and bridges constructed by
the State, banks, shores, roadsteads, and others of similar character;
xxxx
26 See first and third "Whereas Clause" of P.D. 1112.
27 See Law of Basic Taxation in the Philippines (Revised Ed.), Benjamin B. Aban, p. 14.
28 See The Fundamentals of Taxation (2004 Ed.), Hector S. De Leon and Hector M. De Leon, Jr., p. 16.
29 Contex Corporation v. Commissioner of Internal Revenue, G.R. No. 151135, July 2, 2004, 433 SCRA
376, 384-385.
30 The National Internal Revenue Code Annotated, Eighth Ed.(Vol. II), Hector S. De Leon and Hector M.
De Leon, Jr., p. 3.
31 SEC. 105. Persons Liable. Any person who, in the course of trade or business, sells, barters,
exchanges, leases goods or properties, rendered services, and any person who imports goods shall be
subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code.
xxxx
The phrase ‘in the course of trade or business’ means the regular conduct or pursuit of a commercial or an
economic activity, including transactions incidental thereto, by any person regardless of whether or not
the person engaged therein is a nonstock, nonprofit private organization (irrespective of the disposition of
its net income) and whether or not it sells exclusively to members or their guests), or government entity.
32 Supra note 27, at 24-25.
33 Rollo, p. 540.
34 Tax Law and Jurisprudence, Third Edition (2006), Justice Jose C. Vitug and Justice Ernesto D. Acosta,
pp. 2-3.
35 Rollo, pp. 246-254.
36 SEC. 111. Transitional/Presumptive Input Tax credits.-
 92

(A) Transitional Input Tax Credits.- A person who becomes liable to value-added tax or any person who
elects to be a VAT-registered person shall, subject to the filing of an inventory according to rules and
regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, be
allowed input tax on his beginning inventory of goods, materials and supplies equivalent to two percent
(2%) of the value of such inventory or the actual value-added tax paid on such goods, materials, and
supplies, whichever is higher, which shall be creditable against the output tax.
37 Supra note 27, at 119