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[1956V354E] EMILIO Y. HILADO, petitioner, vs. THE COLLECTOR OF INTERNAL REVENUE and THE COURT OF TAX APPEALS, respondents.1956 Oct 31En BancG.R. No. L-9408D E C I S I O N

BAUTISTA ANGELO, J.:

On March 31, 1952, petitioner filed his income tax return for 1951 with the treasurer of Bacolod City wherein he claimed, among other things, the amount of P12,837.65 as a deductible item from his gross income pursuant to General Circular No. V-123 issued by the Collector of Internal Revenue. This circular was issued pursuant to certain rules laid down by the Secretary of Finance On the basis of said return, an assessment notice demanding the payment of P9,419 was sent to petitioner, who paid the tax in monthly installments, the last payment having been made on January 2, 1953.

Meanwhile, on August 30, 1952, the Secretary of Finance, through the Collector of Internal Revenue, issued General Circular No. V-139 which not only revoked and declared void his general Circular No. V123 but laid down the rule that losses of property which occurred during the period of World War II from fires, storms, shipwreck or other casualty, or from robbery, theft, or embezzlement are deductible in the year of actual loss or destruction of said property. As a consequence, the amount of P12,837.65 was disallowed as a deduction from the gross income of petitioner for 1951 and the Collector of Internal Revenue demanded from him the payment of the sum of P3,546 as deficiency income tax for said year. When the petition for reconsideration filed by petitioner was denied, he filed a petition for review with the Court of Tax Appeals. In due time, this court rendered decision affirming the assessment made by respondent Collector of Internal Revenue. This is an appeal from said decision.

It appears that petitioner claimed in his 1951 income tax return the deduction of the sum of P12,837.65 as a loss consisting in a portion of his war damage claim which had been duly approved by the Philippine War Damage Commission under the Philippine Rehabilitation Act of 1946 but which was not paid and never has been paid pursuant to a notice served upon him by said Commission that said part of his claim will not be paid until the United States Congress should make further appropriation. He claims that said amount of P12,837.65 represents a "business asset" within the meaning of said Act which he is entitled to deduct as a loss in his return for 1951. This claim is untenable.

To begin with, assuming that said a mount represents a portion of the 75% of his war damage claim which was not paid, the same would not be deductible as a loss in 1951 because, according to petitioner, the last installment he received from the War Damage Commission, together with the notice that no further payment would be made on his claim, was in 1950. In the circumstance, said amount would at most be a proper deduction from his 1950 gross income. In the second place, said amount cannot be considered as a "business asset" which can be deducted as a loss in contemplation of law because its collection is not enforceable as a matter of right, but is dependent merely upon the generosity and magnanimity of the U. S. government. Note that, as of the end of 1945, there was absolutely no law under which petitioner could claim compensation for the destruction of his properties during the battle for the liberation of the Philippines. And under the Philippine Rehabilitation Act of 1946, the payments of claims by the War Damage Commission merely depended upon its discretion to be exercised in the manner it may see fit, but the non-payment of which cannot give rise to any enforceable right, for, under said Act, "All findings of the Commission concerning the amount of loss or damage sustained, the cause of such loss or damage, the persons to whom compensation pursuant to this title is payable, and the value of the property lost or damaged, shall be conclusive and shall not be reviewable by any court". (section 113)

It is true that under the authority of section 338 of the National Internal Revenue Code the Secretary of Finance, in the exercise of his administrative powers, caused the issuance of General Circular No. V-123 as an implementation or interpretative regulation of section 30 of the same Code, under which the amount of P12,837.65 was allowed to be deducted "in the year the last installment was received with notice that no further payment would be made until the United States Congress makes further appropriation therefor", but such circular was found later to be wrong and was revoked. Thus, when doubts arose as to the soundness or validity of such circular, the Secretary of Finance sought the advice of the Secretary of Justice who, accordingly, gave his opinion the pertinent portion of which reads as follows:

"Yet it might be argued that war losses were not included as deductions for the year when they were sustained because the taxpayers had prospects that losses would be compensated for by the United States Government; that since only uncompensated losses are deductible, they had to wait until after the determination by the Philippine War Damage Commission as to the compensability in part or in whole of their war losses so that they could exclude from the deductions those compensated for by the said Commission; and that, of necessity, such determination could be complete only much later than in the year when the loss was sustained. This contention falls to the ground when it is considered that the Philippine Rehabilitation Act which authorized the payment by the United States Government of war losses suffered by property owners in the Philippines was passed only on August 30, 1946, long after the losses were sustained. It cannot be said therefore, that the property owners had any conclusive assurance during the years said losses were sustained, that the compensation was to be paid therefor. Whatever assurance they could have had, could have been based only on some information less reliable

and less conclusive than the passage of the Act itself. Hence, as diligent property owners, they should adopt the safest alternative by considering such losses deductible during the year when they were sustained."

In line with this opinion, the Secretary of Finance, through the Collector of Internal Revenue, issued General Circular No. V-139 which not only revoked and declared void his previous Circular No. V - 123 but laid down the rule that losses of property which occurred during the period of World War II from fires, storms, shipwreck or other casualty, or from robbery, theft, or embezzlement are deductible for income tax purposes in the year of actual destruction of said property. We can hardly argue against this opinion. Since we have already stated that the amount claimed does not represent a "business asset" that may be deducted as a loss in 1951, it is clear that the loss of the corresponding asset or property could only be deducted in the year it was actually sustained. This is in line with section 30 (d) of the National Internal Revenue Code which prescribes that losses sustained are allowable as deduction only within the corresponding taxable year.

Petitioner's contention that during the last war and as a consequence of enemy occupation in the Philippines "there was no taxable year" within the meaning of our internal revenue laws because during that period they were unenforceable, is without merit. It is well known that our internal revenue laws are not political in nature and as such were continued in force during the period of enemy occupation and in effect were actually enforced by the occupation government. As a matter of fact, income tax returns were filed during that period and income tax payment were effected and considered valid and legal. Such tax laws are deemed to be the laws of the occupied territory and not of the occupying enemy.

"Furthermore, it is a legal maxim, that excepting that of a political nature, 'Law once established continues until changed by some competent legislative power. It is not changed merely by change of sovereignty.' (Joseph H. Beale, Cases on Conflict of Laws, III, Summary section 9, citing Commonwealth vs. Chapman, 13 Met., 68.) As the same author says, in his Treatise on the Conflict of Laws (Cambridge, 1916, section 131): `There can be no break or interregnun in law. From the time the law comes into existence with the first-felt corporateness of a primitive people it must last until the final disappearance of human society. Once created, it persists until a change takes place, and when changed it continues in such changed condition until the next change and so forever. Conquest or colonization is impotent to bring law to an end; inspite of change of constitution, the law continues unchanged until the new sovereign by legislative act creates a change.'" (Co Kim Chan vs. Valdes Tan Keh and Dizon, 75 Phil., 113, 142-143.)

It is likewise contended that the power to pass upon the validity of General Circular No. V-123 is vested exclusively in our courts in view of the principle of separation of powers and, therefore, the Secretary of Finance acted without valid authority in revoking it and approving in lieu thereof General Circular No. V139. It cannot be denied, however, that the Secretary of Finance is vested with authority to revoke, repeal or abrogate the acts or previous rulings of his predecessor in office because the construction of a statute by those administering it is not binding on their successors if thereafter the latter become satisfied that a different construction should be given. [Association of Clerical Employees vs. Brotherhood of Railways & Steamship Clerks, 85 F. (2d) 152, 109 A.L.R., 345.]

"When the Commissioner determined in 1937 that the petitioner was not exempt and never had been, it was his duty to determine, assess and collect the tax due for all years not barred by the statutes of limitation. The conclusion reached and announced by his predecessor in 1924 was not binding upon him. It did not exempt the petitioner from tax, This same point was decided in this way in Stanford University Bookstore, 29 B. T. A., 1280; affd., 83 Fed. (2d) 710." (Southern Maryland Agricultural Fair Association vs. Commissioner of Internal Revenue, 40 B. T. A., 549, 554)

With regard to the contention that General Circular No. V-139 cannot be given retroactive effect because that would affect and obliterate the vested right acquired by petitioner under the previous circular, suffice it to say that General Circular No. V-123, having been issued on a wrong construction of the law, cannot give rise to a vested right that can be invoked by a taxpayer. The reason is obvious: a vested right cannot spring from a wrong interpretation. This is too clear to require elaboration.

"It seems too clear for serious argument that an administrative officer can not change a law enacted by Congress. A regulation that is merely an interpretation of the statute when once determined to have been erroneous becomes nullity. An erroneous construction of the law by the Treasury Department or the collector of internal revenue does not preclude or estop the government from collecting a tax which is legally due." (Ben Stocker, et al., 12 B. T. A., 1351.)

"Art. 2254. - No vested or acquired right can arise from acts or omissions which are against the law or which infringe upon the rights of others." (Article 2254, New Civil Code.)

Wherefore, the decision appealed from is affirmed Without pronouncement as to costs.

Paras, C.J., Padilla, Montemayor, Labrador, Concepcion, Reyes, J. B. L., Endencia and Felix, JJ., concur.

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([1956V354E] EMILIO Y. HILADO, petitioner, vs. THE COLLECTOR OF INTERNAL REVENUE and THE COURT OF TAX APPEALS, respondents., G.R. No. L-9408, 1956 Oct 31, En Banc)

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[1984V329E] ANTERO M. SISON, JR., petitioner, vs. RUBEN B. ANCHETA, Acting Commissioner, Bureau of Internal Revenue; ROMULO VILLA, Deputy Commissioner, Bureau of Internal Revenue; TOMAS TOLEDO, Deputy Commissioner, Bureau of Internal Revenue; MANUEL ALBA, Minister of Budget, FRANCISCO TANTUICO, Chairman, Commissioner on Audit, and CESAR E. A. VIRATA, Minister of Finance, respondents.1984 Jul 25En BancG.R. No. L-59431D E C I S I O N

FERNANDO, J.:

The success of the challenge posed in this suit for declaratory relief or prohibition proceeding 1 on the validity of Section 1 of Batas Pambansa Blg. 135 depends upon a showing of its constitutional infirmity. The assailed provision further amends Section 21 of the National Internal Revenue Code of 1977, which provides for rates of tax on citizens or residents on (a) taxable compensation income, (b) taxable net income, (c) royalties, prizes, and other winnings, (d) interest from bank deposits and yield or any other monetary benefit from deposit substitutes and from trust fund and similar arrangements, (e) dividends and share of individual partner in the net profits of taxable partnership, (f) adjusted gross income. 2 Petitioner 3 as taxpayer alleges that by virtue thereof, "he would be unduly discriminated against by the imposition of higher rates of tax upon his income arising from the exercise of his profession vis-a-vis those which are imposed upon fixed income or salaried individual taxpayers." 4 He characterizes the above section as arbitrary amounting to class legislation, oppressive and capricious in character. 5 For petitioner, therefore, there is a transgression of both the equal protection and due process clauses 6 of the Constitution as well as of the rule requiring uniformity in taxation. 7

The Court, in a resolution of January 26, 1982, required respondents to file an answer within 10 days from notice. Such an answer, after two extensions were granted the Office of the Solicitor General, was

filed on May 28, 1982. 8 The facts as alleged were admitted but not the allegations which to their mind are "mere arguments, opinions or conclusions on the part of the petitioner, the truth [for them] being those stated [in their] Special and Affirmative Defenses." 9 The answer then affirmed: "Batas Pambansa Blg. 135 is a valid exercise of the State's power to tax. The authorities and cases cited, while correctly quoted or paraphrased, do not support petitioner's stand." 10 The prayer is for the dismissal of the petition for lack of merit.

This Court finds such a plea more than justified. The petition must be dismissed.

1. It is manifest that the field of state activity has assumed a much wider scope. The reason was so clearly set forth by retired Chief Justice Makalintal thus:

"The areas which used to be left to private enterprise and initiative and which the government was called upon to enter optionally, and only 'because it was better equipped to administer for the public welfare than is any private individual or group of individuals,' continue to lose their well-defined boundaries and to be absorbed within activities that the government must undertake in its sovereign capacity if it is to meet the increasing social challenges of the times." 11

Hence the need for more revenues. The power to tax, an inherent prerogative, has to be availed of to assure the performance of vital state functions. It is the source of the bulk of public funds. To paraphrase a recent decision, taxes being the lifeblood of the government, their prompt and certain availability is of the essence. 12

2. The power to tax moreover, to borrow from Justice Malcolm, "is an attribute of sovereignty. It is the strongest of all the powers of government." 13 It is, of course, to be admitted that for all its plenitude, the power to tax is not unconfined. There are restrictions. The Constitution sets forth such limits. Adversely affecting as it does property rights, both the due process and equal protection clauses may properly be invoked, as petitioner does, to invalidate in appropriate cases a revenue measure. If it were otherwise, there would be truth to the 1803 dictum of Chief Justice Marshall that "the power to tax involves the power to destroy." 14 In a separate opinion in Graves v. New York, 15 Justice Frankfurter, after referring to it as an "unfortunate remark," characterized it as "a flourish of rhetoric [attributable to] the intellectual fashion of the times [allowing] a free use of absolutes." 16 This is merely to emphasize that it is not and there cannot be such a constitutional mandate. Justice Frankfurter could rightfully conclude: "The web of unreality spun from Marshall's famous dictum was brushed away by

one stroke of Mr. Justice Holmes's pen: 'The power to tax is not the power to destroy while this Court sits.'" 17 So it is in the Philippines.

3. This Court then is left with no choice. The Constitution as the fundamental law overrides any legislative or executive act that runs counter to it. In any case therefore where it can be demonstrated that the challenged statutory provision - as petitioner here alleges - fails to abide by its command, then this Court must so declared and adjudge it null. The inquiry thus is centered on the question of whether the imposition of a higher tax rate on taxable net income derived from business or profession than on compensation is constitutionally infirm.

4. The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. A mere allegation, as here, does not suffice. There must be a factual foundation of such unconstitutional taint. Considering that petitioner here would condemn such a provision as void on its face, he has not made out a case. This is merely to adhere to the authoritative doctrine that where the due process and equal protection clauses are invoked, considering that they are not fixed rules but rather broad standards, there is a need for proof of such persuasive character as would lead to such a conclusion. Absent such a showing, the presumption of validity must prevail. 18

5. It is undoubted that the due process clause may be invoked where a taxing statute is so arbitrary that it finds no support in the Constitution. An obvious example is where it can be shown to amount to the confiscation of property. That would be a clear abuse of power. It then becomes the duty of this Court to say that such an arbitrary act amounted to the exercise of an authority not conferred. That properly calls for the application of the Holmes dictum. It has also been held that where the assailed tax measure is beyond the jurisdiction of the state, or is not for a public purpose, or, in case of a retroactive statute is so harsh and unreasonable, it is subject to attack on due process grounds. 19

6. Now for equal protection. The applicable standard to avoid the charge that there is a denial of this constitutional mandate whether the assailed act is in the exercise of the police power or the power of eminent domain is to demonstrate "that the governmental act assailed, far from being inspired by the attainment of the common weal was prompted by the spirit of hostility, or at the very least, discrimination that finds to support in reason. It suffices then that the laws operate equally and uniformly on all persons under similar circumstances or that all persons must be treated in the same manner, the conditions not being different, both in the privileges conferred and the liabilities imposed. Favoritism and undue preference cannot be allowed. For the principle is that equal protection and security shall be given to every person under circumstances, which if not identical are analogous. If law be looks upon in terms of burden or charges, those that fall within a class should be treated in the same

fashion, whatever restrictions cast on some in the group equally binding on the rest." 20 That same formulation applies as well to taxation measures. The equal protection clause is, of course, inspired by the noble concept of approximating the ideal of the laws's benefits being available to all and the affairs of men being governed by that serene and impartial uniformity, which is of the very essence of the idea of law. There is, however, wisdom, as well as realism, in these words of Justice Frankfurter: "The equality at which the 'equal protection' clause aims is not a disembodied equality. The Fourteenth Amendment enjoins 'the equal protection of the laws,' and laws are not abstract propositions. They do not relate to abstract units A, B and C, but are expressions of policy arising out of specific difficulties, addressed to the attainment of specific ends by the use of specific remedies. The Constitution does not require things which are different in fact or opinion to be treated in law as though they were the same." 21 Hence the constant reiteration of the view that classification if rational in character is allowable. As a matter of fact, in a leading case of Lutz V. Araneta, 22 this Court, through Justice J.B.L. Reyes, went so far as to hold "at any rate, it is inherent in the power to tax that a state be free to select the subjects of taxation, and it has been repeatedly held that 'inequalities which result from a singling out of one particular class for taxation, or exemption infringe no constitutional limitation.'" 23

7. Petitioner likewise invoked the kindred concept of uniformity. According to the Constitution: "The rule of taxation shall be uniform and equitable." 24 This requirement is met according to Justice Laurel in Philippine Trust Company v. Yatco, 25 decided in 1940, when the tax "operates with the same force and effect in every place where the subject may be found." 26 He likewise added: "The rule of uniformity does not call for perfect uniformity or perfect equality, because this is hardly attainable." 27 The problem of classification did not present itself in that case. It did not arise until nine years later, when the Supreme Court held: "Equality and uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. The taxing power has the authority to make reasonable and natural classifications for purposes of taxation, . . . 28 As clarified by Justice Tuason, where "the differentiation" complained of "conforms to the practical dictates of justice and equity" it "is not discriminatory within the meaning of this clause and is therefore uniform." 29 There is quite a similarity then to the standard of equal protection for all that is required is that the tax "applies equally to all persons, firms and corporations placed in similar situation." 30

8. Further on this point. Apparently, what misled petitioner is his failure to take into consideration the distinction between a tax rate and a tax base. There is no legal objection to a broader tax base or taxable income by eliminating all deductible items and at the same time reducing the applicable tax rate. Taxpayers may be classified into different categories. To repeat, it is enough that the classification must rest upon substantial distinctions that make real differences. In the case of the gross income taxation embodied in Batas Pambansa Blg. 135, the discernible basis of classification is the susceptibility of the income to the application of generalized rules removing all deductible items for all taxpayers within the class and fixing a set of reduced tax rates to be applied to all of them. Taxpayers who are recipients of compensation income are set apart as a class. As there is practically no overhead expense, these

taxpayers are not entitled to make deductions for income tax purposes because they are in the same situation more or less. On the other hand, in the case of professionals in the practice of their calling and businessmen, there is no uniformity in the costs or expenses necessary to produce their income. It would not be just then to disregard the disparities by giving all of them zero deduction and indiscriminately impose on all alike the same tax rates on the basis of gross income. There is ample justification then for the Batasang Pambansa to adopt the gross system of income taxation to compensation income, while continuing the system of net income taxation as regards professional and business income.

9. Nothing can be clearer, therefore, than that the petition is without merit, considering the (1) lack of factual foundation to show the arbitrary character of the assailed provision; 31 (2) the force of controlling doctrines on due process, equal protection, and uniformity in taxation and (3) the reasonableness of the distinction between compensation and taxable net income of professionals and businessmen certainly not a suspect classification.

WHEREFORE, the petition is dismissed. Costs against petitioner.

Makasiar, Concepcion, Jr., Guerrero, Melencio-Herrera, Escolin, Relova, Gutierrez, Jr., De la Fuente and Cuevas, JJ., concur. Teehankee, J., in the result. Aquino, J., In the result. The petitioner has no cause of action for prohibition. Plana, J., did not take part.

Abad Santos, J., This is a frivolous suit. While the tax rates for compensation income are lower than those for net income such circumstance does not necessarily result in lower tax payments for those receiving compensation income. In fact, the reverse will most likely be the case; those who file returns on the basis of net income will pay less taxes because they can claim all sorts of deductions justified or not. I vote for dismissal.

-----------Footnotes

1. Petitioner must have realized that a suit for declaratory relief must be filed with Regional Trial Courts. 2. Batas Pambansa Blg. 135, Section 21 (1981). 3. The respondents are Ruben B. Ancheta, Acting Commissioner, Bureau of Internal Revenue; Romulo Villa, Deputy Commissioner, Bureau of Internal Revenue; Tomas Toledo, Deputy Commissioner, Bureau of Internal Revenue; Manuel Alba, Minister of Budget; Francisco Tantuico, Chairman, Commissioner on Audit; and Cesar E. A. Virata, Minister of Finance. 4. Petition, Parties, par. 1. The challenge is thus aimed at paragraphs (a) and (b) of Section 1 further Amending Section 21 of the National Internal Revenue Code of 1977. Par. (a) reads: "(a) On taxable compensation income. - A tax is hereby imposed upon the taxable compensation income as determined in Section 28 (a) received during each taxable year from all sources by every individual, whether a citizen of the Philippines, determined in accordance with the following schedule:

Not over P2,500 Over P 2,500 but not over Over P 5,000 but not over Over P 10,000 but not over Over P 20,000 but not over 5,000

0% 1%

10,000 P 25 + 3% of excess over P 5,000 20,000 P 175 + 7% of excess over P 10,000 40,000 P 875 + 11% of excess over P 20,000

Over P 40,000 but not over 60,000 P3,075 + 15% of excess over P 40,000 Over P 60,000 but not over 100,000 P 6,075 + 19% of excess over P 60,000 Over P 100,000 but not over 250,000 P 13,675 + 24% of excess over P100,000 Over P 250,000 but not over 500,000 P 49,675 + 29% of excess over P250,000 Over P 500,000 P 122,175 + 35% of excess over P500,000

Par. (b) reads: "(b) On taxable net income. - A tax is hereby imposed upon the taxable net income as determined in Section 29 (a) received during each taxable year from all sources by every individual, whether a citizen of the Philippines, or an alien residing in the Philippines determined in accordance with the following schedule:

Not over P10,0005%

Over P10,000 but not over

P30,000 P 500 + 15% of excess over P 10,000

Over P30,000 but not over P150,000 P 3,500 + 30% of excess over P 30,000 Over P150,000 but not over P500,000 P39,500 + 45% of excess over P150,000 Over P500,000 P197,000 + 60% of excess over P500,000

5. Ibid, Statement, par. 4. 6. Article IV, Section 1 of the Constitution reads: "No person shall be deprived of life, liberty or property without due process of law, nor shall any person be denied the equal protection of the laws." 7. Article VII, Section 7, par. (1) of the Constitution reads: "The rule of taxation shall be uniform and equitable. The Batasang Pambansa shall evolve a progressive system of taxation." 8. It was filed by Solicitor General Estelito P. Mendoza. He was assisted by Assistant Solicitor General Eduardo D. Montenegro and Solicitor Erlinda B. Masakayan. 9. Answer, pars. 1-6. 10. Ibid, par. 6. 11. Agricultural Credit and Cooperative Financing Administration v. Confederation of Unions in Government Corporation and Offices, L-21484, November 29, 1969, 30 SCRA 649, 662. 12. Cf. Vera v. Fernandez, L-31364, March 30, 1979, 89 SCRA 199, per Castro, J. 13. Sarasola v. Trinidad, 40 Phil. 252, 262 (1919). 14. McCulloch v. Maryland, 4 Wheaton 316. 15. 306 US 466 (1938). 16. Ibid, 489. 17. Ibid, 490. 18. Cf. Ermita-Malate Hotel and Motel Operators Association v. Hon. City Mayor, 127 Phil. 306, 315 (1967); U.S. v. Salaveria, 39 Phil. 102, 111 (1918) and Eboa v. Daet, 85 Phil. 369 (1950). Likewise referred to is O'Gorman and Young v. Hartford Fire Insurance Co., 282 US 251, 328 (1931). 19. Cf. Manila Gas Co. v. Collector of Internal Revenue, 62 Phil. 895 (1936); Wells Fargo Bank and Union Trust Co. v. Collector, 70 Phil. 325 (1940); Republic v. Oasan Vda. de Fernandez, 99 Phil. 934 (1956). 20. The excerpt is from the opinion in J.M. Tuason and Co. v. The Land Tenure Administration, L-21064, February 18, 1970, 31 SCRA 413, 435 and reiterated in Bautista v. Juinio, G.R. No. 50908, January 31,

1984, 127 SCRA 329, 339. The former deals with an eminent domain proceeding and the latter with a suit contesting the validity of a police power measure. 21. Tigner v. Texas, 310 US 141,147 (1940). 22. 98 Phil. 148 (1955). 23. Ibid, 153. 24. Article VIII, Section 17, par. 1, first sentence of the Constitution. 25. 69 Phil. 420 (1940). 26. Ibid, 426. 27. Ibid, 424. 28. Eastern Theatrical Co. v. Alfonso, 83 Phil. 852, 862 (1949). 29. Manila Race Horse Trainers Asso. v. De la Fuente, 88 Phil. 60, 65 (1951). 30. Uy Matias v. City of Cebu, 93 Phil. 300 (1953). 31. While petitioner cited figures to sustain his assertion, public respondents refuted with other figures that argue against his submission. One reason for requiring declaratory relief proceedings to start in regional trial courts is precisely to enable petitioner to prove his allegation, absent an admission in the answer.

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([1984V329E] ANTERO M. SISON, JR., petitioner, vs. RUBEN B. ANCHETA, Acting Commissioner, Bureau of Internal Revenue; ROMULO VILLA, Deputy Commissioner, Bureau of Internal Revenue; TOMAS TOLEDO, Deputy Commissioner, Bureau of Internal Revenue; MANUEL ALBA, Minister of Budget, FRANCISCO TANTUICO, Chairman, Commissioner on Audit, and CESAR E. A. VIRATA, Minister of Finance, respondents., G.R. No. L-59431, 1984 Jul 25, En Banc)

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[1967V390E] COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. MANUEL B. PINEDA, as one of the heirs of deceased ATANASIO PINEDA, respondent.1967 Sep 15En BancG.R. No. L-22734DECISION

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 1946 1947 Add: P135.83 436.95 1,206.91 P1,779.69 88.98

5% surcharge 1% monthly interest from November 30, 1953 to April 15, 1957 Compromise for late filing 80.00

720.77

Compromise for late payment 40.00 ________

Total Amount due 2.

P2,707.44.

Additional residence tax for 1945 14.50 =======

3.

Real Estate dealer's tax for the fourth quarter of 1946 and the whole year of 1947 207.50 ======

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 1847 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 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 1945 1946 P135.83 436.95

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. Pined 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. 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 vs. Pamintuan 2 where We held that "after the partition of an 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 the 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 taxes 4 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 days of collecting the taxes 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 vs. 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 discreation 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 heir 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 real estate dealer's fixed tax for the fourth quarter to his right of contribution from his co-heirs. No costs. So ordered. Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Ruiz Castro, Angeles and Fernando, JJ., concur.

Footnotes

1. Collector of Internal Revenue vs. Manuel B. Pineda as one of the heirs of the deceased Antonio Pineda, L-14522, May 31, 1961. 2. 3. 4. 55 Phi. 13. Government of the Philippine Islands vs. Santos, 56 Phi., 827. Art., 1311, Civil Code of the Philippines.

4a. Real estate dealer's fixed tax is subject to the same lien pursuant to the first paragraph of Sec. 315, Tax Code. 5. 6. 7. Government of the Philippine Islands vs. Santos, G.R. No. L- 34152, Dec. 15, 1931, 56 Phil. 827. Lopez vs. Enriquez, 16 Phil. 336. Bull vs. United States, 295 U.S. 247, 15 AFTR 1069, 1073.

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([1967V390E] COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. MANUEL B. PINEDA, as one of the heirs of deceased ATANASIO PINEDA, respondent., G.R. No. L-22734, 1967 Sep 15, En Banc)

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[1965V145E] THE PHILIPPINE GUARANTY CO., INC., petitioner, vs. THE COMMISSIONER OF INTERNAL REVENUE and THE COURT OF TAX APPEALS, respondents.1965 Apr 30En BancG.R. No. L-22074D E C I S I ON

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 Compaia de Seguros, La Union y El Fenix Espaol, Overseas Assurances Corp., Ltd., Sociedad Anonima de Reaseguros Alianza, Tokio Marine & 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 insurances 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 reinsurance 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 were 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 1954 P842,466.71 721,471.85

Said premiums were excluded by Philippine Guaranty Co., Inc. from its gross income when it filed its income tax returns for 1953 and 1954. Furthermore, it did not withhold or pay tax on them. Consequently, 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 Withholding tax due thereon at 24% 25% surcharge 46,114.00 Compromise for non-filing of withholding income tax return TOTAL AMOUNT DUE & COLLECTIBLE 1954 Gross premium per investigation Withholding tax due thereon at 24% 25% surcharge 46,853.00 Compromise for non-filing of withholding income tax return TOTAL AMOUNT DUE & COLLECTIBLE P234,364.00 100.00 P780,880.68 P187,411.00 P230,673.00 100.00 P768,580.00 P184,459.00

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." 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 maintains 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 losses 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 reinsurers, 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 255 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 laws. 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 implies 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. 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 aggression, a navy to defend its shores from invasion, a corps of civil servants to serve, public improvements 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 it from the payment of surcharges or penalties imposed for failure to pay the corresponding withholding tax, but it certainly would not exculpate it 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 Sections 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-19392, 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 corporation 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) Non-resident aliens. All persons, corporations and general copartnerships (companias colectivas), in whatever 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 non-resident 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 cases 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 hereof: Provided, That no such deduction 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 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. Accordingly, in computing the withholding tax due on the reinsurance premiums 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 judgment becomes final, there shall be collected a surcharge 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 against 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

1. 2.

Mertens, Jr., Jacob, Law On Federal Income Taxation, Vol. 8, Section 45.27. Imperial vs. Collector of Internal Revenue, L-7924, September 30, 1955.

3. Hilado vs. Collector of Internal Revenue, 100 Phil., 288; 53 O.G. 2471; Koppel (Philippines), Inc. vs. Collector of Internal Revenue, L-10550, September 19, 1961; Compaia General de Tobacos de Filipinas vs. City of Manila, L-16619, June 29, 1963.

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([1965V145E] THE PHILIPPINE GUARANTY CO., INC., petitioner, vs. THE COMMISSIONER OF INTERNAL REVENUE and THE COURT OF TAX APPEALS, respondents., G.R. No. L-22074, 1965 Apr 30, En Banc)

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COLLECTOR OF INTERNAL REVENUE, petitioner, vs. J.C. YUSECO and THE COURT OF TAX APPEALS, respondents.1961 Oct 28En BancG.R. No. L-12518D E C I S I O N

PADILLA, J.:

The Collector of Internal Revenue seeks a review under section 18, Republic Act No. 1125, and prays for the setting aside of the judgment rendered by the Court of Tax Appeals on 25 March 1957, in C.T.A. Case No. 217, the dispositive part of which is, as follows:

Wherefore, pursuant to section 51 (d) of the National Internal Revenue Code, judgment is hereby rendered declaring the warrant of distraint and levy issued by respondent on January 20, 1955 to effect collection of the "amount of P2,447.30 as income tax for the year 1946 plus 5 per cent surcharge and the 1 per cent monthly interest from August 16, 1953" allegedly due from petitioner, is hereby declared null and void and of no legal force and effect and respondent is hereby directed to return to petitioner the properties seized from the latter under said warrant. The respondent Collector of Internal Revenue is likewise enjoined from taking any further proceeding to effect by summary methods the collection of the alleged income taxes assessed against petitioner J. C. Yuseco in the sums of P134.14 and P2,447.30 for the years 1945 and 1946, respectively. Without pronouncement as to costs. (Appendix N) and the resolution entered by the same Court on 17 June 1957 denying his motion for reconsideration (Appendix P). The facts, which are not disputed, are, as summarized by the Court, as follows: The facts established in this case show that petitioner did not file income tax returns for the Calendar years 1945 and 1946. This fact having come to the knowledge of revenue examiners, they accordingly made income tax returns for petitioner upon which respondent on August 20, 1948, assessed against and demanded from petitioner the sums of P134.14 and P7,563.28 representing alleged income taxes and corresponding surcharges for the years 1945 and 1946. On September 1, 1948, petitioner wrote the respondent, requesting that he be informed as to how the assessments were arrived at. In reply thereto, respondent in a letter dated September 17, 1948 furnished the information sought and at the same time demanded the payment of the aforesaid assessments. On October 4, 1948, petitioner asked that he be given an opportunity to present his side of the matter. However, respondent on December 13, 1948, denied reconsideration of the assessment and reiterated his demand upon petitioner for payment thereof which was followed with another demand on June 29, 1949. On July 28, 1949, petitioner once more requested for a reinvestigation of the case but the same was denied by respondent in his letter dated February 7, 1951 wherein he repeated his demand for payment. On April 3, 1951, petitioner renewed his request for reinvestigation and nothing was heard of the matter for almost three years thereafter. On January 6, 1953, respondent issued a warrant of distraint and levy upon petitioner's properties which, however, was not executed. On January 16, 1953, petitioner sought the withdrawal and/or reconsideration of said warrant. Meanwhile, on July 2, 1953, respondent issued a revised assessment notice which reduced the original assessment for the 1946 income tax to P2,447.30, including surcharge. On July 18, 1953, petitioner asked that he be informed of the action upon his petition for reinvestigation. This request was reiterated in his letter of August 18, 1953 wherein he acknowledged receipt of the modified assessment for the 1946 income tax. On September 1, 1953, respondent wrote petitioner demanding from the latter payment of the said sum of P2,447.30 as income tax for the year 1946 plus penalties incident to delinquency, and reiterating the demand for the unrevised income tax assessment for 1945 in the sum of P134.14, but respondent did not take any further action thereafter to effect collection of the assessment.

On January 20, 1955, respondent again issued a warrant of distraint and levy on the properties of petitioner, this time only to effect collection of the said sum of P2,447.30 as income tax for 1946. The distraint being still enforce, petitioner on December 12, 1955 filed his petition for prohibition with this Court. The petitioner Collector of Internal Revenue assails the jurisdiction of the respondent Court of Tax Appeals to take cognizance of the respondent taxpayer's petition that seeks to enjoin him (the petitioner) from collecting his income taxes due for the years 1945 and 1946 and surcharges by summary distraint of and levy upon his personal and real properties, under the provisions of sections 316 to 330 of the National Internal Revenue Code. The petitioner's contention is that the respondent taxpayer cannot bring in the respondent Court an independent special civil action for prohibition without taking to said Court an appeal from the decision or ruling of the Collector of Internal Revenue in the cases provided for in sections 7 and 11 of Republic Act No. 1125. Sections 7, 9 and 11 of Republic Act No. 1125, creating the Court of Tax Appeals, provide: SEC. 7. Jurisdiction. The Court of Tax Appeals shall exercise exclusive appellate jurisdiction to review by appeal, as herein provided (1) Decisions of the Collector of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under the National Internal Revenue Code or other law or part of law administered by the Bureau of Internal Revenue; (2) Decisions of the Commissioner of Customs in cases involving liability for customs duties, fees or other money charges; seizure, detention or release of property affected; fines, forfeitures or other penalties imposed in relation thereto; or other matters arising under the Customs Law or other law or part of law administered by the Bureau of Customs; and (3) Decisions of provincial or city Boards of Assessment Appeals in cases involving the assessment and taxation of real property or other matters arising under the Assessment Law, including rules and regulations relative thereto. SEC. 9. Fees. The Court shall fix reasonable fees for the filing of an appeal for certified copies of any transcript of record, entry or other document, and for other authorized services rendered by the Court or its personnel. SEC. 11. Who may appeal; effect of appeal. Any person, association or corporation adversely affected by a decision or ruling of the Collector of Internal Revenue, the Collector of Customs or any provincial or city Board of Assessment Appeals may file an appeal in the Court of Tax Appeals within thirty days after the receipt of such decision or ruling. No appeal taken to the Court of Tax Appeals from the decision of the Collector of Internal Revenue or the Collector of Customs shall suspend the payment, levy, distraint, and/or sale of any property of the taxpayer for the satisfaction of his tax liability as provided by existing law; Provided, however, That

when in the opinion of the Court the collection by the Bureau of Internal Revenue or the Commissioner of Customs may jeopardize the interest of the Government and/or the taxpayer the Court at any stage of the proceeding may suspend the said collection and require the taxpayer either to deposit the amount claimed or to file a surety bond for not more than double the amount with the Court. ( talics supplied.) The foregoing provisions of the law refer and limit only to appeals from decisions or rulings of the Collector of Internal Revenue, Commissioner of Customs and Provincial or City Boards of Assessment Appeals in the proper cases. Nowhere does the law expressly vest in the Court of Tax Appeals original jurisdiction to issue writs of prohibition and injunction independently of, and apart from, an appealed case. The writ of prohibition or injunction that it may issue under the provisions of section 11, Republic Act No. 1125, to suspend the collection of taxes, is merely ancillary to and in furtherance of its appellate jurisdiction in the cases mentioned in section 7 of the Act. The power to issue the writ exists only in cases appealed to it. This is reflected on the explanatory note of the bill (House No. 175), creating the Court of Tax Appeals. We quote from the explanatory note: . . . It is proposed in the attached bill to establish not merely an administrative body but a regular court vested with exclusive appellate jurisdiction over cases arising under the National Internal Revenue Code, Customs Law and the Assessment Law. ( talics supplied. p. 2202, Congressional Record, Third Congress, Vol. I, Part II.) Congressman Castaeda, one of the proponents of the bill, in his opening remarks sponsoring its enactment into law, said that "House Bill No. 175 has for its purpose the creation of a regular court of tax appeals." (p. 2204, supra.) Answering a question from Congressman Alonzo whether the Court of Tax Appeals would have only appellate jurisdiction and no concurrent or original jurisdiction, the proponent said that "It has exclusive jurisdiction with reference to matters or cases arising from the Internal Revenue Code, the Customs Law and the Assessment Law." (pp. 2209-2210, supra). Dwelling further on the subject, the two members of the House of Representatives continued their discussion, as follows: Mr. Alonzo. So that under this proposal you will bring the case immediately to this court that you are proposing to create, without first having it decided by the Commissioner of Customs or the Collector of Internal Revenue, as the case may be. Mr. Castaeda. It will have to be appealed from the decision of the Collector of Internal Revenue, the Collector of Customs or the Assessors, to the court of Tax Appeals, then to the Supreme Court. (pp. 2209-2210, supra.) These statements made during the proceedings indicate that the intention of Congress was to vest the Court of Tax Appeals with jurisdiction to issue writs of prohibition and injunction only in aid of its appellate jurisdiction in cases appealed to it and not to clothe it with original jurisdiction to issue them. Such intent is reflected on the second paragraph of section 11, Republic Act No. 1125 quoted above. Taxes being the chief source of revenue for the Government to keep it running must be paid immediately and without delay. A taxpayer who feels aggrieved by the decision or ruling handed down by a revenue officer and appeals from his decision or ruling to the Court of Tax Appeals must pay the tax

assessed, except that, if in the opinion of the Court the collection would jeopardize the interest of the Government and/or the taxpayer, it could suspend the collection and require the taxpayer either to deposit the amount claimed or to file a surety bond for not more than double the amount of the tax assessed. The judgment under review is annulled and set aside, without pronouncement as to costs. Bengzon, C.J., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Paredes, Dizon, and De Leon, JJ., concur.

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(COLLECTOR OF INTERNAL REVENUE, petitioner, vs. J.C. YUSECO and THE COURT OF TAX APPEALS, respondents., G.R. No. L-12518, 1961 Oct 28, En Banc)

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 was only after Atty. Guevara gave the BIR a copy of the protest that it was, if at all, considered by the tax authorities. During the intervening period, the warrant was premature and could therefore not be served. As the Court of Tax Appeals correctly noted," 11 the protest filed by private respondent was not pro forma and was based on strong legal considerations. It thus had the effect of suspending on January 18, 1965, when it was filed, the reglementary period which started on the date the assessment was received, viz., January 14, 1965. The period started running again only on April 7, 1965, when the private respondent was definitely informed of the implied rejection of the said protest and the warrant was finally served on it. Hence, when the appeal was filed on April 23, 1965, only 20 days of the reglementary period had been consumed. Now for the substantive question. The petitioner contends that the claimed deduction of P75,000.00 was properly disallowed because it was not an ordinary reasonable or necessary business expense. The Court of Tax Appeals had seen it differently. Agreeing with Algue, it held that the said amount had been legitimately paid by the private respondent for actual services rendered. The payment was in the form of promotional fees. These were collected by the Payees for their work in the creation of the Vegetable Oil Investment Corporation of the Philippines and its subsequent purchase of the properties of the Philippine Sugar Estate Development Company. Parenthetically, it may be observed that the petitioner had Originally claimed these promotional fees to be personal holding company income 12 but later conformed to the decision of the respondent court rejecting this assertion. 13 In fact, as the said court found, the amount was earned through the joint efforts of the persons among whom it was distributed It has been established that the Philippine Sugar Estate Development Company had earlier appointed Algue as its agent, authorizing it to sell its land, factories and oil manufacturing process. Pursuant to such authority, Alberto Guevara, Jr., Eduardo Guevara, Isabel Guevara, Edith, O'Farell, and Pablo Sanchez, worked for the formation of the Vegetable Oil Investment Corporation, inducing other persons to invest in it. 14 Ultimately, after its incorporation largely through the promotion of the said persons, this new corporation purchased the PSEDC properties. 15 For this sale, Algue received as agent a commission of P126,000.00, and it was from this commission that the P75,000.00 promotional fees were paid to the aforenamed individuals. 16

There is no dispute that the payees duly reported their respective shares of the fees in their income tax returns and paid the corresponding taxes thereon. 17 The Court of Tax Appeals also found, after examining the evidence, that no distribution of dividends was involved. 18 The petitioner claims that these payments are fictitious because most of the payees are members of the same family in control of Algue. It is argued that no indication was made as to how such payments were made, whether by check or in cash, and there is not enough substantiation of such payments. In short, the petitioner suggests a tax dodge, an attempt to evade a legitimate assessment by involving an imaginary deduction. We find that these suspicions were adequately met by the private respondent when its President, Alberto Guevara, and the accountant, Cecilia V. de Jesus, testified that the payments were not made in one lump sum but periodically and in different amounts as each payee's need arose. 19 It should be remembered that this was a family corporation where strict business procedures were not applied and immediate issuance of receipts was not required. Even so, at the end of the year, when the books were to be closed, each payee made an accounting of all of the fees received by him or her, to make up the total of P75,000.00. 20 Admittedly, everything seemed to be informal. This arrangement was understandable, however, in view of the close relationship among the persons in the family corporation. We agree with the respondent court that the amount of the promotional fees was not excessive. The total commission paid by the Philippine Sugar Estate Development Co. to the private respondent was P125,000.00. 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 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 Grio-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. Avancea. 12 Rollo, p. 33.

13 Ibid., pp. 7-8; Petition, pp. 2-3. 11 Id., p. 37. 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.

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[1988V88] COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.1988 Feb 171st DivisionG.R. No. L-28896D E C I S I O N

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 filed 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 court not be located in the office of the petitioner. It was only after Atty. Guevara gave the BIR a copy of the protest that it was, if at all, considered by the tax authorities. During the intervening period, the warrant was premature and could therefore not be served.

As the Court of Tax Appeals correctly noted, 11 the protest filed by private respondent was not pro forma and was based on strong legal considerations. It thus had the effect of suspending on January 18, 1965, when it was filed, the reglementary period which started on the date the assessment was received, viz., January 14, 1965. The period started running again only on April 7, 1965, when the private respondent was definitely informed of the implied rejection of the said protest and the warrant was finally served on it. Hence, when the appeal was filed on April 23, 1965, only 20 days of the reglementary period had been consumed.

Now for the substantive question.

The petitioner contends that the claimed deduction of P75,000.00 was properly disallowed because it was not an ordinary, reasonable or necessary business expense. The Court of Tax Appeals had seen it differently. Agreeing with Algue, it held that the said amount had been legitimately paid by the private respondent for actual services rendered. The payment was in the form of promotional fees. These were collected by the payees for their work in the creation of the Vegetable Oil Investment Corporation of the Philippines and its subsequent purchase of the properties of the Philippine Sugar Estate Development Company.

Parenthetically, it may be observed that the petitioner had originally claimed these promotional fees to be personal holding company income 12 but later conformed to the decision of the respondent court rejecting this assertion. 13 In fact, as the said court found, the amount was earned through the joint efforts of the persons among whom it was distributed. It has been established that the Philippine Sugar Estate Development Company had earlier appointed Algue as its agent, authorizing it to sell its land, factories and oil manufacturing process. Pursuant to such authority, Alberto Guevara, Jr., Eduardo Guevara, Isabel Guevara, Edith O'Farell, and Pablo Sanchez worked for the formation of the Vegetable Oil Investment Corporation, inducing other persons to invest in it. 14 Ultimately, after its incorporation largely through the promotion of the said persons, this new corporation purchased the PSEDC properties. 15 For this sale, Algue received as agent a commission of P125,000.00, and it was from this commission that the P75,000.00 promotional fees were paid to the aforenamed individuals. 16

There is no dispute that the payees duly reported their respective shares of the fees in their income tax returns and paid the corresponding taxes thereon. 17 The Court of Tax Appeals also found, after examining the evidence, that no distribution of dividends was involved. 18

The petitioner claims that these payments are fictitious because most of the payees are members of the same family in control of Algue. It is argued that no indication was made as to how such payments were made, whether by check or in cash, and there is not enough substantiation of such payments. In short, the petitioner suggests a tax dodge, an attempt to evade a legitimate assessment by involving an imaginary deduction.

We find that these suspicions were adequately met by the private respondent when its President, Alberto Guevara, and the accountant, Cecilia V. de Jesus, testified that the payments were not made in one lump sum but periodically and in different amounts as each payee's need arose. 19 It should be

remembered that this was a family corporation where strict business procedures were not applied and immediate issuance of receipts was not required. Even so, at the end of the year, when the books were to be closed, each payee made an accounting of all of the fees received by him or her, to make up the total of P75,000.00. 20 Admittedly, everything seemed to be informal. This arrangement was understandable, however, in view of the close relationship among the persons in the family corporation.

We agree with the respondent court that the amount of the promotional fees was not excessive. The total commission paid by the Philippine Sugar Estate Development Co. to the private respondent was P125,000.00. 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 deduction

(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 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 civilized society. Without taxes, the government would be paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one's hard-earned income to the taxing authorities, every person who is able to must contribute his share in the running of the government. The government for its part, is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of power.

But even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic regimes that it be exercised reasonably and in accordance with the prescribed procedure. If it is not, then the taxpayer has a right to complain and the courts will then come to his succor. For all the awesome power of the tax collector, he may still be stopped in his tracks if the taxpayer can demonstrate, as it has here, that the law has not been observed. We hold that the appeal of the private respondent from the decision of the petitioner was filed on time with the respondent court in accordance with Rep. Act No. 1125. And we also find that the claimed

deduction by the private respondent was permitted under the Internal Revenue Code and should therefore not have been disallowed by the petitioner.

ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED in toto, without costs.

SO ORDERED.

Teehankee (C.J.), Narvasa, Gancayco and Grio-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. Acting 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. 1256, 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. Avancea. 12. Rollo, p. 33. 13. Ibid., pp. 7-8; Petition, pp. 2-3.

14. Id., p. 37. 15. Id. 16. Id. 17 Id. 18. Id. 19. Respondent's 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.

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([1988V88] COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. ALGUE, INC., and THE COURT OF TAX APPEALS, respondents., G.R. No. L-28896, 1988 Feb 17, 1st Division)

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[2003V368] NATIONAL POWER CORPORATION, petitioner, vs. CITY OF CABANATUAN, respondent.2003 Apr 93rd DivisionG.R. No. 149110D E C I S I O N

PUNO, J.:

This is a petition for review[1] of the Decision[2] and the Resolution[3] of the Court of Appeals dated March 12, 2001 and July 10, 2001, respectively, finding petitioner National Power Corporation (NPC) liable to pay franchise tax to respondent City of Cabanatuan.

Petitioner is a government-owned and controlled corporation created under Commonwealth Act No. 120, as amended.[4] It is tasked to undertake the "development of hydroelectric generations of power and the production of electricity from nuclear, geothermal and other sources, as well as, the transmission of electric power on a nationwide basis."[5] Concomitant to its mandated duty, petitioner has, among others, the power to construct, operate and maintain power plants, auxiliary plants, power stations and substations for the purpose of developing hydraulic power and supplying such power to the inhabitants.[6]

For many years now, petitioner sells electric power to the residents of Cabanatuan City, posting a gross income of P107,814,187.96 in 1992.[7] Pursuant to section 37 of Ordinance No. 165-92,[8] the respondent assessed the petitioner a franchise tax amounting to P808,606.41, representing 75% of 1% of the latter s gross receipts for the preceding year.[9]

Petitioner, whose capital stock was subscribed and paid wholly by the Philippine Government,[10] refused to pay the tax assessment. It argued that the respondent has no authority to impose tax on government entities. Petitioner also contended that as a non-profit organization, it is exempted from the payment of all forms of taxes, charges, duties or fees[11] in accordance with sec. 13 of Rep. Act No. 6395, as amended, viz:

"Sec.13. Non-profit Character of the Corporation; Exemption from all Taxes, Duties, Fees, Imposts and Other Charges by Government and Governmental Instrumentalities.- The Corporation shall be non-profit and shall devote all its return from its capital investment, as well as excess revenues from its operation, for expansion. To enable the Corporation to pay its indebtedness and obligations and in furtherance and effective implementation of the policy enunciated in Section one of this Act, the Corporation is hereby exempt:

(a) From the payment of all taxes, duties, fees, imposts, charges, costs and service fees in any court or administrative proceedings in which it may be a party, restrictions and duties to the Republic of the Philippines, its provinces, cities, municipalities and other government agencies and instrumentalities;

(b) From all income taxes, franchise taxes and realty taxes to be paid to the National Government, its provinces, cities, municipalities and other government agencies and instrumentalities;

(c) From all import duties, compensating taxes and advanced sales tax, and wharfage fees on import of foreign goods required for its operations and projects; and

(d) From all taxes, duties, fees, imposts, and all other charges imposed by the Republic of the Philippines, its provinces, cities, municipalities and other government agencies and instrumentalities, on all petroleum products used by the Corporation in the generation, transmission, utilization, and sale of electric power." [12]

The respondent filed a collection suit in the Regional Trial Court of Cabanatuan City, demanding that petitioner pay the assessed tax due, plus a surcharge equivalent to 25% of the amount of tax, and 2% monthly interest.[13] Respondent alleged that petitioner s exemption from local taxes has been repealed by section 193 of Rep. Act No. 7160,[14] which reads as follows:

"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. No. 6938, non-stock and non-profit hospitals and educational institutions, are hereby withdrawn upon the effectivity of this Code."

On January 25, 1996, the trial court issued an Order[15] dismissing the case. It ruled that the tax exemption privileges granted to petitioner subsist despite the passage of Rep. Act No. 7160 for the following reasons: (1) Rep. Act No. 6395 is a particular law and it may not be repealed by Rep. Act No. 7160 which is a general law; (2) section 193 of Rep. Act No. 7160 is in the nature of an implied repeal which is not favored; and (3) local governments have no power to tax instrumentalities of the national government. Pertinent portion of the Order reads:

"The question of whether a particular law has been repealed or not by a subsequent law is a matter of legislative intent. The lawmakers may expressly repeal a law by incorporating therein repealing provisions which expressly and specifically cite(s) the particular law or laws, and portions thereof, that are intended to be repealed. A declaration in a statute, usually in its repealing clause, that a particular and specific law, identified by its number or title is repealed is an express repeal; all others are implied

repeal. Sec. 193 of R.A. No. 7160 is an implied repealing clause because it fails to identify the act or acts that are intended to be repealed. It is a well-settled rule of statutory construction that repeals of statutes by implication are not favored. The presumption is against inconsistency and repugnancy for the legislative is presumed to know the existing laws on the subject and not to have enacted inconsistent or conflicting statutes. It is also a well-settled rule that, generally, general law does not repeal a special law unless it clearly appears that the legislative has intended by the latter general act to modify or repeal the earlier special law. Thus, despite the passage of R.A. No. 7160 from which the questioned Ordinance No. 165-92 was based, the tax exemption privileges of defendant NPC remain.

Another point going against plaintiff in this case is the ruling of the Supreme Court in the case of Basco vs. Philippine Amusement and Gaming Corporation, 197 SCRA 52, where it was held that:

Local governments have no power to tax instrumentalities of the National Government. PAGCOR is a government owned or controlled corporation with an original charter, PD 1869. All of its shares of stocks are owned by the National Government. xxx 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 mere local government.

Like PAGCOR, NPC, being a government owned and controlled corporation with an original charter and its shares of stocks owned by the National Government, is beyond the taxing power of the Local Government. Corollary to this, it should be noted here that in the NPC Charter s declaration of Policy, Congress declared that: xxx (2) the total electrification of the Philippines through the development of power from all services to meet the needs of industrial development and dispersal and needs of rural electrification are primary objectives of the nations which shall be pursued coordinately and supported by all instrumentalities and agencies of the government, including its financial institutions. underscoring supplied). To allow plaintiff to subject defendant to its tax-ordinance would be to impede the avowed goal of this government instrumentality.

Unlike the State, a city or municipality has no inherent power of taxation. Its taxing power is limited to that which is provided for in its charter or other statute. Any grant of taxing power is to be construed strictly, with doubts resolved against its existence.

From the existing law and the rulings of the Supreme Court itself, it is very clear that the plaintiff could not impose the subject tax on the defendant." [16]

On appeal, the Court of Appeals reversed the trial court s Order[17] on the ground that section 193, in relation to sections 137 and 151 of the LGC, expressly withdrew the exemptions granted to the petitioner.[18] It ordered the petitioner to pay the respondent city government the following: (a) the sum of P808,606.41 representing the franchise tax due based on gross receipts for the year 1992, (b) the tax due every year thereafter based in the gross receipts earned by NPC, (c) in all cases, to pay a surcharge of 25% of the tax due and unpaid, and (d) the sum of P 10,000.00 as litigation expense.[19]

On April 4, 2001, the petitioner filed a Motion for Reconsideration on the Court of Appeal s Decision. This was denied by the appellate court, viz:

"The Court finds no merit in NPC s motion for reconsideration. Its arguments reiterated therein that the taxing power of the province under Art. 137 (sic) of the Local Government Code refers merely to private persons or corporations in which category it (NPC) does not belong, and that the LGC (RA 7160) which is a general law may not impliedly repeal the NPC Charter which is a special law - finds the answer in Section 193 of the LGC to the effect that 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 xxx are hereby withdrawn. The repeal is direct and unequivocal, not implied.

IN VIEW WHEREOF, the motion for reconsideration is hereby DENIED.

SO ORDERED."[20]

In this petition for review, petitioner raises the following issues:

"A. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT NPC, A PUBLIC NON-PROFIT CORPORATION, IS LIABLE TO PAY A FRANCHISE TAX AS IT FAILED TO CONSIDER THAT SECTION 137 OF THE LOCAL GOVERNMENT CODE IN RELATION TO SECTION 131 APPLIES ONLY TO PRIVATE PERSONS OR CORPORATIONS ENJOYING A FRANCHISE.

B. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT NPC S EXEMPTION FROM ALL FORMS OF TAXES HAS BEEN REPEALED BY THE PROVISION OF THE LOCAL GOVERNMENT CODE AS THE ENACTMENT

OF A LATER LEGISLATION, WHICH IS A GENERAL LAW, CANNOT BE CONSTRUED TO HAVE REPEALED A SPECIAL LAW.

C. THE COURT OF APPEALS GRAVELY ERRED IN NOT CONSIDERING THAT AN EXERCISE OF POLICE POWER THROUGH TAX EXEMPTION SHOULD PREVAIL OVER THE LOCAL GOVERNMENT CODE."[21]

It is beyond dispute that the respondent city government has the authority to issue Ordinance No. 16592 and impose an annual tax on "businesses enjoying a franchise," pursuant to section 151 in relation to section 137 of the LGC, viz:

"Sec. 137. Franchise Tax.- Notwithstanding any exemption granted by any law or other special law, the province may impose a tax on businesses enjoying a franchise, at a rate not exceeding fifty percent (50%) of one percent (1%) of the gross annual receipts for the preceding calendar year based on the incoming receipt, or realized, within its territorial jurisdiction.

In the case of a newly started business, the tax shall not exceed one-twentieth (1/20) of one percent (1%) of the capital investment. In the succeeding calendar year, regardless of when the business started to operate, the tax shall be based on the gross receipts for the preceding calendar year, or any fraction thereof, as provided herein." mphasis supplied)

xxx

Sec. 151. Scope of Taxing Powers.- Except as otherwise provided in this Code, the city, may levy the taxes, fees, and charges which the province or municipality may impose: Provided, however, That the taxes, fees and charges levied and collected by highly urbanized and independent component cities shall accrue to them and distributed in accordance with the provisions of this Code.

The rates of taxes that the city may levy may exceed the maximum rates allowed for the province or municipality by not more than fifty percent (50%) except the rates of professional and amusement taxes."

Petitioner, however, submits that it is not liable to pay an annual franchise tax to the respondent city government. It contends that sections 137 and 151 of the LGC in relation to section 131, limit the taxing power of the respondent city government to private entities that are engaged in trade or occupation for profit.[22]

Section 131 (m) of the LGC defines a "franchise" as "a right or privilege, affected with public interest which is conferred upon private persons or corporations, under such terms and conditions as the government and its political subdivisions may impose in the interest of the public welfare, security and safety." From the phraseology of this provision, the petitioner claims that the word "private" modifies the terms "persons" and "corporations." Hence, when the LGC uses the term "franchise," petitioner submits that it should refer specifically to franchises granted to private natural persons and to private corporations.[23] Ergo, its charter should not be considered a "franchise" for the purpose of imposing the franchise tax in question.

On the other hand, section 131 (d) of the LGC defines "business" as "trade or commercial activity regularly engaged in as means of livelihood or with a view to profit." Petitioner claims that it is not engaged in an activity for profit, in as much as its charter specifically provides that it is a "non-profit organization." In any case, petitioner argues that the accumulation of profit is merely incidental to its operation; all these profits are required by law to be channeled for expansion and improvement of its facilities and services.[24]

Petitioner also alleges that it is an instrumentality of the National Government,[25] and as such, may not be taxed by the respondent city government. It cites the doctrine in Basco vs. Philippine Amusement and Gaming Corporation[26] where this Court held that local governments have no power to tax instrumentalities of the National Government, viz:

"Local governments have no power to tax instrumentalities of the National Government.

PAGCOR has a dual role, to operate and regulate gambling casinos. The latter role 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. (MC Culloch v. Maryland, 4 Wheat 316, 4 L Ed. 579)

This doctrine emanates from the supremacy of the National Government over local governments.

Justice Holmes, speaking for the Supreme Court, made reference 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 seriously burden it from accomplishment of them. (Antieau, Modern Constitutional Law, Vol. 2, p. 140, italics supplied)

Otherwise, mere creatures 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 tool regulation ( U.S. v. Sanchez, 340 US 42).

The power to tax which was called by Justice Marshall as the power to destroy (Mc Culloch v. Maryland, supra) cannot be allowed to defeat an instrumentality or creation of the very entity which has the inherent power to wield it."[27]

Petitioner contends that section 193 of Rep. Act No. 7160, withdrawing the tax privileges of government-owned or controlled corporations, is in the nature of an implied repeal. A special law, its charter cannot be amended or modified impliedly by the local government code which is a general law. Consequently, petitioner claims that its exemption from all taxes, fees or charges under its charter subsists despite the passage of the LGC, viz:

"It is a well-settled rule of statutory construction that repeals of statutes by implication are not favored and as much as possible, effect must be given to all enactments of the legislature. Moreover, it has to be conceded that the charter of the NPC constitutes a special law. Republic Act No. 7160, is a general law. It is a basic rule in statutory construction that the enactment of a later legislation which is a general law cannot be construed to have repealed a special law. Where there is a conflict between a general law and a special statute, the special statute should prevail since it evinces the legislative intent more clearly than the general statute."[28]

Finally, petitioner submits that the charter of the NPC, being a valid exercise of police power, should prevail over the LGC. It alleges that the power of the local government to impose franchise tax is subordinate to petitioner s exemption from taxation; "police power being the most pervasive, the least limitable and most demanding of all powers, including the power of taxation."[29]

The petition is without merit.

Taxes are the lifeblood of the government,[30] for without taxes, the government can neither exist nor endure. A principal attribute of sovereignty,[31] the exercise of taxing power derives its source from the very existence of the state whose social contract with its citizens obliges it to promote public interest and common good. The theory behind the exercise of the power to tax emanates from necessity;[32] without taxes, government cannot fulfill its mandate of promoting the general welfare and well-being of the people.

In recent years, the increasing social challenges of the times expanded the scope of state activity, and taxation has become a tool to realize social justice and the equitable distribution of wealth, economic progress and the protection of local industries as well as public welfare and similar objectives.[33] Taxation assumes even greater significance with the ratification of the 1987 Constitution. Thenceforth, the power to tax is no longer vested exclusively on Congress; local legislative bodies are now given direct authority to levy taxes, fees and other charges[34] pursuant to Article X, section 5 of the 1987 Constitution, viz:

"Section 5.- Each Local Government unit shall have the power to create its own sources of revenue, to levy taxes, fees and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees and charges shall accrue exclusively to the Local Governments."

This paradigm shift results from the realization that genuine development can be achieved only by strengthening local autonomy and promoting decentralization of governance. For a long time, the country s highly centralized government structure has bred a culture of dependence among local government leaders upon the national leadership. It has also "dampened the spirit of initiative, innovation and imaginative resilience in matters of local development on the part of local government leaders." [35] The only way to shatter this culture of dependence is to give the LGUs a wider role in the

delivery of basic services, and confer them sufficient powers to generate their own sources for the purpose. To achieve this goal, section 3 of Article X of the 1987 Constitution mandates Congress to enact a local government code that will, consistent with the basic policy of local autonomy, set the guidelines and limitations to this grant of taxing powers, viz:

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

To recall, prior to the enactment of the Rep. Act No. 7160, [36] also known as the Local Government Code of 1991 (LGC), various measures have been enacted to promote local autonomy. These include the Barrio Charter of 1959,[37] the Local Autonomy Act of 1959,[38] the Decentralization Act of 1967[39] and the Local Government Code of 1983.[40] Despite these initiatives, however, the shackles of dependence on the national government remained. Local government units were faced with the same problems that hamper their capabilities to participate effectively in the national development efforts, among which are: (a) inadequate tax base, (b) lack of fiscal control over external sources of income, (c) limited authority to prioritize and approve development projects, (d) heavy dependence on external sources of income, and (e) limited supervisory control over personnel of national line agencies.[41]

Considered as the most revolutionary piece of legislation on local autonomy, [42] the LGC effectively deals with the fiscal constraints faced by LGUs. It widens the tax base of LGUs to include taxes which were prohibited by previous laws such as the imposition of taxes on forest products, forest concessionaires, mineral products, mining operations, and the like. The LGC likewise provides enough flexibility to impose tax rates in accordance with their needs and capabilities. It does not prescribe graduated fixed rates but merely specifies the minimum and maximum tax rates and leaves the determination of the actual rates to the respective sanggunian.[43]

One of the most significant provisions of the LGC is the removal of the blanket exclusion of instrumentalities and agencies of the national government from the coverage of local taxation. Although as a general rule, LGUs cannot impose taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities, this rule now admits an exception, i.e., when specific provisions of the LGC authorize the LGUs to impose taxes, fees or charges on the aforementioned entities, viz:

"Section 133. Common Limitations on the Taxing Powers of the 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:

xxx

(o) Taxes, fees, or charges of any kind on the National Government, its agencies and instrumentalities, and local government units." mphasis supplied)

In view of the afore-quoted provision of the LGC, the doctrine in Basco vs. Philippine Amusement and Gaming Corporation[44] relied upon by the petitioner to support its claim no longer applies. To emphasize, the Basco case was decided prior to the effectivity of the LGC, when no law empowering the local government units to tax instrumentalities of the National Government was in effect. However, as this Court ruled in the case of Mactan Cebu International Airport Authority (MCIAA) vs. Marcos,[45] nothing prevents Congress from decreeing that even instrumentalities or agencies of the government performing governmental functions may be subject to tax.[46] In enacting the LGC, Congress exercised its prerogative to tax instrumentalities and agencies of government as it sees fit. Thus, after reviewing the specific provisions of the LGC, this Court held that MCIAA, although an instrumentality of the national government, was subject to real property tax, viz:

"Thus, reading together sections 133, 232, and 234 of the LGC, we conclude that as a general rule, as laid down in section 133, the taxing power of local governments cannot extend to the levy of inter alia, taxes, fees and charges of any kind on the national government, its agencies and instrumentalities, and local government units ; however, pursuant to section 232, provinces, cities and 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 use thereof has been granted for consideration or otherwise, to a taxable person as provided in the item (a) of the first paragraph of section 12. "[47]

In the case at bar, section 151 in relation to section 137 of the LGC clearly authorizes the respondent city government to impose on the petitioner the franchise tax in question.

In its general signification, a franchise is a privilege conferred by government authority, which does not belong to citizens of the country generally as a matter of common right.[48] In its specific sense, a

franchise may refer to a general or primary franchise, or to a special or secondary franchise. The former relates to the right to exist as a corporation, by virtue of duly approved articles of incorporation, or a charter pursuant to a special law creating the corporation.[49] The right under a primary or general franchise is vested in the individuals who compose the corporation and not in the corporation itself.[50] On the other hand, the latter refers to the right or privileges conferred upon an existing corporation such as the right to use the streets of a municipality to lay pipes of tracks, erect poles or string wires.[51] The rights under a secondary or special franchise are vested in the corporation and may ordinarily be conveyed or mortgaged under a general power granted to a corporation to dispose of its property, except such special or secondary franchises as are charged with a public use.[52]

In section 131 (m) of the LGC, Congress unmistakably defined a franchise in the sense of a secondary or special franchise. This is to avoid any confusion when the word franchise is used in the context of taxation. As commonly used, a franchise tax is "a tax on the privilege of transacting business in the state and exercising corporate franchises granted by the state."[53] It is not levied on the corporation simply for existing as a corporation, upon its property[54] or its income,[55] but on its exercise of the rights or privileges granted to it by the government. Hence, a corporation need not pay franchise tax from the time it ceased to do business and exercise its franchise.[56] It is within this context that the phrase "tax on businesses enjoying a franchise" in section 137 of the LGC should be interpreted and understood. Verily, to determine whether the petitioner is covered by the franchise tax in question, the following requisites should concur: (1) that petitioner has a "franchise" in the sense of a secondary or special franchise; and (2) that it is exercising its rights or privileges under this franchise within the territory of the respondent city government.

Petitioner fulfills the first requisite. Commonwealth Act No. 120, as amended by Rep. Act No. 7395, constitutes petitioner s primary and secondary franchises. It serves as the petitioner s charter, defining its composition, capitalization, the appointment and the specific duties of its corporate officers, and its corporate life span.[57] As its secondary franchise, Commonwealth Act No. 120, as amended, vests the petitioner the following powers which are not available to ordinary corporations, viz:

"xxx

(e) To conduct investigations and surveys for the development of water power in any part of the Philippines;

(f) To take water from any public stream, river, creek, lake, spring or waterfall in the Philippines, for the purposes specified in this Act; to intercept and divert the flow of waters from lands of riparian owners and from persons owning or interested in waters which are or may be necessary for said purposes, upon payment of just compensation therefor; to alter, straighten, obstruct or increase the flow of water in streams or water channels intersecting or connecting therewith or contiguous to its works or any part thereof: Provided, That just compensation shall be paid to any person or persons whose property is, directly or indirectly, adversely affected or damaged thereby;

(g) To construct, operate and maintain power plants, auxiliary plants, dams, reservoirs, pipes, mains, transmission lines, power stations and substations, and other works for the purpose of developing hydraulic power from any river, creek, lake, spring and waterfall in the Philippines and supplying such power to the inhabitants thereof; to acquire, construct, install, maintain, operate, and improve gas, oil, or steam engines, and/or other prime movers, generators and machinery in plants and/or auxiliary plants for the production of electric power; to establish, develop, operate, maintain and administer power and lighting systems for the transmission and utilization of its power generation; to sell electric power in bulk to (1) industrial enterprises, (2) city, municipal or provincial systems and other government institutions, (3) electric cooperatives, (4) franchise holders, and (5) real estate subdivisions xxx;

(h) To acquire, promote, hold, transfer, sell, lease, rent, mortgage, encumber and otherwise dispose of property incident to, or necessary, convenient or proper to carry out the purposes for which the Corporation was created: Provided, That in case a right of way is necessary for its transmission lines, easement of right of way shall only be sought: Provided, however, That in case the property itself shall be acquired by purchase, the cost thereof shall be the fair market value at the time of the taking of such property;

(i) To construct works across, or otherwise, any stream, watercourse, canal, ditch, flume, street, avenue, highway or railway of private and public ownership, as the location of said works may require xxx;

(j) To exercise the right of eminent domain for the purpose of this Act in the manner provided by law for instituting condemnation proceedings by the national, provincial and municipal governments;

xxx

(m) To cooperate with, and to coordinate its operations with those of the National Electrification Administration and public service entities;

(n) To exercise complete jurisdiction and control over watersheds surrounding the reservoirs of plants and/or projects constructed or proposed to be constructed by the Corporation. Upon determination by the Corporation of the areas required for watersheds for a specific project, the Bureau of Forestry, the Reforestation Administration and the Bureau of Lands shall, upon written advice by the Corporation, forthwith surrender jurisdiction to the Corporation of all areas embraced within the watersheds, subject to existing private rights, the needs of waterworks systems, and the requirements of domestic water supply;

(o) In the prosecution and maintenance of its projects, the Corporation shall adopt measures to prevent environmental pollution and promote the conservation, development and maximum utilization of natural resources xxx "[58]

With these powers, petitioner eventually had the monopoly in the generation and distribution of electricity. This monopoly was strengthened with the issuance of Pres. Decree No. 40,[59] nationalizing the electric power industry. Although Exec. Order No. 215[60] thereafter allowed private sector participation in the generation of electricity, the transmission of electricity remains the monopoly of the petitioner.

Petitioner also fulfills the second requisite. It is operating within the respondent city government s territorial jurisdiction pursuant to the powers granted to it by Commonwealth Act No. 120, as amended. From its operations in the City of Cabanatuan, petitioner realized a gross income of P107,814,187.96 in 1992. Fulfilling both requisites, petitioner is, and ought to be, subject of the franchise tax in question.

Petitioner, however, insists that it is excluded from the coverage of the franchise tax simply because its stocks are wholly owned by the National Government, and its charter characterized it as a "non-profit" organization.

These contentions must necessarily fail.

To stress, a franchise tax is imposed based not on the ownership but on the exercise by the corporation of a privilege to do business. The taxable entity is the corporation which exercises the franchise, and not the individual stockholders. By virtue of its charter, petitioner was created as a separate and distinct entity from the National Government. It can sue and be sued under its own name,[61] and can exercise all the powers of a corporation under the Corporation Code.[62]

To be sure, the ownership by the National Government of its entire capital stock does not necessarily imply that petitioner is not engaged in business. Section 2 of Pres. Decree No. 2029[63] classifies government-owned or controlled corporations (GOCCs) into those performing governmental functions and those performing proprietary functions, viz:

"A government-owned or controlled corporation is a stock or a non-stock corporation, whether performing governmental or proprietary functions, which is directly chartered by special law or if organized under the general corporation law is owned or controlled by the government directly, or indirectly through a parent corporation or subsidiary corporation, to the extent of at least a majority of its outstanding voting capital stock xxx." (emphases supplied)

Governmental functions are those pertaining to the administration of government, and as such, are treated as absolute obligation on the part of the state to perform while proprietary functions are those that are undertaken only by way of advancing the general interest of society, and are merely optional on the government.[64] Included in the class of GOCCs performing proprietary functions are "business-like" entities such as the National Steel Corporation (NSC), the National Development Corporation (NDC), the Social Security System (SSS), the Government Service Insurance System (GSIS), and the National Water Sewerage Authority (NAWASA),[65] among others.

Petitioner was created to "undertake the development of hydroelectric generation of power and the production of electricity from nuclear, geothermal and other sources, as well as the transmission of electric power on a nationwide basis."[66] Pursuant to this mandate, petitioner generates power and sells electricity in bulk. Certainly, these activities do not partake of the sovereign functions of the government. They are purely private and commercial undertakings, albeit imbued with public interest. The public interest involved in its activities, however, does not distract from the true nature of the petitioner as a commercial enterprise, in the same league with similar public utilities like telephone and telegraph companies, railroad companies, water supply and irrigation companies, gas, coal or light companies, power plants, ice plant among others; all of which are declared by this Court as ministrant or proprietary functions of government aimed at advancing the general interest of society.[67]

A closer reading of its charter reveals that even the legislature treats the character of the petitioner s enterprise as a "business," although it limits petitioner s profits to twelve percent (12%), viz:[68]

"(n) When essential to the proper administration of its corporate affairs or necessary for the proper transaction of its business or to carry out the purposes for which it was organized, to contract indebtedness and issue bonds subject to approval of the President upon recommendation of the Secretary of Finance;

(o) To exercise such powers and do such things as may be reasonably necessary to carry out the business and purposes for which it was organized, or which, from time to time, may be declared by the Board to be necessary, useful, incidental or auxiliary to accomplish the said purpose xxx."(emphases supplied)

It is worthy to note that all other private franchise holders receiving at least sixty percent (60%) of its electricity requirement from the petitioner are likewise imposed the cap of twelve percent (12%) on profits.[69] The main difference is that the petitioner is mandated to devote "all its returns from its capital investment, as well as excess revenues from its operation, for expansion"[70] while other franchise holders have the option to distribute their profits to its stockholders by declaring dividends. We do not see why this fact can be a source of difference in tax treatment. In both instances, the taxable entity is the corporation, which exercises the franchise, and not the individual stockholders.

We also do not find merit in the petitioner s contention that its tax exemptions under its charter subsist despite the passage of the LGC.

As a rule, tax exemptions are construed strongly against the claimant. Exemptions must be shown to exist clearly and categorically, and supported by clear legal provisions.[71] In the case at bar, the petitioner s sole refuge is section 13 of Rep. Act No. 6395 exempting from, among others, "all income taxes, franchise taxes and realty taxes to be paid to the National Government, its provinces, cities, municipalities and other government agencies and instrumentalities." However, section 193 of the LGC withdrew, subject to limited exceptions, the sweeping tax privileges previously enjoyed by private and public corporations. Contrary to the contention of petitioner, section 193 of the LGC is an express, albeit general, repeal of all statutes granting tax exemptions from local taxes.[72] It reads:

"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. No. 6938, non-stock and non-profit hospitals and educational institutions, are hereby withdrawn upon the effectivity of this Code." (emphases supplied)

It is a basic precept of statutory construction that the express mention of one person, thing, act, or consequence excludes all others as expressed in the familiar maxim expressio unius est exclusio alterius.[73] Not being a local water district, a cooperative registered under R.A. No. 6938, or a nonstock and non-profit hospital or educational institution, petitioner clearly does not belong to the exception. It is therefore incumbent upon the petitioner to point to some provisions of the LGC that expressly grant it exemption from local taxes.

But this would be an exercise in futility. Section 137 of the LGC clearly states that the LGUs can impose franchise tax "notwithstanding any exemption granted by any law or other special law." This particular provision of the LGC does not admit any exception. In City Government of San Pablo, Laguna v. Reyes,[74] MERALCO s exemption from the payment of franchise taxes was brought as an issue before this Court. The same issue was involved in the subsequent case of Manila Electric Company v. Province of Laguna.[75] Ruling in favor of the local government in both instances, we ruled that the franchise tax in question is imposable despite any exemption enjoyed by MERALCO under special laws, viz:

"It is our view that petitioners correctly rely on provisions of Sections 137 and 193 of the LGC to support their position that MERALCO s tax exemption has been withdrawn. The explicit language of section 137 which authorizes the province to impose franchise tax notwithstanding any exemption granted by any law or other special law is all-encompassing and clear. The franchise tax is imposable despite any exemption enjoyed under special laws.

Section 193 buttresses the withdrawal of extant tax exemption privileges. By stating that 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 (1) local water districts, (2) cooperatives duly registered under R.A. 6938, (3) non-stock and non-profit hospitals and educational institutions, are withdrawn upon the effectivity of this code, the obvious import is to limit the exemptions to the three enumerated entities. It is a basic precept of statutory construction that the express mention of one person, thing, act, or consequence excludes all others as expressed in the familiar maxim expressio unius est exclusio alterius. In the absence of any provision of

the Code to the contrary, and we find no other provision in point, any existing tax exemption or incentive enjoyed by MERALCO under existing law was clearly intended to be withdrawn.

Reading together sections 137 and 193 of the LGC, we conclude that under the LGC the local government unit may now impose a local tax at a rate not exceeding 50% of 1% of the gross annual receipts for the preceding calendar based on the incoming receipts realized within its territorial jurisdiction. The legislative purpose to withdraw tax privileges enjoyed under existing law or charter is clearly manifested by the language used on (sic) Sections 137 and 193 categorically withdrawing such exemption subject only to the exceptions enumerated. Since it would be not only tedious and impractical to attempt to enumerate all the existing statutes providing for special tax exemptions or privileges, the LGC provided for an express, albeit general, withdrawal of such exemptions or privileges. No more unequivocal language could have been used."[76] (emphases supplied).

It is worth mentioning that section 192 of the LGC empowers the LGUs, through ordinances duly approved, to grant tax exemptions, initiatives or reliefs. [77] But in enacting section 37 of Ordinance No. 165-92 which imposes an annual franchise tax "notwithstanding any exemption granted by law or other special law," the respondent city government clearly did not intend to exempt the petitioner from the coverage thereof.

Doubtless, the power to tax is the most effective instrument to raise needed revenues to finance and support myriad activities of the 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. As this Court observed in the Mactan case, "the original reasons for the withdrawal of tax exemption privileges granted to government-owned or 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."[78] With the added burden of devolution, it is even more imperative for government entities to share in the requirements of development, fiscal or otherwise, by paying taxes or other charges due from them.

IN VIEW WHEREOF, the instant petition is DENIED and the assailed Decision and Resolution of the Court of Appeals dated March 12, 2001 and July 10, 2001, respectively, are hereby AFFIRMED.

SO ORDERED.

Panganiban, Sandoval-Gutierrez, Corona, and Carpio-Morales, JJ., concur.

[1] Petition for Review on Certiorari under Rule 45 of the Rules of Civil Procedure. See Petition, Rollo, pp. 8-28.

[2] CA-G.R. CV No. 53297, penned by Assoc. Justice Rodrigo Cosico. See Annex "A" of the Petition, Rollo, pp. 30-38.

[3] Id., Annex "B" of the Petition, Rollo, p. 39.

[4] Among the amendments to Comm. Act No. 120 are Rep. Act No. 6395 (1971) and Pres. Decree No. 938 (1976).

[5] Rep. Act No. 6395, sec. 2.

[6] Id., sec. 3.

[7] Rollo, p. 41.

[8] "Section 37. Imposition of Tax- Notwithstanding any exemption granted by law or other special law, there is hereby imposed an annual tax on a business enjoying franchise at a rate of 75% of 1% of the gross receipts for the preceding year realized within the territorial jurisdiction of Cabanatuan City."

[9] Rollo, p. 41.

[10] Rollo, p. 48. Rep. Act No. 6395, sec. 5. "Capital Stock of the Corporation.- The authorized capital stock of the Corporation is three hundred million pesos divided into three million shares having a par value of one hundred pesos each, which shares are not to be transferred, negotiated, pledged, mortgaged, or otherwise given as a security for the payment of any obligation. The said capital stock has

been subscribed and paid wholly by the Government of the Philippines in accordance with the provisions of Republic Act Numbered Four Thousand Eight Hundred Ninety-Seven."

[11] Rollo, pp. 52-53.

[12] Rep. Act No. 6395, sec. 13, as amended by P.D. No. 938.

[13] Complaint, Records, pp. 1-3. The case was docketed as Civil Case No. 1659-AF and was raffled to Branch 30 presided by Judge Federico B. Fajardo, Jr.

[14] "The Local Government Code of 1991." The law took effect on January 1, 1992.

[15] Records, pp. 45-54.

[16] Records, pp. 52-54.

[17] Supra note 2.

[18] Id. at 36-37.

[19] Id. at 38.

[20] Rollo, p. 39.

[21] Petition, pp. 9-10; Rollo, pp. 16-17.

[22] Rollo, p. 18.

[23] Petition, p. 11; Rollo, p. 18.

[24] Ibid.

[25] Citing the case of Maceda v. Macaraig, 197 SCRA 771, 800 (1991).

[26] 197 SCRA 52 (1991).

[27] Id. at 64-65.

[28] Rollo, p. 21.

[29] Id. at 21-22.

[30] Commissioner vs. Pineda, 21 SCRA 105, 110 (1967) citing Bull vs. United States, 295 U.S. 247, 15 AFTR 1069, 1073; Surigao Electric Co., Inc. vs. Court of Tax Appeals, 57 SCRA 523 (1974).

[31] Hong Kong & Shanghai Banking Corp. vs. Rafferty, 19 Phil. 145 (1918); Wee Poco vs. Posadas, 64 Phil. 640 (1937); Reyes vs. Almanzor, 196 SCRA 322, 327 (1991).

[32] Phil. Guaranty Co., Inc. vs. CIR, 13 SCRA 775, 780 (1965).

[33] Vitug and Acosta, Tax Law and Jurisprudence, 2nd ed. (2000) at 1.

[34] Mactan Cebu International Airport Authority vs. Marcos, 261 SCRA 667, 680 (1996) citing Cruz, Isagani A., Constitutional Law (1991) at 84.

[35] Pimentel, The Local Government Code of 1991: The Key to National Development (1993) at 2-4.

[36] Supra note 14.

[37] Rep. Act No. 2370 (1959).

[38] Rep. Act No. 2264 (1959).

[39] Rep. Act No. 5185 (1967).

[40] B.P. Blg. 337 (1983).

[41] Sponsorship Remarks of Cong. Hilario De Pedro III, Records of the House of Representatives, 3rd Regular Session (1989-1990), vol. 8, p. 757.

[42] Pimentel, supra note 20; "Brilliantes, Issues and Trends in Local Governance in the Philippines," The Local Government Code: An Assessment" (1999) at 3.

[43] Supra note 41.

[44] Supra note 26.

[45] Supra note 34.

[46] Id. at 692.

[47] Id. at 686.

[48] J.R. S. Business Corp., et al. vs. Ofilada, et al., 120 Phil. 618, 628 (1964).

[49] J. Campos, Jr., I Corporation Code (1990) at 2.

[50] Supra note 48.

[51] Ibid.

[52] Ibid.

[53] People v. Knight, 67 N.E. 65, 66, 174 N.Y. 475, 63 L.R.A. 87.

[54] Tremont & Sufflok Mills v. City of Lowell, 59 N.E. 1007, 178 Mass. 469.

[55] United North & South Development Co. v. Health, Tex. Civ. App., 78 S.W.2d 650, 652.

[56] In re Commercial Safe Deposit Co. of Buffalo, 266 N.Y.S. 626, 148 Misc. 527.

[57] Rep. Act No. 6395, sec. 2 extends NAPOCOR s corporate existence "for fifty years from and after the expiration of its present corporate existence."

[58] Rep. Act No. 6395, sec. 3.

[59] "Establishing Basic Policies for the Electric Power Industry." Issued by former President Ferdinand E. Marcos on November 7, 1972.

[60] "Amending Presidential Decree No. 40 and Allowing the Private Sector to Generate Electricity." Issued by former President Corazon C. Aquino on July 10, 1987.

[61] Rep. Act No. 6395, sec. 3 (d).

[62] Rep. Act No. 6395, sec. 4 (p) authorizes NAPOCOR to "exercise all the powers of a corporation under the Corporation Law insofar as they are not inconsistent with the provisions of this Act."

[63] Approved on February 4, 1986.

[64] Social Security System Employees Association vs. Soriano, 7 SCRA 1016, 1020 (1963).

[65] See Boy Scouts of the Philippines vs. NLRC, 196 SCRA 176, 185 (1991); Shipside Incorporated vs. CA, 352 SCRA 334, 350 (2001).

[66] Rep. Act No. 6395, Sec. 2.

[67] National Waterworks & Sewerage Authority vs. NWSA Consolidated Unions, 11 SCRA 766, 774 (1964).

[68] Rep. Act No. 7648, sec. 4. The law, also known as "Electric Power Crisis Act," was signed on April 5, 1993.

[69] Rep. Act No. 6395, sec. 14 reads: "Contract with Franchise Holders, Conditions of . - The Corporation shall, in any contract for the supply of electric power to a franchise holder, require as a condition that the franchise holder, if it receives at least sixty per cent of its electric power and energy from the Corporation, shall not realize a rate of return of more than twelve per cent annually on a rate base composed of the sum of its net assets in operation revalued from time to time, plus two-month operating capital, subject to the non-impairment-of-obligations-of-contracts provision of the Constitution: Provided, That in determining the rate of return, interest on loans, bonds and other debts shall not be included as expenses. It shall likewise be a condition in the contract that the Corporation shall cancel or revoke the contract upon judgment of the Public Service Commission after due hearing and upon a showing by customers of the franchise holder that household electrical appliances, have been damaged resulting from deliberate overloading by, or power deficiency of, the franchise holder. The Corporation shall renew all existing contracts with franchise holders for the supply of electric power and energy in order to give effect to the provisions hereof."

[70] Rep. Act No. 6395, sec. 13.

[71] Commissioner of Internal Revenue v. Guerrero, 21 SCRA 180 (1967).

[72] City Government of San Pablo, Laguna v. Reyes, 305 SCRA 353 (1999).

[73] Commissioner of Customs vs. Court of Tax Appeals, 251 SCRA 42, 56 (1995).

[74] Supra note 72.

[75] 306 SCRA 750 (1999).

[76] Supra note 72 at 361-362.

[77] "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."

[78] Supra note 34 at 690.

\---!e-library! 6.0 Philippines Copyright 2000 by Sony Valdez---/

([2003V368] NATIONAL POWER CORPORATION, petitioner, vs. CITY OF CABANATUAN, respondent., G.R. No. 149110, 2003 Apr 9, 3rd Division)

Republic of the Philippines SUPREME COURT Manila THIRD DIVISION G.R. No. 149110 April 9, 2003

NATIONAL POWER CORPORATION, petitioner, vs. CITY OF CABANATUAN, respondent. PUNO, J.: This is a petition for review1 of the Decision2 and the Resolution3 of the Court of Appeals dated March 12, 2001 and July 10, 2001, respectively, finding petitioner National Power Corporation (NPC) liable to pay franchise tax to respondent City of Cabanatuan. Petitioner is a government-owned and controlled corporation created under Commonwealth Act No. 120, as amended.4 It is tasked to undertake the "development of hydroelectric generations of power and the production of electricity from nuclear, geothermal and other sources, as well as, the transmission of electric power on a nationwide basis."5 Concomitant to its mandated duty, petitioner has, among others, the power to construct, operate and maintain power plants, auxiliary plants, power stations and substations for the purpose of developing hydraulic power and supplying such power to the inhabitants.6 For many years now, petitioner sells electric power to the residents of Cabanatuan City, posting a gross income of P107,814,187.96 in 1992.7 Pursuant to section 37 of Ordinance No. 165-92,8 the respondent assessed the petitioner a franchise tax amounting to P808,606.41, representing 75% of 1% of the latter's gross receipts for the preceding year.9 Petitioner, whose capital stock was subscribed and paid wholly by the Philippine Government,10 refused to pay the tax assessment. It argued that the respondent has no authority to impose tax on government entities. Petitioner also contended that as a non-profit organization, it is exempted from the payment of all forms of taxes, charges, duties or fees11 in accordance with sec. 13 of Rep. Act No. 6395, as amended, viz: "Sec.13. Non-profit Character of the Corporation; Exemption from all Taxes, Duties, Fees, Imposts and Other Charges by Government and Governmental Instrumentalities.- The Corporation shall be non-profit and shall devote all its return from its capital investment, as well as excess revenues from its operation, for expansion. To enable the Corporation to pay its indebtedness and obligations and in furtherance and effective implementation of the policy enunciated in Section one of this Act, the Corporation is hereby exempt: (a) From the payment of all taxes, duties, fees, imposts, charges, costs and service fees in any court or administrative proceedings in which it may be a party, restrictions and duties to the Republic of the Philippines, its provinces, cities, municipalities and other government agencies and instrumentalities;

(b) From all income taxes, franchise taxes and realty taxes to be paid to the National Government, its provinces, cities, municipalities and other government agencies and instrumentalities; (c) From all import duties, compensating taxes and advanced sales tax, and wharfage fees on import of foreign goods required for its operations and projects; and (d) From all taxes, duties, fees, imposts, and all other charges imposed by the Republic of the Philippines, its provinces, cities, municipalities and other government agencies and instrumentalities, on all petroleum products used by the Corporation in the generation, transmission, utilization, and sale of electric power."12 The respondent filed a collection suit in the Regional Trial Court of Cabanatuan City, demanding that petitioner pay the assessed tax due, plus a surcharge equivalent to 25% of the amount of tax, and 2% monthly interest.13 Respondent alleged that petitioner's exemption from local taxes has been repealed by section 193 of Rep. Act No. 7160,14 which reads as follows: "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. No. 6938, non-stock and non-profit hospitals and educational institutions, are hereby withdrawn upon the effectivity of this Code." On January 25, 1996, the trial court issued an Order15 dismissing the case. It ruled that the tax exemption privileges granted to petitioner subsist despite the passage of Rep. Act No. 7160 for the following reasons: (1) Rep. Act No. 6395 is a particular law and it may not be repealed by Rep. Act No. 7160 which is a general law; (2) section 193 of Rep. Act No. 7160 is in the nature of an implied repeal which is not favored; and (3) local governments have no power to tax instrumentalities of the national government. Pertinent portion of the Order reads: "The question of whether a particular law has been repealed or not by a subsequent law is a matter of legislative intent. The lawmakers may expressly repeal a law by incorporating therein repealing provisions which expressly and specifically cite(s) the particular law or laws, and portions thereof, that are intended to be repealed. A declaration in a statute, usually in its repealing clause, that a particular and specific law, identified by its number or title is repealed is an express repeal; all others are implied repeal. Sec. 193 of R.A. No. 7160 is an implied repealing clause because it fails to identify the act or acts that are intended to be repealed. It is a well-settled rule of statutory construction that repeals of statutes by implication are not favored. The presumption is against inconsistency and repugnancy for the legislative is presumed to know the existing laws on the subject and not to have enacted inconsistent or conflicting statutes. It is also a wellsettled rule that, generally, general law does not repeal a special law unless it clearly appears that the legislative has intended by the latter general act to modify or repeal the earlier special law. Thus, despite the passage of R.A. No. 7160 from which the questioned Ordinance No. 165-92 was based, the tax exemption privileges of defendant NPC remain. Another point going against plaintiff in this case is the ruling of the Supreme Court in the case of Basco vs. Philippine Amusement and Gaming Corporation, 197 SCRA 52, where it was held that: 'Local governments have no power to tax instrumentalities of the National Government. PAGCOR is a government owned or controlled corporation with an original charter, PD 1869. All of its shares of stocks are owned by the National Government. xxx 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 mere local government.' Like PAGCOR, NPC, being a government owned and controlled corporation with an original charter and its shares of stocks owned by the National Government, is beyond the taxing power of the Local Government. Corollary to this, it should be noted here that in the NPC Charter's declaration of Policy, Congress declared that: 'xxx (2) the total electrification of the Philippines through the development of power from all services to meet the needs of industrial development and dispersal and needs of rural electrification are primary objectives of the nations which shall be pursued coordinately and supported by all instrumentalities and agencies of the government, including its financial institutions.' (underscoring supplied). To allow plaintiff to subject defendant to its tax-ordinance would be to impede the avowed goal of this government instrumentality. Unlike the State, a city or municipality has no inherent power of taxation. Its taxing power is limited to that which is provided for in its charter or other statute. Any grant of taxing power is to be construed strictly, with doubts resolved against its existence. From the existing law and the rulings of the Supreme Court itself, it is very clear that the plaintiff could not impose the subject tax on the defendant."16 On appeal, the Court of Appeals reversed the trial court's Order17 on the ground that section 193, in relation to sections 137 and 151 of the LGC, expressly withdrew the exemptions granted to the petitioner.18 It ordered the petitioner to pay the respondent city government the following: (a) the sum of P808,606.41 representing the franchise tax due based on gross receipts for the year 1992, (b) the tax due every year thereafter based in the gross receipts earned by NPC, (c) in all cases, to pay a surcharge of 25% of the tax due and unpaid, and (d) the sum of P 10,000.00 as litigation expense.19 On April 4, 2001, the petitioner filed a Motion for Reconsideration on the Court of Appeal's Decision. This was denied by the appellate court, viz: "The Court finds no merit in NPC's motion for reconsideration. Its arguments reiterated therein that the taxing power of the province under Art. 137 (sic) of the Local Government Code refers merely to private persons or corporations in which category it (NPC) does not belong, and that the LGC (RA 7160) which is a general law may not impliedly repeal the NPC Charter which is a special lawfinds the answer in Section 193 of the LGC to the effect that '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 xxx are hereby withdrawn.' The repeal is direct and unequivocal, not implied.

IN VIEW WHEREOF, the motion for reconsideration is hereby DENIED. SO ORDERED."20 In this petition for review, petitioner raises the following issues: "A. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT NPC, A PUBLIC NON-PROFIT CORPORATION, IS LIABLE TO PAY A FRANCHISE TAX AS IT FAILED TO CONSIDER THAT SECTION 137 OF THE LOCAL GOVERNMENT CODE IN RELATION TO SECTION 131 APPLIES ONLY TO PRIVATE PERSONS OR CORPORATIONS ENJOYING A FRANCHISE. B. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT NPC'S EXEMPTION FROM ALL FORMS OF TAXES HAS BEEN REPEALED BY THE PROVISION OF THE LOCAL GOVERNMENT CODE AS THE ENACTMENT OF A LATER LEGISLATION, WHICH IS A GENERAL LAW, CANNOT BE CONSTRUED TO HAVE REPEALED A SPECIAL LAW. C. THE COURT OF APPEALS GRAVELY ERRED IN NOT CONSIDERING THAT AN EXERCISE OF POLICE POWER THROUGH TAX EXEMPTION SHOULD PREVAIL OVER THE LOCAL GOVERNMENT CODE."21 It is beyond dispute that the respondent city government has the authority to issue Ordinance No. 165-92 and impose an annual tax on "businesses enjoying a franchise," pursuant to section 151 in relation to section 137 of the LGC, viz: "Sec. 137. Franchise Tax. - Notwithstanding any exemption granted by any law or other special law, the province may impose a tax on businesses enjoying a franchise, at a rate not exceeding fifty percent (50%) of one percent (1%) of the gross annual receipts for the preceding calendar year based on the incoming receipt, or realized, within its territorial jurisdiction. In the case of a newly started business, the tax shall not exceed one-twentieth (1/20) of one percent (1%) of the capital investment. In the succeeding calendar year, regardless of when the business started to operate, the tax shall be based on the gross receipts for the preceding calendar year, or any fraction thereof, as provided herein." (emphasis supplied) x x x

Sec. 151. Scope of Taxing Powers.- Except as otherwise provided in this Code, the city, may levy the taxes, fees, and charges which the province or municipality may impose: Provided, however, That the taxes, fees and charges levied and collected by highly urbanized and independent component cities shall accrue to them and distributed in accordance with the provisions of this Code. The rates of taxes that the city may levy may exceed the maximum rates allowed for the province or municipality by not more than fifty percent (50%) except the rates of professional and amusement taxes." Petitioner, however, submits that it is not liable to pay an annual franchise tax to the respondent city government. It contends that sections 137 and 151 of the LGC in relation to section 131, limit the taxing power of the respondent city government to private entities that are engaged in trade or occupation for profit.22 Section 131 (m) of the LGC defines a "franchise" as "a right or privilege, affected with public interest which is conferred upon private persons or corporations, under such terms and conditions as the government and its political subdivisions may impose in the interest of the public welfare, security and safety." From the phraseology of this provision, the petitioner claims that the word "private" modifies the terms "persons" and "corporations." Hence, when the LGC uses the term "franchise," petitioner submits that it should refer specifically to franchises granted to private natural persons and to private corporations.23 Ergo, its charter should not be considered a "franchise" for the purpose of imposing the franchise tax in question. On the other hand, section 131 (d) of the LGC defines "business" as "trade or commercial activity regularly engaged in as means of livelihood or with a view to profit." Petitioner claims that it is not engaged in an activity for profit, in as much as its charter specifically provides that it is a "non-profit organization." In any case, petitioner argues that the accumulation of profit is merely incidental to its operation; all these profits are required by law to be channeled for expansion and improvement of its facilities and services.24 Petitioner also alleges that it is an instrumentality of the National Government,25 and as such, may not be taxed by the respondent city government. It cites the doctrine in Basco vs. Philippine Amusement and Gaming Corporation26where this Court held that local governments have no power to tax instrumentalities of the National Government, viz: "Local governments have no power to tax instrumentalities of the National Government. PAGCOR has a dual role, to operate and regulate gambling casinos. The latter role 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. (MC Culloch v. Maryland, 4 Wheat 316, 4 L Ed. 579)'

This doctrine emanates from the 'supremacy' of the National Government over local governments. 'Justice Holmes, speaking for the Supreme Court, made reference 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 seriously burden it from accomplishment of them.' (Antieau, Modern Constitutional Law, Vol. 2, p. 140, italics supplied) Otherwise, mere creatures 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 tool regulation' (U.S. v. Sanchez, 340 US 42). The power to tax which was called by Justice Marshall as the 'power to destroy' (Mc Culloch v. Maryland,supra) cannot be allowed to defeat an instrumentality or creation of the very entity which has the inherent power to wield it."27 Petitioner contends that section 193 of Rep. Act No. 7160, withdrawing the tax privileges of government-owned or controlled corporations, is in the nature of an implied repeal. A special law, its charter cannot be amended or modified impliedly by the local government code which is a general law. Consequently, petitioner claims that its exemption from all taxes, fees or charges under its charter subsists despite the passage of the LGC, viz: "It is a well-settled rule of statutory construction that repeals of statutes by implication are not favored and as much as possible, effect must be given to all enactments of the legislature. Moreover, it has to be conceded that the charter of the NPC constitutes a special law. Republic Act No. 7160, is a general law. It is a basic rule in statutory construction that the enactment of a later legislation which is a general law cannot be construed to have repealed a special law. Where there is a conflict between a general law and a special statute, the special statute should prevail since it evinces the legislative intent more clearly than the general statute."28 Finally, petitioner submits that the charter of the NPC, being a valid exercise of police power, should prevail over the LGC. It alleges that the power of the local government to impose franchise tax is subordinate to petitioner's exemption from taxation; "police power being the most pervasive, the least limitable and most demanding of all powers, including the power of taxation."29 The petition is without merit. Taxes are the lifeblood of the government, 30 for without taxes, the government can neither exist nor endure. A principal attribute of sovereignty,31 the exercise of taxing power derives its source from the very existence of the state whose social contract with its citizens obliges it to promote public interest and common good. The theory behind the exercise of the power to tax emanates from necessity; 32 without taxes, government cannot fulfill its mandate of promoting the general welfare and well-being of the people. In recent years, the increasing social challenges of the times expanded the scope of state activity, and taxation has become a tool to realize social justice and the equitable distribution of wealth, economic progress and the protection of local industries as well as public welfare and similar objectives.33 Taxation assumes even greater significance with the ratification of the 1987 Constitution. Thenceforth, the power to tax is no longer vested exclusively on Congress; local legislative bodies are now given direct authority to levy taxes, fees and other charges34 pursuant to Article X, section 5 of the 1987 Constitution, viz: "Section 5.- Each Local Government unit shall have the power to create its own sources of revenue, to levy taxes, fees and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees and charges shall accrue exclusively to the Local Governments." This paradigm shift results from the realization that genuine development can be achieved only by strengthening local autonomy and promoting decentralization of governance. For a long time, the country's highly centralized government structure has bred a culture of dependence among local government leaders upon the national leadership. It has also "dampened the spirit of initiative, innovation and imaginative resilience in matters of local development on the part of local government leaders."35 The only way to shatter this culture of dependence is to give the LGUs a wider role in the delivery of basic services, and confer them sufficient powers to generate their own sources for the purpose. To achieve this goal, section 3 of Article X of the 1987 Constitution mandates Congress to enact a local government code that will, consistent with the basic policy of local autonomy, set the guidelines and limitations to this grant of taxing powers, viz: "Section 3. The Congress shall enact a local government code which shall provide for a more responsive and accountable local government structure instituted through a system of decentralization with effective mechanisms of recall, initiative, and referendum, allocate among the different local government units their powers, responsibilities, and resources, and provide for the qualifications, election, appointment and removal, term, salaries, powers and functions and duties of local officials, and all other matters relating to the organization and operation of the local units." To recall, prior to the enactment of the Rep. Act No. 7160, 36 also known as the Local Government Code of 1991 (LGC), various measures have been enacted to promote local autonomy. These include the Barrio Charter of 1959,37the Local Autonomy Act of 1959,38 the Decentralization Act of 196739 and the Local Government Code of 1983.40Despite these initiatives, however, the shackles of dependence on the national government remained. Local government units were faced with the same problems that hamper their capabilities to participate effectively in the national development efforts, among which are: (a) inadequate tax base, (b) lack of fiscal control over external sources of income, (c) limited authority to prioritize and approve development projects, (d) heavy dependence on external sources of income, and (e) limited supervisory control over personnel of national line agencies.41 Considered as the most revolutionary piece of legislation on local autonomy,42 the LGC effectively deals with the fiscal constraints faced by LGUs. It widens the tax base of LGUs to include taxes which were prohibited by previous laws such as the imposition of taxes on forest products, forest concessionaires, mineral products, mining operations, and the like. The LGC likewise provides enough flexibility to impose tax rates in accordance with

their needs and capabilities. It does not prescribe graduated fixed rates but merely specifies the minimum and maximum tax rates and leaves the determination of the actual rates to the respective sanggunian.43 One of the most significant provisions of the LGC is the removal of the blanket exclusion of instrumentalities and agencies of the national government from the coverage of local taxation. Although as a general rule, LGUs cannot impose taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities, this rule now admits an exception, i.e., when specific provisions of the LGC authorize the LGUs to impose taxes, fees or charges on the aforementioned entities, viz: "Section 133. Common Limitations on the Taxing Powers of the 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: x x x

(o) Taxes, fees, or charges of any kind on the National Government, its agencies and instrumentalities, and local government units." (emphasis supplied) In view of the afore-quoted provision of the LGC, the doctrine in Basco vs. Philippine Amusement and Gaming Corporation44 relied upon by the petitioner to support its claim no longer applies. To emphasize, the Basco case was decided prior to the effectivity of the LGC, when no law empowering the local government units to tax instrumentalities of the National Government was in effect. However, as this Court ruled in the case of Mactan Cebu International Airport Authority (MCIAA) vs. Marcos,45 nothing prevents Congress from decreeing that even instrumentalities or agencies of the government performing governmental functions may be subject to tax.46 In enacting the LGC, Congress exercised its prerogative to tax instrumentalities and agencies of government as it sees fit. Thus, after reviewing the specific provisions of the LGC, this Court held that MCIAA, although an instrumentality of the national government, was subject to real property tax, viz: "Thus, reading together sections 133, 232, and 234 of the LGC, we conclude that as a general rule, as laid down in section 133, the taxing power of local governments cannot extend to the levy of inter alia, 'taxes, fees and charges of any kind on the national government, its agencies and instrumentalities, and local government units'; however, pursuant to section 232, provinces, cities and 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 use thereof has been granted for consideration or otherwise, to a taxable person as provided in the item (a) of the first paragraph of section 12.'"47 In the case at bar, section 151 in relation to section 137 of the LGC clearly authorizes the respondent city government to impose on the petitioner the franchise tax in question. In its general signification, a franchise is a privilege conferred by government authority, which does not belong to citizens of the country generally as a matter of common right.48 In its specific sense, a franchise may refer to a general or primary franchise, or to a special or secondary franchise. The former relates to the right to exist as a corporation, by virtue of duly approved articles of incorporation, or a charter pursuant to a special law creating the corporation.49 The right under a primary or general franchise is vested in the individuals who compose the corporation and not in the corporation itself.50 On the other hand, the latter refers to the right or privileges conferred upon an existing corporation such as the right to use the streets of a municipality to lay pipes of tracks, erect poles or string wires.51 The rights under a secondary or special franchise are vested in the corporation and may ordinarily be conveyed or mortgaged under a general power granted to a corporation to dispose of its property, except such special or secondary franchises as are charged with a public use.52 In section 131 (m) of the LGC, Congress unmistakably defined a franchise in the sense of a secondary or special franchise. This is to avoid any confusion when the word franchise is used in the context of taxation. As commonly used, a franchise tax is "a tax on the privilege of transacting business in the state and exercising corporate franchises granted by the state."53 It is not levied on the corporation simply for existing as a corporation, upon its property54 or its income,55 but on its exercise of the rights or privileges granted to it by the government. Hence, a corporation need not pay franchise tax from the time it ceased to do business and exercise its franchise.56 It is within this context that the phrase "tax on businesses enjoying a franchise" in section 137 of the LGC should be interpreted and understood. Verily, to determine whether the petitioner is covered by the franchise tax in question, the following requisites should concur: (1) that petitioner has a "franchise" in the sense of a secondary or special franchise; and (2) that it is exercising its rights or privileges under this franchise within the territory of the respondent city government. Petitioner fulfills the first requisite. Commonwealth Act No. 120, as amended by Rep. Act No. 7395, constitutes petitioner's primary and secondary franchises. It serves as the petitioner's charter, defining its composition, capitalization, the appointment and the specific duties of its corporate officers, and its corporate life span.57 As its secondary franchise, Commonwealth Act No. 120, as amended, vests the petitioner the following powers which are not available to ordinary corporations, viz: "x x x (e) To conduct investigations and surveys for the development of water power in any part of the Philippines; (f) To take water from any public stream, river, creek, lake, spring or waterfall in the Philippines, for the purposes specified in this Act; to intercept and divert the flow of waters from lands of riparian owners and from persons owning or interested in waters which are or may be necessary for said purposes, upon payment of just compensation therefor; to alter, straighten, obstruct or increase the flow of water in streams or water channels intersecting or connecting therewith or contiguous to its works or any part thereof: Provided, That just compensation shall be paid to any person or persons whose property is, directly or indirectly, adversely affected or damaged thereby; (g) To construct, operate and maintain power plants, auxiliary plants, dams, reservoirs, pipes, mains, transmission lines, power stations and substations, and other works for the purpose of developing hydraulic power from any river, creek, lake, spring and waterfall in the Philippines and supplying such power to the inhabitants thereof; to acquire, construct, install, maintain, operate, and improve gas, oil, or

steam engines, and/or other prime movers, generators and machinery in plants and/or auxiliary plants for the production of electric power; to establish, develop, operate, maintain and administer power and lighting systems for the transmission and utilization of its power generation; to sell electric power in bulk to (1) industrial enterprises, (2) city, municipal or provincial systems and other government institutions, (3) electric cooperatives, (4) franchise holders, and (5) real estate subdivisions x x x; (h) To acquire, promote, hold, transfer, sell, lease, rent, mortgage, encumber and otherwise dispose of property incident to, or necessary, convenient or proper to carry out the purposes for which the Corporation was created: Provided, That in case a right of way is necessary for its transmission lines, easement of right of way shall only be sought: Provided, however, That in case the property itself shall be acquired by purchase, the cost thereof shall be the fair market value at the time of the taking of such property; (i) To construct works across, or otherwise, any stream, watercourse, canal, ditch, flume, street, avenue, highway or railway of private and public ownership, as the location of said works may require xxx; (j) To exercise the right of eminent domain for the purpose of this Act in the manner provided by law for instituting condemnation proceedings by the national, provincial and municipal governments; x x x

(m) To cooperate with, and to coordinate its operations with those of the National Electrification Administration and public service entities; (n) To exercise complete jurisdiction and control over watersheds surrounding the reservoirs of plants and/or projects constructed or proposed to be constructed by the Corporation. Upon determination by the Corporation of the areas required for watersheds for a specific project, the Bureau of Forestry, the Reforestation Administration and the Bureau of Lands shall, upon written advice by the Corporation, forthwith surrender jurisdiction to the Corporation of all areas embraced within the watersheds, subject to existing private rights, the needs of waterworks systems, and the requirements of domestic water supply; (o) In the prosecution and maintenance of its projects, the Corporation shall adopt measures to prevent environmental pollution and promote the conservation, development and maximum utilization of natural resources xxx "58 With these powers, petitioner eventually had the monopoly in the generation and distribution of electricity. This monopoly was strengthened with the issuance of Pres. Decree No. 40,59 nationalizing the electric power industry. Although Exec. Order No. 21560 thereafter allowed private sector participation in the generation of electricity, the transmission of electricity remains the monopoly of the petitioner. Petitioner also fulfills the second requisite. It is operating within the respondent city government's territorial jurisdiction pursuant to the powers granted to it by Commonwealth Act No. 120, as amended. From its operations in the City of Cabanatuan, petitioner realized a gross income of P107,814,187.96 in 1992. Fulfilling both requisites, petitioner is, and ought to be, subject of the franchise tax in question. Petitioner, however, insists that it is excluded from the coverage of the franchise tax simply because its stocks are wholly owned by the National Government, and its charter characterized it as a "non-profit" organization. These contentions must necessarily fail. To stress, a franchise tax is imposed based not on the ownership but on the exercise by the corporation of a privilege to do business. The taxable entity is the corporation which exercises the franchise, and not the individual stockholders. By virtue of its charter, petitioner was created as a separate and distinct entity from the National Government. It can sue and be sued under its own name,61 and can exercise all the powers of a corporation under the Corporation Code.62 To be sure, the ownership by the National Government of its entire capital stock does not necessarily imply that petitioner is not engaged in business. Section 2 of Pres. Decree No. 202963 classifies government-owned or controlled corporations (GOCCs) into those performing governmental functions and those performing proprietary functions, viz: "A government-owned or controlled corporation is a stock or a non-stock corporation, whether performing governmental or proprietary functions, which is directly chartered by special law or if organized under the general corporation law is owned or controlled by the government directly, or indirectly through a parent corporation or subsidiary corporation, to the extent of at least a majority of its outstanding voting capital stock x x x." (emphases supplied) Governmental functions are those pertaining to the administration of government, and as such, are treated as absolute obligation on the part of the state to perform while proprietary functions are those that are undertaken only by way of advancing the general interest of society, and are merely optional on the government.64 Included in the class of GOCCs performing proprietary functions are "business-like" entities such as the National Steel Corporation (NSC), the National Development Corporation (NDC), the Social Security System (SSS), the Government Service Insurance System (GSIS), and the National Water Sewerage Authority (NAWASA),65 among others. Petitioner was created to "undertake the development of hydroelectric generation of power and the production of electricity from nuclear, geothermal and other sources, as well as the transmission of electric power on a nationwide basis."66 Pursuant to this mandate, petitioner generates power and sells electricity in bulk. Certainly, these activities do not partake of the sovereign functions of the government. They are purely private and commercial undertakings, albeit imbued with public interest. The public interest involved in its activities, however, does not distract from the true nature of the petitioner as a commercial enterprise, in the same league with similar public utilities like telephone and telegraph companies, railroad companies, water

supply and irrigation companies, gas, coal or light companies, power plants, ice plant among others; all of which are declared by this Court as ministrant or proprietary functions of government aimed at advancing the general interest of society.67 A closer reading of its charter reveals that even the legislature treats the character of the petitioner's enterprise as a "business," although it limits petitioner's profits to twelve percent (12%), viz:68 "(n) When essential to the proper administration of its corporate affairs or necessary for the proper transaction of its business or to carry out the purposes for which it was organized, to contract indebtedness and issue bonds subject to approval of the President upon recommendation of the Secretary of Finance; (o) To exercise such powers and do such things as may be reasonably necessary to carry out the business and purposes for which it was organized, or which, from time to time, may be declared by the Board to be necessary, useful, incidental or auxiliary to accomplish the said purpose xxx."(emphases supplied) It is worthy to note that all other private franchise holders receiving at least sixty percent (60%) of its electricity requirement from the petitioner are likewise imposed the cap of twelve percent (12%) on profits.69 The main difference is that the petitioner is mandated to devote "all its returns from its capital investment, as well as excess revenues from its operation, for expansion"70 while other franchise holders have the option to distribute their profits to its stockholders by declaring dividends. We do not see why this fact can be a source of difference in tax treatment. In both instances, the taxable entity is the corporation, which exercises the franchise, and not the individual stockholders. We also do not find merit in the petitioner's contention that its tax exemptions under its charter subsist despite the passage of the LGC. As a rule, tax exemptions are construed strongly against the claimant. Exemptions must be shown to exist clearly and categorically, and supported by clear legal provisions.71 In the case at bar, the petitioner's sole refuge is section 13 of Rep. Act No. 6395 exempting from, among others, "all income taxes, franchise taxes and realty taxes to be paid to the National Government, its provinces, cities, municipalities and other government agencies and instrumentalities." However, section 193 of the LGC withdrew, subject to limited exceptions, the sweeping tax privileges previously enjoyed by private and public corporations. Contrary to the contention of petitioner, section 193 of the LGC is an express, albeit general, repeal of all statutes granting tax exemptions from local taxes.72 It reads: "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. No. 6938, non-stock and non-profit hospitals and educational institutions, are hereby withdrawn upon the effectivity of this Code." (emphases supplied) It is a basic precept of statutory construction that the express mention of one person, thing, act, or consequence excludes all others as expressed in the familiar maxim expressio unius est exclusio alterius.73 Not being a local water district, a cooperative registered under R.A. No. 6938, or a non-stock and non-profit hospital or educational institution, petitioner clearly does not belong to the exception. It is therefore incumbent upon the petitioner to point to some provisions of the LGC that expressly grant it exemption from local taxes. But this would be an exercise in futility. Section 137 of the LGC clearly states that the LGUs can impose franchise tax "notwithstanding any exemption granted by any law or other special law." This particular provision of the LGC does not admit any exception. In City Government of San Pablo, Laguna v. Reyes,74 MERALCO's exemption from the payment of franchise taxes was brought as an issue before this Court. The same issue was involved in the subsequent case of Manila Electric Company v. Province of Laguna. 75 Ruling in favor of the local government in both instances, we ruled that the franchise tax in question is imposable despite any exemption enjoyed by MERALCO under special laws, viz: "It is our view that petitioners correctly rely on provisions of Sections 137 and 193 of the LGC to support their position that MERALCO's tax exemption has been withdrawn. The explicit language of section 137 which authorizes the province to impose franchise tax 'notwithstanding any exemption granted by any law or other special law' is all-encompassing and clear. The franchise tax is imposable despite any exemption enjoyed under special laws. Section 193 buttresses the withdrawal of extant tax exemption privileges. By stating that 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 (1) local water districts, (2) cooperatives duly registered under R.A. 6938, (3) non-stock and non-profit hospitals and educational institutions, are withdrawn upon the effectivity of this code, the obvious import is to limit the exemptions to the three enumerated entities. It is a basic precept of statutory construction that the express mention of one person, thing, act, or consequence excludes all others as expressed in the familiar maxim expressio unius est exclusio alterius. In the absence of any provision of the Code to the contrary, and we find no other provision in point, any existing tax exemption or incentive enjoyed by MERALCO under existing law was clearly intended to be withdrawn. Reading together sections 137 and 193 of the LGC, we conclude that under the LGC the local government unit may now impose a local tax at a rate not exceeding 50% of 1% of the gross annual receipts for the preceding calendar based on the incoming receipts realized within its territorial jurisdiction. The legislative purpose to withdraw tax privileges enjoyed under existing law or charter is clearly manifested by the language used on (sic) Sections 137 and 193 categorically withdrawing such exemption subject only to the exceptions enumerated. Since it would be not only tedious and impractical to attempt to enumerate all the existing statutes providing for special tax exemptions or privileges, the LGC provided for an express, albeit general, withdrawal of such exemptions or privileges. No more unequivocal language could have been used."76(emphases supplied). It is worth mentioning that section 192 of the LGC empowers the LGUs, through ordinances duly approved, to grant tax exemptions, initiatives or reliefs.77 But in enacting section 37 of Ordinance No. 165-92 which imposes an annual franchise tax "notwithstanding any exemption granted by law or other special law," the respondent city government clearly did not intend to exempt the petitioner from the coverage thereof.

Doubtless, the power to tax is the most effective instrument to raise needed revenues to finance and support myriad activities of the 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. As this Court observed in the Mactancase, "the original reasons for the withdrawal of tax exemption privileges granted to government-owned or 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."78 With the added burden of devolution, it is even more imperative for government entities to share in the requirements of development, fiscal or otherwise, by paying taxes or other charges due from them. IN VIEW WHEREOF, the instant petition is DENIED and the assailed Decision and Resolution of the Court of Appeals dated March 12, 2001 and July 10, 2001, respectively, are hereby AFFIRMED. SO ORDERED. Panganiban, Sandoval-Gutierrez, Corona, and Carpio-Morales, JJ., concur.

Footnotes
1

Petition for Review on Certiorari under Rule 45 of the Rules of Civil Procedure. See Petition, Rollo, pp. 8-28. CA-G.R. CV No. 53297, penned by Assoc. Justice Rodrigo Cosico. See Annex "A" of the Petition, Rollo, pp. 30-38. Id., Annex "B" of the Petition, Rollo, p. 39. Among the amendments to Comm. Act No. 120 are Rep. Act No. 6395 (1971) and Pres. Decree No. 938 (1976). Rep. Act No. 6395, sec. 2. Id., sec. 3. Rollo, p. 41.

8 "Section 37. Imposition of Tax - Notwithstanding any exemption granted by law or other special law, there is hereby imposed an annual tax on a business enjoying franchise at a rate of 75% of 1% of the gross receipts for the preceding year realized within the territorial jurisdiction of Cabanatuan City."

Rollo, p. 41.

10 Rollo, p. 48. Rep. Act No. 6395, sec. 5. "Capital Stock of the Corporation.- The authorized capital stock of the Corporation is three hundred million pesos divided into three million shares having a par value of one hundred pesos each, which shares are not to be transferred, negotiated, pledged, mortgaged, or otherwise given as a security for the payment of any obligation. The said capital stock has been subscribed and paid wholly by the Government of the Philippines in accordance with the provisions of Republic Act Numbered Four Thousand Eight Hundred Ninety-Seven."

11

Rollo, pp. 52-53. Rep. Act No. 6395, sec. 13, as amended by P.D. No. 938.

12

13

Complaint, Records, pp. 1-3. The case was docketed as Civil Case No. 1659-AF and was raffled to Branch 30 presided by Judge Federico B. Fajardo, Jr. "The Local Government Code of 1991." The law took effect on January 1, 1992. Records, pp. 45-54. Records, pp. 52-54. Supra note 2. Id. at 36-37. Id. at 38.

14

15

16

17

18

19

20

Rollo, p. 39. Petition, pp. 9-10; Rollo, pp. 16-17. Rollo, p. 18. Petition, p. 11; Rollo, p. 18. Ibid. Citing the case of Maceda v. Macaraig, 197 SCRA 771, 800 (1991). 197 SCRA 52 (1991). Id. at 64-65. Rollo, p. 21. Id. at 21-22.

21

22

23

24

25

26

27

28

29

30

Commissioner vs. Pineda, 21 SCRA 105, 110 (1967) citing Bull vs. United States, 295 U.S. 247, 15 AFTR 1069, 1073; Surigao Electric Co., Inc. vs. Court of Tax Appeals, 57 SCRA 523 (1974). Hong Kong & Shanghai Banking Corp. vs. Rafferty, 19 Phil. 145 (1918); Wee Poco vs. Posadas, 64 Phil. 640 (1937); Reyes vs. Almanzor, 196 SCRA 322, 327 (1991). Phil. Guaranty Co., Inc. vs. CIR, 13 SCRA 775, 780 (1965). Vitug and Acosta, Tax Law and Jurisprudence, 2nd ed. (2000) at 1.

31

32

33

34

Mactan Cebu International Airport Authority vs. Marcos, 261 SCRA 667, 680 (1996) citing Cruz, Isagani A., Constitutional Law (1991) at 84. Pimentel, The Local Government Code of 1991: The Key to National Development (1993) at 2-4. Supra note 14. Rep. Act No. 2370 (1959). Rep. Act No. 2264 (1959). Rep. Act No. 5185 (1967). B.P. Blg. 337 (1983).

35

36

37

38

39

40

41 Sponsorship Remarks of Cong. Hilario De Pedro III, Records of the House of Representatives, 3rd Regular Session (1989-1990), vol. 8, p. 757.

42

Pimentel, supra note 20; "Brilliantes, Issues and Trends in Local Governance in the Philippines," The Local Government Code: An Assessment" (1999) at 3.
43

Supra note 41. Supra note 26. Supra note 34. Id. at 692. Id. at 686.

44

45

46

47

48

J.R. S. Business Corp., et al. vs. Ofilada, et al., 120 Phil. 618, 628 (1964). J. Campos, Jr., I Corporation Code (1990) at 2. Supra note 48. Ibid. Ibid. People v. Knight, 67 N.E. 65, 66, 174 N.Y. 475, 63 L.R.A. 87. Tremont & Sufflok Mills v. City of Lowell, 59 N.E. 1007, 178 Mass. 469. United North & South Development Co. v. Health, Tex. Civ. App., 78 S.W.2d 650, 652. In re Commercial Safe Deposit Co. of Buffalo, 266 N.Y.S. 626, 148 Misc. 527.

49

50

51

52

53

54

55

56

57 Rep. Act No. 6395, sec. 2 extends NAPOCOR's corporate existence "for fifty years from and after the expiration of its present corporate existence."

58

Rep. Act No. 6395, sec. 3. "Establishing Basic Policies for the Electric Power Industry." Issued by former President Ferdinand E. Marcos on November 7, 1972.

59

60 "Amending Presidential Decree No. 40 and Allowing the Private Sector to Generate Electricity." Issued by former President Corazon C. Aquino on July 10, 1987.

61

Rep. Act No. 6395, sec. 3 (d).

62

Rep. Act No. 6395, sec. 4 (p) authorizes NAPOCOR to "exercise all the powers of a corporation under the Corporation Law insofar as they are not inconsistent with the provisions of this Act." Approved on February 4, 1986. Social Security System Employees Association vs. Soriano, 7 SCRA 1016, 1020 (1963). See Boy Scouts of the Philippines vs. NLRC, 196 SCRA 176, 185 (1991); Shipside Incorporated vs. CA, 352 SCRA 334, 350 (2001). Rep. Act No. 6395, Sec. 2. National Waterworks & Sewerage Authority vs. NWSA Consolidated Unions, 11 SCRA 766, 774 (1964). Rep. Act No. 7648, sec. 4. The law, also known as "Electric Power Crisis Act," was signed on April 5, 1993.

63

64

65

66

67

68

69 Rep. Act No. 6395, sec. 14 reads: "Contract with Franchise Holders, Conditions of. The Corporation shall, in any contract for the supply of electric power to a franchise holder, require as a condition that the franchise holder, if it receives at least sixty per cent of its electric power and energy from the Corporation, shall not realize a rate of return of more than twelve per cent annually on a rate base composed of the sum of its net assets in operation revalued from time to time, plus two-month operating capital, subject to the nonimpairment-of-obligations-of-contracts provision of the Constitution: Provided, That in determining the rate of return, interest on loans, bonds and other debts shall not be included as expenses. It shall likewise be a condition in the contract that the Corporation shall cancel or revoke the contract upon judgment of the Public Service Commission after due hearing and upon a showing by customers of the franchise holder that household electrical appliances, have been damaged resulting from deliberate overloading by, or power deficiency of, the franchise holder. The Corporation shall renew all existing contracts with franchise holders for the supply of electric power and energy in order to give effect to the provisions hereof."

70

Rep. Act No. 6395, sec. 13. Commissioner of Internal Revenue v. Guerrero, 21 SCRA 180 (1967). City Government of San Pablo, Laguna v. Reyes, 305 SCRA 353 (1999).

71

72

73

Commissioner of Customs vs. Court of Tax Appeals, 251 SCRA 42, 56 (1995). Supra note 72. 306 SCRA 750 (1999). Supra note 72 at 361-362.

74

75

76

77 "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."

78

Supra note 34 at 690.

/---!e-library! 6.0 Philippines Copyright 2000 by Sony Valdez---\

[1937V20] PABLO LORENzO, as trustee of the estate of Thomas Hanley, deceased, plaintiff-appellant, vs. JUAN POSADAS, JR., Collector of Internal Revenue, defendant-appellant.1937 Jun 181st DivisionG.R. No. 43082D E C I S I O N

LAUREL, J:

On October 4, 1932, the plaintiff, Pablo Lorenzo, in his capacity as trustee of the estate of Thomas Hanley, deceased, brought this action in the Court of First Instance of Zamboanga against the defendant, Juan Posadas, Jr., then the Collector of Internal Revenue, for the refund of the amount of P2,052.74, paid by the plaintiff as inheritance tax on the estate of the deceased, and for the collection of interest thereon at the rate of 6 per cent per annum, computed from September 15, 1932, the date when the aforesaid tax was paid under protest. The defendant set up a counterclaim for P1,191.27 alleged to be interest due on the tax in question and which was not included in the original assessment. From the decision of the Court of First Instance of Zamboanga dismissing both the plaintiff's complaint and the defendant's counterclaim, both parties appealed to this court.

It appears that on May 27, 1922, one Thomas Hanley died in Zamboanga, Zamboanga, leaving a will (Exhibit 5) and considerable amount of real and personal properties. On June 14, 1922, proceedings for the probate of his will and the settlement and distribution of his estate were begun in the Court of First Instance of Zamboanga. The will was admitted to probate. Said will provides among other things, as follows:

"4. I direct that any money left by me be given to my nephew Matthew Hanley.

"5. I direct that all real estate owned by me at the time of my death be not sold or otherwise disposed of for a period of ten (10) years after my death, and that the same be handled and managed by my executors, and proceeds thereof to be given to my nephew, Matthew Hanley, at Castlemore, Ballaghaderine, County of Rosecommon, Ireland, and that he be directed that the same be used only for the education of my brother's children and their descendants.

"6. I direct that ten (10) years after my death my property be given to the above-mentioned Matthew Hanley to be disposed of in the way he thinks most advantageous.

xxx

xxx

xxx

"8. I state that at this time I have one brother living named Malachi Hanley, and that my nephew, Matthew Hanley, is a son of my brother, Malachi Hanley."

The Court of First Instance of Zamboanga considered it proper for the best interests of the estate to appoint a trustee to administer the real properties which, under the will, were to pass to Matthew Hanley ten years after the testator's death. Accordingly, P. J. M. Moore, one of the two executors named in the will, was, on March 8, 1924, appointed trustee. Moore took his oath of office and gave bond on March 10, 1924. He acted as trustee until February 29, 1932, when he resigned and the plaintiff herein was appointed in his stead.

During the incumbency of the plaintiff as trustee, the defendant Collector of Internal Revenue, alleging that the estate left by the deceased at the time of his death consisted of realty valued at P27,920 and personality valued at P1,465, and allowing a deduction of P480.81, assessed against the estate an inheritance tax in the amount of P1,434.24 which, together with the penalties for delinquency in payment consisting of a 1 per cent monthly interest from July 1, 1931 to the date of payment and a surcharge of 25 per cent on the tax, amounted to P2,052.74. On march 15, 1932, the defendant filed a motion in the testamentary proceedings pending before the Court of First Instance of Zamboanga (Special proceedings No. 302) praying that the trustee, plaintiff herein, be ordered to pay to the Government the said sum of P2,052.74. The motion was granted. On September 15, 1932, the plaintiff paid this amount under protest, notifying the defendant at the same time that unless the amount was promptly refunded suit would be brought for its recovery. The defendant overruled the plaintiff's

protest and refused to refund the said amount or any part thereof. His administrative remedies exhausted, plaintiff went to court with the result herein above indicated.

In his appeal, plaintiff contends that the lower court erred:

"I. In holding that the real property of Thomas Hanley, deceased, passed to his instituted heir, Matthew Hanley, from the moment of the death of the former, and that from that time, the latter became the owner thereof.

"II. In holding, in effect, that there was delinquency in the payment of inheritance tax due on the estate of said deceased.

"III. In holding that the inheritance tax in question be based upon the value of the estate upon the death of the testator, and not, as it should have been held, upon the value thereof at the expiration of the period of ten years after which, according to the testator's will, the property could be and was to be delivered to the instituted heir.

"IV. In not allowing as lawful deductions, in the determination of the net amount of the estate subject to said tax, the amounts allowed by the court as compensation to the "trustee" and paid to them from the decedent's estate.

"V. In not rendering judgment in favor of the plaintiff and in denying his motion for new trial."

The defendant-appellant contradicts the theories of the plaintiff and assigns the following error besides:

"The lower court erred in not ordering the plaintiff to pay to the defendant the sum of P1,191.27, representing part of the interest at the rate of 1 per cent per month from April 10, 1924, to June 30, 1931, which the plaintiff had failed to pay on the inheritance tax assessed by the defendant against the estate of Thomas Hanley."

The following are the principal questions to be decided by this court in this appeal: (a) When does the inheritance tax accrue and when must it be satisfied? (b) Should the inheritance tax be computed on the basis of the value of the estate at the time of the testator's death, or on its value ten years later? (c) In determining the net value of the estate subject to tax, is it proper to deduct the compensation due to trustees? (d) What law governs the case at bar? Should the provisions of Act No. 3606 favorable to the taxpayer be given retroactive effect? (e) Has there been delinquency in the payment of the inheritance tax? If so, should the additional interest claimed by the defendant in his appeal be paid by the estate? Other points of incidental importance, raised by the parties in their briefs, will be touched upon in the course of this opinion.

(a) The accrual of the inheritance tax is distinct from the obligation to pay the same. Section 1536 as amended, of the Administrative code, imposes the tax upon "every transmission by virtue of inheritance, devise, bequest, gift mortis causa, or advance in anticipation of inheritance, devise, or bequest." The tax therefore is upon transmission or the transfer or devolution of property of a decedent, made effective by his death. (61 C. J., p. 1592.) It is in reality an excise or privilege tax imposed on the right to succeed to, receive, or take property by or under a will or the intestacy law, or deed, grant, or gift, to become operative at or after death. According to article 657 of the Civil Code, "the rights to the succession of a person are transmitted from the moment of his death." "In other words", said Arellano, C. J., ". . . the heirs succeed immediately to all of the property of the deceased ancestor. The property belongs to the heirs at the moment of the death of the ancestor as completely as if the ancestor had executed and delivered to them a deed for the same before his death." (Bondad vs. Bondad, 34 Phil., 232. See also, Mijares vs. Nery, 3 Phil., 195; Suiliong & Co., vs. Chio-Taysan, 12 Phil., 13; Lubrico vs. Arbado, 12 Phil., 391; Inocencio vs. Gat- Pandan, 14 Phil., 491; Aliasas vs. Alcantara, 16 Phil., 489; Ilustre vs. Alaras Frondosa, 17 Phil., 321; Malahacan vs. Ignacio, 19 Phil., 434; Bowa vs. Briones, 38 Phil., 276; Osorio vs. Osorio & Ynchausti Steamship Co., 41 Phil., 531; Fule vs. Fule, 46 Phil., 317; Dais vs. Court of First Instance of Capiz, 51 Phil., 396; Baun vs. Heirs of Baun, 53 Phil., 654.) Plaintiff, however, asserts that while article 657 of the Civil Code is applicable to testate as well as intestate succession, it operates only in so far as forced heirs are concerned. But the language of Article 657 of the Civil Code is broad and makes no distinction between different classes of heirs. That article does not speak of forced heirs; it does not even use the word "heir". It speaks of the rights of succession and of the transmission thereof from the moment of death. The provision of section 625 of the Code of Civil Procedure regarding the authentication and probate of a will as a necessary condition to effect transmission of property does not effect the general rule laid down in article 647 of the Civil Code. The authentication of a will implies its due execution but once probated and allowed the transmission is effective as of the death of the testator in accordance with article 657 of the Civil Code. Whatever may be the time when actual transmission of the inheritance takes place, succession takes place in any event at the moment of the decedent's death. The time when the heirs legally succeed to the inheritance may differ from the time when the heirs actually received such inheritance. "Poco importa", says Manresa commenting on article 567 of the Civil Code, "que desde el fallecimiento del causante, hasta que el heredero o legatario entre en posesion de los bienes de la herencia a del legado, transcurra mucho o poco tiempo, pues la

adquisicion ha de retrotraerse al momento de la muerte, y asi lo ordena el articulo 989, que debe considerarse como complemento del presente." (5 Manresa, 305; see also art. 440, par. 1, Civil Code.) Thomas Hanley having died on May 27, 1922, the inheritance tax accrued as of that date.

From the fact, however, that Thomas Hanley died on May 27, 1922, it dies not follow that the obligation to pay the tax arose as of that date. The time for the payment of inheritance tax is clearly fixed by section 1544 of the Revised Administrative code as amended by Act No. 3031, in relation to section 1543 of the same code. The two sections follow:

"SEC. 1543. Exemption of certain acquisitions and transmission.

The following shall not be taxed:

"(a) The merger of the usufruct in the owner of the naked title.

"(b) The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the trustees.

" The transmission from the first heir, legatee, or donee in favor of another beneficiary, in accordance with the desire of the predecessor.

"In the last two cases, if the scale of taxation appropriate to the new beneficiary is greater than that paid by the first, the former must pay the difference.

"SEC. 1544. When tax to be paid. The Tax fixed in this article shall be paid:

"(a) In the second and third cases of the next preceding section, before entrance into possession of the property.

"(b) In other cases, within the six months subsequent to the death of the predecessor; but if judicial testamentary or intestate proceedings shall be instituted prior to the expiration of said period, the payment shall be made by the executor or administrator before delivering to each beneficiary his share.

"If the tax is not paid within the time hereinbefore prescribed, interest at the rate of twelve per centum per annum shall be added as part of the tax; and to the tax and interest due and unpaid within ten days after the date of notice and demand thereof by the Collector, there shall be further added a surcharge of twenty-five per centum.

"A certified copy of all letters testamentary or of administration shall be furnished the Collector of Internal Revenue by the Clerk of Court within thirty days after their issuance."

It should be observed in passing that the word "trustee", appearing in subsection (b) of section 1543, should read "fideicommissary" or "cestui que trust". There was an obvious mistake in translation from the Spanish to the English version.

The instant case does not fall under subsection (a), but under subsection (b), of section 1544 abovequoted, as there is here no fiduciary heir, first heir, legatee or donee. Under that subsection, the tax should have been paid before the delivery of the properties in question to P. J. M. Moore as trustee on March 10, 1924.

(b) The plaintiff contends that the estate of Thomas Hanley, in so far as the real properties are concerned, did not and could not legally pass to the instituted heir, Matthew Hanley, until after the expiration of ten years from the death of the testator on May 27, 1922 and, that the inheritance tax should be based on the value of the estate in 1932, or ten years after the testator's death. The plaintiff introduced evidence tending to show that in 1932 the real properties in question had a reasonable value of only P5,787. This amount added to the value of the personal property left by the deceased, which the plaintiff admits is P1,465, would generate an inheritance tax which, excluding deductions, interest and surcharge, would amount only to about P169.52.

If death is the generating source from which the power of the state to impose inheritance taxes its being and if, upon the death of the decedent, succession takes place and the right of the state to tax vests instantly, the tax should be measured by the value of the estate as it stood at the time of the decedent's death, regardless of any subsequent contingency affecting value or any subsequent increase or decrease in value. (61 C. J., pp. 1692, 1693; 26 R. C. L., p. 232; Blakemore and Bancroft, Inheritance Taxes, p. 137. See also Knowlton vs. Moore, 178 U. S., 41; 20 Sup. Ct. Rep., 747; 44 Law ed., 969.) "The right of the state to an inheritance tax accrues at the moment of death, and hence is ordinarily measured as to any

beneficiary by the value at that time of such property as passes to him. Subsequent appreciation or depreciation is immaterial." (Ross, Inheritance Taxation, p. 72.).

Our attention is directed to the statement of the rule in Cyclopedia of Law and Procedure (vol. 37, pp. 1574, 1575) that, in the case of contingent remainders, taxation is postponed until the estate vests in possession or the contingency is settled. This rule was formerly followed in New York and has been adopted in Illinois, Minnesota, Massachusetts, Ohio, Pennsylvania and Wisconsin. this rule, however, is by no means entirely satisfactory either to the estate or to those interested in the property (26 R. C. L., p. 231). Realizing, perhaps, the defects of its anterior system, we find upon examination of cases and authorities that New York has varied and now requires the immediate appraisal of the postponed estate at its clear market value and the payment forthwith of the tax on it out of the corpus of the estate transferred. (In re Vanderbilt, 172 N. Y., 69; 69 N. E., 782; In re Hober, 86 N. Y. App. Div., 458; 83 N. Y. Supp., 769; Estate of Tracy, 179, 179 N. Y., 501; 72 N. Y., 519; Estate of Brez, 172 N. Y., 609; 64; 64 N. E., 958; Estate of Post, 85 App. Div., 611; 82 N. Y. Supp., 1079. Vide also, Saltoun vs. Lord Advocate, 1 Pater. Sc. App., 970; 3 Macq. H. L., 659; 23 Eng. Rul. Cas., 888.) California adheres to this new rule (Stats. 1905, sec. 5, p. 343).

But whatever may be the rule in other jurisdiction, we hold that a transmission by inheritance is taxable at the time of the predecessor's death, notwithstanding the postponement of the actual possession or enjoyment of the estate by the beneficiary, and the tax measured by the value of the property transmitted at that time regardless of its appreciation or depreciation.

Certain items are required by law to be deducted from the appraised gross value in arriving at the net value of the estate on which the inheritance tax is to be computed (sec. 1539, Revised Administrative Code). In the case at of only P480.81. This sum represents the expenses and disbursement of the executors until March 10, 1924, among which were their fees and the proven debts of the deceased. The plaintiff contends that the compensation and fees of the trustees, which aggregate P1,187.28 (Exhibits C, AA, EE, PP, HH, JJ, LL, NN, OO)., should also be deducted under section 1539 of the Revised Administrative Code which provides, in part, as follows: "In order to determine the net sum which must bear the tax, when an inheritance is concerned, there shall be deducted, in case of a resident, . . . the judicial expenses of the testamentary or intestate proceedings, . . .."

A trustee, no doubt, is entitled to receive a fair compensation for his services (Barney vs. Saunders, 16 How., 535; 14 Law. ed., 1047). But from this it does not follow that the compensation due him may lawfully be deducted in arriving at the net value of the estate subject to tax. There is no statute in the Philippines which requires trustees' commissions to be deducted in determining the net value of the

estate subject to inheritance tax (61 C. J., p. 1705). Furthermore, though a testamentary trust has been created, it does not appear that the testator intended that the duties of his executors and trustees should be separated. (Ibid.; In re Vanneck's Estate, 161 N. Y. Supp., 893; 175 App. Div., 363; In re Collard's Estate, 161 N. Y. Supp., 455.) On the contrary, in paragraph 5 of his will, the testator expressed the desire that his real estate be handled and managed by his executors until the expiration of the period of ten years therein provided. Judicial expenses are expenses of administration (61 C. J., p. 1705) but, in State vs. Hennepin County Probate Court (112 N. W., 878; 101 Minn., 485), it was said: " . . . The compensation of a trustee, earned, not in the administration of the estate, but in the management thereof for the benefit of the legatees or devisees, does not come properly within the class or reason for exempting administration expenses. . . . Services rendered in that behalf have no reference to closing the estate for the purpose of a distribution thereof to those entitled to it and are not required or essential to the perfection of the rights of the heirs or legatees. . . . Trusts . . . of the character of that here before the court, are created for the benefit of those to whom the property ultimately passes, are of voluntary creation, and intended for the preservation of the estate. No sound reason is given to support the contention that such expenses should be taken into consideration in fixing the value of the estate for the purpose of this tax."

(d) The defendant levied and assessed the inheritance tax due from the estate of Thomas Hanley under the provisions of section 1544 of the Revised Administrative Code, as amended by section 3 of Act No. 3606. But Act No. 3606 went into effect on January 1, 1930. It, therefore, was not the law in force when the testator died on May 27, 1922. The law at that time was section 1544 above-mentioned, as amended by Act No. 3031, which took effect on March 9, 1922.

It is well-settled that inheritance taxation is governed by the statute in force at the time of the death of the decedent (26 R. C. L., p. 206; 4 Cooley on Taxation, 4th ed., p. 3461). The taxpayer can not foresee and ought not to be required to guess the outcome of pending measures. Of course, a tax statute may be made retroactive in its operation. Liability for taxes under retroactive legislation has been "one of the incidents of social life." (Seattle vs. Kelleher, 195 U.S., 351, 360; 49 Law. ed., 232; 25 Sup. Ct. Rep., 44.) But legislative intent that a tax statute should operate retroactively should be perfectly clear. (Scwab vs. Doyle, 42 Sup. Ct., Rep., 491; Smietanka vs. First Trust & Savings Bank, 257 U. S., 602; Stockdale vs. Insurance Co., 20 Wall., 323 Lunch vs. Turrish, 247 U. S., 221.) "A statute should be considered as prospective in its operation, whether it enacts, amends, or repeals an inheritance tax, unless the language of the statute clearly demands or presses that it shall have a retroactive effect, . . . (61 C. J., p. 1602.) Though the last paragraph of section of Regulations No. 65 of the Department of Finance makes section 3 of Act No. 3606, amending section 1544 of the Revised Administrative Code, applicable to all estates the inheritance taxes due from which have not been paid, Act No. 3606 itself contains no provisions indicating legislative intent to give it retroactive effect. No Such effect can be given the statute by this court.

The defendant Collector of Internal Revenue maintains, however, that certain provisions of Act No. 3606 are more favorable to the taxpayer than those of Act No. 3031, that said provisions are penal in nature and, therefore, should operate retroactively in conformity with the provisions of article 22 of the Revised Penal Code. This is the reason why he applied Act No. 3606 instead of Act No. 3031. Indeed, under Act No. 3606, (1) the surcharge of 25 per cent is based on the tax only, instead of on both the tax and the interest, as provided for in Act No. 3031, and (2) the taxpayer is allowed twenty days from notice and demand by the Collector of Internal Revenue within which to pay the tax, instead of ten days only as required by the old law.

Properly speaking, a statute is penal when it imposes punishment for an offense committed against the state which, under the Constitution, the Executive has the power to pardon. In common use, however, this sense has been enlarged to include within the term "penal statutes" all statutes which command or prohibit certain acts, and establish penalties for their violation, and even those which, without expressly prohibiting certain acts, impose a penalty upon their commission (59 C. J., p. 1110). Revenue laws, generally, which impose taxes collected by the means ordinarily resorted to for the collection of taxes are not classed as penal laws, although there are authorities to the contrary. (See Sutherland, Statutory Construction, 361; Twine Co., vs. Worthington, 141 U.S. , 468; 12 Sup. Ct., 55; Rice vs. U. S., 4 C. C. A., 104; 53 Fed., 910; Com. vs. Standard Oil Co., 101 Pa. St., 150; State vs. Wheeler, 44 P., 430; 25 Nev., 143.) Article 22 of the Revised Penal Code is not applicable to the case at bar, and in the absence of clear legislative intent, we cannot give Act No. 3606 a retroactive effect.

(e) The plaintiff correctly states that the liability to pay a tax may arise at a certain time and the tax may be paid within another given time. As stated by this court, "the mere failure to pay one's tax does not render one delinquent until and unless the entire period has elapsed within which the taxpayer is authorized by law to make such payments without being subjected to the payment of penalties for failure to pay his taxes within the prescribed period." (U. S. vs. Labadan, 26 Phil., 239.)

The defendant maintains that it was the duty of the executor to pay the inheritance tax before the delivery of the decedent's property to the trustee. Stated otherwise, the defendant contends that delivery to the trustee was delivery to the cestui que trust, the beneficiary in this case, within the meaning of the first paragraph of subsection (b) of section 1544 of the Revised Administrative Code. This contention is well taken and is sustained. The appointment of P. J. M. Moore as trustee was made by the trial court in conformity with the wishes of the testator as expressed in his will. It is true that the word "trust" is not mentioned or used in the will but the intention to create one is clear. No particular or technical words are required to create a testamentary trust (69 C. J., p. 711). The words "trust" and "trustee", though apt for the purpose, are not necessary. In fact, the use of these two words is not

conclusive on the question that a trust is created (69 C. J., p. 714). "To create a trust by will the testator must indicate in the will his intention so to do by using language sufficient to separate the legal from the equitable estate, and with sufficient certainly designate the beneficiaries, their interest in the trust, the purpose or object of the trust, and the property or subject matter thereof, Stated otherwise, to constitute a valid testamentary trust there must be a concurrence of three circumstances: (1) Sufficient words to raise a trust; (2) a definite subject; (3) a certain or ascertained object; statutes in some jurisdictions expressly or in effect so providing." (69 C. J., pp. 705, 706.) There is no doubt that the testator intended to create a trust. He ordered in his will that certain of his properties be kept together undisposed during a fixed period, for a stated purpose. The probate court certainly exercised sound judgment in appointing a trustee to carry into effect the provisions of the will (see sec. 582, Code of Civil Procedure).

P. J. M. Moore became trustee on March 10, 1924. On that date the trust estate vested in him (sec. 582 in relation to sec. 590, Code of Civil Procedure). The mere fact that the estate of the deceased was placed in trust did not remove it from the operation of our inheritance tax laws or exempt it from the payment of the inheritance tax. The corresponding inheritance tax should have been paid on or before March 10, 1924, to escape the penalties of the law. This is so for the reason already stated that the delivery of the estate to the trustee was in esse delivery of the same estate to the cestui que trust, the beneficiary in this case. A trustee is but an instrument or agent for the cestui que trust (Shelton vs. King, 299 U. S., 90; 33 Sup. Ct. Rep., 689; 57 Law. ed., 1086). When Moore accepted the trust and took possession of the trust estate he thereby admitted that the estate belonged not to him but to his cestui que trust (Tolentino vs. Vitug, 39 Phil., 126, cited in 65 C. J., p. 692, n. 63). He did not acquire any beneficial interest in the estate. He took such legal estate only as the proper execution of the trust required (65 C. J., p. 528) and, his estate ceased upon the fulfillment of the testator's wishes. The estate then vested absolutely in the beneficiary (65 C. J., p. 542).

The highest considerations of public policy also justify the conclusion we have reached. Were we to hold that the payment of the tax could be postponed or delayed by the creation of a trust of the type at hand, the result would be plainly disastrous. Testators may provide, as Thomas Hanley has provided, that their estates be not delivered to their beneficiaries until after the lapse of a certain period of time. In the case at bar, the period is ten years. In other cases, the trust may last for fifty years, or for a longer period which does not offend the rule against perpetuities. The collection of the tax would then be left to the will of a private individual. The mere suggestion of this result is a sufficient warning against the acceptance of the contention of the plaintiff in the case at bar. Taxes are essential to the very existence of government. (Dobbins vs. Erie County, 16 Pet., 435; 10 Law. ed., 1022; Kirkland vs. Hotchkiss, 100 U. S., 491; 25 Law. ed., 558; Lane County vs. Oregon, 7 Wall, 71; 19 Law. ed., 101; Union Refrigerator Transit Co., vs. Kentucky, 199 U. S., 194; 26 Sup. Ct., Rep., 36; 50 Law. ed., 150; Charles River Bridge vs. Warren Bridge, 11 Pet., 420; 9 Law. ed., 773.) The obligation to pay taxes rests not upon the privileges enjoyed by, or the protection afforded to, a citizen by the government, but upon the necessity of money

for the support of the state (Dobbins vs. Erie County, supra). For this reason, no one is allowed to object to or resist the payment of taxes solely because no personal benefit to him can be pointed out. (Thomas vs. Gay, 169 U. S., 264; 18 Sup. Ct. Rep., 340; 43 Law. ed., 740.) While courts will not enlarge, by construction, the government's power of taxation (Bromley vs. McCaughn, 280 U. S., 124; 74 Law. ed., 226; 50 Sup. Ct. Rep., 46) they also will not place upon tax laws so loose a construction as to permit evasions on merely fanciful and insubstantial distinctions. (U. S. vs. Watts, 1 Bond, 580; Fed. Cas. No. 16,653; U. S. vs. Wigglesworth, 2 Story, 369; Fed. Cas. No. 16,690, followed in Froelich & Kuttner vs. Collector of Customs, 18 Phil., 461, 481; Castle Bros., Wolf & Sons vs. McCoy, 21 Phil., 300; Muoz & Co. vs. Hord, 12 Phil., 624; Hongkong & Shanghai Banking Corporation vs. Rafferty, 39 Phil., 145; Luzon Stevedoring Co. vs. Trinidad, 43 Phil., 803.) When proper, a tax statute should be construed to avoid the possibilities of tax evasion. Construed this way, the statute, without resulting in injustice to the taxpayer, becomes fair to the government.

That taxes must be collected promptly is a policy deeply intrenched in our tax system. Thus, no court is allowed to grant injunction to restrain the collection of any internal revenue tax (sec. 1578, Revised Administrative Code; Sarasola vs. Trinidad, 40 Phil., 252). In the case of Lim Co Chui vs. Posadas (47 Phil., 461), this court had occasion to demonstrate trenchant adherence to this policy of the law. It held that "the fact that on account of riots directed against the Chinese on October 18, 19, and 20, 1924, they were prevented from paying their internal revenue taxes on time and by mutual agreement closed their homes and stores and remained therein, does not authorize the Collector of Internal Revenue to extend the time prescribed for the payment of the taxes or to accept them without the additional penalty of twenty five per cent." (Syllabus, No. 3.) ". . . It is of the utmost importance," said the Supreme Court of the United Stated. ". . . that the modes adopted to enforce the taxes levied should be interfered with as little as possible. Any delay in the proceedings of the officers, upon whom the duty is devolved of collecting the taxes, may derange the operations of government, and thereby cause serious detriment to the public." (Dows vs. Chicago, 11 Wall., 108; 20 Law. ed., 65.66; Churchill and Tait vs. Rafferty, 32 Phil., 580.)

It results that the estate which plaintiff represents has been delinquent in the payment of inheritance tax and, therefore, liable for the payment of interest and surcharge provided by law in such cases.

The delinquency in payment occurred on March 10, 1924, the date when Moore became trustee. The interest due should be computed from that date and it is error on the part of the defendant to compute it one month later. The provision of law requiring the payment of interest in appropriate cases is mandatory (see and cf. Lim Co Chui vs. Posadas, supra), and neither the Collector of Internal Revenue nor this court may remit or decrease such interest, no matter how heavily it may burden the taxpayer.

To the tax and interest due and unpaid within ten days after the date of notice and demand thereof by the Collector of Internal Revenue, a surcharge of twenty-five per centum should be added (sec. 1544, subsec. (b), par. 2 Revised Administrative Code). Demand was made by the Deputy Collector of Internal Revenue upon Moore in a communication dated October 16, 1931 (Exhibit 29). The date fixed for the payment of the tax and interest was November 30, 1931. November 30 being an official holiday, the tenth day fell on December 1, 1931. As the tax and interest due were not paid on that date, the estate became liable for the payment of the surcharge.

In view of the foregoing, it becomes unnecessary for us to discuss the fifth error assigned by the plaintiff in his brief.

We shall now compute the tax, together with the interest and surcharge, due from the estate of Thomas Hanley in accordance with the conclusion we have reached.

At the time of his death, the deceased left real properties valued at P27,920 and personal properties worth P1,465, or a total of P29,385. Deducting from this amount the sum of P480.81, representing allowable deductions under section 1539 of the Revised Administrative Code, we have P28,904.19 as the net value of the estate subject to inheritance tax.

The primary tax, according to section 1536, subsection (c), of the Revised Administrative Code, should be imposed at the rate of one per centum upon the first ten thousand pesos and two per centum upon the amount by which the share of the beneficiary exceeds ten thousand pesos but does not exceed thirty thousand pesos, plus an additional two hundred per centum. One per centum of ten thousand pesos is P100. Two per centum of P18,904.19 is P378.08. Adding to these two sums an additional two hundred per centum, or P956.16, we have as primary tax, correctly computed by the defendant, the sum of P1,434.24.

To the primary tax thus computed should be added the sums collectible under section 1544 of the Revised Administrative Code. First should be added P1,465.31 which stands for interest at the rate of twelve per centum per annum from March 10, 1924, the date of delinquency, to September 15, 1932, the date of payment under protest, a period covering 8 years, 6 months and 5 days. To the tax and interest thus computed should be added the sum of P724.88, representing a surcharge of 25 per cent on both the tax and interest, and also P10, the compromise sum fixed by the defendant (Exh. 29), giving a grand total of P3,634.43.

As the plaintiff has already paid the sum of P2,052.74, only the sum of P1,581.69 is legally due from the estate. This last sum is P390.42 more than the amount demanded by the defendant in his counterclaim. But, as we cannot give the defendant more than what he claims, we must hold that the plaintiff is liable only in the sum of P1,191.27, the amount stated in the counterclaim.

The judgment of the lower court is accordingly modified, with costs against the plaintiff in both instances. So ordered.

Avancea, C. J. Abad Santos, Imperial, Diaz and Concepcion, JJ., concur.

VILLA-REAL, J.:

I concur in the result.

\---!e-library! 6.0 Philippines Copyright 2000 by Sony Valdez---/

([1937V20] PABLO LORENzO, as trustee of the estate of Thomas Hanley, deceased, plaintiff-appellant, vs. JUAN POSADAS, JR., Collector of Internal Revenue, defendant-appellant., G.R. No. 43082, 1937 Jun 18, 1st Division)

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-43082 June 18, 1937

PABLO LORENZO, as trustee of the estate of Thomas Hanley, deceased, plaintiff-appellant, vs. JUAN POSADAS, JR., Collector of Internal Revenue, defendant-appellant.

Pablo Lorenzo and Delfin Joven for plaintiff-appellant. Office of the Solicitor-General Hilado for defendant-appellant. LAUREL, J.: On October 4, 1932, the plaintiff Pablo Lorenzo, in his capacity as trustee of the estate of Thomas Hanley, deceased, brought this action in the Court of First Instance of Zamboanga against the defendant, Juan Posadas, Jr., then the Collector of Internal Revenue, for the refund of the amount of P2,052.74, paid by the plaintiff as inheritance tax on the estate of the deceased, and for the collection of interst thereon at the rate of 6 per cent per annum, computed from September 15, 1932, the date when the aforesaid tax was [paid under protest. The defendant set up a counterclaim for P1,191.27 alleged to be interest due on the tax in question and which was not included in the original assessment. From the decision of the Court of First Instance of Zamboanga dismissing both the plaintiff's complaint and the defendant's counterclaim, both parties appealed to this court. It appears that on May 27, 1922, one Thomas Hanley died in Zamboanga, Zamboanga, leaving a will (Exhibit 5) and considerable amount of real and personal properties. On june 14, 1922, proceedings for the probate of his will and the settlement and distribution of his estate were begun in the Court of First Instance of Zamboanga. The will was admitted to probate. Said will provides, among other things, as follows: 4. I direct that any money left by me be given to my nephew Matthew Hanley. 5. I direct that all real estate owned by me at the time of my death be not sold or otherwise disposed of for a period of ten (10) years after my death, and that the same be handled and managed by the executors, and proceeds thereof to be given to my nephew, Matthew Hanley, at Castlemore, Ballaghaderine, County of Rosecommon, Ireland, and that he be directed that the same be used only for the education of my brother's children and their descendants. 6. I direct that ten (10) years after my death my property be given to the above mentioned Matthew Hanley to be disposed of in the way he thinks most advantageous. xxx xxx xxx

8. I state at this time I have one brother living, named Malachi Hanley, and that my nephew, Matthew Hanley, is a son of my said brother, Malachi Hanley. The Court of First Instance of Zamboanga considered it proper for the best interests of ther estate to appoint a trustee to administer the real properties which, under the will, were to pass to Matthew Hanley ten years after the two executors named in the will, was, on March 8, 1924, appointed trustee. Moore took his oath of office and gave bond on March 10, 1924. He acted as trustee until February 29, 1932, when he resigned and the plaintiff herein was appointed in his stead. During the incumbency of the plaintiff as trustee, the defendant Collector of Internal Revenue, alleging that the estate left by the deceased at the time of his death consisted of realty valued at P27,920 and personalty valued at P1,465, and allowing a deduction of P480.81, assessed against the estate an inheritance tax in the amount of P1,434.24 which, together with the penalties for deliquency in payment consisting of a 1 per cent monthly interest from July 1, 1931 to the date of payment and a surcharge of 25 per cent on the tax, amounted to P2,052.74. On March 15, 1932, the defendant filed a motion in the testamentary proceedings pending before the Court of First Instance of Zamboanga (Special proceedings No. 302) praying that the trustee, plaintiff herein, be ordered to pay to the Government the said sum of P2,052.74. The motion was granted. On September 15, 1932, the plaintiff paid said amount under protest, notifying the defendant at the same time that unless the amount was promptly refunded suit would be brought for its recovery. The defendant overruled the plaintiff's protest and refused to refund the said amount hausted, plaintiff went to court with the result herein above indicated. In his appeal, plaintiff contends that the lower court erred: I. In holding that the real property of Thomas Hanley, deceased, passed to his instituted heir, Matthew Hanley, from the moment of the death of the former, and that from the time, the latter became the owner thereof. II. In holding, in effect, that there was deliquency in the payment of inheritance tax due on the estate of said deceased. III. In holding that the inheritance tax in question be based upon the value of the estate upon the death of the testator, and not, as it should have been held, upon the value thereof at the expiration of the period of ten years after which, according to the testator's will, the property could be and was to be delivered to the instituted heir. IV. In not allowing as lawful deductions, in the determination of the net amount of the estate subject to said tax, the amounts allowed by the court as compensation to the "trustees" and paid to them from the decedent's estate. V. In not rendering judgment in favor of the plaintiff and in denying his motion for new trial. The defendant-appellant contradicts the theories of the plaintiff and assigns the following error besides: The lower court erred in not ordering the plaintiff to pay to the defendant the sum of P1,191.27, representing part of the interest at the rate of 1 per cent per month from April 10, 1924, to June 30, 1931, which the plaintiff had failed to pay on the inheritance tax assessed by the defendant against the estate of Thomas Hanley.

The following are the principal questions to be decided by this court in this appeal: (a) When does the inheritance tax accrue and when must it be satisfied? (b) Should the inheritance tax be computed on the basis of the value of the estate at the time of the testator's death, or on its value ten years later? (c) In determining the net value of the estate subject to tax, is it proper to deduct the compensation due to trustees? (d) What law governs the case at bar? Should the provisions of Act No. 3606 favorable to the tax-payer be given retroactive effect? (e) Has there been deliquency in the payment of the inheritance tax? If so, should the additional interest claimed by the defendant in his appeal be paid by the estate? Other points of incidental importance, raised by the parties in their briefs, will be touched upon in the course of this opinion. (a) The accrual of the inheritance tax is distinct from the obligation to pay the same. Section 1536 as amended, of the Administrative Code, imposes the tax upon "every transmission by virtue of inheritance, devise, bequest, gift mortis causa, or advance in anticipation of inheritance,devise, or bequest." The tax therefore is upon transmission or the transfer or devolution of property of a decedent, made effective by his death. (61 C. J., p. 1592.) It is in reality an excise or privilege tax imposed on the right to succeed to, receive, or take property by or under a will or the intestacy law, or deed, grant, or gift to become operative at or after death. Acording to article 657 of the Civil Code, "the rights to the succession of a person are transmitted from the moment of his death." "In other words", said Arellano, C. J., ". . . the heirs succeed immediately to all of the property of the deceased ancestor. The property belongs to the heirs at the moment of the death of the ancestor as completely as if the ancestor had executed and delivered to them a deed for the same before his death." (Bondad vs. Bondad, 34 Phil., 232. See also, Mijares vs. Nery, 3 Phil., 195; Suilong & Co., vs. Chio-Taysan, 12 Phil., 13; Lubrico vs. Arbado, 12 Phil., 391; Innocencio vs. Gat-Pandan, 14 Phil., 491; Aliasas vs.Alcantara, 16 Phil., 489; Ilustre vs. Alaras Frondosa, 17 Phil., 321; Malahacan vs. Ignacio, 19 Phil., 434; Bowa vs. Briones, 38 Phil., 27; Osario vs. Osario & Yuchausti Steamship Co., 41 Phil., 531; Fule vs. Fule, 46 Phil., 317; Dais vs. Court of First Instance of Capiz, 51 Phil., 396; Baun vs. Heirs of Baun, 53 Phil., 654.) Plaintiff, however, asserts that while article 657 of the Civil Code is applicable to testate as well as intestate succession, it operates only in so far as forced heirs are concerned. But the language of article 657 of the Civil Code is broad and makes no distinction between different classes of heirs. That article does not speak of forced heirs; it does not even use the word "heir". It speaks of the rights of succession and the transmission thereof from the moment of death. The provision of section 625 of the Code of Civil Procedure regarding the authentication and probate of a will as a necessary condition to effect transmission of property does not affect the general rule laid down in article 657 of the Civil Code. The authentication of a will implies its due execution but once probated and allowed the transmission is effective as of the death of the testator in accordance with article 657 of the Civil Code. Whatever may be the time when actual transmission of the inheritance takes place, succession takes place in any event at the moment of the decedent's death. The time when the heirs legally succeed to the inheritance may differ from the time when the heirs actually receive such inheritance. "Poco importa", says Manresa commenting on article 657 of the Civil Code, "que desde el falleimiento del causante, hasta que el heredero o legatario entre en posesion de los bienes de la herencia o del legado, transcurra mucho o poco tiempo, pues la adquisicion ha de retrotraerse al momento de la muerte, y asi lo ordena el articulo 989, que debe considerarse como complemento del presente." (5 Manresa, 305; see also, art. 440, par. 1, Civil Code.) Thomas Hanley having died on May 27, 1922, the inheritance tax accrued as of the date. From the fact, however, that Thomas Hanley died on May 27, 1922, it does not follow that the obligation to pay the tax arose as of the date. The time for the payment on inheritance tax is clearly fixed by section 1544 of the Revised Administrative Code as amended by Act No. 3031, in relation to section 1543 of the same Code. The two sections follow: SEC. 1543. Exemption of certain acquisitions and transmissions. The following shall not be taxed: (a) The merger of the usufruct in the owner of the naked title. (b) The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the trustees. (c) The transmission from the first heir, legatee, or donee in favor of another beneficiary, in accordance with the desire of the predecessor. In the last two cases, if the scale of taxation appropriate to the new beneficiary is greater than that paid by the first, the former must pay the difference. SEC. 1544. When tax to be paid. The tax fixed in this article shall be paid: (a) In the second and third cases of the next preceding section, before entrance into possession of the property. (b) In other cases, within the six months subsequent to the death of the predecessor; but if judicial testamentary or intestate proceedings shall be instituted prior to the expiration of said period, the payment shall be made by the executor or administrator before delivering to each beneficiary his share. If the tax is not paid within the time hereinbefore prescribed, interest at the rate of twelve per centum per annum shall be added as part of the tax; and to the tax and interest due and unpaid within ten days after the date of notice and demand thereof by the collector, there shall be further added a surcharge of twenty-five per centum. A certified of all letters testamentary or of admisitration shall be furnished the Collector of Internal Revenue by the Clerk of Court within thirty days after their issuance. It should be observed in passing that the word "trustee", appearing in subsection (b) of section 1543, should read "fideicommissary" or "cestui que trust". There was an obvious mistake in translation from the Spanish to the English version. The instant case does fall under subsection (a), but under subsection (b), of section 1544 above-quoted, as there is here no fiduciary heirs, first heirs, legatee or donee. Under the subsection, the tax should have been paid before the delivery of the properties in question to P. J. M. Moore as trustee on March 10, 1924.

(b) The plaintiff contends that the estate of Thomas Hanley, in so far as the real properties are concerned, did not and could not legally pass to the instituted heir, Matthew Hanley, until after the expiration of ten years from the death of the testator on May 27, 1922 and, that the inheritance tax should be based on the value of the estate in 1932, or ten years after the testator's death. The plaintiff introduced evidence tending to show that in 1932 the real properties in question had a reasonable value of only P5,787. This amount added to the value of the personal property left by the deceased, which the plaintiff admits is P1,465, would generate an inheritance tax which, excluding deductions, interest and surcharge, would amount only to about P169.52. If death is the generating source from which the power of the estate to impose inheritance taxes takes its being and if, upon the death of the decedent, succession takes place and the right of the estate to tax vests instantly, the tax should be measured by the vlaue of the estate as it stood at the time of the decedent's death, regardless of any subsequent contingency value of any subsequent increase or decrease in value. (61 C. J., pp. 1692, 1693; 26 R. C. L., p. 232; Blakemore and Bancroft, Inheritance Taxes, p. 137. See also Knowlton vs. Moore, 178 U.S., 41; 20 Sup. Ct. Rep., 747; 44 Law. ed., 969.) "The right of the state to an inheritance tax accrues at the moment of death, and hence is ordinarily measured as to any beneficiary by the value at that time of such property as passes to him. Subsequent appreciation or depriciation is immaterial." (Ross, Inheritance Taxation, p. 72.) Our attention is directed to the statement of the rule in Cyclopedia of Law of and Procedure (vol. 37, pp. 1574, 1575) that, in the case of contingent remainders, taxation is postponed until the estate vests in possession or the contingency is settled. This rule was formerly followed in New York and has been adopted in Illinois, Minnesota, Massachusetts, Ohio, Pennsylvania and Wisconsin. This rule, horever, is by no means entirely satisfactory either to the estate or to those interested in the property (26 R. C. L., p. 231.). Realizing, perhaps, the defects of its anterior system, we find upon examination of cases and authorities that New York has varied and now requires the immediate appraisal of the postponed estate at its clear market value and the payment forthwith of the tax on its out of the corpus of the estate transferred. (In re Vanderbilt, 172 N. Y., 69; 69 N. E., 782; In re Huber, 86 N. Y. App. Div., 458; 83 N. Y. Supp., 769; Estate of Tracy, 179 N. Y., 501; 72 N. Y., 519; Estate of Brez, 172 N. Y., 609; 64 N. E., 958; Estate of Post, 85 App. Div., 611; 82 N. Y. Supp., 1079. Vide also, Saltoun vs. Lord Advocate, 1 Peter. Sc. App., 970; 3 Macq. H. L., 659; 23 Eng. Rul. Cas., 888.) California adheres to this new rule (Stats. 1905, sec. 5, p. 343). But whatever may be the rule in other jurisdictions, we hold that a transmission by inheritance is taxable at the time of the predecessor's death, notwithstanding the postponement of the actual possession or enjoyment of the estate by the beneficiary, and the tax measured by the value of the property transmitted at that time regardless of its appreciation or depreciation. (c) Certain items are required by law to be deducted from the appraised gross in arriving at the net value of the estate on which the inheritance tax is to be computed (sec. 1539, Revised Administrative Code). In the case at bar, the defendant and the trial court allowed a deduction of only P480.81. This sum represents the expenses and disbursements of the executors until March 10, 1924, among which were their fees and the proven debts of the deceased. The plaintiff contends that the compensation and fees of the trustees, which aggregate P1,187.28 (Exhibits C, AA, EE, PP, HH, JJ, LL, NN, OO), should also be deducted under section 1539 of the Revised Administrative Code which provides, in part, as follows: "In order to determine the net sum which must bear the tax, when an inheritance is concerned, there shall be deducted, in case of a resident, . . . the judicial expenses of the testamentary or intestate proceedings, . . . ." A trustee, no doubt, is entitled to receive a fair compensation for his services (Barney vs. Saunders, 16 How., 535; 14 Law. ed., 1047). But from this it does not follow that the compensation due him may lawfully be deducted in arriving at the net value of the estate subject to tax. There is no statute in the Philippines which requires trustees' commissions to be deducted in determining the net value of the estate subject to inheritance tax (61 C. J., p. 1705). Furthermore, though a testamentary trust has been created, it does not appear that the testator intended that the duties of his executors and trustees should be separated. (Ibid.; In re Vanneck's Estate, 161 N. Y. Supp., 893; 175 App. Div., 363;In re Collard's Estate, 161 N. Y. Supp., 455.) On the contrary, in paragraph 5 of his will, the testator expressed the desire that his real estate be handled and managed by his executors until the expiration of the period of ten years therein provided. Judicial expenses are expenses of administration (61 C. J., p. 1705) but, in State vs. Hennepin County Probate Court (112 N. W., 878; 101 Minn., 485), it was said: ". . . The compensation of a trustee, earned, not in the administration of the estate, but in the management thereof for the benefit of the legatees or devises, does not come properly within the class or reason for exempting administration expenses. . . . Service rendered in that behalf have no reference to closing the estate for the purpose of a distribution thereof to those entitled to it, and are not required or essential to the perfection of the rights of the heirs or legatees. . . . Trusts . . . of the character of that here before the court, are created for the the benefit of those to whom the property ultimately passes, are of voluntary creation, and intended for the preservation of the estate. No sound reason is given to support the contention that such expenses should be taken into consideration in fixing the value of the estate for the purpose of this tax." (d) The defendant levied and assessed the inheritance tax due from the estate of Thomas Hanley under the provisions of section 1544 of the Revised Administrative Code, as amended by section 3 of Act No. 3606. But Act No. 3606 went into effect on January 1, 1930. It, therefore, was not the law in force when the testator died on May 27, 1922. The law at the time was section 1544 above-mentioned, as amended by Act No. 3031, which took effect on March 9, 1922. It is well-settled that inheritance taxation is governed by the statute in force at the time of the death of the decedent (26 R. C. L., p. 206; 4 Cooley on Taxation, 4th ed., p. 3461). The taxpayer can not foresee and ought not to be required to guess the outcome of pending measures. Of course, a tax statute may be made retroactive in its operation. Liability for taxes under retroactive legislation has been "one of the incidents of social life." (Seattle vs. Kelleher, 195 U. S., 360; 49 Law. ed., 232 Sup. Ct. Rep., 44.) But legislative intent that a tax statute should operate retroactively should be perfectly clear. (Scwab vs. Doyle, 42 Sup. Ct. Rep., 491; Smietanka vs. First Trust & Savings Bank, 257 U. S., 602; Stockdale vs. Insurance Co., 20 Wall., 323; Lunch vs. Turrish, 247 U. S., 221.) "A statute should be considered as prospective in its operation, whether it enacts, amends, or repeals an inheritance tax, unless the language of the statute clearly demands or expresses that it shall have a retroactive effect, . . . ." (61 C. J., P. 1602.) Though the last paragraph of section 5 of Regulations No. 65 of the Department of Finance makes section 3 of Act No. 3606, amending section 1544 of the Revised Administrative Code, applicable to all estates the inheritance taxes due from which have not been paid, Act No. 3606 itself contains no provisions indicating legislative intent to give it retroactive effect. No such effect can begiven the statute by this court. The defendant Collector of Internal Revenue maintains, however, that certain provisions of Act No. 3606 are more favorable to the taxpayer than those of Act No. 3031, that said provisions are penal in nature and, therefore, should operate retroactively in conformity with the provisions of article 22 of the Revised Penal Code. This is the reason why he applied Act No. 3606 instead of Act No. 3031. Indeed, under Act No. 3606, (1) the surcharge of 25 per cent is based on the tax only, instead of on both the tax and the interest, as provided for in Act No. 3031, and (2) the taxpayer is allowed twenty days from notice and demand by rthe Collector of Internal Revenue within which to pay the tax, instead of ten days only as required by the old law.

Properly speaking, a statute is penal when it imposes punishment for an offense committed against the state which, under the Constitution, the Executive has the power to pardon. In common use, however, this sense has been enlarged to include within the term "penal statutes" all status which command or prohibit certain acts, and establish penalties for their violation, and even those which, without expressly prohibiting certain acts, impose a penalty upon their commission (59 C. J., p. 1110). Revenue laws, generally, which impose taxes collected by the means ordinarily resorted to for the collection of taxes are not classed as penal laws, although there are authorities to the contrary. (See Sutherland, Statutory Construction, 361; Twine Co. vs. Worthington, 141 U. S., 468; 12 Sup. Ct., 55; Rice vs. U. S., 4 C. C. A., 104; 53 Fed., 910; Com. vs. Standard Oil Co., 101 Pa. St., 150; State vs. Wheeler, 44 P., 430; 25 Nev. 143.) Article 22 of the Revised Penal Code is not applicable to the case at bar, and in the absence of clear legislative intent, we cannot give Act No. 3606 a retroactive effect. (e) The plaintiff correctly states that the liability to pay a tax may arise at a certain time and the tax may be paid within another given time. As stated by this court, "the mere failure to pay one's tax does not render one delinqent until and unless the entire period has eplased within which the taxpayer is authorized by law to make such payment without being subjected to the payment of penalties for fasilure to pay his taxes within the prescribed period." (U. S. vs. Labadan, 26 Phil., 239.) The defendant maintains that it was the duty of the executor to pay the inheritance tax before the delivery of the decedent's property to the trustee. Stated otherwise, the defendant contends that delivery to the trustee was delivery to the cestui que trust, the beneficiery in this case, within the meaning of the first paragraph of subsection (b) of section 1544 of the Revised Administrative Code. This contention is well taken and is sustained. The appointment of P. J. M. Moore as trustee was made by the trial court in conformity with the wishes of the testator as expressed in his will. It is true that the word "trust" is not mentioned or used in the will but the intention to create one is clear. No particular or technical words are required to create a testamentary trust (69 C. J., p. 711). The words "trust" and "trustee", though apt for the purpose, are not necessary. In fact, the use of these two words is not conclusive on the question that a trust is created (69 C. J., p. 714). "To create a trust by will the testator must indicate in the will his intention so to do by using language sufficient to separate the legal from the equitable estate, and with sufficient certainty designate the beneficiaries, their interest in the ttrust, the purpose or object of the trust, and the property or subject matter thereof. Stated otherwise, to constitute a valid testamentary trust there must be a concurrence of three circumstances: (1) Sufficient words to raise a trust; (2) a definite subject; (3) a certain or ascertain object; statutes in some jurisdictions expressly or in effect so providing." (69 C. J., pp. 705,706.) There is no doubt that the testator intended to create a trust. He ordered in his will that certain of his properties be kept together undisposed during a fixed period, for a stated purpose. The probate court certainly exercised sound judgment in appointment a trustee to carry into effect the provisions of the will (see sec. 582, Code of Civil Procedure). P. J. M. Moore became trustee on March 10, 1924. On that date trust estate vested in him (sec. 582 in relation to sec. 590, Code of Civil Procedure). The mere fact that the estate of the deceased was placed in trust did not remove it from the operation of our inheritance tax laws or exempt it from the payment of the inheritance tax. The corresponding inheritance tax should have been paid on or before March 10, 1924, to escape the penalties of the laws. This is so for the reason already stated that the delivery of the estate to the trustee was in esse delivery of the same estate to the cestui que trust, the beneficiary in this case. A trustee is but an instrument or agent for the cestui que trust (Shelton vs. King, 299 U. S., 90; 33 Sup. Ct. Rep., 689; 57 Law. ed., 1086). When Moore accepted the trust and took possesson of the trust estate he thereby admitted that the estate belonged not to him but to his cestui que trust (Tolentino vs. Vitug, 39 Phil.,126, cited in 65 C. J., p. 692, n. 63). He did not acquire any beneficial interest in the estate. He took such legal estate only as the proper execution of the trust required (65 C. J., p. 528) and, his estate ceased upon the fulfillment of the testator's wishes. The estate then vested absolutely in the beneficiary (65 C. J., p. 542). The highest considerations of public policy also justify the conclusion we have reached. Were we to hold that the payment of the tax could be postponed or delayed by the creation of a trust of the type at hand, the result would be plainly disastrous. Testators may provide, as Thomas Hanley has provided, that their estates be not delivered to their beneficiaries until after the lapse of a certain period of time. In the case at bar, the period is ten years. In other cases, the trust may last for fifty years, or for a longer period which does not offend the rule against petuities. The collection of the tax would then be left to the will of a private individual. The mere suggestion of this result is a sufficient warning against the accpetance of the essential to the very exeistence of government. (Dobbins vs. Erie Country, 16 Pet., 435; 10 Law. ed., 1022; Kirkland vs. Hotchkiss, 100 U. S., 491; 25 Law. ed., 558; Lane County vs. Oregon, 7 Wall., 71; 19 Law. ed., 101; Union Refrigerator Transit Co. vs. Kentucky, 199 U. S., 194; 26 Sup. Ct. Rep., 36; 50 Law. ed., 150; Charles River Bridge vs. Warren Bridge, 11 Pet., 420; 9 Law. ed., 773.) The obligation to pay taxes rests not upon the privileges enjoyed by, or the protection afforded to, a citizen by the government but upon the necessity of money for the support of the state (Dobbins vs. Erie Country, supra). For this reason, no one is allowed to object to or resist the payment of taxes solely because no personal benefit to him can be pointed out. (Thomas vs. Gay, 169 U. S., 264; 18 Sup. Ct. Rep., 340; 43 Law. ed., 740.) While courts will not enlarge, by construction, the government's power of taxation (Bromley vs. McCaughn, 280 U. S., 124; 74 Law. ed., 226; 50 Sup. Ct. Rep., 46) they also will not place upon tax laws so loose a construction as to permit evasions on merely fanciful and insubstantial distictions. (U. S. vs. Watts, 1 Bond., 580; Fed. Cas. No. 16,653; U. S. vs. Wigglesirth, 2 Story, 369; Fed. Cas. No. 16,690, followed in Froelich & Kuttner vs. Collector of Customs, 18 Phil., 461, 481; Castle Bros., Wolf & Sons vs. McCoy, 21 Phil., 300; Muoz & Co. vs. Hord, 12 Phil., 624; Hongkong & Shanghai Banking Corporation vs. Rafferty, 39 Phil., 145; Luzon Stevedoring Co. vs. Trinidad, 43 Phil., 803.) When proper, a tax statute should be construed to avoid the possibilities of tax evasion. Construed this way, the statute, without resulting in injustice to the taxpayer, becomes fair to the government. That taxes must be collected promptly is a policy deeply intrenched in our tax system. Thus, no court is allowed to grant injunction to restrain the collection of any internal revenue tax ( sec. 1578, Revised Administrative Code; Sarasola vs. Trinidad, 40 Phil., 252). In the case of Lim Co Chui vs. Posadas (47 Phil., 461), this court had occassion to demonstrate trenchment adherence to this policy of the law. It held that "the fact that on account of riots directed against the Chinese on October 18, 19, and 20, 1924, they were prevented from praying their internal revenue taxes on time and by mutual agreement closed their homes and stores and remained therein, does not authorize the Collector of Internal Revenue to extend the time prescribed for the payment of the taxes or to accept them without the additional penalty of twenty five per cent." (Syllabus, No. 3.) ". . . It is of the utmost importance," said the Supreme Court of the United States, ". . . that the modes adopted to enforce the taxes levied should be interfered with as little as possible. Any delay in the proceedings of the officers, upon whom the duty is developed of collecting the taxes, may derange the operations of government, and thereby, cause serious detriment to the public." (Dows vs. Chicago, 11 Wall., 108; 20 Law. ed., 65, 66; Churchill and Tait vs. Rafferty, 32 Phil., 580.) It results that the estate which plaintiff represents has been delinquent in the payment of inheritance tax and, therefore, liable for the payment of interest and surcharge provided by law in such cases. The delinquency in payment occurred on March 10, 1924, the date when Moore became trustee. The interest due should be computed from that date and it is error on the part of the defendant to compute it one month later. The provisions cases is mandatory (see and cf. Lim Co Chui vs.

Posadas, supra), and neither the Collector of Internal Revenuen or this court may remit or decrease such interest, no matter how heavily it may burden the taxpayer. To the tax and interest due and unpaid within ten days after the date of notice and demand thereof by the Collector of Internal Revenue, a surcharge of twenty-five per centum should be added (sec. 1544, subsec. (b), par. 2, Revised Administrative Code). Demand was made by the Deputy Collector of Internal Revenue upon Moore in a communiction dated October 16, 1931 (Exhibit 29). The date fixed for the payment of the tax and interest was November 30, 1931. November 30 being an official holiday, the tenth day fell on December 1, 1931. As the tax and interest due were not paid on that date, the estate became liable for the payment of the surcharge. In view of the foregoing, it becomes unnecessary for us to discuss the fifth error assigned by the plaintiff in his brief. We shall now compute the tax, together with the interest and surcharge due from the estate of Thomas Hanley inaccordance with the conclusions we have reached. At the time of his death, the deceased left real properties valued at P27,920 and personal properties worth P1,465, or a total of P29,385. Deducting from this amount the sum of P480.81, representing allowable deductions under secftion 1539 of the Revised Administrative Code, we have P28,904.19 as the net value of the estate subject to inheritance tax. The primary tax, according to section 1536, subsection (c), of the Revised Administrative Code, should be imposed at the rate of one per centum upon the first ten thousand pesos and two per centum upon the amount by which the share exceed thirty thousand pesos, plus an additional two hundred per centum. One per centum of ten thousand pesos is P100. Two per centum of P18,904.19 is P378.08. Adding to these two sums an additional two hundred per centum, or P965.16, we have as primary tax, correctly computed by the defendant, the sum of P1,434.24. To the primary tax thus computed should be added the sums collectible under section 1544 of the Revised Administrative Code. First should be added P1,465.31 which stands for interest at the rate of twelve per centum per annum from March 10, 1924, the date of delinquency, to September 15, 1932, the date of payment under protest, a period covering 8 years, 6 months and 5 days. To the tax and interest thus computed should be added the sum of P724.88, representing a surhcarge of 25 per cent on both the tax and interest, and also P10, the compromise sum fixed by the defendant (Exh. 29), giving a grand total of P3,634.43. As the plaintiff has already paid the sum of P2,052.74, only the sums of P1,581.69 is legally due from the estate. This last sum is P390.42 more than the amount demanded by the defendant in his counterclaim. But, as we cannot give the defendant more than what he claims, we must hold that the plaintiff is liable only in the sum of P1,191.27 the amount stated in the counterclaim. The judgment of the lower court is accordingly modified, with costs against the plaintiff in both instances. So ordered. Avancea, C.J., Abad Santos, Imperial, Diaz and Concepcion, JJ., concur. Villa-Real, J., concurs. Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L- 41383 August 15, 1988 PHILIPPINE AIRLINES, INC., plaintiff-appellant, vs. ROMEO F. EDU in his capacity as Land Transportation Commissioner, and UBALDO CARBONELL, in his capacity as National Treasurer, defendants-appellants. Ricardo V. Puno, Jr. and Conrado A. Boro for plaintiff-appellant.

GUTIERREZ, JR., J.: What is the nature of motor vehicle registration fees? Are they taxes or regulatory fees? This question has been brought before this Court in the past. The parties are, in effect, asking for a re-examination of the latest decision on this issue. This appeal was certified to us as one involving a pure question of law by the Court of Appeals in a case where the then Court of First Instance of Rizal dismissed the portion-about complaint for refund of registration fees paid under protest.

The disputed registration fees were imposed by the appellee, Commissioner Romeo F. Elevate pursuant to Section 8, Republic Act No. 4136, otherwise known as the Land Transportation and Traffic Code. The Philippine Airlines (PAL) is a corporation organized and existing under the laws of the Philippines and engaged in the air transportation business under a legislative franchise, Act No. 42739, as amended by Republic Act Nos. 25). and 269.1 Under its franchise, PAL is exempt from the payment of taxes. The pertinent provision of the franchise provides as follows: Section 13. In consideration of the franchise and rights hereby granted, the grantee shall pay to the National Government during the life of this franchise a tax of two per cent of the gross revenue or gross earning derived by the grantee from its operations under this franchise. Such tax shall be due and payable quarterly and shall be in lieu of all taxes of any kind, nature or description, levied, established or collected by any municipal, provincial or national automobiles, Provided, that if, after the audit of the accounts of the grantee by the Commissioner of Internal Revenue, a deficiency tax is shown to be due, the deficiency tax shall be payable within the ten days from the receipt of the assessment. The grantee shall pay the tax on its real property in conformity with existing law. On the strength of an opinion of the Secretary of Justice (Op. No. 307, series of 1956) PAL has, since 1956, not been paying motor vehicle registration fees. Sometime in 1971, however, appellee Commissioner Romeo F. Elevate issued a regulation requiring all tax exempt entities, among them PAL to pay motor vehicle registration fees. Despite PAL's protestations, the appellee refused to register the appellant's motor vehicles unless the amounts imposed under Republic Act 4136 were paid. The appellant thus paid, under protest, the amount of P19,529.75 as registration fees of its motor vehicles. After paying under protest, PAL through counsel, wrote a letter dated May 19,1971, to Commissioner Edu demanding a refund of the amounts paid, invoking the ruling in Calalang v. Lorenzo (97 Phil. 212 [1951]) where it was held that motor vehicle registration fees are in reality taxes from the payment of which PAL is exempt by virtue of its legislative franchise. Appellee Edu denied the request for refund basing his action on the decision in Republic v. Philippine Rabbit Bus Lines, Inc., (32 SCRA 211, March 30, 1970) to the effect that motor vehicle registration fees are regulatory exceptional. and not revenue measures and, therefore, do not come within the exemption granted to PAL? under its franchise. Hence, PAL filed the complaint against Land Transportation Commissioner Romeo F. Edu and National Treasurer Ubaldo Carbonell with the Court of First Instance of Rizal, Branch 18 where it was docketed as Civil Case No. Q-15862. Appellee Romeo F. Elevate in his capacity as LTC Commissioner, and LOI Carbonell in his capacity as National Treasurer, filed a motion to dismiss alleging that the complaint states no cause of action. In support of the motion to dismiss, defendants repatriation the ruling in Republic v. Philippine Rabbit Bus Lines, Inc., (supra) that registration fees of motor vehicles are not taxes, but regulatory fees imposed as an incident of the exercise of the police power of the state. They contended that while Act 4271 exempts PAL from the payment of any tax except two per cent on its gross revenue or earnings, it does not exempt the plaintiff from paying regulatory fees, such as motor vehicle registration fees. The resolution of the motion to dismiss was deferred by the Court until after trial on the merits. On April 24, 1973, the trial court rendered a decision dismissing the appellant's complaint "moved by the later ruling laid down by the Supreme Court in the case or Republic v. Philippine Rabbit Bus Lines, Inc., (supra)." From this judgment, PAL appealed to the Court of Appeals which certified the case to us. Calalang v. Lorenzo (supra) and Republic v. Philippine Rabbit Bus Lines, Inc. (supra) cited by PAL and Commissioner Romeo F. Edu respectively, discuss the main points of contention in the case at bar. Resolving the issue in the Philippine Rabbit case, this Court held: "The registration fee which defendant-appellee had to pay was imposed by Section 8 of the Revised Motor Vehicle Law (Republic Act No. 587 [1950]). Its heading speaks of "registration fees." The term is repeated four times in the body thereof. Equally so, mention is made of the "fee for registration." (Ibid., Subsection G) A subsection starts with a categorical statement "No fees shall be charged." (lbid.,Subsection H) The conclusion is difficult to resist therefore that the Motor Vehicle Act requires the payment not of a tax but of a registration fee under the police power. Hence the incipient, of the section relied upon by defendant-appellee under the Back Pay Law, It is not held liable for a tax but for a registration fee. It therefore cannot make use of a backpay certificate to meet such an obligation. Any vestige of any doubt as to the correctness of the above conclusion should be dissipated by Republic Act No. 5448. ([1968]. Section 3 thereof as to the imposition of additional tax on privately-owned passenger automobiles, motorcycles and scooters was amended by Republic Act No. 5470 which is (sic) approved on May 30, 1969.) A special science fund was thereby created and its title expressly sets forth that a tax on privately-owned passenger automobiles, motorcycles and scooters was imposed. The rates thereof were provided for in its Section 3 which clearly specifies the" Philippine tax."(Cooley to be paid as distinguished from the registration fee under the Motor Vehicle Act. There cannot be any clearer expression therefore of the legislative will, even on the assumption that the earlier legislation could by subdivision the point be susceptible of the interpretation that a tax rather than a fee was levied. What is thus most apparent is that where the legislative body relies on its authority to tax it expressly so states, and where it is enacting a regulatory measure, it is equally exploded (at p. 22,1969 In direct refutation is the ruling in Calalang v. Lorenzo (supra), where the Court, on the other hand, held:

The charges prescribed by the Revised Motor Vehicle Law for the registration of motor vehicles are in section 8 of that law called "fees". But the appellation is no impediment to their being considered taxes if taxes they really are. For not the name but the object of the charge determines whether it is a tax or a fee. Geveia speaking, taxes are for revenue, whereas fees are exceptional. for purposes of regulation and inspection and are for that reason limited in amount to what is necessary to cover the cost of the services rendered in that connection. Hence, a charge fixed by statute for the service to be person,-When by an officer, where the charge has no relation to the value of the services performed and where the amount collected eventually finds its way into the treasury of the branch of the government whose officer or officers collected the chauffeur, is not a fee but a tax."(Cooley on Taxation, Vol. 1, 4th ed., p. 110.) From the data submitted in the court below, it appears that the expenditures of the Motor Vehicle Office are but a small portionabout 5 per centumof the total collections from motor vehicle registration fees. And as proof that the money collected is not intended for the expenditures of that office, the law itself provides that all such money shall accrue to the funds for the construction and maintenance of public roads, streets and bridges. It is thus obvious that the fees are not collected for regulatory purposes, that is to say, as an incident to the enforcement of regulations governing the operation of motor vehicles on public highways, for their express object is to provide revenue with which the Government is to discharge one of its principal functionsthe construction and maintenance of public highways for everybody's use. They are veritable taxes, not merely fees. As a matter of fact, the Revised Motor Vehicle Law itself now regards those fees as taxes, for it provides that "no other taxes or fees than those prescribed in this Act shall be imposed," thus implying that the charges therein imposedthough called fees are of the category of taxes. The provision is contained in section 70, of subsection (b), of the law, as amended by section 17 of Republic Act 587, which reads: Sec. 70(b) No other taxes or fees than those prescribed in this Act shall be imposed for the registration or operation or on the ownership of any motor vehicle, or for the exercise of the profession of chauffeur, by any municipal corporation, the provisions of any city charter to the contrary notwithstanding: Provided, however, That any provincial board, city or municipal council or board, or other competent authority may exact and collect such reasonable and equitable toll fees for the use of such bridges and ferries, within their respective jurisdiction, as may be authorized and approved by the Secretary of Public Works and Communications, and also for the use of such public roads, as may be authorized by the President of the Philippines upon the recommendation of the Secretary of Public Works and Communications, but in none of these cases, shall any toll fee." be charged or collected until and unless the approved schedule of tolls shall have been posted levied, in a conspicuous place at such toll station. (at pp. 213-214) Motor vehicle registration fees were matters originally governed by the Revised Motor Vehicle Law (Act 3992 [19511) as amended by Commonwealth Act 123 and Republic Acts Nos. 587 and 1621. Today, the matter is governed by Rep. Act 4136 [1968]), otherwise known as the Land Transportation Code, (as amended by Rep. Acts Nos. 5715 and 64-67, P.D. Nos. 382, 843, 896, 110.) and BP Blg. 43, 74 and 398). Section 73 of Commonwealth Act 123 (which amended Sec. 73 of Act 3992 and remained unsegregated, by Rep. Act Nos. 587 and 1603) states: Section 73. Disposal of moneys collected.Twenty per centum of the money collected under the provisions of this Act shall accrue to the road and bridge funds of the different provinces and chartered cities in proportion to the centum shall during the next previous year and the remaining eighty per centum shall be deposited in the Philippine Treasury to create a special fund for the construction and maintenance of national and provincial roads and bridges. as well as the streets and bridges in the chartered cities to be alloted by the Secretary of Public Works and Communications for projects recommended by the Director of Public Works in the different provinces and chartered cities. .... Presently, Sec. 61 of the Land Transportation and Traffic Code provides: Sec. 61. Disposal of Mortgage. CollectedMonies collected under the provisions of this Act shall be deposited in a special trust account in the National Treasury to constitute the Highway Special Fund, which shall be apportioned and expended in accordance with the provisions of the" Philippine Highway Act of 1935. "Provided, however, That the amount necessary to maintain and equip the Land Transportation Commission but not to exceed twenty per cent of the total collection during one year, shall be set aside for the purpose. (As amended by RA 64-67, approved August 6, 1971). It appears clear from the above provisions that the legislative intent and purpose behind the law requiring owners of vehicles to pay for their registration is mainly to raise funds for the construction and maintenance of highways and to a much lesser degree, pay for the operating expenses of the administering agency. On the other hand, the Philippine Rabbit case mentions a presumption arising from the use of the term "fees," which appears to have been favored by the legislature to distinguish fees from other taxes such as those mentioned in Section 13 of Rep. Act 4136 which reads: Sec. 13. Payment of taxes upon registration.No original registration of motor vehicles subject to payment of taxes, customs s duties or other charges shall be accepted unless proof of payment of the taxes due thereon has been presented to the Commission. referring to taxes other than those imposed on the registration, operation or ownership of a motor vehicle (Sec. 59, b, Rep. Act 4136, as amended). Fees may be properly regarded as taxes even though they also serve as an instrument of regulation, As stated by a former presiding judge of the Court of Tax Appeals and writer on various aspects of taxpayers

It is possible for an exaction to be both tax arose. regulation. License fees are changes. looked to as a source of revenue as well as a means of regulation (Sonzinky v. U.S., 300 U.S. 506) This is true, for example, of automobile license fees. Isabela such case, the fees may properly be regarded as taxes even though they also serve as an instrument of regulation. If the purpose is primarily revenue, or if revenue is at least one of the real and substantial purposes, then the exaction is properly called a tax. (1955 CCH Fed. tax Course, Par. 3101, citing Cooley on Taxation (2nd Ed.) 592, 593; Calalang v. Lorenzo. 97 Phil. 213-214) Lutz v. Araneta 98 Phil. 198.) These exactions are sometimes called regulatory taxes. (See Secs. 4701, 4711, 4741, 4801, 4811, 4851, and 4881, U.S. Internal Revenue Code of 1954, which classify taxes on tobacco and alcohol as regulatory taxes.) (Umali, Reviewer in Taxation, 1980, pp. 12-13, citing Cooley on Taxation, 2nd Edition, 591-593). Indeed, taxation may be made the implement of the state's police power (Lutz v. Araneta, 98 Phil. 148). If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial purposes, then the exaction is properly called a tax (Umali, Id.) Such is the case of motor vehicle registration fees. The conclusions become inescapable in view of Section 70(b) of Rep. Act 587 quoted in the Calalang case. The same provision appears as Section 591-593). in the Land Transportation code. It is patent therefrom that the legislators had in mind a regulatory tax as the law refers to the imposition on the registration, operation or ownership of a motor vehicle as a "tax or fee." Though nowhere in Rep. Act 4136 does the law specifically state that the imposition is a tax, Section 591-593). speaks of "taxes." or fees ... for the registration or operation or on the ownership of any motor vehicle, or for the exercise of the profession of chauffeur ..." making the intent to impose a tax more apparent. Thus, even Rep. Act 5448 cited by the respondents, speak of an "additional" tax," where the law could have referred to an original tax and not one in addition to the tax already imposed on the registration, operation, or ownership of a motor vehicle under Rep. Act 41383. Simply put, if the exaction under Rep. Act 4136 were merely a regulatory fee, the imposition in Rep. Act 5448 need not be an "additional" tax. Rep. Act 4136 also speaks of other "fees," such as the special permit fees for certain types of motor vehicles (Sec. 10) and additional fees for change of registration (Sec. 11). These are not to be understood as taxes because such fees are very minimal to be revenue-raising. Thus, they are not mentioned by Sec. 591-593). of the Code as taxes like the motor vehicle registration fee and chauffers' license fee. Such fees are to go into the expenditures of the Land Transportation Commission as provided for in the last proviso of see. 61, aforequoted. It is quite apparent that vehicle registration fees were originally simple exceptional. intended only for rigidly purposes in the exercise of the State's police powers. Over the years, however, as vehicular traffic exploded in number and motor vehicles became absolute necessities without which modem life as we know it would stand still, Congress found the registration of vehicles a very convenient way of raising much needed revenues. Without changing the earlier deputy. of registration payments as "fees," their nature has become that of "taxes." In view of the foregoing, we rule that motor vehicle registration fees as at present exacted pursuant to the Land Transportation and Traffic Code are actually taxes intended for additional revenues. of government even if one fifth or less of the amount collected is set aside for the operating expenses of the agency administering the program. May the respondent administrative agency be required to refund the amounts stated in the complaint of PAL? The answer is NO. The claim for refund is made for payments given in 1971. It is not clear from the records as to what payments were made in succeeding years. We have ruled that Section 24 of Rep. Act No. 5448 dated June 27, 1968, repealed all earlier tax exemptions Of corporate taxpayers found in legislative franchises similar to that invoked by PAL in this case. In Radio Communications of the Philippines, Inc. v. Court of Tax Appeals, et al. (G.R. No. 615)." July 11, 1985), this Court ruled: Under its original franchise, Republic Act No. 21); enacted in 1957, petitioner Radio Communications of the Philippines, Inc., was subject to both the franchise tax and income tax. In 1964, however, petitioner's franchise was amended by Republic Act No. 41-42). to the effect that its franchise tax of one and one-half percentum (1-1/2%) of all gross receipts was provided as "in lieu of any and all taxes of any kind, nature, or description levied, established, or collected by any authority whatsoever, municipal, provincial, or national from which taxes the grantee is hereby expressly exempted." The issue raised to this Court now is the validity of the respondent court's decision which ruled that the exemption under Republic Act No. 41-42). was repealed by Section 24 of Republic Act No. 5448 dated June 27, 1968 which reads: "(d) The provisions of existing special or general laws to the contrary notwithstanding, all corporate taxpayers not specifically exempt under Sections 24 (c) (1) of this Code shall pay the rates provided in this section. All corporations, agencies, or instrumentalities owned or controlled by the government, including the Government Service Insurance System and the Social Security System but excluding educational institutions, shall pay such rate of tax upon their taxable net income as are imposed by this section upon associations or corporations engaged in a similar business or industry. " An examination of Section 24 of the Tax Code as amended shows clearly that the law intended all corporate taxpayers to pay income tax as provided by the statute. There can be no doubt as to the power of Congress to repeal the earlier exemption it granted. Article XIV, Section 8 of the 1935 Constitution and Article XIV, Section 5 of the Constitution as amended in 1973 expressly provide that no franchise shall be granted to any individual, firm, or corporation except under the condition that it shall be subject to amendment, alteration, or repeal by the legislature when the public interest so requires. There is no question as to the public interest involved. The country needs increased revenues. The repealing clause is clear and unambiguous. There is a listing of entities entitled to tax exemption. The petitioner is not covered by the provision. Considering the foregoing, the Court Resolved to DENY the petition for lack of merit. The decision of the respondent court is affirmed. Any registration fees collected between June 27, 1968 and April 9, 1979, were correctly imposed because the tax exemption in the franchise of PAL was repealed during the period. However, an amended franchise was given to PAL in 1979. Section 13 of Presidential Decree No. 1590, now provides:

In consideration of the franchise and rights hereby granted, the grantee shall pay to the Philippine Government during the lifetime of this franchise whichever of subsections (a) and (b) hereunder will result in a lower taxes.) (a) The basic corporate income tax based on the grantee's annual net taxable income computed in accordance with the provisions of the Internal Revenue Code; or (b) A franchise tax of two per cent (2%) of the gross revenues. derived by the grantees from all specific. without distinction as to transport or nontransport corporations; provided that with respect to international airtransport service, only the gross passengers, mail, and freight revenues. from its outgoing flights shall be subject to this law. The tax paid by the grantee under either of the above alternatives shall be in lieu of all other taxes, duties, royalties, registration, license and other fees and charges of any kind, nature or description imposed, levied, established, assessed, or collected by any municipal, city, provincial, or national authority or government, agency, now or in the future, including but not limited to the following: xxx xxx xxx (5) All taxes, fees and other charges on the registration, license, acquisition, and transfer of airtransport equipment, motor vehicles, and all other personal or real property of the gravitates (Pres. Decree 1590, 75 OG No. 15, 3259, April 9, 1979). PAL's current franchise is clear and specific. It has removed the ambiguity found in the earlier law. PAL is now exempt from the payment of any tax, fee, or other charge on the registration and licensing of motor vehicles. Such payments are already included in the basic tax or franchise tax provided in Subsections (a) and (b) of Section 13, P.D. 1590, and may no longer be exacted. WHEREFORE, the petition is hereby partially GRANTED. The prayed for refund of registration fees paid in 1971 is DENIED. The Land Transportation Franchising and Regulatory Board (LTFRB) is enjoined functions-the collecting any tax, fee, or other charge on the registration and licensing of the petitioner's motor vehicles from April 9, 1979 as provided in Presidential Decree No. 1590. SO ORDERED. Fernan, C.J., Narvasa, Melencio-Herrera, Cruz, Paras, Feliciano, Gancayco, Padilla, Bidin, Sarmiento, Cortes, Grio Aquino and Medialdea, JJ., concur. Republic of the Philippines SUPREME COURT Manila EN BANC

G.R. No. 99886 March 31, 1993 JOHN H. OSMEA, petitioner, vs. OSCAR ORBOS, in his capacity as Executive Secretary; JESUS ESTANISLAO, in his capacity as Secretary of Finance; WENCESLAO DELA PAZ, in his capacity as Head of the Office of Energy Affairs; REX V. TANTIONGCO, and the ENERGY REGULATORY BOARD, respondents. Nachura & Sarmiento for petitioner. The Solicitor General for public respondents.

NARVASA, C.J.: The petitioner seeks the corrective, 1 prohibitive and coercive remedies provided by Rule 65 of the Rules of Court, 2upon the following posited grounds, viz.: 3 1) the invalidity of the "TRUST ACCOUNT" in the books of account of the Ministry of Energy (now, the Office of Energy Affairs), created pursuant to 8, paragraph 1, of P.D. No. 1956, as amended, "said creation of a trust fund being contrary to Section 29 (3), Article VI of the . . Constitution; 4

2) the unconstitutionality of 8, paragraph 1 (c) of P.D. No. 1956, as amended by Executive Order No. 137, for "being an undue and invalid delegation of legislative power . . to the Energy Regulatory Board;" 5 3) the illegality of the reimbursements to oil companies, paid out of the Oil Price Stabilization Fund, 6 because it contravenes 8, paragraph 2 (2) of P. D. 1956, as amended; and 4) the consequent nullity of the Order dated December 10, 1990 and the necessity of a rollback of the pump prices and petroleum products to the levels prevailing prior to the said Order. It will be recalled that on October 10, 1984, President Ferdinand Marcos issued P.D. 1956 creating a Special Account in the General Fund, designated as the Oil Price Stabilization Fund (OPSF). The OPSF was designed to reimburse oil companies for cost increases in crude oil and imported petroleum products resulting from exchange rate adjustments and from increases in the world market prices of crude oil. Subsequently, the OPSF was reclassified into a "trust liability account," in virtue of E.O. 1024, 7 and ordered released from the National Treasury to the Ministry of Energy. The same Executive Order also authorized the investment of the fund in government securities, with the earnings from such placements accruing to the fund. President Corazon C. Aquino, amended P.D. 1956. She promulgated Executive Order No. 137 on February 27, 1987, expanding the grounds for reimbursement to oil companies for possible cost underrecovery incurred as a result of the reduction of domestic prices of petroleum products, the amount of the underrecovery being left for determination by the Ministry of Finance. Now, the petition alleges that the status of the OPSF as of March 31, 1991 showed a "Terminal Fund Balance deficit" of some P12.877 billion; 8 that to abate the worsening deficit, "the Energy Regulatory Board . . issued an Order on December 10, 1990, approving the increase in pump prices of petroleum products," and at the rate of recoupment, the OPSF deficit should have been fully covered in a span of six (6) months, but this notwithstanding, the respondents Oscar Orbos, in his capacity as Executive Secretary; Jesus Estanislao, in his capacity as Secretary of Finance; Wenceslao de la Paz, in his capacity as Head of the Office of Energy Affairs; Chairman Rex V. Tantiongco and the Energy Regulatory Board "are poised to accept, process and pay claims not authorized under P.D. 1956." 9 The petition further avers that the creation of the trust fund violates 29(3), Article VI of the Constitution, reading as follows: (3) All money collected on any tax levied for a special purpose shall be treated as a special fund and paid out for such purposes 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. The petitioner argues that "the monies collected pursuant to . . P.D. 1956, as amended, must be treated as a 'SPECIAL FUND,' not as a 'trust account' or a 'trust fund,' and that "if a special tax is collected for a specific purpose, the revenue generated therefrom shall 'be treated as a special fund' to be used only for the purpose indicated, and not channeled to another government objective." 10 Petitioner further points out that since "a 'special fund' consists of monies collected through the taxing power of a State, such amounts belong to the State, although the use thereof is limited to the special purpose/objective for which it was created." 11 He also contends that the "delegation of legislative authority" to the ERB violates 28 (2). Article VI of the Constitution, viz.: (2) The Congress may, by law, authorize the President to fix, within specified limits, and subject to such limitations and restrictions as it may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national development program of the Government; and, inasmuch as the delegation relates to the exercise of the power of taxation, "the limits, limitations and restrictions must be quantitative, that is, the law must not only specify how to tax, who (shall) be taxed (and) what the tax is for, but also impose a specific limit on how much to tax." 12 The petitioner does not suggest that a "trust account" is illegal per se, but maintains that the monies collected, which form part of the OPSF, should be maintained in a special account of the general fund for the reason that the Constitution so provides, and because they are, supposedly, taxes levied for a special purpose. He assumes that the Fund is formed from a tax undoubtedly because a portion thereof is taken from collections of ad valorem taxes and the increases thereon. It thus appears that the challenge posed by the petitioner is premised primarily on the view that the powers granted to the ERB under P.D. 1956, as amended, partake of the nature of the taxation power of the State. The Solicitor General observes that the "argument rests on the assumption that the OPSF is a form of revenue measure drawing from a special tax to be expended for a special purpose." 13 The petitioner's perceptions are, in the Court's view, not quite correct. To address this critical misgiving in the position of the petitioner on these issues, the Court recalls its holding inValmonte v. Energy Regulatory Board, et al. 14

The foregoing arguments suggest the presence of misconceptions about the nature and functions of the OPSF. The OPSF is a "Trust Account" which was established "for the purpose of minimizing the frequent price changes brought about by exchange rate adjustment and/or changes in world market prices of crude oil and imported petroleum products." 15 Under P.D. No. 1956, as amended by Executive Order No. 137 dated 27 February 1987, this Trust Account may be funded from any of the following sources:
a) Any increase in the tax collection from ad valorem tax or customs duty imposed on petroleum products subject to tax under this Decree arising from exchange rate adjustment, as may be determined by the Minister of Finance in consultation with the Board of Energy; b) Any increase in the tax collection as a result of the lifting of tax exemptions of government corporations, as may be determined by the Minister of Finance in consultation with the Board of Energy: c) Any additional amount to be imposed on petroleum products to augment the resources of the Fund through an appropriate Order that may be issued by the Board of Energy requiring payment of persons or companies engaged in the business of importing, manufacturing and/or marketing petroleum products; d) Any resulting peso cost differentials in case the actual peso costs paid by oil companies in the importation of crude oil and petroleum products is less than the peso costs computed using the reference foreign exchange rate as fixed by the Board of Energy. xxx xxx xxx The fact that the world market prices of oil, measured by the spot market in Rotterdam, vary from day to day is of judicial notice. Freight rates for hauling crude oil and petroleum products from sources of supply to the Philippines may also vary from time to time. The exchange rate of the peso vis-a-vis the U.S. dollar and other convertible foreign currencies also changes from day to day. These fluctuations in world market prices and in tanker rates and foreign exchange rates would in a completely free market translate into corresponding adjustments in domestic prices of oil and petroleum products with sympathetic frequency. But domestic prices which vary from day to day or even only from week to week would result in a chaotic market with unpredictable effects upon the country's economy in general. The OPSF was established precisely to protect local consumers from the adverse consequences that such frequent oil price adjustments may have upon the economy. Thus, the OPSF serves as a pocket, as it were, into which a portion of the purchase price of oil and petroleum products paid by consumers as well as some tax revenues are inputted and from which amounts are drawn from time to time to reimburse oil companies, when appropriate situations arise, for increases in, as well as underrecovery of, costs of crude importation. The OPSF is thus a buffer mechanism through which the domestic consumer prices of oil and petroleum products are stabilized, instead of fluctuating every so often, and oil companies are allowed to recover those portions of their costs which they would not otherwise recover given the level of domestic prices existing at any given time. To the extent that some tax revenues are also put into it, the OPSF is in effect a device through which the domestic prices of petroleum products are subsidized in part. It appears to the Court that the establishment and maintenance of the OPSF is well within that 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. The stabilization, and subsidy of domestic prices of petroleum products and fuel oil clearly critical in importance considering, among other things, the continuing high level of dependence of the country on imported crude oil are appropriately regarded as public purposes. Also of relevance is this Court's ruling in relation to the sugar stabilization fund the nature of which is not far different from the OPSF. In Gaston v. Republic Planters Bank, 16 this Court upheld the legality of the sugar stabilization fees and explained their nature and character, viz.: 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 v. Araneta, 98 Phil. 148). . . . The tax collected is not in a pure exercise of the taxing power. It is levied with a regulatory purpose, to provide a means for the stabilization of the sugar industry. The levy is primarily in the exercise of the police power of the State (Lutz v. Araneta, supra). xxx xxx xxx

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 v. 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(1). 17
The character of the Stabilization Fund as a special kind of 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 (3), lifted from the 1935 Constitution, Article VI, Sec. 23(1). (Emphasis supplied). Hence, it seems clear that while the funds collected may be referred to as taxes, they are exacted in the exercise of the police power of the State. Moreover, that the OPSF is a special fund is plain from the special treatment given it by E.O. 137. It is segregated from the general fund; and while it is placed in what the law refers to as a "trust liability account," the fund nonetheless remains subject to the scrutiny and review of the COA. The Court is satisfied that these measures comply with the constitutional description of a "special fund." Indeed, the practice is not without precedent. With regard to the alleged undue delegation of legislative power, the Court finds that the provision conferring the authority upon the ERB to impose additional amounts on petroleum products provides a sufficient standard by which the authority must be exercised. In addition to the general policy of the law to protect the local consumer by stabilizing and subsidizing domestic pump rates, 8(c) of P.D. 1956 18 expressly authorizes the ERB to impose additional amounts to augment the resources of the Fund. What petitioner would wish is the fixing of some definite, quantitative restriction, or "a specific limit on how much to tax." 19 The Court is cited to this requirement by the petitioner on the premise that what is involved here is the power of taxation; but as already discussed, this is not the case. What is here involved is not so much the power of taxation as police power. Although the provision authorizing the ERB to impose additional amounts could be construed to refer to the power of taxation, it cannot be overlooked that the overriding consideration is to enable the delegate to act with expediency in carrying out the objectives of the law which are embraced by the police power of the State. The interplay and constant fluctuation of the various factors involved in the determination of the price of oil and petroleum products, and the frequently shifting need to either augment or exhaust the Fund, do not conveniently permit the setting of fixed or rigid parameters in the law as proposed by the petitioner. To do so would render the ERB unable to respond effectively so as to mitigate or avoid the undesirable consequences of such fluidity. As such, the standard as it is expressed, suffices to guide the delegate in the exercise of the delegated power, taking account of the circumstances under which it is to be exercised. For a valid delegation of power, it is essential that the law delegating the power must be (1) complete in itself, that is it must set forth the policy to be executed by the delegate and (2) it must fix a standard limits of which are sufficiently determinate or determinable to which the delegate must conform. 20

. . . As pointed out in Edu v. Ericta: "To avoid the taint of unlawful delegation, there must be a standard, which implies at the very least that the legislature itself determines matters of principle and lays down fundamental policy. Otherwise, the charge of complete abdication may be hard to repel. A standard thus defines legislative policy, marks its limits, maps out its boundaries and specifies the public agency to apply it. It indicates the circumstances under which the legislative command is to be effected. It is the criterion by which the legislative purpose may be carried out. Thereafter, the executive or administrative office designated may in pursuance of the above guidelines promulgate supplemental rules and regulations. The standard may either be express or implied. If the former, the non-delegation objection is easily met. The standard though does not have to be spelled out specifically. It could be implied from the policy and purpose of the act considered as a whole. 21
It would seem that from the above-quoted ruling, the petition for prohibition should fail. The standard, as the Court has already stated, may even be implied. In that light, there can be no ground upon which to sustain the petition, inasmuch as the challenged law sets forth a determinable standard which guides the exercise of the power granted to the ERB. By the same token, the proper exercise of the delegated power may be tested with ease. It seems obvious that what the law intended was to permit the additional imposts for as long as there exists a need to protect the general public and the petroleum industry from the adverse consequences of pump rate fluctuations. "Where the standards set up for the guidance of an administrative officer and the action taken are in fact recorded in the orders of such officer, so that Congress, the courts and the public are assured that the orders in the judgment of such officer conform to the legislative standard, there is no failure in the performance of the legislative functions." 22 This Court thus finds no serious impediment to sustaining the validity of the legislation; the express purpose for which the imposts are permitted and the general objectives and purposes of the fund are readily discernible, and they constitute a sufficient standard upon which the delegation of power may be justified. In relation to the third question respecting the illegality of the reimbursements to oil companies, paid out of the Oil Price Stabilization Fund, because allegedly in contravention of 8, paragraph 2 (2) of P.D. 1956, amended
23

the Court finds for the petitioner.

The petition assails the payment of certain items or accounts in favor of the petroleum companies (i.e., inventory losses, financing charges, fuel oil sales to the National Power Corporation, etc.) because not authorized by law. Petitioner contends that "these claims are not embraced in the enumeration in 8 of P.D. 1956 . . since none of them was incurred 'as a result of the reduction of domestic prices of petroleum products,'" 24 and since these items are reimbursements for which the OPSF should not have responded, the amount of the P12.877 billion deficit "should be reduced by P5,277.2 million." 25 It is argued "that under the principle of ejusdem generis . . . the term 'other factors' (as used in 8 of P.D. 1956) . . can only include such 'other factors' which necessarily result in the reduction of domestic prices of petroleum products." 26 The Solicitor General, for his part, contends that "(t)o place said (term) within the restrictive confines of the rule ofejusdem generis would reduce (E.O. 137) to a meaningless provision." This Court, in Caltex Philippines, Inc. v. The Honorable Commissioner on Audit, et al., 27 passed upon the application of ejusdem generis to paragraph 2 of 8 of P.D. 1956, viz.:

The rule of ejusdem generis states that "[w]here words follow an enumeration of persons or things, by words of a particular and specific meaning, such general words are not to be construed in their widest extent, but are held to be as applying only to persons or things of the same kind or class as those specifically mentioned." 28A reading of subparagraphs (i) and (ii) easily discloses that they do not have a common characteristic. The first relates to price reduction as directed by the Board of Energy while the second refers to reduction in internal ad valorem taxes. Therefore, subparagraph (iii) cannot be limited by the enumeration in these subparagraphs. What should be considered for purposes of determining the "other factors" in subparagraph (iii) is the first sentence of paragraph (2) of the Section which explicitly allows the cost underrecovery only if such were incurred as a result of the reduction of domestic prices of petroleum products.
The Court thus holds, that the reimbursement of financing charges is not authorized by paragraph 2 of 8 of P.D. 1956, for the reason that they were not incurred as a result of the reduction of domestic prices of petroleum products. Under the same provision, however, the payment of inventory losses is upheld as valid, being clearly a result of domestic price reduction, when oil companies incur a cost underrecovery for yet unsold stocks of oil in inventory acquired at a higher price. Reimbursement for cost underrecovery from the sales of oil to the National Power Corporation is equally permissible, not as coming within the provisions of P.D. 1956, but in virtue of other laws and regulations as held in Caltex 29 and which have been pointed to by the Solicitor General. At any rate, doubts about the propriety of such reimbursements have been dispelled by the enactment of R.A. 6952, establishing the Petroleum Price Standby Fund, 2 of which specifically authorizes the reimbursement of "cost underrecovery incurred as a result of fuel oil sales to the National Power Corporation." Anent the overpayment refunds mentioned by the petitioner, no substantive discussion has been presented to show how this is prohibited by P.D. 1956. Nor has the Solicitor General taken any effort to defend the propriety of this refund. In fine, neither of the parties, beyond the mere mention of overpayment refunds, has at all bothered to discuss the arguments for or against the legality of the so-called overpayment refunds. To be sure, the absence of any argument for or against the validity of the refund cannot result in its disallowance by the Court. Unless the impropriety or illegality of the overpayment refund has been clearly and specifically shown, there can be no basis upon which to nullify the same. Finally, the Court finds no necessity to rule on the remaining issue, the same having been rendered moot and academic. As of date hereof, the pump rates of gasoline have been reduced to levels below even those prayed for in the petition. WHEREFORE, the petition is GRANTED insofar as it prays for the nullification of the reimbursement of financing charges, paid pursuant to E.O. 137, and DISMISSED in all other respects. SO ORDERED. Cruz, Feliciano, Padilla, Bidin, Grio-Aquino, Regalado, Davide, Jr., Romero, Nocon, Bellosillo, Melo, Campos, Jr., and Quiason, JJ., concur. Gutierrez, Jr., J., is on leave.

# Footnotes
1 The writ of certiorari is, of course, available only as against tribunals, boards or officers exercisingjudicial or quasi-judicial functions. 2 The petition alleges separate causes or grounds for each extraordinary writ sought.

3 Rollo, pp. 1 to 4. 4 Rollo, p. 2. 5 Id. 6 When this petition was filed, the amount involved was P5,277.4 million. 7 Issued on 9 May 1985. 8 Rollo, pp. 8-9. 9 Rollo, p. 11; emphasis supplied. 10 Id., pp. 13-4. 11 Id., p. 15. 12 Rollo, p. 17. 13 Comment of the Respondents; Rollo, p. 63. 14 G.R. Nos. L-79501-03 [23 June 1988] 162 SCRA 521; Decided jointly with Citizen's Alliance for Consumer Protection v. Energy Regulatory Board et al., G.R. Nos. L-78888-90, and Kilusang Mayo Uno Labor Center v. Energy Regulatory Board, et al., G.R. Nos. L-79590-92; emphasis supplied. 15 Citing E.O. No. 137, Sec. 1 (amending 8 of P.D. 1956). 16 158 SCRA 626, emphasis supplied. 17 "(3) 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]). 18 Supra; see footnote 14 and related text. 19 Rollo, p. 17. 20 SEE Vigan Electric Light Co., Inc. v. Public Service Commission, G.R. No. L-19850, 30 January 1964 and Pelaez v. Auditor General, G.R. No. L-23825, 24 December 1965; see also Gonzales, N. Administrative Law A Text, (1979) at 29. 21 De La Llana v. Alba, 112 SCRA 294, citing Edu v. Ericta, 35 SCRA 481: Cf. Agustin v. Edu, 88 SCRA 195. 22 Hirabayashi v. U.S., 390 U.S. 99. 23 When this petition was filed, the amount involved was P5,277.4 million. 24 Rollo, p. 20. 25 Id., p. 21. 26 Id., p. 20. 27 Caltex Philippines, Inc. v. The Honorable Commissioner on Audit, et al., G.R. No. 92585, 8 May 1992,En Banc. N.B. The Solicitor General seems to have taken a different position in this case, with respect to the application of ejusdem generis. 28 Smith Bell and Co., Ltd. v. Register of Deeds of Davao, 96 Phil. 53 [1954], citing BLACK on Interpretation of Law, 2nd ed. at 203: see also Republic v. Migrio 189 SCRA 289 [1990]. 29 Supra at note 25; SEE also Maceda v. Hon. Catalino Macaraig, Jr., et al., G.R. No. 88291, 197 SCRA 771 (1991).

Republic of the Philippines SUPREME COURT Manila EN BANC

G.R. No. 92585 May 8, 1992 CALTEX PHILIPPINES, INC., petitioner, vs. THE HONORABLE COMMISSION ON AUDIT, HONORABLE COMMISSIONER BARTOLOME C. FERNANDEZ and HONORABLE COMMISSIONER ALBERTO P. CRUZ, respondents.

DAVIDE, JR., J.: This is a petition erroneously brought under Rule 44 of the Rules of Court 1 questioning the authority of the Commission on Audit (COA) in disallowing petitioner's claims for reimbursement from the Oil Price Stabilization Fund (OPSF) and seeking the reversal of said Commission's decision denying its claims for recovery of financing charges from the Fund and reimbursement of underrecovery arising from sales to the National Power Corporation, Atlas Consolidated Mining and Development Corporation (ATLAS) and Marcopper Mining Corporation (MAR-COPPER), preventing it from exercising the right to offset its remittances against its reimbursement vis-a-vis the OPSF and disallowing its claims which are still pending resolution before the Office of Energy Affairs (OEA) and the Department of Finance (DOF). Pursuant to the 1987 Constitution, 2 any decision, order or ruling of the Constitutional Commissions 3 may be brought to this Court on certiorari by the aggrieved party within thirty (30) days from receipt of a copy thereof. The certiorarireferred to is the special civil action for certiorari under Rule 65 of the Rules of Court. 4 Considering, however, that the allegations that the COA acted with: (a) total lack of jurisdiction in completely ignoring and showing absolutely no respect for the findings and rulings of the administrator of the fund itself and in disallowing a claim which is still pending resolution at the OEA level, and (b) "grave abuse of discretion and completely without jurisdiction" 5 in declaring that petitioner cannot avail of the right to offset any amount that it may be required under the law to remit to the OPSF against any amount that it may receive by way of reimbursement therefrom are sufficient to bring this petition within Rule 65 of the Rules of Court, and, considering further the importance of the issues raised, the error in the designation of the remedy pursued will, in this instance, be excused. The issues raised revolve around the OPSF created under Section 8 of Presidential Decree (P.D.) No. 1956, as amended by Executive Order (E.O.) No. 137. As amended, said Section 8 reads as follows: Sec. 8 . There is hereby created a Trust Account in the books of accounts of the Ministry of Energy to be designated as Oil Price Stabilization Fund (OPSF) for the purpose of minimizing frequent price changes brought about by exchange rate adjustments and/or changes in world market prices of crude oil and imported petroleum products. The Oil Price Stabilization Fund may be sourced from any of the following: a) Any increase in the tax collection from ad valorem tax or customs duty imposed on petroleum products subject to tax under this Decree arising from exchange rate adjustment, as may be determined by the Minister of Finance in consultation with the Board of Energy; b) Any increase in the tax collection as a result of the lifting of tax exemptions of government corporations, as may be determined by the Minister of Finance in consultation with the Board of Energy; c) Any additional amount to be imposed on petroleum products to augment the resources of the Fund through an appropriate Order that may be issued by the Board of Energy requiring payment by persons or companies engaged in the business of importing, manufacturing and/or marketing petroleum products; d) Any resulting peso cost differentials in case the actual peso costs paid by oil companies in the importation of crude oil and petroleum products is less than the peso costs computed using the reference foreign exchange rate as fixed by the Board of Energy. The Fund herein created shall be used for the following: 1) To reimburse the oil companies for cost increases in crude oil and imported petroleum products resulting from exchange rate adjustment and/or increase in world market prices of crude oil;

2) To reimburse the oil companies for possible cost under-recovery incurred as a result of the reduction of domestic prices of petroleum products. The magnitude of the underrecovery, if any, shall be determined by the Ministry of Finance. "Cost underrecovery" shall include the following: i. Reduction in oil company take as directed by the Board of Energy without the corresponding reduction in the landed cost of oil inventories in the possession of the oil companies at the time of the price change; ii. Reduction in internal ad valorem taxes as a result of foregoing government mandated price reductions; iii. Other factors as may be determined by the Ministry of Finance to result in cost underrecovery. The Oil Price Stabilization Fund (OPSF) shall be administered by the Ministry of Energy. The material operative facts of this case, as gathered from the pleadings of the parties, are not disputed. On 2 February 1989, the COA sent a letter to Caltex Philippines, Inc. (CPI), hereinafter referred to as Petitioner, directing the latter to remit to the OPSF its collection, excluding that unremitted for the years 1986 and 1988, of the additional tax on petroleum products authorized under the aforesaid Section 8 of P.D. No. 1956 which, as of 31 December 1987, amounted to P335,037,649.00 and informing it that, pending such remittance, all of its claims for reimbursement from the OPSF shall be held in abeyance. 6 On 9 March 1989, the COA sent another letter to petitioner informing it that partial verification with the OEA showed that the grand total of its unremitted collections of the above tax is P1,287,668,820.00, broken down as follows: 1986 P233,190,916.00 1987 335,065,650.00 1988 719,412,254.00; directing it to remit the same, with interest and surcharges thereon, within sixty (60) days from receipt of the letter; advising it that the COA will hold in abeyance the audit of all its claims for reimbursement from the OPSF; and directing it to desist from further offsetting the taxes collected against outstanding claims in 1989 and subsequent periods. 7 In its letter of 3 May 1989, petitioner requested the COA for an early release of its reimbursement certificates from the OPSF covering claims with the Office of Energy Affairs since June 1987 up to March 1989, invoking in support thereof COA Circular No. 89-299 on the lifting of pre-audit of government transactions of national government agencies and government-owned or controlled corporations. 8 In its Answer dated 8 May 1989, the COA denied petitioner's request for the early release of the reimbursement certificates from the OPSF and repeated its earlier directive to petitioner to forward payment of the latter's unremitted collections to the OPSF to facilitate COA's audit action on the reimbursement claims. 9 By way of a reply, petitioner, in a letter dated 31 May 1989, submitted to the COA a proposal for the payment of the collections and the recovery of claims, since the outright payment of the sum of P1.287 billion to the OEA as a prerequisite for the processing of said claims against the OPSF will cause a very serious impairment of its cash position. 10 The proposal reads: We, therefore, very respectfully propose the following: (1) Any procedural arrangement acceptable to COA to facilitate monitoring of payments and reimbursements will be administered by the ERB/Finance Dept./OEA, as agencies designated by law to administer/regulate OPSF. (2) For the retroactive period, Caltex will deliver to OEA, P1.287 billion as payment to OPSF, similarly OEA will deliver to Caltex the same amount in cash reimbursement from OPSF. (3) The COA audit will commence immediately and will be conducted expeditiously. (4) The review of current claims (1989) will be conducted expeditiously to preclude further accumulation of reimbursement from OPSF. On 7 June 1989, the COA, with the Chairman taking no part, handed down Decision No. 921 accepting the above-stated proposal but prohibiting petitioner from further offsetting remittances and reimbursements for the current and ensuing years. 11 Decision No. 921 reads: This pertains to the within separate requests of Mr. Manuel A. Estrella, President, Petron Corporation, and Mr. Francis Ablan, President and Managing Director, Caltex (Philippines) Inc., for reconsideration of this Commission's adverse action embodied in

its letters dated February 2, 1989 and March 9, 1989, the former directing immediate remittance to the Oil Price Stabilization Fund of collections made by the firms pursuant to P.D. 1956, as amended by E.O. No. 137, S. 1987, and the latter reiterating the same directive but further advising the firms to desist from offsetting collections against their claims with the notice that "this Commission will hold in abeyance the audit of all . . . claims for reimbursement from the OPSF." It appears that under letters of authority issued by the Chairman, Energy Regulatory Board, the aforenamed oil companies were allowed to offset the amounts due to the Oil Price Stabilization Fund against their outstanding claims from the said Fund for the calendar years 1987 and 1988, pending with the then Ministry of Energy, the government entity charged with administering the OPSF. This Commission, however, expressing serious doubts as to the propriety of the offsetting of all types of reimbursements from the OPSF against all categories of remittances, advised these oil companies that such offsetting was bereft of legal basis. Aggrieved thereby, these companies now seek reconsideration and in support thereof clearly manifest their intent to make arrangements for the remittance to the Office of Energy Affairs of the amount of collections equivalent to what has been previously offset, provided that this Commission authorizes the Office of Energy Affairs to prepare the corresponding checks representing reimbursement from the OPSF. It is alleged that the implementation of such an arrangement, whereby the remittance of collections due to the OPSF and the reimbursement of claims from the Fund shall be made within a period of not more than one week from each other, will benefit the Fund and not unduly jeopardize the continuing daily cash requirements of these firms. Upon a circumspect evaluation of the circumstances herein obtaining, this Commission perceives no further objectionable feature in the proposed arrangement, provided that 15% of whatever amount is due from the Fund is retained by the Office of Energy Affairs, the same to be answerable for suspensions or disallowances, errors or discrepancies which may be noted in the course of audit and surcharges for late remittances without prejudice to similar future retentions to answer for any deficiency in such surcharges, and provided further that no offsetting of remittances and reimbursements for the current and ensuing years shall be allowed. Pursuant to this decision, the COA, on 18 August 1989, sent the following letter to Executive Director Wenceslao R. De la Paz of the Office of Energy Affairs: 12 Dear Atty. dela Paz: Pursuant to the Commission on Audit Decision No. 921 dated June 7, 1989, and based on our initial verification of documents submitted to us by your Office in support of Caltex (Philippines), Inc. offsets (sic) for the year 1986 to May 31, 1989, as well as its outstanding claims against the Oil Price Stabilization Fund (OPSF) as of May 31, 1989, we are pleased to inform your Office that Caltex (Philippines), Inc. shall be required to remit to OPSF an amount of P1,505,668,906, representing remittances to the OPSF which were offset against its claims reimbursements (net of unsubmitted claims). In addition, the Commission hereby authorize (sic) the Office of Energy Affairs (OEA) to cause payment of P1,959,182,612 to Caltex, representing claims initially allowed in audit, the details of which are presented hereunder: . . . As presented in the foregoing computation the disallowances totalled P387,683,535, which included P130,420,235 representing those claims disallowed by OEA, details of which is (sic) shown in Schedule 1 as summarized as follows: Disallowance of COA Particulars Amount Recovery of financing charges P162,728,475 /a Product sales 48,402,398 /b Inventory losses Borrow loan arrangement 14,034,786 /c Sales to Atlas/Marcopper 32,097,083 /d Sales to NPC 558 P257,263,300 Disallowances of OEA 130,420,235 Total P387,683,535 The reasons for the disallowances are discussed hereunder: a. Recovery of Financing Charges Review of the provisions of P.D. 1596 as amended by E.O. 137 seems to indicate that recovery of financing charges by oil companies is not among the items for which the OPSF may be utilized. Therefore, it is our view that recovery of financing charges has no legal basis. The mechanism for such claims is provided in DOF Circular 1-87. b. Product Sales Sales to International Vessels/Airlines BOE Resolution No. 87-01 dated February 7, 1987 as implemented by OEA Order No. 87-03-095 indicating that (sic) February 7, 1987 as the effectivity date that (sic) oil companies should pay OPSF impost on export sales of petroleum products. Effective February 7, 1987 sales to international vessels/airlines should not be included as part of its domestic sales. Changing the

effectivity date of the resolution from February 7, 1987 to October 20, 1987 as covered by subsequent ERB Resolution No. 8812 dated November 18, 1988 has allowed Caltex to include in their domestic sales volumes to international vessels/airlines and claim the corresponding reimbursements from OPSF during the period. It is our opinion that the effectivity of the said resolution should be February 7, 1987. c. Inventory losses Settlement of Ad Valorem We reviewed the system of handling Borrow and Loan (BLA) transactions including the related BLA agreement, as they affect the claims for reimbursements of ad valorem taxes. We observed that oil companies immediately settle ad valorem taxes for BLA transaction (sic). Loan balances therefore are not tax paid inventories of Caltex subject to reimbursements but those of the borrower. Hence, we recommend reduction of the claim for July, August, and November, 1987 amounting to P14,034,786. d. Sales to Atlas/Marcopper LOI No. 1416 dated July 17, 1984 provides that "I hereby order and direct the suspension of payment of all taxes, duties, fees, imposts and other charges whether direct or indirect due and payable by the copper mining companies in distress to the national and local governments." It is our opinion that LOI 1416 which implements the exemption from payment of OPSF imposts as effected by OEA has no legal basis. Furthermore, we wish to emphasize that payment to Caltex (Phil.) Inc., of the amount as herein authorized shall be subject to availability of funds of OPSF as of May 31, 1989 and applicable auditing rules and regulations. With regard to the disallowances, it is further informed that the aggrieved party has 30 days within which to appeal the decision of the Commission in accordance with law. On 8 September 1989, petitioner filed an Omnibus Request for the Reconsideration of the decision based on the following grounds: 13 A) COA-DISALLOWED CLAIMS ARE AUTHORIZED UNDER EXISTING RULES, ORDERS, RESOLUTIONS, CIRCULARS ISSUED BY THE DEPARTMENT OF FINANCE AND THE ENERGY REGULATORY BOARD PURSUANT TO EXECUTIVE ORDER NO. 137. xxx xxx xxx B) ADMINISTRATIVE INTERPRETATIONS IN THE COURSE OF EXERCISE OF EXECUTIVE POWER BY DEPARTMENT OF FINANCE AND ENERGY REGULATORY BOARD ARE LEGAL AND SHOULD BE RESPECTED AND APPLIED UNLESS DECLARED NULL AND VOID BY COURTS OR REPEALED BY LEGISLATION. xxx xxx xxx C) LEGAL BASIS FOR RETENTION OF OFFSET ARRANGEMENT, AS AUTHORIZED BY THE EXECUTIVE BRANCH OF GOVERNMENT, REMAINS VALID. xxx xxx xxx On 6 November 1989, petitioner filed with the COA a Supplemental Omnibus Request for Reconsideration. 14 On 16 February 1990, the COA, with Chairman Domingo taking no part and with Commissioner Fernandez dissenting in part, handed down Decision No. 1171 affirming the disallowance for recovery of financing charges, inventory losses, and sales to MARCOPPER and ATLAS, while allowing the recovery of product sales or those arising from export sales. 15 Decision No. 1171 reads as follows: Anent the recovery of financing charges you contend that Caltex Phil. Inc. has the .authority to recover financing charges from the OPSF on the basis of Department of Finance (DOF) Circular 1-87, dated February 18, 1987, which allowed oil companies to "recover cost of financing working capital associated with crude oil shipments," and provided a schedule of reimbursement in terms of peso per barrel. It appears that on November 6, 1989, the DOF issued a memorandum to the President of the Philippines explaining the nature of these financing charges and justifying their reimbursement as follows: As part of your program to promote economic recovery, . . . oil companies (were authorized) to refinance their imports of crude oil and petroleum products from the normal trade credit of 30 days up to 360 days from date of loading . . . Conformably . . ., the oil companies deferred their foreign exchange remittances for purchases by refinancing their import bills from the normal 30-day payment term up to the desired 360 days. This refinancing of importations carried additional costs (financing charges) which then became, due to government mandate, an inherent part of the cost of the purchases of our country's oil requirement. We beg to disagree with such contention. The justification that financing charges increased oil costs and the schedule of reimbursement rate in peso per barrel (Exhibit 1) used to support alleged increase (sic) were not validated in our independent inquiry. As manifested in Exhibit 2, using the same formula which the DOF used in arriving at the reimbursement rate but using comparable percentages instead of pesos, the ineluctable conclusion is that the oil companies are actually gaining rather than

losing from the extension of credit because such extension enables them to invest the collections in marketable securities which have much higher rates than those they incur due to the extension. The Data we used were obtained from CPI (CALTEX) Management and can easily be verified from our records. With respect to product sales or those arising from sales to international vessels or airlines, . . ., it is believed that export sales (product sales) are entitled to claim refund from the OPSF. As regard your claim for underrecovery arising from inventory losses, . . . It is the considered view of this Commission that the OPSF is not liable to refund such surtax on inventory losses because these are paid to BIR and not OPSF, in view of which CPI (CALTEX) should seek refund from BIR. . . . Finally, as regards the sales to Atlas and Marcopper, it is represented that you are entitled to claim recovery from the OPSF pursuant to LOI 1416 issued on July 17, 1984, since these copper mining companies did not pay CPI (CALTEX) and OPSF imposts which were added to the selling price. Upon a circumspect evaluation, this Commission believes and so holds that the CPI (CALTEX) has no authority to claim reimbursement for this uncollected OPSF impost because LOI 1416 dated July 17, 1984, which exempts distressed mining companies from "all taxes, duties, import fees and other charges" was issued when OPSF was not yet in existence and could not have contemplated OPSF imposts at the time of its formulation. Moreover, it is evident that OPSF was not created to aid distressed mining companies but rather to help the domestic oil industry by stabilizing oil prices. Unsatisfied with the decision, petitioner filed on 28 March 1990 the present petition wherein it imputes to the COA the commission of the following errors: 16 I RESPONDENT COMMISSION ERRED IN DISALLOWING RECOVERY OF FINANCING CHARGES FROM THE OPSF. II

RESPONDENT COMMISSION ERRED IN DISALLOWING CPI's 17 CLAIM FOR REIMBURSEMENT OF UNDERRECOVERY ARISING FROM SALES TO NPC.
III RESPONDENT COMMISSION ERRED IN DENYING CPI's CLAIMS FOR REIMBURSEMENT ON SALES TO ATLAS AND MARCOPPER. IV RESPONDENT COMMISSION ERRED IN PREVENTING CPI FROM EXERCISING ITS LEGAL RIGHT TO OFFSET ITS REMITTANCES AGAINST ITS REIMBURSEMENT VIS-A-VIS THE OPSF. V RESPONDENT COMMISSION ERRED IN DISALLOWING CPI's CLAIMS WHICH ARE STILL PENDING RESOLUTION BY (SIC) THE OEA AND THE DOF. In the Resolution of 5 April 1990, this Court required the respondents to comment on the petition within ten (10) days from notice. 18 On 6 September 1990, respondents COA and Commissioners Fernandez and Cruz, assisted by the Office of the Solicitor General, filed their Comment. 19 This Court resolved to give due course to this petition on 30 May 1991 and required the parties to file their respective Memoranda within twenty (20) days from notice. 20 In a Manifestation dated 18 July 1991, the Office of the Solicitor General prays that the Comment filed on 6 September 1990 be considered as the Memorandum for respondents. 21 Upon the other hand, petitioner filed its Memorandum on 14 August 1991. I. Petitioner dwells lengthily on its first assigned error contending, in support thereof, that:

(1) In view of the expanded role of the OPSF pursuant to Executive Order No. 137, which added a second purpose, to wit: 2) To reimburse the oil companies for possible cost underrecovery incurred as a result of the reduction of domestic prices of petroleum products. The magnitude of the underrecovery, if any, shall be determined by the Ministry of Finance. "Cost underrecovery" shall include the following: i. Reduction in oil company take as directed by the Board of Energy without the corresponding reduction in the landed cost of oil inventories in the possession of the oil companies at the time of the price change; ii. Reduction in internal ad valorem taxes as a result of foregoing government mandated price reductions; iii. Other factors as may be determined by the Ministry of Finance to result in cost underrecovery. the "other factors" mentioned therein that may be determined by the Ministry (now Department) of Finance may include financing charges for "in essence, financing charges constitute unrecovered cost of acquisition of crude oil incurred by the oil companies," as explained in the 6 November 1989 Memorandum to the President of the Department of Finance; they "directly translate to cost underrecovery in cases where the money market placement rates decline and at the same time the tax on interest income increases. The relationship is such that the presence of underrecovery or overrecovery is directly dependent on the amount and extent of financing charges." (2) The claim for recovery of financing charges has clear legal and factual basis; it was filed on the basis of Department of Finance Circular No. 1-87, dated 18 February 1987, which provides: To allow oil companies to recover the costs of financing working capital associated with crude oil shipments, the following guidelines on the utilization of the Oil Price Stabilization Fund pertaining to the payment of the foregoing (sic) exchange risk premium and recovery of financing charges will be implemented: 1. The OPSF foreign exchange premium shall be reduced to a flat rate of one (1) percent for the first (6) months and 1/32 of one percent per month thereafter up to a maximum period of one year, to be applied on crude oil' shipments from January 1, 1987. Shipments with outstanding financing as of January 1, 1987 shall be charged on the basis of the fee applicable to the remaining period of financing. 2. In addition, for shipments loaded after January 1987, oil companies shall be allowed to recover financing charges directly from the OPSF per barrel of crude oil based on the following schedule: F i n a n c i n g P e r i o d R e i m b u r s e m e n t R a t e P

e s o s p e r B a r r e l Less than 180 days None 180 days to 239 days 1.90 241 (sic) days to 299 4.02 300 days to 369 (sic) days 6.16 360 days or more 8.28

The above rates shall be subject to review every sixty days. 22

Pursuant to this circular, the Department of Finance, in its letter of 18 February 1987, advised the Office of Energy Affairs as follows: HON. VICENTE T. PATERNO Deputy Executive Secretary For Energy Affairs Office of the President Makati, Metro Manila Dear Sir: This refers to the letters of the Oil Industry dated December 4, 1986 and February 5, 1987 and subsequent discussions held by the Price Review committee on February 6, 1987.

On the basis of the representations made, the Department of Finance recognizes the necessity to reduce the foreign exchange risk premium accruing to the Oil Price Stabilization Fund (OPSF). Such a reduction would allow the industry to recover partly associated financing charges on crude oil imports. Accordingly, the OPSF foreign exchange risk fee shall be reduced to a flat charge of 1% for the first six (6) months plus 1/32% of 1% per month thereafter up to a maximum period of one year, effective January 1, 1987. In addition, since the prevailing company take would still leave unrecovered financing charges, reimbursement may be secured from the OPSF in accordance with the provisions of the attached Department of Finance circular. 23
Acting on this letter, the OEA issued on 4 May 1987 Order No. 87-05-096 which contains the guidelines for the computation of the foreign exchange risk fee and the recovery of financing charges from the OPSF, to wit: B. FINANCE CHARGES 1. Oil companies shall be allowed to recover financing charges directly from the OPSF for both crude and product shipments loaded after January 1, 1987 based on the following rates: F i n a n c i n g P

e r i o d R e i m b u r s e m e n t R a t e ( P B b l . ) Less than 180 days None 180 days to 239 days 1.90 240 days to 229 (sic) days 4.02 300 days to 359 days 6.16 360 days to more 8.28

2. The above rates shall be subject to review every sixty days. 24

Then on 22 November 1988, the Department of Finance issued Circular No. 4-88 imposing further guidelines on the recoverability of financing charges, to wit: Following are the supplemental rules to Department of Finance Circular No. 1-87 dated February 18, 1987 which allowed the recovery of financing charges directly from the Oil Price Stabilization Fund. (OPSF): 1. The Claim for reimbursement shall be on a per shipment basis. 2. The claim shall be filed with the Office of Energy Affairs together with the claim on peso cost differential for a particular shipment and duly certified supporting documents providedfor under Ministry of Finance No. 11-85.

3. The reimbursement shall be on the form of reimbursement certificate (Annex A) to be issued by the Office of Energy Affairs. The said certificate may be used to offset against amounts payable to the OPSF. The oil companies may also redeem said certificates in cash if not utilized, subject to availability of funds. 25
The OEA disseminated this Circular to all oil companies in its Memorandum Circular No. 88-12-017. 26 The COA can neither ignore these issuances nor formulate its own interpretation of the laws in the light of the determination of executive agencies. The determination by the Department of Finance and the OEA that financing charges are recoverable from the OPSF is entitled to great weight and consideration. 27 The function of the COA, particularly in the matter of allowing or disallowing certain expenditures, is limited to the promulgation of accounting and auditing rules for, among others, the disallowance of irregular, unnecessary, excessive, extravagant, or unconscionable expenditures, or uses of government funds and properties. 28 (3) Denial of petitioner's claim for reimbursement would be inequitable. Additionally, COA's claim that petitioner is gaining, instead of losing, from the extension of credit, is belatedly raised and not supported by expert analysis.

In impeaching the validity of petitioner's assertions, the respondents argue that: 1. The Constitution gives the COA discretionary power to disapprove irregular or unnecessary government expenditures and as the monetary claims of petitioner are not allowed by law, the COA acted within its jurisdiction in denying them; 2. P.D. No. 1956 and E.O. No. 137 do not allow reimbursement of financing charges from the OPSF; 3. Under the principle of ejusdem generis, the "other factors" mentioned in the second purpose of the OPSF pursuant to E.O. No. 137 can only include "factors which are of the same nature or analogous to those enumerated;" 4. In allowing reimbursement of financing charges from OPSF, Circular No. 1-87 of the Department of Finance violates P.D. No. 1956 and E.O. No. 137; and 5. Department of Finance rules and regulations implementing P.D. No. 1956 do not likewise allow reimbursement of financing charges. 29 We find no merit in the first assigned error. As to the power of the COA, which must first be resolved in view of its primacy, We find the theory of petitioner that such does not extend to the disallowance of irregular, unnecessary, excessive, extravagant, or unconscionable expenditures, or use of government funds and properties, but only to the promulgation of accounting and auditing rules for, among others, such disallowance to be untenable in the light of the provisions of the 1987 Constitution and related laws. Section 2, Subdivision D, Article IX of the 1987 Constitution expressly provides: Sec. 2(l). The Commission on Audit shall have the power, authority, and duty to examine, audit, and settle all accounts pertaining to the revenue and receipts of, and expenditures or uses of funds and property, owned or held in trust by, or pertaining to, the Government, or any of its subdivisions, agencies, or instrumentalities, including government-owned and controlled corporations with original charters, and on a post-audit basis: (a) constitutional bodies, commissions and offices that have been granted fiscal autonomy under this Constitution; (b) autonomous state colleges and universities; (c) other government-owned or controlled corporations and their subsidiaries; and (d) such non-governmental entities receiving subsidy or equity, directly or indirectly, from or through the government, which are required by law or the granting institution to submit to such audit as a condition of subsidy or equity. However, where the internal control system of the audited agencies is inadequate, the Commission may adopt such measures, including temporary or special pre-audit, as are necessary and appropriate to correct the deficiencies. It shall keep the general accounts, of the Government and, for such period as may be provided by law, preserve the vouchers and other supporting papers pertaining thereto. (2) The Commission shall have exclusive authority, subject to the limitations in this Article, to define the scope of its audit and examination, establish the techniques and methods required therefor, and promulgate accounting and auditing rules and regulations, including those for the prevention and disallowance of irregular, unnecessary, excessive, extravagant, or, unconscionable expenditures, or uses of government funds and properties. These present powers, consistent with the declared independence of the Commission, 30 are broader and more extensive than that conferred by the 1973 Constitution. Under the latter, the Commission was empowered to:

Examine, audit, and settle, in accordance with law and regulations, all accounts pertaining to the revenues, and receipts of, and expenditures or uses of funds and property, owned or held in trust by, or pertaining to, the Government, or any of its subdivisions, agencies, or instrumentalities including government-owned or controlled corporations, keep the general accounts of the Government and, for such period as may beprovided by law, preserve the vouchers pertaining thereto; and promulgate accounting and auditing rules and regulations including those for the prevention of irregular, unnecessary, excessive, or extravagant expenditures or uses of funds and property. 31
Upon the other hand, under the 1935 Constitution, the power and authority of the COA's precursor, the General Auditing Office, were, unfortunately, limited; its very role was markedly passive. Section 2 of Article XI thereofprovided: Sec. 2. The Auditor General shall examine, audit, and settle all accounts pertaining to the revenues and receipts from whatever source, including trust funds derived from bond issues; and audit, in accordance with law and administrative regulations, all expenditures of funds or property pertaining to or held in trust by the Government or the provinces or municipalities thereof. He shall keep the general accounts of the Government and the preserve the vouchers pertaining thereto. It shall be the duty of the Auditor General to bring to the attention of the proper administrative officer expenditures of funds or property which, in his opinion, are irregular, unnecessary, excessive, or extravagant. He shall also perform such other functions as may be prescribed by law.

As clearly shown above, in respect to irregular, unnecessary, excessive or extravagant expenditures or uses of funds, the 1935 Constitution did not grant the Auditor General the power to issue rules and regulations to prevent the same. His was merely to bring that matter to the attention of the proper administrative officer. The ruling on this particular point, quoted by petitioner from the cases of Guevarra vs. Gimenez 32 and Ramos vs.Aquino, 33 are no longer controlling as the two (2) were decided in the light of the 1935 Constitution. There can be no doubt, however, that the audit power of the Auditor General under the 1935 Constitution and the Commission on Audit under the 1973 Constitution authorized them to disallow illegal expenditures of funds or uses of funds and property. Our present Constitution retains that same power and authority, further strengthened by the definition of the COA's general jurisdiction in Section 26 of the Government Auditing Code of the Philippines 34 and Administrative Code of 1987. 35 Pursuant to its power to promulgate accounting and auditing rules and regulations for the prevention of irregular, unnecessary, excessive or extravagant expenditures or uses of funds, 36 the COA promulgated on 29 March 1977 COA Circular No. 77-55. Since the COA is responsible for the enforcement of the rules and regulations, it goes without saying that failure to comply with them is a ground for disapproving the payment of the proposed expenditure. As observed by one of the Commissioners of the 1986 Constitutional Commission, Fr. Joaquin G. Bernas: 37 It should be noted, however, that whereas under Article XI, Section 2, of the 1935 Constitution the Auditor General could not correct "irregular, unnecessary, excessive or extravagant" expenditures of public funds but could only "bring [the matter] to the attention of the proper administrative officer," under the 1987 Constitution, as also under the 1973 Constitution, the Commission on Audit can "promulgate accounting and auditing rules and regulations including those for the prevention and disallowance of irregular, unnecessary, excessive, extravagant, or unconscionable expenditures or uses of government funds and properties." Hence, since the Commission on Audit must ultimately be responsible for the enforcement of these rules and regulations, the failure to comply with these regulations can be a ground for disapproving the payment of a proposed expenditure. Indeed, when the framers of the last two (2) Constitutions conferred upon the COA a more active role and invested it with broader and more extensive powers, they did not intend merely to make the COA a toothless tiger, but rather envisioned a dynamic, effective, efficient and independent watchdog of the Government. The issue of the financing charges boils down to the validity of Department of Finance Circular No. 1-87, Department of Finance Circular No. 4-88 and the implementing circulars of the OEA, issued pursuant to Section 8, P.D. No. 1956, as amended by E.O. No. 137, authorizing it to determine "other factors" which may result in cost underrecovery and a consequent reimbursement from the OPSF. The Solicitor General maintains that, following the doctrine of ejusdem generis, financing charges are not included in "cost underrecovery" and, therefore, cannot be considered as one of the "other factors." Section 8 of P.D. No. 1956, as amended by E.O. No. 137, does not explicitly define what "cost underrecovery" is. It merely states what it includes. Thus: . . . "Cost underrecovery" shall include the following: i. Reduction in oil company takes as directed by the Board of Energy without the corresponding reduction in the landed cost of oil inventories in the possession of the oil companies at the time of the price change; ii. Reduction in internal ad valorem taxes as a result of foregoing government mandated price reductions; iii. Other factors as may be determined by the Ministry of Finance to result in cost underrecovery. These "other factors" can include only those which are of the same class or nature as the two specifically enumerated in subparagraphs (i) and (ii). A common characteristic of both is that they are in the nature of government mandated price reductions. Hence, any other factor which seeks to be a part of the enumeration, or which could qualify as a cost underrecovery, must be of the same class or nature as those specifically enumerated. Petitioner, however, suggests that E.O. No. 137 intended to grant the Department of Finance broad and unrestricted authority to determine or define "other factors." Both views are unacceptable to this Court. The rule of ejusdem generis states that "[w]here general words follow an enumeration of persons or things, by words of a particular and specific meaning, such general words are not to be construed in their widest extent, but are held to be as applying only to persons or things of the same kind or class as those specifically mentioned. 38 A reading of subparagraphs (i) and (ii) easily discloses that they do not have a common characteristic. The first relates to price reduction as directed by the Board of Energy while the second refers to reduction in internal ad valorem taxes. Therefore, subparagraph (iii) cannot be limited by the enumeration in these subparagraphs. What should be considered for purposes of determining the "other factors" in subparagraph (iii) is the first sentence of paragraph (2) of the Section which explicitly allows cost underrecovery only if such were incurred as a result of the reduction of domestic prices of petroleum products. Although petitioner's financing losses, if indeed incurred, may constitute cost underrecovery in the sense that such were incurred as a result of the inability to fully offset financing expenses from yields in money market placements, they do not, however, fall under the foregoing provision of P.D. No. 1956, as amended, because the same did not result from the reduction of the domestic price of petroleum products. Until paragraph (2), Section 8 of the decree, as amended, is further amended by Congress, this Court can do nothing. The duty of this Court is not to legislate, but to apply or interpret the law. Be that as it may, this Court wishes to emphasize that as the facts in this case have shown, it was at the behest of the Government that

petitioner refinanced its oil import payments from the normal 30-day trade credit to a maximum of 360 days. Petitioner could be correct in its assertion that owing to the extended period for payment, the financial institution which refinanced said payments charged a higher interest, thereby resulting in higher financing expenses for the petitioner. It would appear then that equity considerations dictate that petitioner should somehow be allowed to recover its financing losses, if any, which may have been sustained because it accommodated the request of the Government. Although under Section 29 of the National Internal Revenue Code such losses may be deducted from gross income, the effect of that loss would be merely to reduce its taxable income, but not to actually wipe out such losses. The Government then may consider some positive measures to help petitioner and others similarly situated to obtain substantial relief. An amendment, as aforestated, may then be in order. Upon the other hand, to accept petitioner's theory of "unrestricted authority" on the part of the Department of Finance to determine or define "other factors" is to uphold an undue delegation of legislative power, it clearly appearing that the subject provision does not provide any standard for the exercise of the authority. It is a fundamental rule that delegation of legislative power may be sustained only upon the ground that some standard for its exercise is providedand that the legislature, in making the delegation, has prescribed the manner of the exercise of the delegated authority. 39 Finally, whether petitioner gained or lost by reason of the extensive credit is rendered irrelevant by reason of the foregoing disquisitions. It may nevertheless be stated that petitioner failed to disprove COA's claim that it had in fact gained in the process. Otherwise stated, petitioner failed to sufficiently show that it incurred a loss. Such being the case, how can petitioner claim for reimbursement? It cannot have its cake and eat it too. II. Anent the claims arising from sales to the National Power Corporation, We find for the petitioner. The respondents themselves admit in their Comment that underrecovery arising from sales to NPC are reimbursable because NPC was granted full exemption from the payment of taxes; to prove this, respondents trace the laws providing for such exemption. 40 The last law cited is the Fiscal Incentives Regulatory Board's Resolution No. 1787 of 24 June 1987 which provides, in part, "that the tax and duty exemption privileges of the National Power Corporation, including those pertaining to its domestic purchases of petroleum and petroleum products . . . are restored effective March 10, 1987." In a Memorandum issued on 5 October 1987 by the Office of the President, NPC's tax exemption was confirmed and approved. Furthermore, as pointed out by respondents, the intention to exempt sales of petroleum products to the NPC is evident in the recently passed Republic Act No. 6952 establishing the Petroleum Price Standby Fund to support the OPSF. 41The pertinent part of Section 2, Republic Act No. 6952 provides: Sec. 2. Application of the Fund shall be subject to the following conditions: (1) That the Fund shall be used to reimburse the oil companies for (a) cost increases of imported crude oil and finished petroleum products resulting from foreign exchange rate adjustments and/or increases in world market prices of crude oil; (b) cost underrecovery incurred as a result of fuel oil sales to the National Power Corporation (NPC); and (c) other cost underrecoveries incurred as may be finally decided by the Supreme Court; . . . Hence, petitioner can recover its claim arising from sales of petroleum products to the National Power Corporation. III. With respect to its claim for reimbursement on sales to ATLAS and MARCOPPER, petitioner relies on Letter of Instruction (LOI) 1416, dated 17 July 1984, which ordered the suspension of payments of all taxes, duties, fees and other charges, whether direct or indirect, due and payable by the copper mining companies in distress to the national government. Pursuant to this LOI, then Minister of Energy, Hon. Geronimo Velasco, issued Memorandum Circular No. 84-11-22 advising the oil companies that Atlas Consolidated Mining Corporation and Marcopper Mining Corporation are among those declared to be in distress. In denying the claims arising from sales to ATLAS and MARCOPPER, the COA, in its 18 August 1989 letter to Executive Director Wenceslao R. de la Paz, states that "it is our opinion that LOI 1416 which implements the exemption from payment of OPSF imposts as effected by OEA has no legal basis;" 42 in its Decision No. 1171, it ruled that "the CPI (CALTEX) (Caltex) has no authority to claim reimbursement for this uncollected impost because LOI 1416 dated July 17, 1984, . . . was issued when OPSF was not yet in existence and could not have contemplated OPSF imposts at the time of its formulation." 43 It is further stated that: "Moreover, it is evident that OPSF was not created to aid distressed mining companies but rather to help the domestic oil industry by stabilizing oil prices." In sustaining COA's stand, respondents vigorously maintain that LOI 1416 could not have intended to exempt said distressed mining companies from the payment of OPSF dues for the following reasons: a. LOI 1416 granting the alleged exemption was issued on July 17, 1984. P.D. 1956 creating the OPSF was promulgated on October 10, 1984, while E.O. 137, amending P.D. 1956, was issued on February 25, 1987. b. LOI 1416 was issued in 1984 to assist distressed copper mining companies in line with the government's effort to prevent the collapse of the copper industry. P.D No. 1956, as amended, was issued for the purpose of minimizing frequent price changes brought about by exchange rate adjustments and/or changes in world market prices of crude oil and imported petroleum product's; and

c. LOI 1416 caused the "suspension of all taxes, duties, fees, imposts and other charges, whether direct or indirect, due and payable by the copper mining companies in distress to the Notional and Local Governments . . ." On the other hand, OPSF dues are not payable by (sic) distressed copper companies but by oil companies. It is to be noted that the

copper mining companies do not pay OPSF dues. Rather, such imposts are built in or already incorporated in the prices of oil products. 44
Lastly, respondents allege that while LOI 1416 suspends the payment of taxes by distressed mining companies, it does not accord petitioner the same privilege with respect to its obligation to pay OPSF dues. We concur with the disquisitions of the respondents. Aside from such reasons, however, it is apparent that LOI 1416 was never published in the Official Gazette 45 as required by Article 2 of the Civil Code, which reads: Laws shall take effect after fifteen days following the completion of their publication in the Official Gazette, unless it is otherwise provided. . . . In applying said provision, this Court ruled in the case of Taada vs. Tuvera: 46 WHEREFORE, the Court hereby orders respondents to publish in the Official Gazette all unpublished presidential issuances which are of general application, and unless so published they shall have no binding force and effect. Resolving the motion for reconsideration of said decision, this Court, in its Resolution promulgated on 29 December 1986, 47 ruled: We hold therefore that all statutes, including those of local application and private laws, shall be published as a condition for their effectivity, which shall begin fifteen days after publication unless a different effectivity date is fixed by the legislature. Covered by this rule are presidential decrees and executive orders promulgated by the President in the exercise of legislative powers whenever the same are validly delegated by the legislature or, at present, directly conferred by the Constitution. Administrative rules and regulations must also be published if their purpose is to enforce or implement existing laws pursuant also to a valid delegation. xxx xxx xxx WHEREFORE, it is hereby declared that all laws as above defined shall immediately upon their approval, or as soon thereafter as possible, be published in full in the Official Gazette, to become effective only after fifteen days from their publication, or on another date specified by the legislature, in accordance with Article 2 of the Civil Code. LOI 1416 has, therefore, no binding force or effect as it was never published in the Official Gazette after its issuance or at any time after the decision in the abovementioned cases. Article 2 of the Civil Code was, however, later amended by Executive Order No. 200, issued on 18 June 1987. As amended, the said provision now reads: Laws shall take effect after fifteen days following the completion of their publication either in the Official Gazette or in a newspaper of general circulation in the Philippines, unless it is otherwise provided. We are not aware of the publication of LOI 1416 in any newspaper of general circulation pursuant to Executive Order No. 200. Furthermore, even granting arguendo that LOI 1416 has force and effect, petitioner's claim must still fail. Tax exemptions as a general rule are construed strictly against the grantee and liberally in favor of the taxing authority. 48The burden of proof rests upon the party claiming exemption to prove that it is in fact covered by the exemption so claimed. The party claiming exemption must therefore be expressly mentioned in the exempting law or at least be within its purview by clear legislative intent. In the case at bar, petitioner failed to prove that it is entitled, as a consequence of its sales to ATLAS and MARCOPPER, to claim reimbursement from the OPSF under LOI 1416. Though LOI 1416 may suspend the payment of taxes by copper mining companies, it does not give petitioner the same privilege with respect to the payment of OPSF dues. IV. As to COA's disallowance of the amount of P130,420,235.00, petitioner maintains that the Department of Finance has still to issue a final and definitive ruling thereon; accordingly, it was premature for COA to disallow it. By doing so, the latter acted beyond its jurisdiction. 49 Respondents, on the other hand, contend that said amount was already disallowed by the OEA for failure to substantiate it. 50 In fact, when OEA submitted the claims of petitioner for pre-audit, the abovementioned amount was already excluded. An examination of the records of this case shows that petitioner failed to prove or substantiate its contention that the amount of P130,420,235.00 is still pending before the OEA and the DOF. Additionally, We find no reason to doubt the submission of respondents that said amount has already been passed upon by the OEA. Hence, the ruling of respondent COA disapproving said claim must be upheld.

V. The last issue to be resolved in this case is whether or not the amounts due to the OPSF from petitioner may be offset against petitioner's outstanding claims from said fund. Petitioner contends that it should be allowed to offset its claims from the OPSF against its contributions to the fund as this has been allowed in the past, particularly in the years 1987 and 1988. 51 Furthermore, petitioner cites, as bases for offsetting, the provisions of the New Civil Code on compensation and Section 21, Book V, Title I-B of the Revised Administrative Code which provides for "Retention of Money for Satisfaction of Indebtedness to Government." 52 Petitioner also mentions communications from the Board of Energy and the Department of Finance that supposedly authorize compensation. Respondents, on the other hand, citing Francia vs. IAC and Fernandez, 53 contend that there can be no offsetting of taxes against the claims that a taxpayer may have against the government, as taxes do not arise from contracts or depend upon the will of the taxpayer, but are imposed by law. Respondents also allege that petitioner's reliance on Section 21, Book V, Title I-B of the Revised Administrative Code, is misplaced because "while this provision empowers the COA to withhold payment of a government indebtedness to a person who is also indebted to the government and apply the government indebtedness to the satisfaction of the obligation of the person to the government, like authority or right to make compensation is not given to the private person." 54 The reason for this, as stated in Commissioner of Internal Revenue vs. Algue, Inc., 55 is that money due the government, either in the form of taxes or other dues, is its lifeblood and should be collected without hindrance. Thus, instead of giving petitioner a reason for compensation or set-off, the Revised Administrative Code makes it the respondents' duty to collect petitioner's indebtedness to the OPSF. Refuting respondents' contention, petitioner claims that the amounts due from it do not arise as a result of taxation because "P.D. 1956, amended, did not create a source of taxation; it instead established a special fund . . .," 56 and that the OPSF contributions do not go to the general fund of the state and are not used for public purpose, i.e., not for the support of the government, the administration of law, or the payment of public expenses. This alleged lack of a public purpose behind OPSF exactions distinguishes such from a tax. Hence, the ruling in the Francia case is inapplicable. Lastly, petitioner cites R.A. No. 6952 creating the Petroleum Price Standby Fund to support the OPSF; the said law provides in part that: Sec. 2. Application of the fund shall be subject to the following conditions: xxx xxx xxx (3) That no amount of the Petroleum Price Standby Fund shall be used to pay any oil company which has an outstanding obligation to the Government without said obligation being offset first, subject to the requirements of compensation or offset under the Civil Code. We find no merit in petitioner's contention that the OPSF contributions are not for a public purpose because they go to a special fund of the government. Taxation is no longer envisioned as a measure merely to raise revenue to support the existence of the government; taxes may be levied with a regulatory purpose to provide means for the rehabilitation and stabilization of a threatened industry which is affected with public interest as to be within the police power of the state. 57 There can be no doubt that the oil industry is greatly imbued with public interest as it vitally affects the general welfare. Any unregulated increase in oil prices could hurt the lives of a majority of the people and cause economic crisis of untold proportions. It would have a chain reaction in terms of, among others, demands for wage increases and upward spiralling of the cost of basic commodities. The stabilization then of oil prices is of prime concern which the state, via its police power, may properly address. Also, P.D. No. 1956, as amended by E.O. No. 137, explicitly provides that the source of OPSF is taxation. No amount of semantical juggleries could dim this fact. It is settled that a taxpayer may not offset taxes due from the claims that he may have against the government. 58Taxes cannot be the subject of compensation because the government and taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off. 59 We may even further state that technically, in respect to the taxes for the OPSF, the oil companies merely act as agents for the Government in the latter's collection since the taxes are, in reality, passed unto the end-users the consuming public. In that capacity, the petitioner, as one of such companies, has the primary obligation to account for and remit the taxes collected to the administrator of the OPSF. This duty stems from the fiduciary relationship between the two; petitioner certainly cannot be considered merely as a debtor. In respect, therefore, to its collection for the OPSF vis-avis its claims for reimbursement, no compensation is likewise legally feasible. Firstly, the Government and the petitioner cannot be said to be mutually debtors and creditors of each other. Secondly, there is no proof that petitioner's claim is already due and liquidated. Under Article 1279 of the Civil Code, in order that compensation may be proper, it is necessary that: (1) each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; (2) both debts consist in a sum of :money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated; (3) the two (2) debts be due; (4) they be liquidated and demandable; (5) over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor.

That compensation had been the practice in the past can set no valid precedent. Such a practice has no legal basis. Lastly, R.A. No. 6952 does not authorize oil companies to offset their claims against their OPSF contributions. Instead, it prohibits the government from paying any amount from the Petroleum Price Standby Fund to oil companies which have outstanding obligations with the government, without said obligation being offset first subject to the rules on compensation in the Civil Code. WHEREFORE, in view of the foregoing, judgment is hereby rendered AFFIRMING the challenged decision of the Commission on Audit, except that portion thereof disallowing petitioner's claim for reimbursement of underrecovery arising from sales to the National Power Corporation, which is hereby allowed. With costs against petitioner. SO ORDERED. Narvasa, C.J., Melencio-Herrera, Gutierrez, Jr., Paras, Feliciano, Padilla, Bidin, Grio-Aquino, Medialdea, Regalado, Romero and Nocon, JJ., concur.

Footnotes 1 Petitioner explicitly states in the opening paragraph of the petition that its petition is for review under Section 1, Rule 44 of the Rules of Court. 2 Sec. 7, Subdivision A, Article IX; see also Section 35, Chapter 5, Subtitle B, Title I, Book V, Administrative Code of 1987. 3 The Civil Service Commission, the Commission on Elections and the Commission on Audit. 4 Land Bank of the Philippines vs. COA, 190 SCRA 154 [1990]. 5 Rollo, 6-7. 6 Rollo, 65. 7 Id., 66. 8 Rollo, 67-68. 9 Id., 76. 10 Id., 77. 11 Rollo, 58-59. 12 Rollo, 60-62. 13 Rollo, 78-89. 14 Id., 89-90. 15 Rollo, 53-56. Commissioner Fernandez is of the opinion that petitioner should allowed to recover financing charges stating: I find merit in claimants (sic) reliance on and invocation of Department of Finance Circular No. 1-87, dated February 18, 1987, in support of such claims. To my mind, the authority embodied in such circular coupled with the justification therefor as set forth by the Secretary of Finance in his letter of even date to the then Deputy Secretary for Energy Affairs as well as the Memorandum for the President dated November 6, 1989 from the Acting Secretary of Finance, alluded to and subjoined herein, cannot but deserve full faith and credit. I perceive no compelling reason for this Commission to overturn or disturb these pronouncements which treat of a policy matter the resolution which (sic) appropriately pertains to the executive agency concerned, the Department of Finance in this case. 16 Rollo, 8-9. 17 Caltex Philippines, Inc., petitioner herein.

18 Op. cit., 124. 19 Rollo, 143-185. 20 Id., 188. 21 Id., 191. 22 Rollo, 23. 23 Rollo, 24-25. 24 Id., 25. 25 Rollo, 25-26. 26 Id., 26. 27 Citing Ramos vs. CIR, 21 SCRA 1282 [1967]; Sagun vs. PHHC, 162 SCRA 411 [1988]; Hijo Plantation, Inc. vs. Central Bank, 164 SCRA 192 [1988]; Beautifont, Inc. vs. Court of Appeals, 157 SCRA 481 [1988]. 28 Citing Section 11, Book V. Administrative Code of 1987; Guevara vs. Gimenez, 6 SCRA 807 [1962]. 29 Rollo, 155-164. 30 Sec. 1, Subdivision A, Article IX. 31 Paragraph 1, Section 2, Subdivision D, Article XII. 32 Supra. 33 39 SCRA 641 [1971]. 34 P.D. No. 1445. 35 Sec. 11, Chapter 4, Subtitle B, Book V. 36 The 1987 Constitution adds one (1) more category of such expenditure on use unconscionable. 37 BERNAS, J., The Constitution of the Republic of the Philippines: A Commentary, vol. II, 1988 ed., 372. 38 Smith Bell and Co., Ltd. vs. Register of Deeds of Davao, 96 Phil. 53 [1954], citing BLACK onInterpretation of Law. 2nd ed., 203; see also Republic vs. Migrino, 189 SCRA 289 [1990]. 39 Philippine Communications Satellite Corp. vs. Alcuaz, et al., 180 SCRA 218 [1989]. 40 Rollo, 176-177. 41 Id., 184. 42 Rollo, 62; Annex "C," 3. 43 Id., 56; Annex "A." 44 Rollo, 174-176. 45 As verified from the National Printing Office. A certification to this effect, dated 19 November 1991, signed by Heriberto Bacalla, Chief, Official Gazette Publication, of the National Printing Office, is attached to the rollo.

46 136 SCRA 27 [1985]. 47 146 SCRA 446 [1986]. 48 CIR vs. Mitsubishi Corp., 181 SCRA 214 [1990]; CIR vs. P.J. Kiener Co., Ltd., 65 SCRA 142 [1975]. 49 Rollo, 49. 50 Id., 173. 51 Rollo, 42-47. 52 Id., 48-49. 53 162 SCRA 753 [1988]. 54 Op. cit., 171. 55 158 SCRA 9 [1988]. 56 Petitioner's Memorandum, 8. 57 Lutz vs. Araneta, 98 Phil. 148 [1955]; Gaston vs. Republic Planters Bank, 158 SCRA 626 [1988]. 58 Francia vs. IAC, supra.; Republic vs. Mambulao Lumber Co., 4 SCRA 622 [1962]. 59 Cordero vs. Gonda, 18 SCRA 331 [1966]. 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 Pias, 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. 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. 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. 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 ofErmita-Malate Hotel, et al. v. Mayor of Manila (G.R. No. L24693, 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 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. Grio-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. Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-25043 April 26, 1968

ANTONIO ROXAS, EDUARDO ROXAS and ROXAS Y CIA., in their own respective behalf and as judicial co-guardians of JOSE ROXAS, petitioners, vs. COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents. Leido, Andrada, Perez and Associates for petitioners. Office of the Solicitor General for respondents. BENGZON, J.P., J.: Don Pedro Roxas and Dona Carmen Ayala, Spanish subjects, transmitted to their grandchildren by hereditary succession the following properties: (1) Agricultural lands with a total area of 19,000 hectares, situated in the municipality of Nasugbu, Batangas province; (2) A residential house and lot located at Wright St., Malate, Manila; and (3) Shares of stocks in different corporations. To manage the above-mentioned properties, said children, namely, Antonio Roxas, Eduardo Roxas and Jose Roxas, formed a partnership called Roxas y Compania. AGRICULTURAL LANDS

At the conclusion of the Second World War, the tenants who have all been tilling the lands in Nasugbu for generations expressed their desire to purchase from Roxas y Cia. the parcels which they actually occupied. For its part, the Government, in consonance with the constitutional mandate to acquire big landed estates and apportion them among landless tenants-farmers, persuaded the Roxas brothers to part with their landholdings. Conferences were held with the farmers in the early part of 1948 and finally the Roxas brothers agreed to sell 13,500 hectares to the Government for distribution to actual occupants for a price of P2,079,048.47 plus P300,000.00 for survey and subdivision expenses. It turned out however that the Government did not have funds to cover the purchase price, and so a special arrangement was made for the Rehabilitation Finance Corporation to advance to Roxas y Cia. the amount of P1,500,000.00 as loan. Collateral for such loan were the lands proposed to be sold to the farmers. Under the arrangement, Roxas y Cia. allowed the farmers to buy the lands for the same price but by installment, and contracted with the Rehabilitation Finance Corporation to pay its loan from the proceeds of the yearly amortizations paid by the farmers. In 1953 and 1955 Roxas y Cia. derived from said installment payments a net gain of P42,480.83 and P29,500.71. Fifty percent of said net gain was reported for income tax purposes as gain on the sale of capital asset held for more than one year pursuant to Section 34 of the Tax Code. RESIDENTIAL HOUSE During their bachelor days the Roxas brothers lived in the residential house at Wright St., Malate, Manila, which they inherited from their grandparents. After Antonio and Eduardo got married, they resided somewhere else leaving only Jose in the old house. In fairness to his brothers, Jose paid to Roxas y Cia. rentals for the house in the sum of P8,000.00 a year. ASSESSMENTS On June 17, 1958, the Commissioner of Internal Revenue demanded from Roxas y Cia the payment of real estate dealer's tax for 1952 in the amount of P150.00 plus P10.00 compromise penalty for late payment, and P150.00 tax for dealers of securities for 1952 plus P10.00 compromise penalty for late payment. The assessment for real estate dealer's tax was based on the fact that Roxas y Cia. received house rentals from Jose Roxas in the amount of P8,000.00. Pursuant to Sec. 194 of the Tax Code, an owner of a real estate who derives a yearly rental income therefrom in the amount of P3,000.00 or more is considered a real estate dealer and is liable to pay the corresponding fixed tax. The Commissioner of Internal Revenue justified his demand for the fixed tax on dealers of securities against Roxas y Cia., on the fact that said partnership made profits from the purchase and sale of securities. In the same assessment, the Commissioner assessed deficiency income taxes against the Roxas Brothers for the years 1953 and 1955, as follows: 1953 Antonio Roxas Eduardo Roxas Jose Roxas P7,010.00 7,281.00 6,323.00 1955 P5,813.00 5,828.00 5,588.00

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

ROXAS Y CIA.: 1953 Tickets for Banquet in honor of S. Osmea Gifts of San Miguel beer Contributions to Philippine Air Force Chapel Manila Police Trust Fund Philippines Herald's fund for Manila's neediest families 1955 Contributions to Contribution to Our Lady of Fatima Chapel, FEU 50.00 100.00 150.00 100.00 P 40.00 28.00

ANTONIO ROXAS: 1953 Contributions to Pasay City Firemen Christmas Fund Pasay City Police Dept. X'mas fund 1955 Contributions to Baguio City Police Christmas fund Pasay City Firemen Christmas fund Pasay City Police Christmas fund EDUARDO ROXAS: 1953 Contributions to Hijas de Jesus' Retiro de Manresa Philippines Herald's fund for Manila's neediest families 1955 Contributions to Philippines Herald's fund for Manila's neediest families JOSE ROXAS: 1955 Contributions to Philippines Herald's fund for Manila's neediest families 450.00 100.00 25.00 25.00 50.00 25.00 50.00

120.00

120.00

The Roxas brothers protested the assessment but inasmuch as said protest was denied, they instituted an appeal in the Court of Tax Appeals on January 9, 1961. The Tax Court heard the appeal and rendered judgment on July 31, 1965 sustaining the assessment except the demand for the payment of the fixed tax on dealer of securities and the disallowance of the deductions for contributions to the Philippine Air Force Chapel and Hijas de Jesus' Retiro de Manresa. The Tax Court's judgment reads: WHEREFORE, the decision appealed from is hereby affirmed with respect to petitioners Antonio Roxas, Eduardo Roxas, and Jose Roxas who are hereby ordered to pay the respondent Commissioner of Internal Revenue the amounts of P12,808.00, P12,887.00 and P11,857.00, respectively, as deficiency income taxes for the years 1953 and 1955, plus 5% surcharge and 1% monthly interest as provided for in Sec. 51(a) of the Revenue Code; and modified with respect to the partnership Roxas y Cia. in the sense that it should pay only P150.00, as real estate dealer's tax. With costs against petitioners. Not satisfied, Roxas y Cia. and the Roxas brothers appealed to this Court. The Commissioner of Internal Revenue did not appeal. The issues: (1) Is the gain derived from the sale of the Nasugbu farm lands an ordinary gain, hence 100% taxable? (2) Are the deductions for business expenses and contributions deductible? (3) Is Roxas y Cia. liable for the payment of the fixed tax on real estate dealers? The Commissioner of Internal Revenue contends that Roxas y Cia. could be considered a real estate dealer because it engaged in the business of selling real estate. The business activity alluded to was the act of subdividing the Nasugbu farm lands and selling them to the farmers-occupants on installment. To bolster his stand on the point, he cites one of the purposes of Roxas y Cia. as contained in its articles of partnership, quoted below: 4. (a) La explotacion de fincas urbanes pertenecientes a la misma o que pueden pertenecer a ella en el futuro, alquilandoles por los plazos y demas condiciones, estime convenientes y vendiendo aquellas que a juicio de sus gerentes no deben conservarse;

The above-quoted purpose notwithstanding, the proposition of the Commissioner of Internal Revenue cannot be favorably accepted by Us in this isolated transaction with its peculiar circumstances in spite of the fact that there were hundreds of vendees. Although they paid for their respective holdings in installment for a period of ten years, it would nevertheless not make the vendor Roxas y Cia. a real estate dealer during the ten-year amortization period. It should be borne in mind that the sale of the Nasugbu farm lands to the very farmers who tilled them for generations was not only in consonance with, but more in obedience to the request and pursuant to the policy of our Government to allocate lands to the landless. It was the bounden duty of the Government to pay the agreed compensation after it had persuaded Roxas y Cia. to sell its haciendas, and to subsequently subdivide them among the farmers at very reasonable terms and prices. However, the Government could not comply with its duty for lack of funds. Obligingly, Roxas y Cia. shouldered the Government's burden, went out of its way and sold lands directly to the farmers in the same way and under the same terms as would have been the case had the Government done it itself. For this magnanimous act, the municipal council of Nasugbu passed a resolution expressing the people's gratitude. The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg". And, in order to maintain the general public's trust and confidence in the Government this power must be used justly and not treacherously. It does not conform with Our sense of justice in the instant case for the Government to persuade the taxpayer to lend it a helping hand and later on to penalize him for duly answering the urgent call. In fine, Roxas y Cia. cannot be considered a real estate dealer for the sale in question. Hence, pursuant to Section 34 of the Tax Code the lands sold to the farmers are capital assets, and the gain derived from the sale thereof is capital gain, taxable only to the extent of 50%. DISALLOWED DEDUCTIONS Roxas y Cia. deducted from its gross income the amount of P40.00 for tickets to a banquet given in honor of Sergio Osmena and P28.00 for San Miguel beer given as gifts to various persons. The deduction were claimed as representation expenses. Representation expenses are deductible from gross income as expenditures incurred in carrying on a trade or business under Section 30(a) of the Tax Code provided the taxpayer proves that they are reasonable in amount, ordinary and necessary, and incurred in connection with his business. In the case at bar, the evidence does not show such link between the expenses and the business of Roxas y Cia. The findings of the Court of Tax Appeals must therefore be sustained. The petitioners also claim deductions for contributions to the Pasay City Police, Pasay City Firemen, and Baguio City Police Christmas funds, Manila Police Trust Fund, Philippines Herald's fund for Manila's neediest families and Our Lady of Fatima chapel at Far Eastern University. The contributions to the Christmas funds of the Pasay City Police, Pasay City Firemen and Baguio City Police are not deductible for the reason that the Christmas funds were not spent for public purposes but as Christmas gifts to the families of the members of said entities. Under Section 39(h), a contribution to a government entity is deductible when used exclusively for public purposes. For this reason, the disallowance must be sustained. On the other hand, the contribution to the Manila Police trust fund is an allowable deduction for said trust fund belongs to the Manila Police, a government entity, intended to be used exclusively for its public functions. The contributions to the Philippines Herald's fund for Manila's neediest families were disallowed on the ground that the Philippines Herald is not a corporation or an association contemplated in Section 30 (h) of the Tax Code. It should be noted however that the contributions were not made to the Philippines Herald but to a group of civic spirited citizens organized by the Philippines Herald solely for charitable purposes. There is no question that the members of this group of citizens do not receive profits, for all the funds they raised were for Manila's neediest families. Such a group of citizens may be classified as an association organized exclusively for charitable purposes mentioned in Section 30(h) of the Tax Code. Rightly, the Commissioner of Internal Revenue disallowed the contribution to Our Lady of Fatima chapel at the Far Eastern University on the ground that the said university gives dividends to its stockholders. Located within the premises of the university, the chapel in question has not been shown to belong to the Catholic Church or any religious organization. On the other hand, the lower court found that it belongs to the Far Eastern University, contributions to which are not deductible under Section 30(h) of the Tax Code for the reason that the net income of said university injures to the benefit of its stockholders. The disallowance should be sustained. Lastly, Roxas y Cia. questions the imposition of the real estate dealer's fixed tax upon it, because although it earned a rental income of P8,000.00 per annum in 1952, said rental income came from Jose Roxas, one of the partners. Section 194 of the Tax Code, in considering as real estate dealers owners of real estate receiving rentals of at least P3,000.00 a year, does not provide any qualification as to the persons paying the rentals. The law, which states:
1wph1.t

. . . "Real estate dealer" includes any person engaged in the business of buying, selling, exchanging, leasing or renting property on his own account as principal and holding himself out as a full or part-time dealer in real estate or as an owner of rental property or properties rented or offered to rent for an aggregate amount of three thousand pesos or more a year: . . . (Emphasis supplied) . is too clear and explicit to admit construction. The findings of the Court of Tax Appeals or, this point is sustained.

1wph1. t

To Summarize, no deficiency income tax is due for 1953 from Antonio Roxas, Eduardo Roxas and Jose Roxas. For 1955 they are liable to pay deficiency income tax in the sum of P109.00, P91.00 and P49.00, respectively, computed as follows: *

ANTONIO ROXAS Net income per return P315,476.59

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

P 153,249.15 146,135.46

Amount understated Contributions disallowed

P 7,113.69 115.00

P 7,228.69 Less 1/3 share of contributions amounting to P21,126.06 disallowed from partnership but allowed to partners

7,042.02

186.67

Net income per review Less: Exemptions

P315,663.26 4,200.00

Net taxable income Tax due Tax paid 154,169.00 154,060.00

P311,463.26

Deficiency

P 109.00 ========== EDUARDO ROXAS

Net income per return Add: 1/3 share, profits in Roxas y Cia Less profits declared P 153,249.15 146,052.58

P 304,166.92

Amount understated Less 1/3 share in contributions amounting to P21,126.06 disallowed from partnership but allowed to partners

P 7,196.57

7,042.02

155.55

Net income per review Less: Exemptions

P304,322.47 4,800.00

Net taxable income Tax Due Tax paid P147,250.00 147,159.00

P299,592.47

Deficiency JOSE ROXAS Net income per return Add: 1/3 share, profits in Roxas y Cia. Less amount reported

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

P222,681.76 P153,429.15 146,135.46

Amount understated Less 1/3 share of contributions disallowed from partnership but allowed as deductions to partners

7,113.69

7,042.02

71.67

Net income per review Less: Exemption

P222,753.43 1,800.00

Net income subject to tax Tax due Tax paid P102,763.00 102,714.00

P220,953.43

Deficiency

P 49.00 ===========

WHEREFORE, the decision appealed from is modified. Roxas y Cia. is hereby ordered to pay the sum of P150.00 as real estate dealer's fixed tax for 1952, and Antonio Roxas, Eduardo Roxas and Jose Roxas are ordered to pay the respective sums of P109.00, P91.00 and P49.00 as their individual deficiency income tax all corresponding for the year 1955. No costs. So ordered. Reyes, J.B.L., Dizon, Makalintal, Sanchez, Castro, Angeles and Fernando, JJ., concur. Zaldivar, J., took no part. Concepcion, C.J., is on leave. Footnotes
*

See BIR Records, p. 387.

Republic of the Philippines SUPREME COURT Manila EN BANC

G.R. No. 118295 May 2, 1997 WIGBERTO E. TAADA and ANNA DOMINIQUE COSETENG, as members of the Philippine Senate and as taxpayers; GREGORIO ANDOLANA and JOKER ARROYO as members of the House of Representatives and as taxpayers; NICANOR P. PERLAS and HORACIO R. MORALES, both as taxpayers; CIVIL LIBERTIES UNION, NATIONAL ECONOMIC PROTECTIONISM ASSOCIATION, CENTER FOR ALTERNATIVE DEVELOPMENT INITIATIVES, LIKAS-KAYANG KAUNLARAN FOUNDATION, INC., PHILIPPINE RURAL RECONSTRUCTION MOVEMENT, DEMOKRATIKONG KILUSAN NG MAGBUBUKID NG PILIPINAS, INC., and PHILIPPINE PEASANT INSTITUTE, in representation of various taxpayers and as non-governmental organizations, petitioners, vs. EDGARDO ANGARA, ALBERTO ROMULO, LETICIA RAMOS-SHAHANI, HEHERSON ALVAREZ, AGAPITO AQUINO, RODOLFO BIAZON, NEPTALI GONZALES, ERNESTO HERRERA, JOSE LINA, GLORIA. MACAPAGAL-ARROYO, ORLANDO MERCADO, BLAS OPLE, JOHN OSMEA, SANTANINA RASUL, RAMON REVILLA, RAUL ROCO, FRANCISCO TATAD and FREDDIE WEBB, in their respective capacities as members of the Philippine Senate who concurred in the ratification by the President of the Philippines of the Agreement Establishing the World Trade Organization; SALVADOR ENRIQUEZ, in his capacity as Secretary of Budget and Management; CARIDAD VALDEHUESA, in her capacity as National Treasurer; RIZALINO NAVARRO, in his capacity as Secretary of Trade and Industry; ROBERTO SEBASTIAN, in his capacity as Secretary of Agriculture; ROBERTO DE OCAMPO, in his capacity as Secretary of Finance; ROBERTO ROMULO, in his capacity as Secretary of Foreign Affairs; and TEOFISTO T. GUINGONA, in his capacity as Executive Secretary,respondents.

PANGANIBAN, J.: The emergence on January 1, 1995 of the World Trade Organization, abetted by the membership thereto of the vast majority of countries has revolutionized international business and economic relations amongst states. It has irreversibly propelled the world towards trade liberalization and economic globalization. Liberalization, globalization, deregulation and privatization, the third-millennium buzz words, are ushering in a new borderless world of business by sweeping away as mere historical relics the heretofore traditional modes of promoting and protecting national economies like

tariffs, export subsidies, import quotas, quantitative restrictions, tax exemptions and currency controls. Finding market niches and becoming the best in specific industries in a market-driven and export-oriented global scenario are replacing age-old "beggar-thy-neighbor" policies that unilaterally protect weak and inefficient domestic producers of goods and services. In the words of Peter Drucker, the well-known management guru, "Increased participation in the world economy has become the key to domestic economic growth and prosperity." Brief Historical Background To hasten worldwide recovery from the devastation wrought by the Second World War, plans for the establishment of three multilateral institutions inspired by that grand political body, the United Nations were discussed at Dumbarton Oaks and Bretton Woods. The first was the World Bank (WB) which was to address the rehabilitation and reconstruction of war-ravaged and later developing countries; the second, the International Monetary Fund (IMF) which was to deal with currency problems; and the third, the International Trade Organization (ITO), which was to foster order and predictability in world trade and to minimize unilateral protectionist policies that invite challenge, even retaliation, from other states. However, for a variety of reasons, including its non-ratification by the United States, the ITO, unlike the IMF and WB, never took off. What remained was only GATT the General Agreement on Tariffs and Trade. GATT was a collection of treaties governing access to the economies of treaty adherents with no institutionalized body administering the agreements or dependable system of dispute settlement. After half a century and several dizzying rounds of negotiations, principally the Kennedy Round, the Tokyo Round and the Uruguay Round, the world finally gave birth to that administering body the World Trade Organization with the signing of the "Final Act" in Marrakesh, Morocco and the ratification of the WTO Agreement by its members. 1 Like many other developing countries, the Philippines joined WTO as a founding member with the goal, as articulated by President Fidel V. Ramos in two letters to the Senate (infra), of improving "Philippine access to foreign markets, especially its major trading partners, through the reduction of tariffs on its exports, particularly agricultural and industrial products." The President also saw in the WTO the opening of "new opportunities for the services sector . . . , (the reduction of) costs and uncertainty associated with exporting . . . , and (the attraction of) more investments into the country." Although the Chief Executive did not expressly mention it in his letter, the Philippines and this is of special interest to the legal profession will benefit from the WTO system of dispute settlement by judicial adjudication through the independent WTO settlement bodies called (1) Dispute Settlement Panels and (2) Appellate Tribunal. Heretofore, trade disputes were settled mainly through negotiations where solutions were arrived at frequently on the basis of relative bargaining strengths, and where naturally, weak and underdeveloped countries were at a disadvantage. The Petition in Brief Arguing mainly (1) that the WTO requires the Philippines "to place nationals and products of member-countries on the same footing as Filipinos and local products" and (2) that the WTO "intrudes, limits and/or impairs" the constitutional powers of both Congress and the Supreme Court, the instant petition before this Court assails the WTO Agreement for violating the mandate of the 1987 Constitution to "develop a self-reliant and independent national economy effectively controlled by Filipinos . . . (to) give preference to qualified Filipinos (and to) promote the preferential use of Filipino labor, domestic materials and locally produced goods." Simply stated, does the Philippine Constitution prohibit Philippine participation in worldwide trade liberalization and economic globalization? Does it proscribe Philippine integration into a global economy that is liberalized, deregulated and privatized? These are the main questions raised in this petition for certiorari, prohibition and mandamus under Rule 65 of the Rules of Court praying (1) for the nullification, on constitutional grounds, of the concurrence of the Philippine Senate in the ratification by the President of the Philippines of the Agreement Establishing the World Trade Organization (WTO Agreement, for brevity) and (2) for the prohibition of its implementation and enforcement through the release and utilization of public funds, the assignment of public officials and employees, as well as the use of government properties and resources by respondent-heads of various executive offices concerned therewith. This concurrence is embodied in Senate Resolution No. 97, dated December 14, 1994. The Facts On April 15, 1994, Respondent Rizalino Navarro, then Secretary of The Department of Trade and Industry (Secretary Navarro, for brevity), representing the Government of the Republic of the Philippines, signed in Marrakesh, Morocco, the Final Act Embodying the Results of the Uruguay Round of Multilateral Negotiations (Final Act, for brevity). By signing the Final Act, 2 Secretary Navarro on behalf of the Republic of the Philippines, agreed: (a) to submit, as appropriate, the WTO Agreement for the consideration of their respective competent authorities, with a view to seeking approval of the Agreement in accordance with their procedures; and (b) to adopt the Ministerial Declarations and Decisions. On August 12, 1994, the members of the Philippine Senate received a letter dated August 11, 1994 from the President of the Philippines, 3 stating among others that "the Uruguay Round Final Act is hereby submitted to the Senate for its concurrence pursuant to Section 21, Article VII of the Constitution." On August 13, 1994, the members of the Philippine Senate received another letter from the President of the Philippines 4 likewise dated August 11, 1994, which stated among others that "the Uruguay Round Final Act, the Agreement Establishing the World Trade Organization, the Ministerial Declarations and Decisions, and the Understanding on Commitments in Financial Services are hereby submitted to the Senate for its concurrence pursuant to Section 21, Article VII of the Constitution." On December 9, 1994, the President of the Philippines certified the necessity of the immediate adoption of P.S. 1083, a resolution entitled "Concurring in the Ratification of the Agreement Establishing the World Trade Organization." 5

On December 14, 1994, the Philippine Senate adopted Resolution No. 97 which "Resolved, as it is hereby resolved, that the Senate concur, as it hereby concurs, in the ratification by the President of the Philippines of the Agreement Establishing the World Trade Organization." 6 The text of the WTO Agreement is written on pages 137 et seq. of Volume I of the 36-volume Uruguay Round of Multilateral Trade Negotiations and includes various agreements and associated legal instruments (identified in the said Agreement as Annexes 1, 2 and 3 thereto and collectively referred to as Multilateral Trade Agreements, for brevity) as follows: ANNEX 1 Annex 1A: Multilateral Agreement on Trade in Goods General Agreement on Tariffs and Trade 1994 Agreement on Agriculture Agreement on the Application of Sanitary and Phytosanitary Measures Agreement on Textiles and Clothing Agreement on Technical Barriers to Trade Agreement on Trade-Related Investment Measures Agreement on Implementation of Article VI of he General Agreement on Tariffs and Trade 1994 Agreement on Implementation of Article VII of the General on Tariffs and Trade 1994 Agreement on Pre-Shipment Inspection Agreement on Rules of Origin Agreement on Imports Licensing Procedures Agreement on Subsidies and Coordinating Measures Agreement on Safeguards Annex 1B: General Agreement on Trade in Services and Annexes Annex 1C: Agreement on Trade-Related Aspects of Intellectual Property Rights ANNEX 2 Understanding on Rules and Procedures Governing the Settlement of Disputes ANNEX 3 Trade Policy Review Mechanism On December 16, 1994, the President of the Philippines signed 7 the Instrument of Ratification, declaring: NOW THEREFORE, be it known that I, FIDEL V. RAMOS, President of the Republic of the Philippines, after having seen and considered the aforementioned Agreement Establishing the World Trade Organization and the agreements and associated legal instruments included in Annexes one (1), two (2) and three (3) of that Agreement which are integral parts thereof, signed at Marrakesh, Morocco on 15 April 1994, do hereby ratify and confirm the same and every Article and Clause thereof. To emphasize, the WTO Agreement ratified by the President of the Philippines is composed of the Agreement Proper and "the associated legal instruments included in Annexes one (1), two (2) and three (3) of that Agreement which are integral parts thereof." On the other hand, the Final Act signed by Secretary Navarro embodies not only the WTO Agreement (and its integral annexes aforementioned) but also (1) the Ministerial Declarations and Decisions and (2) the Understanding on Commitments in Financial Services. In his Memorandum dated May 13, 1996, 8 the Solicitor General describes these two latter documents as follows: The Ministerial Decisions and Declarations are twenty-five declarations and decisions on a wide range of matters, such as measures in favor of least developed countries, notification procedures, relationship of WTO with the International Monetary Fund (IMF), and agreements on technical barriers to trade and on dispute settlement. The Understanding on Commitments in Financial Services dwell on, among other things, standstill or limitations and qualifications of commitments to existing non-conforming measures, market access, national treatment, and definitions of nonresident supplier of financial services, commercial presence and new financial service. On December 29, 1994, the present petition was filed. After careful deliberation on respondents' comment and petitioners' reply thereto, the Court resolved on December 12, 1995, to give due course to the petition, and the parties thereafter filed their respective memoranda. The court also requested the Honorable Lilia R. Bautista, the Philippine Ambassador to the United Nations stationed in Geneva, Switzerland, to submit a paper, hereafter referred to as "Bautista Paper," 9 for brevity, (1) providing a historical background of and (2) summarizing the said agreements.

During the Oral Argument held on August 27, 1996, the Court directed: (a) the petitioners to submit the (1) Senate Committee Report on the matter in controversy and (2) the transcript of proceedings/hearings in the Senate; and (b) the Solicitor General, as counsel for respondents, to file (1) a list of Philippine treaties signed prior to the Philippine adherence to the WTO Agreement, which derogate from Philippine sovereignty and (2) copies of the multi-volume WTO Agreement and other documents mentioned in the Final Act, as soon as possible. After receipt of the foregoing documents, the Court said it would consider the case submitted for resolution. In a Compliance dated September 16, 1996, the Solicitor General submitted a printed copy of the 36-volume Uruguay Round of Multilateral Trade Negotiations, and in another Compliance dated October 24, 1996, he listed the various "bilateral or multilateral treaties or international instruments involving derogation of Philippine sovereignty." Petitioners, on the other hand, submitted their Compliance dated January 28, 1997, on January 30, 1997. The Issues In their Memorandum dated March 11, 1996, petitioners summarized the issues as follows: A. Whether the petition presents a political question or is otherwise not justiciable. B. Whether the petitioner members of the Senate who participated in the deliberations and voting leading to the concurrence are estopped from impugning the validity of the Agreement Establishing the World Trade Organization or of the validity of the concurrence. C. Whether the provisions of the Agreement Establishing the World Trade Organization contravene the provisions of Sec. 19, Article II, and Secs. 10 and 12, Article XII, all of the 1987 Philippine Constitution. D. Whether provisions of the Agreement Establishing the World Trade Organization unduly limit, restrict and impair Philippine sovereignty specifically the legislative power which, under Sec. 2, Article VI, 1987 Philippine Constitution is "vested in the Congress of the Philippines"; E. Whether provisions of the Agreement Establishing the World Trade Organization interfere with the exercise of judicial power. F. Whether the respondent members of the Senate acted in grave abuse of discretion amounting to lack or excess of jurisdiction when they voted for concurrence in the ratification of the constitutionally-infirm Agreement Establishing the World Trade Organization. G. Whether the respondent members of the Senate acted in grave abuse of discretion amounting to lack or excess of jurisdiction when they concurred only in the ratification of the Agreement Establishing the World Trade Organization, and not with the Presidential submission which included the Final Act, Ministerial Declaration and Decisions, and the Understanding on Commitments in Financial Services. On the other hand, the Solicitor General as counsel for respondents "synthesized the several issues raised by petitioners into the following": 10 1. Whether or not the provisions of the "Agreement Establishing the World Trade Organization and the Agreements and Associated Legal Instruments included in Annexes one (1), two (2) and three (3) of that agreement" cited by petitioners directly contravene or undermine the letter, spirit and intent of Section 19, Article II and Sections 10 and 12, Article XII of the 1987 Constitution. 2. Whether or not certain provisions of the Agreement unduly limit, restrict or impair the exercise of legislative power by Congress. 3. Whether or not certain provisions of the Agreement impair the exercise of judicial power by this Honorable Court in promulgating the rules of evidence. 4. Whether or not the concurrence of the Senate "in the ratification by the President of the Philippines of the Agreement establishing the World Trade Organization" implied rejection of the treaty embodied in the Final Act. By raising and arguing only four issues against the seven presented by petitioners, the Solicitor General has effectively ignored three, namely: (1) whether the petition presents a political question or is otherwise not justiciable; (2) whether petitioner-members of the Senate (Wigberto E. Taada and Anna Dominique Coseteng) are estopped from joining this suit; and (3) whether the respondent-members of the Senate acted in grave abuse of discretion when they voted for concurrence in the ratification of the WTO Agreement. The foregoing notwithstanding, this Court resolved to deal with these three issues thus: (1) The "political question" issue being very fundamental and vital, and being a matter that probes into the very jurisdiction of this Court to hear and decide this case was deliberated upon by the Court and will thus be ruled upon as the first issue;

(2) The matter of estoppel will not be taken up because this defense is waivable and the respondents have effectively waived it by not pursuing it in any of their pleadings; in any event, this issue, even if ruled in respondents' favor, will not cause the petition's dismissal as there are petitioners other than the two senators, who are not vulnerable to the defense of estoppel; and (3) The issue of alleged grave abuse of discretion on the part of the respondent senators will be taken up as an integral part of the disposition of the four issues raised by the Solicitor General. During its deliberations on the case, the Court noted that the respondents did not question the locus standi of petitioners. Hence, they are also deemed to have waived the benefit of such issue. They probably realized that grave constitutional issues, expenditures of public funds and serious international commitments of the nation are involved here, and that transcendental public interest requires that the substantive issues be met head on and decided on the merits, rather than skirted or deflected by procedural matters. 11 To recapitulate, the issues that will be ruled upon shortly are: (1) DOES THE PETITION PRESENT A JUSTICIABLE CONTROVERSY? OTHERWISE STATED, DOES THE PETITION INVOLVE A POLITICAL QUESTION OVER WHICH THIS COURT HAS NO JURISDICTION? (2) DO THE PROVISIONS OF THE WTO AGREEMENT AND ITS THREE ANNEXES CONTRAVENE SEC. 19, ARTICLE II, AND SECS. 10 AND 12, ARTICLE XII, OF THE PHILIPPINE CONSTITUTION? (3) DO THE PROVISIONS OF SAID AGREEMENT AND ITS ANNEXES LIMIT, RESTRICT, OR IMPAIR THE EXERCISE OF LEGISLATIVE POWER BY CONGRESS? (4) DO SAID PROVISIONS UNDULY IMPAIR OR INTERFERE WITH THE EXERCISE OF JUDICIAL POWER BY THIS COURT IN PROMULGATING RULES ON EVIDENCE? (5) WAS THE CONCURRENCE OF THE SENATE IN THE WTO AGREEMENT AND ITS ANNEXES SUFFICIENT AND/OR VALID, CONSIDERING THAT IT DID NOT INCLUDE THE FINAL ACT, MINISTERIAL DECLARATIONS AND DECISIONS, AND THE UNDERSTANDING ON COMMITMENTS IN FINANCIAL SERVICES? The First Issue: Does the Court Have Jurisdiction Over the Controversy? In seeking to nullify an act of the Philippine Senate on the ground that it contravenes the Constitution, the petition no doubt raises a justiciable controversy. Where an action of the legislative branch is seriously alleged to have infringed the Constitution, it becomes not only the right but in fact the duty of the judiciary to settle the dispute. "The question thus posed is judicial rather than political. The duty (to adjudicate) remains to assure that the supremacy of the Constitution is upheld." 12 Once a "controversy as to the application or interpretation of a constitutional provision is raised before this Court (as in the instant case), it becomes a legal issue which the Court is bound by constitutional mandate to decide." 13 The jurisdiction of this Court to adjudicate the matters 14 raised in the petition is clearly set out in the 1987 Constitution, 15 as follows: Judicial power includes the duty of the courts of justice to settle actual controversies involving rights which are legally demandable and enforceable, and to determine whether or not there has been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any branch or instrumentality of the government. The foregoing text emphasizes the judicial department's duty and power to strike down grave abuse of discretion on the part of any branch or instrumentality of government including Congress. It is an innovation in our political law. 16 As explained by former Chief Justice Roberto Concepcion, 17 "the judiciary is the final arbiter on the question of whether or not a branch of government or any of its officials has acted without jurisdiction or in excess of jurisdiction or so capriciously as to constitute an abuse of discretion amounting to excess of jurisdiction. This is not only a judicial power but a duty to pass judgment on matters of this nature." As this Court has repeatedly and firmly emphasized in many cases, 18 it will not shirk, digress from or abandon its sacred duty and authority to uphold the Constitution in matters that involve grave abuse of discretion brought before it in appropriate cases, committed by any officer, agency, instrumentality or department of the government. As the petition alleges grave abuse of discretion and as there is no other plain, speedy or adequate remedy in the ordinary course of law, we have no hesitation at all in holding that this petition should be given due course and the vital questions raised therein ruled upon under Rule 65 of the Rules of Court. Indeed, certiorari, prohibition and mandamusare appropriate remedies to raise constitutional issues and to review and/or prohibit/nullify, when proper, acts of legislative and executive officials. On this, we have no equivocation. We should stress that, in deciding to take jurisdiction over this petition, this Court will not review the wisdom of the decision of the President and the Senate in enlisting the country into the WTO, or pass upon the merits of trade liberalization as a policy espoused by said international body. Neither will it rule on the propriety of the government's economic policy of reducing/removing tariffs, taxes, subsidies, quantitative restrictions, and other import/trade barriers. Rather, it will only exercise its constitutional duty "to determine whether or not there had been a grave abuse of discretion amounting to lack or excess of jurisdiction" on the part of the Senate in ratifying the WTO Agreement and its three annexes.

Second Issue: The WTO Agreement and Economic Nationalism This is the lis mota, the main issue, raised by the petition. Petitioners vigorously argue that the "letter, spirit and intent" of the Constitution mandating "economic nationalism" are violated by the so-called "parity provisions" and "national treatment" clauses scattered in various parts not only of the WTO Agreement and its annexes but also in the Ministerial Decisions and Declarations and in the Understanding on Commitments in Financial Services. Specifically, the "flagship" constitutional provisions referred to are Sec 19, Article II, and Secs. 10 and 12, Article XII, of the Constitution, which are worded as follows: Article II DECLARATION OF PRINCIPLES AND STATE POLICIES xxx xxx xxx Sec. 19. The State shall develop a self-reliant and independent national economy effectively controlled by Filipinos. xxx xxx xxx Article XII NATIONAL ECONOMY AND PATRIMONY xxx xxx xxx Sec. 10. . . . The Congress shall enact measures that will encourage the formation and operation of enterprises whose capital is wholly owned by Filipinos. In the grant of rights, privileges, and concessions covering the national economy and patrimony, the State shall give preference to qualified Filipinos. xxx xxx xxx Sec. 12. The State shall promote the preferential use of Filipino labor, domestic materials and locally produced goods, and adopt measures that help make them competitive. Petitioners aver that these sacred constitutional principles are desecrated by the following WTO provisions quoted in their memorandum: 19 a) In the area of investment measures related to trade in goods (TRIMS, for brevity): Article 2 National Treatment and Quantitative Restrictions. 1. Without prejudice to other rights and obligations under GATT 1994, no Member shall apply any TRIM that is inconsistent with the provisions of Article II or Article XI of GATT 1994. 2. An illustrative list of TRIMS that are inconsistent with the obligations of general elimination of quantitative restrictions provided for in paragraph I of Article XI of GATT 1994 is contained in the Annex to this Agreement." (Agreement on Trade-Related Investment Measures, Vol. 27, Uruguay Round, Legal Instruments, p. 22121, emphasis supplied). The Annex referred to reads as follows: ANNEX Illustrative List

1. TRIMS that are inconsistent with the obligation of national treatment provided for in paragraph 4 of Article III of GATT 1994 include those which are mandatory or enforceable under domestic law or under administrative rulings, or compliance with which is necessary to obtain an advantage, and which require: (a) the purchase or use by an enterprise of products of domestic origin or from any domestic source, whether specified in terms of particular products, in terms of volume or value of products, or in terms of proportion of volume or value of its local production; or (b) that an enterprise's purchases or use of imported products be limited to an amount related to the volume or value of local products that it exports. 2. TRIMS that are inconsistent with the obligations of general elimination of quantitative restrictions provided for in paragraph 1 of Article XI of GATT 1994 include those which are mandatory or enforceable under domestic laws or under administrative rulings, or compliance with which is necessary to obtain an advantage, and which restrict: (a) the importation by an enterprise of products used in or related to the local production that it exports; (b) the importation by an enterprise of products used in or related to its local production by restricting its access to foreign exchange inflows attributable to the enterprise; or (c) the exportation or sale for export specified in terms of particular products, in terms of volume or value of products, or in terms of a preparation of volume or value of its local production. (Annex to the Agreement on Trade-Related Investment Measures, Vol. 27, Uruguay Round Legal Documents, p. 22125, emphasis supplied). The paragraph 4 of Article III of GATT 1994 referred to is quoted as follows: The products of the territory of any contracting party imported into the territory of any other contracting party shall be accorded treatment no less favorable than that accorded to like products of national origin in respect of laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use, the provisions of this paragraph shall not prevent the application of differential internal transportation charges which are based exclusively on the economic operation of the means of transport and not on the nationality of the product." (Article III, GATT 1947, as amended by the Protocol Modifying Part II, and Article XXVI of GATT, 14 September 1948, 62 UMTS 82-84 in relation to paragraph 1(a) of the General Agreement on Tariffs and Trade 1994, Vol. 1, Uruguay Round, Legal Instruments p. 177, emphasis supplied). (b) In the area of trade related aspects of intellectual property rights (TRIPS, for brevity): Each Member shall accord to the nationals of other Members treatment no less favourable than that it accords to its own nationals with regard to the protection of intellectual property. . . (par. 1 Article 3, Agreement on Trade-Related Aspect of Intellectual Property rights, Vol. 31, Uruguay Round, Legal Instruments, p. 25432 (emphasis supplied) (c) In the area of the General Agreement on Trade in Services: National Treatment 1. In the sectors inscribed in its schedule, and subject to any conditions and qualifications set out therein, each Member shall accord to services and service suppliers of any other Member, in respect of all measures affecting the supply of services, treatment no less favourable than it accords to its own like services and service suppliers. 2. A Member may meet the requirement of paragraph I by according to services and service suppliers of any other Member, either formally suppliers of any other Member, either formally identical treatment or formally different treatment to that it accords to its own like services and service suppliers. 3. Formally identical or formally different treatment shall be considered to be less favourable if it modifies the conditions of completion in favour of services or service suppliers of the Member compared to like services or service suppliers of any other Member. (Article XVII, General Agreement on Trade in Services, Vol. 28, Uruguay Round Legal Instruments, p. 22610 emphasis supplied). It is petitioners' position that the foregoing "national treatment" and "parity provisions" of the WTO Agreement "place nationals and products of member countries on the same footing as Filipinos and local products," in contravention of the "Filipino First" policy of the Constitution. They allegedly render meaningless the phrase "effectively controlled by Filipinos." The constitutional conflict becomes more manifest when viewed in the context of the clear duty imposed on the Philippines as a WTO member to ensure the conformity of its laws, regulations and administrative procedures with its obligations as provided in the annexed agreements. 20 Petitioners further argue that these provisions contravene constitutional limitations on the role exports play in national development and negate the preferential treatment accorded to Filipino labor, domestic materials and locally produced goods.

On the other hand, respondents through the Solicitor General counter (1) that such Charter provisions are not self-executing and merely set out general policies; (2) that these nationalistic portions of the Constitution invoked by petitioners should not be read in isolation but should be related to other relevant provisions of Art. XII, particularly Secs. 1 and 13 thereof; (3) that read properly, the cited WTO clauses do not conflict with Constitution; and (4) that the WTO Agreement contains sufficient provisions to protect developing countries like the Philippines from the harshness of sudden trade liberalization. We shall now discuss and rule on these arguments. Declaration of Principles Not Self-Executing By its very title, Article II of the Constitution is a "declaration of principles and state policies." The counterpart of this article in the 1935 Constitution 21 is called the "basic political creed of the nation" by Dean Vicente Sinco. 22 These principles in Article II are not intended to be self-executing principles ready for enforcement through the courts. 23 They are used by the judiciary as aids or as guides in the exercise of its power of judicial review, and by the legislature in its enactment of laws. As held in the leading case of Kilosbayan, Incorporated vs. Morato, 24 the principles and state policies enumerated in Article II and some sections of Article XII are not "self-executing provisions, the disregard of which can give rise to a cause of action in the courts. They do not embody judicially enforceable constitutional rights but guidelines for legislation." In the same light, we held in Basco vs. Pagcor 25 that broad constitutional principles need legislative enactments to implement the, thus: On petitioners' allegation that P.D. 1869 violates Sections 11 (Personal Dignity) 12 (Family) and 13 (Role of Youth) of Article II; Section 13 (Social Justice) of Article XIII and Section 2 (Educational Values) of Article XIV of the 1987 Constitution, suffice it to state also that these are merely statements of principles and policies. As such, they are basically not self-executing, meaning a law should be passed by Congress to clearly define and effectuate such principles. In general, therefore, the 1935 provisions were not intended to be self-executing principles ready for enforcement through the courts. They were rather directives addressed to the executive and to the legislature. If the executive and the legislature failed to heed the directives of the article, the available remedy was not judicial but political. The electorate could express their displeasure with the failure of the executive and the legislature through the language of the ballot. (Bernas, Vol. II, p. 2). The reasons for denying a cause of action to an alleged infringement of board constitutional principles are sourced from basic considerations of due process and the lack of judicial authority to wade "into the uncharted ocean of social and economic policy making." Mr. Justice Florentino P. Feliciano in his concurring opinion in Oposa vs. Factoran, Jr.,26 explained these reasons as follows: My suggestion is simply that petitioners must, before the trial court, show a more specific legal right a right cast in language of a significantly lower order of generality than Article II (15) of the Constitution that is or may be violated by the actions, or failures to act, imputed to the public respondent by petitioners so that the trial court can validly render judgment grating all or part of the relief prayed for. To my mind, the court should be understood as simply saying that such a more specific legal right or rights may well exist in our corpus of law, considering the general policy principles found in the Constitution and the existence of the Philippine Environment Code, and that the trial court should have given petitioners an effective opportunity so to demonstrate, instead of aborting the proceedings on a motion to dismiss. It seems to me important that the legal right which is an essential component of a cause of action be a specific, operable legal right, rather than a constitutional or statutory policy, for at least two (2) reasons. One is that unless the legal right claimed to have been violated or disregarded is given specification in operational terms, defendants may well be unable to defend themselves intelligently and effectively; in other words, there are due process dimensions to this matter. The second is a broader-gauge consideration where a specific violation of law or applicable regulation is not alleged or proved, petitioners can be expected to fall back on the expanded conception of judicial power in the second paragraph of Section 1 of Article VIII of the Constitution which reads: Sec. 1. . . . Judicial power includes the duty of the courts of justice to settle actual controversies involving rights which are legally demandable and enforceable, and to determine whether or not there has been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any branch or instrumentality of the Government. (Emphasis supplied) When substantive standards as general as "the right to a balanced and healthy ecology" and "the right to health" are combined with remedial standards as broad ranging as "a grave abuse of discretion amounting to lack or excess of jurisdiction," the result will be, it is respectfully submitted, to propel courts into the uncharted ocean of social and economic policy making. At least in respect of the vast area of environmental protection and management, our courts have no claim to special technical competence and experience and professional qualification. Where no specific, operable norms and standards are shown to exist, then the policy making departments the legislative and executive departments must be given a real and effective opportunity to fashion and promulgate those norms and standards, and to implement them before the courts should intervene.

Economic Nationalism Should Be Read with Other Constitutional Mandates to Attain Balanced Development of Economy On the other hand, Secs. 10 and 12 of Article XII, apart from merely laying down general principles relating to the national economy and patrimony, should be read and understood in relation to the other sections in said article, especially Secs. 1 and 13 thereof which read: Sec. 1. The goals of the national economy are a more equitable distribution of opportunities, income, and wealth; a sustained increase in the amount of goods and services produced by the nation for the benefit of the people; and an expanding productivity as the key to raising the quality of life for all especially the underprivileged. The State shall promote industrialization and full employment based on sound agricultural development and agrarian reform, through industries that make full and efficient use of human and natural resources, and which are competitive in both domestic and foreign markets. However, the State shall protect Filipino enterprises against unfair foreign competition and trade practices. In the pursuit of these goals, all sectors of the economy and all regions of the country shall be given optimum opportunity to develop. . . . xxx xxx xxx Sec. 13. The State shall pursue a trade policy that serves the general welfare and utilizes all forms and arrangements of exchange on the basis of equality and reciprocity. As pointed out by the Solicitor General, Sec. 1 lays down the basic goals of national economic development, as follows: 1. A more equitable distribution of opportunities, income and wealth; 2. A sustained increase in the amount of goods and services provided by the nation for the benefit of the people; and 3. An expanding productivity as the key to raising the quality of life for all especially the underprivileged. With these goals in context, the Constitution then ordains the ideals of economic nationalism (1) by expressing preference in favor of qualified Filipinos "in the grant of rights, privileges and concessions covering the national economy and patrimony" 27 and in the use of "Filipino labor, domestic materials and locally-produced goods"; (2) by mandating the State to "adopt measures that help make them competitive; 28 and (3) by requiring the State to "develop a self-reliant and independent national economy effectively controlled by Filipinos." 29 In similar language, the Constitution takes into account the realities of the outside world as it requires the pursuit of "a trade policy that serves the general welfare and utilizes all forms and arrangements of exchange on the basis of equality ad reciprocity"; 30 and speaks of industries "which are competitive in both domestic and foreign markets" as well as of the protection of "Filipino enterprises against unfair foreign competition and trade practices." It is true that in the recent case of Manila Prince Hotel vs. Government Service Insurance System, et al., 31 this Court held that "Sec. 10, second par., Art. XII of the 1987 Constitution is a mandatory, positive command which is complete in itself and which needs no further guidelines or implementing laws or rule for its enforcement. From its very words the provision does not require any legislation to put it in operation. It is per se judicially enforceable." However, as the constitutional provision itself states, it is enforceable only in regard to "the grants of rights, privileges and concessions covering national economy and patrimony" and not to every aspect of trade and commerce. It refers to exceptions rather than the rule. The issue here is not whether this paragraph of Sec. 10 of Art. XII is self-executing or not. Rather, the issue is whether, as a rule, there are enough balancing provisions in the Constitution to allow the Senate to ratify the Philippine concurrence in the WTO Agreement. And we hold that there are. All told, while the Constitution indeed mandates a bias in favor of Filipino goods, services, labor and enterprises, at the same time, it recognizes the need for business exchange with the rest of the world on the bases of equality and reciprocity and limits protection of Filipino enterprises only against foreign competition and trade practices that are unfair. 32 In other words, the Constitution did not intend to pursue an isolationist policy. It did not shut out foreign investments, goods and services in the development of the Philippine economy. While the Constitution does not encourage the unlimited entry of foreign goods, services and investments into the country, it does not prohibit them either. In fact, it allows an exchange on the basis of equality and reciprocity, frowning only on foreign competition that is unfair. WTO Recognizes Need to Protect Weak Economies Upon the other hand, respondents maintain that the WTO itself has some built-in advantages to protect weak and developing economies, which comprise the vast majority of its members. Unlike in the UN where major states have permanent seats and veto powers in the Security Council, in the WTO, decisions are made on the basis of sovereign equality, with each member's vote equal in weight to that of any other. There is no WTO equivalent of the UN Security Council.

WTO decides by consensus whenever possible, otherwise, decisions of the Ministerial Conference and the General Council shall be taken by the majority of the votes cast, except in cases of interpretation of the Agreement or waiver of the obligation of a member which would require three fourths vote. Amendments would require two thirds

vote in general. Amendments to MFN provisions and the Amendments provision will require assent of all members. Any member may withdraw from the Agreement upon the expiration of six months from the date of notice of withdrawals. 33
Hence, poor countries can protect their common interests more effectively through the WTO than through one-on-one negotiations with developed countries. Within the WTO, developing countries can form powerful blocs to push their economic agenda more decisively than outside the Organization. This is not merely a matter of practical alliances but a negotiating strategy rooted in law. Thus, the basic principles underlying the WTO Agreement recognize the need of developing countries like the Philippines to "share in the growth in international trade commensurate with the needs of their economic development." These basic principles are found in the preamble 34 of the WTO Agreement as follows: The Parties to this Agreement, Recognizing that their relations in the field of trade and economic endeavour should be conducted with a view to raising standards of living, ensuring full employment and a large and steadily growing volume of real income and effective demand, and expanding the production of and trade in goods and services, while allowing for the optimal use of the world's resources in accordance with the objective of sustainable development, seeking both to protect and preserve the environment and to enhance the means for doing so in a manner consistent with their respective needs and concerns at different levels of economic development, Recognizing further that there is need for positive efforts designed to ensure that developing countries, and especially the least developed among them, secure a share in the growth in international trade commensurate with the needs of their economic development, Being desirous of contributing to these objectives by entering into reciprocal and mutually advantageous arrangements directed to the substantial reduction of tariffs and other barriers to trade and to theelimination of discriminatory treatment in international trade relations, Resolved, therefore, to develop an integrated, more viable and durable multilateral trading system encompassing the General Agreement on Tariffs and Trade, the results of past trade liberalization efforts, and all of the results of the Uruguay Round of Multilateral Trade Negotiations, Determined to preserve the basic principles and to further the objectives underlying this multilateral trading system, . . . (emphasis supplied.) Specific WTO Provisos Protect Developing Countries So too, the Solicitor General points out that pursuant to and consistent with the foregoing basic principles, the WTO Agreement grants developing countries a more lenient treatment, giving their domestic industries some protection from the rush of foreign competition. Thus, with respect to tariffs in general, preferential treatment is given to developing countries in terms of the amount of tariff reduction and the period within which the reduction is to be spread out. Specifically, GATT requires an average tariff reduction rate of 36% for developed countries to be effected within aperiod of six (6) years while developing countries including the Philippines are required to effect an average tariff reduction of only 24% within ten (10) years. In respect to domestic subsidy, GATT requires developed countries to reduce domestic support to agricultural products by 20% over six (6) years, as compared to only 13% for developing countries to be effected within ten (10) years. In regard to export subsidy for agricultural products, GATT requires developed countries to reduce their budgetary outlays for export subsidy by 36% and export volumes receiving export subsidy by 21% within a period of six (6) years. For developing countries, however, the reduction rate is only two-thirds of that prescribed for developed countries and a longer period of ten (10) years within which to effect such reduction. Moreover, GATT itself has provided built-in protection from unfair foreign competition and trade practices including anti-dumping measures, countervailing measures and safeguards against import surges. Where local businesses are jeopardized by unfair foreign competition, the Philippines can avail of these measures. There is hardly therefore any basis for the statement that under the WTO, local industries and enterprises will all be wiped out and that Filipinos will be deprived of control of the economy. Quite the contrary, the weaker situations of developing nations like the Philippines have been taken into account; thus, there would be no basis to say that in joining the WTO, the respondents have gravely abused their discretion. True, they have made a bold decision to steer the ship of state into the yet uncharted sea of economic liberalization. But such decision cannot be set aside on the ground of grave abuse of discretion, simply because we disagree with it or simply because we believe only in other economic policies. As earlier stated, the Court in taking jurisdiction of this case will not pass upon the advantages and disadvantages of trade liberalization as an economic policy. It will only perform its constitutional duty of determining whether the Senate committed grave abuse of discretion. Constitution Does Not Rule Out Foreign Competition Furthermore, the constitutional policy of a "self-reliant and independent national economy" 35 does not necessarily rule out the entry of foreign investments, goods and services. It contemplates neither "economic seclusion" nor "mendicancy in the international community." As explained by Constitutional Commissioner Bernardo Villegas, sponsor of this constitutional policy:

Economic self-reliance is a primary objective of a developing country that is keenly aware of overdependence on external assistance for even its most basic needs. It does not mean autarky or economic seclusion; rather, it means avoiding mendicancy in the international community. Independence refers to the freedom from undue foreign control of the national economy, especially in such strategic industries as in the development of natural resources and public utilities. 36
The WTO reliance on "most favored nation," "national treatment," and "trade without discrimination" cannot be struck down as unconstitutional as in fact they are rules of equality and reciprocity that apply to all WTO members. Aside from envisioning a trade policy based on "equality and reciprocity," 37 the fundamental law encourages industries that are "competitive in both domestic and foreign markets," thereby demonstrating a clear policy against a sheltered domestic trade environment, but one in favor of the gradual development of robust industries that can compete with the best in the foreign markets. Indeed, Filipino managers and Filipino enterprises have shown capability and tenacity to compete internationally. And given a free trade environment, Filipino entrepreneurs and managers in Hongkong have demonstrated the Filipino capacity to grow and to prosper against the best offered under a policy of laissez faire. Constitution Favors Consumers, Not Industries or Enterprises The Constitution has not really shown any unbalanced bias in favor of any business or enterprise, nor does it contain any specific pronouncement that Filipino companies should be pampered with a total proscription of foreign competition. On the other hand, respondents claim that WTO/GATT aims to make available to the Filipino consumer the best goods and services obtainable anywhere in the world at the most reasonable prices. Consequently, the question boils down to whether WTO/GATT will favor the general welfare of the public at large. Will adherence to the WTO treaty bring this ideal (of favoring the general welfare) to reality? Will WTO/GATT succeed in promoting the Filipinos' general welfare because it will as promised by its promoters expand the country's exports and generate more employment? Will it bring more prosperity, employment, purchasing power and quality products at the most reasonable rates to the Filipino public? The responses to these questions involve "judgment calls" by our policy makers, for which they are answerable to our people during appropriate electoral exercises. Such questions and the answers thereto are not subject to judicial pronouncements based on grave abuse of discretion. Constitution Designed to Meet Future Events and Contingencies No doubt, the WTO Agreement was not yet in existence when the Constitution was drafted and ratified in 1987. That does not mean however that the Charter is necessarily flawed in the sense that its framers might not have anticipated the advent of a borderless world of business. By the same token, the United Nations was not yet in existence when the 1935 Constitution became effective. Did that necessarily mean that the then Constitution might not have contemplated a diminution of the absoluteness of sovereignty when the Philippines signed the UN Charter, thereby effectively surrendering part of its control over its foreign relations to the decisions of various UN organs like the Security Council? It is not difficult to answer this question. Constitutions are designed to meet not only the vagaries of contemporary events. They should be interpreted to cover even future and unknown circumstances. It is to the credit of its drafters that a Constitution can withstand the assaults of bigots and infidels but at the same time bend with the refreshing winds of change necessitated by unfolding events. As one eminent political law writer and respected jurist 38 explains: The Constitution must be quintessential rather than superficial, the root and not the blossom, the base and frame-work only of the edifice that is yet to rise. It is but the core of the dream that must take shape, not in a twinkling by mandate of our delegates, but slowly "in the crucible of Filipino minds and hearts," where it will in time develop its sinews and gradually gather its strength and finally achieve its substance. In fine, the Constitution cannot, like the goddess Athena, rise full-grown from the brow of the Constitutional Convention, nor can it conjure by mere fiat an instant Utopia. It must grow with the society it seeks to re-structure and march apace with the progress of the race, drawing from the vicissitudes of history the dynamism and vitality that will keep it, far from becoming a petrified rule, a pulsing, living law attuned to the heartbeat of the nation. Third Issue: The WTO Agreement and Legislative Power The WTO Agreement provides that "(e)ach Member shall ensure the conformity of its laws, regulations and administrative procedures with its obligations as provided in the annexed Agreements." 39 Petitioners maintain that this undertaking "unduly limits, restricts and impairs Philippine sovereignty, specifically the legislative power which under Sec. 2, Article VI of the 1987 Philippine Constitution is vested in the Congress of the Philippines. It is an assault on the sovereign powers of the Philippines because this means that Congress could not pass legislation that will be good for our national interest and general welfare if such legislation will not conform with the WTO Agreement, which not only relates to the trade in goods . . . but also to the flow of investments and money . . . as well as to a whole slew of agreements on socio-cultural matters . . . 40 More specifically, petitioners claim that said WTO proviso derogates from the power to tax, which is lodged in the Congress. 41 And while the Constitution allows Congress to authorize the President to fix tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or

imposts, such authority is subject to "specified limits and . . . such limitations and restrictions" as Congress may provide, 42 as in fact it did under Sec. 401 of the Tariff and Customs Code. Sovereignty Limited by International Law and Treaties This Court notes and appreciates the ferocity and passion by which petitioners stressed their arguments on this issue. However, while sovereignty has traditionally been deemed absolute and all-encompassing on the domestic level, it is however subject to restrictions and limitations voluntarily agreed to by the Philippines, expressly or impliedly, as a member of the family of nations. Unquestionably, the Constitution did not envision a hermit-type isolation of the country from the rest of the world. In its Declaration of Principles and State Policies, the Constitution "adopts the generally accepted principles of international law as part of the law of the land, and adheres to the policy of peace, equality, justice, freedom, cooperation and amity, with all nations." 43 By the doctrine of incorporation, the country is bound by generally accepted principles of international law, which are considered to be automatically part of our own laws. 44One of the oldest and most fundamental rules in international law is pacta sunt servanda international agreements must be performed in good faith. "A treaty engagement is not a mere moral obligation but creates a legally binding obligation on the parties . . . A state which has contracted valid international obligations is bound to make in its legislations such modifications as may be necessary to ensure the fulfillment of the obligations undertaken." 45 By their inherent nature, treaties really limit or restrict the absoluteness of sovereignty. By their voluntary act, nations may surrender some aspects of their state power in exchange for greater benefits granted by or derived from a convention or pact. After all, states, like individuals, live with coequals, and in pursuit of mutually covenanted objectives and benefits, they also commonly agree to limit the exercise of their otherwise absolute rights. Thus, treaties have been used to record agreements between States concerning such widely diverse matters as, for example, the lease of naval bases, the sale or cession of territory, the termination of war, the regulation of conduct of hostilities, the formation of alliances, the regulation of commercial relations, the settling of claims, the laying down of rules governing conduct in peace and the establishment of international organizations. 46 The sovereignty of a state therefore cannot in fact and in reality be considered absolute. Certain restrictions enter into the picture: (1) limitations imposed by the very nature of membership in the family of nations and (2) limitations imposed by treaty stipulations. As aptly put by John F. Kennedy, "Today, no nation can build its destiny alone. The age of self-sufficient nationalism is over. The age of interdependence is here." 47 UN Charter and Other Treaties Limit Sovereignty Thus, when the Philippines joined the United Nations as one of its 51 charter members, it consented to restrict its sovereign rights under the "concept of sovereignty as auto-limitation." 47-A Under Article 2 of the UN Charter, "(a)ll members shall give the United Nations every assistance in any action it takes in accordance with the present Charter, and shall refrain from giving assistance to any state against which the United Nations is taking preventive or enforcement action." Such assistance includes payment of its corresponding share not merely in administrative expenses but also in expenditures for the peace-keeping operations of the organization. In its advisory opinion of July 20, 1961, the International Court of Justice held that money used by the United Nations Emergency Force in the Middle East and in the Congo were "expenses of the United Nations" under Article 17, paragraph 2, of the UN Charter. Hence, all its members must bear their corresponding share in such expenses. In this sense, the Philippine Congress is restricted in its power to appropriate. It is compelled to appropriate funds whether it agrees with such peace-keeping expenses or not. So too, under Article 105 of the said Charter, the UN and its representatives enjoy diplomatic privileges and immunities, thereby limiting again the exercise of sovereignty of members within their own territory. Another example: although "sovereign equality" and "domestic jurisdiction" of all members are set forth as underlying principles in the UN Charter, such provisos are however subject to enforcement measures decided by the Security Council for the maintenance of international peace and security under Chapter VII of the Charter. A final example: under Article 103, "(i)n the event of a conflict between the obligations of the Members of the United Nations under the present Charter and their obligations under any other international agreement, their obligation under the present charter shall prevail," thus unquestionably denying the Philippines as a member the sovereign power to make a choice as to which of conflicting obligations, if any, to honor. Apart from the UN Treaty, the Philippines has entered into many other international pacts both bilateral and multilateral that involve limitations on Philippine sovereignty. These are enumerated by the Solicitor General in his Compliance dated October 24, 1996, as follows: (a) Bilateral convention with the United States regarding taxes on income, where the Philippines agreed, among others, to exempt from tax, income received in the Philippines by, among others, the Federal Reserve Bank of the United States, the Export/Import Bank of the United States, the Overseas Private Investment Corporation of the United States. Likewise, in said convention, wages, salaries and similar remunerations paid by the United States to its citizens for labor and personal services performed by them as employees or officials of the United States are exempt from income tax by the Philippines. (b) Bilateral agreement with Belgium, providing, among others, for the avoidance of double taxation with respect to taxes on income. (c) Bilateral convention with the Kingdom of Sweden for the avoidance of double taxation. (d) Bilateral convention with the French Republic for the avoidance of double taxation. (e) Bilateral air transport agreement with Korea where the Philippines agreed to exempt from all customs duties, inspection fees and other duties or taxes aircrafts of South Korea and the regular equipment, spare parts and supplies arriving with said aircrafts. (f) Bilateral air service agreement with Japan, where the Philippines agreed to exempt from customs duties, excise taxes, inspection fees and other similar duties, taxes or charges fuel, lubricating oils, spare parts, regular equipment, stores on board Japanese aircrafts while on Philippine soil.

(g) Bilateral air service agreement with Belgium where the Philippines granted Belgian air carriers the same privileges as those granted to Japanese and Korean air carriers under separate air service agreements. (h) Bilateral notes with Israel for the abolition of transit and visitor visas where the Philippines exempted Israeli nationals from the requirement of obtaining transit or visitor visas for a sojourn in the Philippines not exceeding 59 days. (i) Bilateral agreement with France exempting French nationals from the requirement of obtaining transit and visitor visa for a sojourn not exceeding 59 days. (j) Multilateral Convention on Special Missions, where the Philippines agreed that premises of Special Missions in the Philippines are inviolable and its agents can not enter said premises without consent of the Head of Mission concerned. Special Missions are also exempted from customs duties, taxes and related charges. (k) Multilateral convention on the Law of Treaties. In this convention, the Philippines agreed to be governed by the Vienna Convention on the Law of Treaties. (l) Declaration of the President of the Philippines accepting compulsory jurisdiction of the International Court of Justice. The International Court of Justice has jurisdiction in all legal disputes concerning the interpretation of a treaty, any question of international law, the existence of any fact which, if established, would constitute a breach "of international obligation." In the foregoing treaties, the Philippines has effectively agreed to limit the exercise of its sovereign powers of taxation, eminent domain and police power. The underlying consideration in this partial surrender of sovereignty is the reciprocal commitment of the other contracting states in granting the same privilege and immunities to the Philippines, its officials and its citizens. The same reciprocity characterizes the Philippine commitments under WTO-GATT.

International treaties, whether relating to nuclear disarmament, human rights, the environment, the law of the sea, or trade, constrain domestic political sovereignty through the assumption of external obligations. But unless anarchy in international relations is preferred as an alternative, in most cases we accept that the benefits of the reciprocal obligations involved outweigh the costs associated with any loss of political sovereignty. (T)rade treaties that structure relations by reference to durable, well-defined substantive norms and objective dispute resolution procedures reduce the risks of larger countries exploiting raw economic power to bully smaller countries, by subjecting power relations to some form of legal ordering. In addition, smaller countries typically stand to gain disproportionately from trade liberalization. This is due to the simple fact that liberalization will provide access to a larger set of potential new trading relationship than in case of the larger country gaining enhanced success to the smaller country's market. 48
The point is that, as shown by the foregoing treaties, a portion of sovereignty may be waived without violating the Constitution, based on the rationale that the Philippines "adopts the generally accepted principles of international law as part of the law of the land and adheres to the policy of . . . cooperation and amity with all nations." Fourth Issue: The WTO Agreement and Judicial Power Petitioners aver that paragraph 1, Article 34 of the General Provisions and Basic Principles of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) 49 intrudes on the power of the Supreme Court to promulgate rules concerning pleading, practice and procedures. 50 To understand the scope and meaning of Article 34, TRIPS, 51 it will be fruitful to restate its full text as follows: Article 34 Process Patents: Burden of Proof 1. For the purposes of civil proceedings in respect of the infringement of the rights of the owner referred to in paragraph 1 (b) of Article 28, if the subject matter of a patent is a process for obtaining a product, the judicial authorities shall have the authority to order the defendant to prove that the process to obtain an identical product is different from the patented process. Therefore, Members shall provide, in at least one of the following circumstances, that any identical product when produced without the consent of the patent owner shall, in the absence of proof to the contrary, be deemed to have been obtained by the patented process: (a) if the product obtained by the patented process is new;

(b) if there is a substantial likelihood that the identical product was made by the process and the owner of the patent has been unable through reasonable efforts to determine the process actually used. 2. Any Member shall be free to provide that the burden of proof indicated in paragraph 1 shall be on the alleged infringer only if the condition referred to in subparagraph (a) is fulfilled or only if the condition referred to in subparagraph (b) is fulfilled. 3. In the adduction of proof to the contrary, the legitimate interests of defendants in protecting their manufacturing and business secrets shall be taken into account. From the above, a WTO Member is required to provide a rule of disputable (not the words "in the absence of proof to the contrary") presumption that a product shown to be identical to one produced with the use of a patented process shall be deemed to have been obtained by the (illegal) use of the said patented process, (1) where such product obtained by the patented product is new, or (2) where there is "substantial likelihood" that the identical product was made with the use of the said patented process but the owner of the patent could not determine the exact process used in obtaining such identical product. Hence, the "burden of proof" contemplated by Article 34 should actually be understood as the duty of the alleged patent infringer to overthrow such presumption. Such burden, properly understood, actually refers to the "burden of evidence" (burden of going forward) placed on the producer of the identical (or fake) product to show that his product was produced without the use of the patented process. The foregoing notwithstanding, the patent owner still has the "burden of proof" since, regardless of the presumption provided under paragraph 1 of Article 34, such owner still has to introduce evidence of the existence of the alleged identical product, the fact that it is "identical" to the genuine one produced by the patented process and the fact of "newness" of the genuine product or the fact of "substantial likelihood" that the identical product was made by the patented process. The foregoing should really present no problem in changing the rules of evidence as the present law on the subject, Republic Act No. 165, as amended, otherwise known as the Patent Law, provides a similar presumption in cases of infringement of patented design or utility model, thus: Sec. 60. Infringement. Infringement of a design patent or of a patent for utility model shall consist in unauthorized copying of the patented design or utility model for the purpose of trade or industry in the article or product and in the making, using or selling of the article or product copying the patented design or utility model. Identity or substantial identity with the patented design or utility model shall constitute evidence of copying. (emphasis supplied) Moreover, it should be noted that the requirement of Article 34 to provide a disputable presumption applies only if (1) the product obtained by the patented process in NEW or (2) there is a substantial likelihood that the identical product was made by the process and the process owner has not been able through reasonable effort to determine the process used. Where either of these two provisos does not obtain, members shall be free to determine the appropriate method of implementing the provisions of TRIPS within their own internal systems and processes. By and large, the arguments adduced in connection with our disposition of the third issue derogation of legislative power will apply to this fourth issue also. Suffice it to say that the reciprocity clause more than justifies such intrusion, if any actually exists. Besides, Article 34 does not contain an unreasonable burden, consistent as it is with due process and the concept of adversarial dispute settlement inherent in our judicial system. So too, since the Philippine is a signatory to most international conventions on patents, trademarks and copyrights, the adjustment in legislation and rules of procedure will not be substantial. 52 Fifth Issue: Concurrence Only in the WTO Agreement and Not in Other Documents Contained in the Final Act Petitioners allege that the Senate concurrence in the WTO Agreement and its annexes but not in the other documents referred to in the Final Act, namely the Ministerial Declaration and Decisions and the Understanding on Commitments in Financial Services is defective and insufficient and thus constitutes abuse of discretion. They submit that such concurrence in the WTO Agreement alone is flawed because it is in effect a rejection of the Final Act, which in turn was the document signed by Secretary Navarro, in representation of the Republic upon authority of the President. They contend that the second letter of the President to the Senate 53 which enumerated what constitutes the Final Act should have been the subject of concurrence of the Senate. "A final act, sometimes called protocol de cloture, is an instrument which records the winding up of the proceedings of a diplomatic conference and usually includes a reproduction of the texts of treaties, conventions, recommendations and other acts agreed upon and signed by the plenipotentiaries attending the conference." 54 It is not the treaty itself. It is rather a summary of the proceedings of a protracted conference which may have taken place over several years. The text of the "Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations" is contained in just one page 55 in Vol. I of the 36-volume Uruguay Round of Multilateral Trade Negotiations. By signing said Final Act, Secretary Navarro as representative of the Republic of the Philippines undertook: (a) to submit, as appropriate, the WTO Agreement for the consideration of their respective competent authorities with a view to seeking approval of the Agreement in accordance with their procedures; and (b) to adopt the Ministerial Declarations and Decisions. The assailed Senate Resolution No. 97 expressed concurrence in exactly what the Final Act required from its signatories, namely, concurrence of the Senate in the WTO Agreement.

The Ministerial Declarations and Decisions were deemed adopted without need for ratification. They were approved by the ministers by virtue of Article XXV: 1 of GATT which provides that representatives of the members can meet "to give effect to those provisions of this Agreement which invoke joint action, and generally with a view to facilitating the operation and furthering the objectives of this Agreement." 56 The Understanding on Commitments in Financial Services also approved in Marrakesh does not apply to the Philippines. It applies only to those 27 Members which "have indicated in their respective schedules of commitments on standstill, elimination of monopoly, expansion of operation of existing financial service suppliers, temporary entry of personnel, free transfer and processing of information, and national treatment with respect to access to payment, clearing systems and refinancing available in the normal course of business." 57 On the other hand, the WTO Agreement itself expresses what multilateral agreements are deemed included as its integral parts, 58 as follows: Article II Scope of the WTO 1. The WTO shall provide the common institutional frame-work for the conduct of trade relations among its Members in matters to the agreements and associated legal instruments included in the Annexes to this Agreement. 2. The Agreements and associated legal instruments included in Annexes 1, 2, and 3, (hereinafter referred to as "Multilateral Agreements") are integral parts of this Agreement, binding on all Members. 3. The Agreements and associated legal instruments included in Annex 4 (hereinafter referred to as "Plurilateral Trade Agreements") are also part of this Agreement for those Members that have accepted them, and are binding on those Members. The Plurilateral Trade Agreements do not create either obligation or rights for Members that have not accepted them. 4. The General Agreement on Tariffs and Trade 1994 as specified in annex 1A (hereinafter referred to as "GATT 1994") is legally distinct from the General Agreement on Tariffs and Trade, dated 30 October 1947, annexed to the Final Act adopted at the conclusion of the Second Session of the Preparatory Committee of the United Nations Conference on Trade and Employment, as subsequently rectified, amended or modified (hereinafter referred to as "GATT 1947"). It should be added that the Senate was well-aware of what it was concurring in as shown by the members' deliberation on August 25, 1994. After reading the letter of President Ramos dated August 11, 1994, 59 the senators of the Republic minutely dissected what the Senate was concurring in, as follows: 60 THE CHAIRMAN: Yes. Now, the question of the validity of the submission came up in the first day hearing of this Committee yesterday. Was the observation made by Senator Taada that what was submitted to the Senate was not the agreement on establishing the World Trade Organization by the final act of the Uruguay Round which is not the same as the agreement establishing the World Trade Organization? And on that basis, Senator Tolentino raised a point of order which, however, he agreed to withdraw upon understanding that his suggestion for an alternative solution at that time was acceptable. That suggestion was to treat the proceedings of the Committee as being in the nature of briefings for Senators until the question of the submission could be clarified. And so, Secretary Romulo, in effect, is the President submitting a new . . . is he making a new submission which improves on the clarity of the first submission? MR. ROMULO: Mr. Chairman, to make sure that it is clear cut and there should be no misunderstanding, it was his intention to clarify all matters by giving this letter. THE CHAIRMAN: Thank you. Can this Committee hear from Senator Taada and later on Senator Tolentino since they were the ones that raised this question yesterday? Senator Taada, please. SEN. TAADA: Thank you, Mr. Chairman. Based on what Secretary Romulo has read, it would now clearly appear that what is being submitted to the Senate for ratification is not the Final Act of the Uruguay Round, but rather the Agreement on the World Trade Organization as well as the Ministerial Declarations and Decisions, and the Understanding and Commitments in Financial Services. I am now satisfied with the wording of the new submission of President Ramos. SEN. TAADA. . . . of President Ramos, Mr. Chairman.

THE CHAIRMAN. Thank you, Senator Taada. Can we hear from Senator Tolentino? And after him Senator Neptali Gonzales and Senator Lina. SEN. TOLENTINO, Mr. Chairman, I have not seen the new submission actually transmitted to us but I saw the draft of his earlier, and I think it now complies with the provisions of the Constitution, and with the Final Act itself . The Constitution does not require us to ratify the Final Act. It requires us to ratify the Agreement which is now being submitted. The Final Act itself specifies what is going to be submitted to with the governments of the participants. In paragraph 2 of the Final Act, we read and I quote: By signing the present Final Act, the representatives agree: (a) to submit as appropriate the WTO Agreement for the consideration of the respective competent authorities with a view to seeking approval of the Agreement in accordance with their procedures. In other words, it is not the Final Act that was agreed to be submitted to the governments for ratification or acceptance as whatever their constitutional procedures may provide but it is the World Trade Organization Agreement. And if that is the one that is being submitted now, I think it satisfies both the Constitution and the Final Act itself . Thank you, Mr. Chairman. THE CHAIRMAN. Thank you, Senator Tolentino, May I call on Senator Gonzales. SEN. GONZALES. Mr. Chairman, my views on this matter are already a matter of record. And they had been adequately reflected in the journal of yesterday's session and I don't see any need for repeating the same. Now, I would consider the new submission as an act ex abudante cautela. THE CHAIRMAN. Thank you, Senator Gonzales. Senator Lina, do you want to make any comment on this? SEN. LINA. Mr. President, I agree with the observation just made by Senator Gonzales out of the abundance of question. Then the new submission is, I believe, stating the obvious and therefore I have no further comment to make. Epilogue In praying for the nullification of the Philippine ratification of the WTO Agreement, petitioners are invoking this Court's constitutionally imposed duty "to determine whether or not there has been grave abuse of discretion amounting to lack or excess of jurisdiction" on the part of the Senate in giving its concurrence therein via Senate Resolution No. 97. Procedurally, a writ of certiorari grounded on grave abuse of discretion may be issued by the Court under Rule 65 of the Rules of Court when it is amply shown that petitioners have no other plain, speedy and adequate remedy in the ordinary course of law. By grave abuse of discretion is meant such capricious and whimsical exercise of judgment as is equivalent to lack of jurisdiction. 61 Mere abuse of discretion is not enough. It must be grave abuse of discretion as when the power is exercised in an arbitrary or despotic manner by reason of passion or personal hostility, and must be so patent and so gross as to amount to an evasion of a positive duty or to a virtual refusal to perform the duty enjoined or to act at all in contemplation of law. 62 Failure on the part of the petitioner to show grave abuse of discretion will result in the dismissal of the petition. 63 In rendering this Decision, this Court never forgets that the Senate, whose act is under review, is one of two sovereign houses of Congress and is thus entitled to great respect in its actions. It is itself a constitutional body independent and coordinate, and thus its actions are presumed regular and done in good faith. Unless convincing proof and persuasive arguments are presented to overthrow such presumptions, this Court will resolve every doubt in its favor. Using the foregoing well-accepted definition of grave abuse of discretion and the presumption of regularity in the Senate's processes, this Court cannot find any cogent reason to impute grave abuse of discretion to the Senate's exercise of its power of concurrence in the WTO Agreement granted it by Sec. 21 of Article VII of the Constitution. 64 It is true, as alleged by petitioners, that broad constitutional principles require the State to develop an independent national economy effectively controlled by Filipinos; and to protect and/or prefer Filipino labor, products, domestic materials and locally produced goods. But it is equally true that such principles while serving as judicial and legislative guides are not in themselves sources of causes of action. Moreover, there are other equally fundamental constitutional principles relied upon by the Senate which mandate the pursuit of a "trade policy that serves the general welfare and utilizes all forms and arrangements of exchange on the basis of equality and reciprocity" and the promotion of industries "which are competitive in both domestic and foreign markets," thereby justifying its acceptance of said treaty. So too, the alleged impairment of sovereignty in the exercise of legislative and judicial powers is balanced by the adoption of the generally accepted principles of international law as part of the law of the land and the adherence of the Constitution to the policy of cooperation and amity with all nations. That the Senate, after deliberation and voting, voluntarily and overwhelmingly gave its consent to the WTO Agreement thereby making it "a part of the law of the land" is a legitimate exercise of its sovereign duty and power. We find no "patent and gross" arbitrariness or despotism "by reason of passion or personal hostility" in such exercise. It is not impossible to surmise that this Court, or at least some of its members, may even agree with petitioners that it is more advantageous to the national interest to strike down Senate Resolution No. 97. But that is not a legal reason to attribute grave abuse of discretion to the Senate and to nullify its decision. To do so would constitute grave abuse in the exercise of our own judicial power and duty. Ineludably, what the Senate did was a valid exercise of its authority. As to whether such exercise was wise, beneficial or viable is outside the realm of judicial

inquiry and review. That is a matter between the elected policy makers and the people. As to whether the nation should join the worldwide march toward trade liberalization and economic globalization is a matter that our people should determine in electing their policy makers. After all, the WTO Agreement allows withdrawal of membership, should this be the political desire of a member. The eminent futurist John Naisbitt, author of the best seller Megatrends, predicts an Asian Renaissance 65 where "the East will become the dominant region of the world economically, politically and culturally in the next century." He refers to the "free market" espoused by WTO as the "catalyst" in this coming Asian ascendancy. There are at present about 31 countries including China, Russia and Saudi Arabia negotiating for membership in the WTO. Notwithstanding objections against possible limitations on national sovereignty, the WTO remains as the only viable structure for multilateral trading and the veritable forum for the development of international trade law. The alternative to WTO is isolation, stagnation, if not economic self-destruction. Duly enriched with original membership, keenly aware of the advantages and disadvantages of globalization with its on-line experience, and endowed with a vision of the future, the Philippines now straddles the crossroads of an international strategy for economic prosperity and stability in the new millennium. Let the people, through their duly authorized elected officers, make their free choice. WHEREFORE, the petition is DISMISSED for lack of merit. SO ORDERED. Narvasa, C.J., Regalado, Davide, Jr., Romero, Bellosillo, Melo, Puno, Kapunan, Mendoza, Francisco, Hermosisima, Jr. and Torres, Jr., JJ., concur. Padilla and Vitug, JJ., concur in the result. Footnotes 1 In Annex "A" of her Memorandum, dated August 8, 1996, received by this Court on August 12, 1996, Philippine Ambassador to the United Nations, World Trade Organization and other international organizations Lilia R. Bautista (hereafter referred to as "Bautista Paper") submitted a "46-year Chronology" of GATT as follows: 1947 The birth of GATT. On 30 October 1947, the General Agreement on Tariffs and Trade (GATT) was signed by 23 nations at the Palais des Nations in Geneva. The Agreement contained tariff concessions agreed to in the first multilateral trade negotiations and a set of rules designed to prevent these concessions from being frustrated by restrictive trade measures. The 23 founding contracting parties were members of the Preparatory Committee established by the United Nations Economic and Social Council in 1946 to draft the charter of the International Trade Organization (ITO). The ITO was envisaged as the final leg of a triad of post-War economic agencies (the other two were the International Monetary Fund and the International Bank for Reconstruction later the World Bank). In parallel with this task, the Committee members decided to negotiate tariff concessions among themselves. From April to October 1947, the participants completed some 123 negotiations and established 20 schedules containing the tariff reductions and bindings which became an integral part of GATT. These schedules resulting from the first Round covered some 45,000 tariff concessions and about $10 billion in trade. GATT was conceived as an interim measure that put into effect the commercial-policy provisions of the ITO. In November, delegations from 56 countries met in Havana, Cuba, to consider the to ITO draft as a whole. After long and difficult negotiations, some 53 countries signed the Final Act authenticating the text of the Havana Charter in March 1948. There was no commitment, however, from governments to ratification and, in the end, the ITO was stillborn, leaving GATT as the only international instrument governing the conduct of world trade. 1948 Entry into force. On 1 January 1948, GATT entered into force. The 23 founding members were: Australia, Belgium, Brazil, Burma, Canada, Ceylon, Chile, China, Cuba, Czechoslovakia, France, India, Lebanon, Luxembourg, Netherlands, New Zealand, Norway, Pakistan, Southern Rhodesia, Syria, South Africa, United Kingdom and the United States. The first Session of the Contracting Parties was held from February to March in Havana, Cuba. The secretariat of the Interim Commission for the ITO, which served as the ad hocsecretariat of GATT, moved from Lake Placid, New York, to Geneva. The Contracting Parties held their second session in Geneva from August to September. 1949 Second Round at Annecy. During the second Round of trade negotiations, held from April to August at Annecy, France, the contracting parties exchanged some 5,000 tariff concessions. At their third Session, they also dealt with the accession of ten more countries. 1950 Third Round at Torquay. From September 1950 to April 1951, the contracting parties exchanged some 8,700 tariff concessions in the English town, yielding tariff reduction of about 25 per cent in relation to the 1948 level. Four more countries acceded to GATT. During the fifth Session of the Contracting Parties, the United States indicated that the ITO Charter would not be re-submitted to the US Congress; this, in effect, meant that ITO would not come into operation.

1956 Fourth Round at Geneva. The fourth Round was completed in May and produced some $2.5 billion worth of tariff reductions. At the beginning of the year, the GATT commercial policy course for officials of developing countries was inaugurated. 1958 The Haberler Report. GATT published Trends in International Trade in October. Known as the "Haberler Report" in honour of Professor Gottfried Haberler, the chairman of the panel of eminent economists, it provided initial guidelines for the work of GATT. The Contracting Parties at their 13th Sessions, attended by Ministers, subsequently established three committees in GATT: Committee I to convene a further tariff negotiating conference; Committee II to review the agricultural policies of member governments and Committee III to tackle the problem facing developing countries in their trade. The establishment of the European Economic Community during the previous year also demanded large-scale tariff negotiations under Article XXIV: 6 of the General Agreement. 1960 The Dillon Round. The fifth Round opened in September and was divided into two phases: the first was concerned with negotiations with EEC member states for the creation of a single schedule of concessions for the Community based on its Common External Tariff; and the second was a further general round of tariff negotiations. Named in honour of US Under-Secretary of State Douglas Dillon who proposed the negotiations, the Round was concluded in July 1962 and resulted in about 4,400 tariff concessions covering $4.9 billion of trade. 1961 The Short-Term Arrangement covering cotton textiles was agreed as an exception to the GATT rules. The arrangement permitted the negotiation of quota restrictions affecting the exports of cottonproducing countries. In 1962 the "Short Term" Arrangement became the "Long term" Arrangement, lasting until 1974 when the Multifibre Arrangement entered into force. 1964 The Kennedy Round. Meeting at Ministerial level, a Trade Negotiations Committee formally opened the Kennedy Round in May. In June 1967, the Round's Final Act was signed by some 50 participating countries which together accounted for 75 per cent of world trade. For the first time, negotiations departed from the product-by-product approach used in the previous Rounds to an acrossthe-board or linear method of cutting tariffs for industrial goods. The working hypothesis of a 50 per cent target cut in tariff levels was achieved in many areas. Concessions covered an estimated total value of trade of about $410 billion. Separate agreements were reached on grains, chemical products and a Code on Anti-Dumping. 1965 A New Chapter. The early 1960s marked the accession to the general Agreement of many newlyindependent developing countries. In February, the Contracting Parties, meeting in a special session, adopted the text of Part IV on Trade and Development. The additional chapter to the GATT required developed countries to accord high priority to the reduction of trade barriers to products of developing countries. A Committee on Trade and Development was established to oversee the functioning of the new GATT provisions. In the preceding year, GATT had established the International Trade Centre (ITC) to help developing countries in trade promotion and identification of potential markets. Since 1968, the ITC had been jointly operated by GATT and the UN Conference on Trade and Development (UNCTAD). 1973 The Tokyo Round. The seventh Round was launched by Ministers in September at the Japanese capital. Some 99 countries participated in negotiating a comprehensive body of agreements covering both tariff and non-tariff matters. At the end of the Round in November 1979, participants exchanged tariff reductions and bindings which covered more than $300 billion of trade. As a result of these cuts, the weighted average tariff on manufactured goods in the world's nine major industrial markets declined from 7.0 to 4.7 per cent. Agreements were reached in the following areas: subsidies and countervailing measures, technical barriers to trade, import licensing procedures, government procurement, customs valuation, a revised anti-dumping code, trade in bovine meat, trade in dairy products and trade in civil aircraft. The first concrete result of the Round was the reduction of import duties and other trade barriers by industrial countries on tropical products exported by developing countries. 1974 On 1 January 1974, the Arrangement Regarding International Trade in Textiles, otherwise known as the Multifibre Arrangement (MFA), entered into force. It superseded the arrangements that had been governing trade in cotton textiles since 1961. The MFA seeks to promote the expansion and progressive liberalization of trade in textile products while at the same time avoiding disruptive effects in individual markets and lines of production. The MFA was extended in 1978, 1982, 1986, 1991 and 1992. MFA members account for most of the world exports of textiles and clothing which in 1986 amounted to US$128 billion. 1982 Ministerial Meeting. Meeting for the first time in nearly ten years, the GATT Ministers in November at Geneva reaffirmed the validity of GATT rules for the conduct of international trade and committed themselves to combating protectionist pressures. They also established a wide-ranging work programme for the GATT which was to lay down the groundwork for a new Round 1986. The Uruguay Round. The GATT Trade Ministers meeting at Punta del Este, Uruguay, launched the eighth Round of trade negotiations on 20 September. The Punta del Este Declaration, while representing a single political undertaking, was divided into two sections. The first covered negotiations on trade in goods and the second initiated negotiation on trade in services. In the area of trade in goods, the Ministers committed themselves to a "standstill" on new trade measures inconsistent with their GATT obligations and to a "rollback" programme aimed at phasing out existing inconsistent measures. Envisaged to last four years, negotiations started in early February 1987 in the following areas tariffs, non-tariff measures, tropical products, natural resource-based products, textiles and clothing, agriculture, subsidies, safe-guards,

trade-related aspects of intellectual property rights including trade in counterfeit goods, and trade-related investment measures. The work of other groups included a review of GATT articles, the GATT dispute settlement procedure, the Tokyo Round agreements, as well as the functioning of the GATT system as a whole. 1994 "GATT 1994" is the updated version of GATT 1947 and takes into account the substantive and institutional changes negotiated in the Uruguay Round GATT 1994 is an integral part of the World Trade Organization established on 1 January 1995. It is agreed that there be a one year transition period during which certain GATT 1947 bodies and commitments would co-exist with those of the World Trade Organization. 2 The Final Act was signed by representatives of 125 entities, namely Algeria, Angola, Antigua and Barbuda, Argentine Republic, Australia, Republic of Austria, State of Bahrain, People's Republic of Bangladesh, Barbados, The Kingdom of Belgium Belize, Republic of Benin, Bolivia, Botswana, Brazil, Brunei Darussalam, Burkina Faso, Burundi, Cameroon, Canada, Central African Republic, Chad, Chile, People's Republic of China, Colombia, Congo, Costa Rica, Republic of Cote d'Ivoire, Cuba, Cyprus, Czech Republic, Kingdom of Denmark, Commonwealth of Dominica, Dominican Republic, Arab Republic of Egypt, El Salvador, European Communities, Republic of Fiji, Finland, French Republic, Gabonese Republic, Gambia, Federal Republic of Germany, Ghana, Hellenic Republic, Grenada, Guatemala, Republic of Guinea-Bissau, Republic of Guyana, Haiti, Honduras, Hong Kong, Hungary, Iceland, India, Indonesia, Ireland, State of Israel, Italian Republic, Jamaica, Japan, Kenya, Korea, State of Kuwait, Kingdom of Lesotho, Principality of Liechtenstein, Grand Duchy of Luxembourg, Macau, Republic of Madagascar, Republic of Malawi, Malaysia, Republic of Maldives, Republic of Mali, Republic of Malta, Islamic Republic of Mauritania, Republic of Mauritius, United Mexican States, Kingdom of Morocco, Republic of Mozambique, Union of Myanmar, Republic of Namibia, Kingdom of the Netherlands, New Zealand, Nicaragua, Republic of Niger, Federal Republic of Nigeria, Kingdom of Norway, Islamic Republic of Pakistan, Paraguay, Peru, Philippines, Poland, Potuguese Republic, State of Qatar, Romania, Rwandese Republic, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Senegal, Sierra Leone, Singapore, Slovak Republic, South Africa, Kingdom of Spain, Democratic Socialist Republic of Sri Lanka, Republic of Surinam, Kingdom of Swaziland, Kingdom of Sweden, Swiss Confederation, United Republic of Tanzania, Kingdom of Thailand, Togolese Republic, Republic of Trinidad and Tobago, Tunisia, Turkey, Uganda, United Arab Emirates, United Kingdom of Great Britain and Northern Ireland, United States of America, Eastern Republic of Uruguay, Venezuela, Republic of Zaire, Republic of Zambia, Republic of Zimbabwe; see pp. 6-25, Vol. 1, Uruguay Round of Multilateral Trade Negotiations. 3 11 August 1994 The Honorable Members Senate Through Senate President Edgardo Angara Manila Ladies and Gentlemen: I have the honor to forward herewith an authenticated copy of the Uruguay Round Final Act signed by Department of Trade and Industry Secretary Rizalino S. Navarro for the Philippines on 15 April 1994 in Marrakesh, Morocco. The Uruguay Round Final Act aims to liberalize and expand world trade and strengthen the interrelationship between trade and economic policies affecting growth and development. The Final Act will improve Philippine access to foreign markets, especially its major trading partners through the reduction of tariffs on its exports particularly agricultural and industrial products. These concessions may be availed of by the Philippines, only if it is a member of the World Trade Organization. By GATT estimates, the Philippines can acquire additional export from $2.2 to $2.7 Billion annually under Uruguay Round. This will be on top of the normal increase in exports that the Philippines may experience. The Final Act will also open up new opportunities for the services sector in such areas as the movement of personnel, (e.g. professional services and construction services), cross-border supply (e.g. computer-related services), consumption abroad (e.g. tourism, convention services, etc.) and commercial presence. The clarified and improved rules and disciplines on anti-dumping and countervailing measures will also benefit Philippine exporters by reducing the costs ad uncertainty associated with exporting while at the same time providing means for domestic industries to safeguard themselves against unfair imports. Likewise, the provision of adequate protection for intellectual property rights is expected to attract more investments into the country and to make it less vulnerable to unilateral actions by its trading partners (e.g. Sec. 301 of the United States' Omnibus Trade Law). In view of the foregoing, the Uruguay Round Final Act is hereby submitted to the Senate for its concurrence pursuant to Section 21, Article VII of the Constitution.

A draft of a proposed Resolution giving its concurrence to the aforesaid Agreement is enclosed. Very truly yours, (SGD.) FIDEL V. RAMOS 4 11 August 1994 The Honorable Members Senate Through Senate President Edgardo Angara Manila Ladies and Gentlemen: I have the honor to forward herewith an authenticated copy of the Uruguay Round Final Act signed by Department of Trade and Industry Secretary Rizalino S. Navarro for the Philippines on 13 April 1994 in Marrakech (sic), Morocco. Members of the trade negotiations committee, which included the Philippines, agreed that the Agreement Establishing the World Trade Organization, the Ministerial Declarations and Decisions, and the Understanding on Commitments in Financial Services embody the results of their negotiations and form an integral part of the Uruguay Round Final Act. By signing the Uruguay Round Final Act, the Philippines, through Secretary Navarro, agreed: (a) To submit the Agreement Establishing the World Trade Organization to the Senate for its concurrence pursuant to Section 21, Article VII of the Constitution; and (b) To adopt the Ministerial Declarations and Decisions. The Uruguay Round Final Act aims to liberalize and expand world trade and strengthen the interrelationship between trade and economic policies affecting growth and development. The Final Act will improve Philippine access to foreign markets, especially its major trading partners through the reduction of tariffs on its exports particularly agricultural and industrial products. These concessions may be availed of by the Philippines, only if it is a member of the World Trade Organization. By GATT estimates, the Philippines can acquire additional export revenues from $2.2 to $2.7 Billion annually under Uruguay Round. This will be on top of the normal increase in the exports that the Philippines may experience. The Final Act will also open up new opportunities for the services sector in such areas as the movement of personnel, (e.g., professional services and construction services), cross-border supply (e.g., computer-related services), consumption abroad (e.g., tourism, convention services, etc.) and commercial presence. The clarified and improved rules ad disciplines on anti-dumping and countervailing measures will also benefit Philippine exporters by reducing the costs and uncertainty associated with exporting while at the same time providing a means for domestic industries to safeguard themselves against unfair imports. Likewise, the provision of adequate protection for intellectual property rights is expected to attract more investments into the country and to make it a less vulnerable to unilateral actions by its trading partners (e.g., Sec. 301 of the United States Omnibus Trade Law). In view of the foregoing, the Uruguay Round Final Act, the Agreement Establishing the World Trade Organization, the Ministerial Declarations and Decisions, and the Understanding on Commitments in Financial Services, as embodied in the Uruguay Round Final Act and forming and integral part thereof are hereby submitted to the Senate for its concurrence pursuant to Section 21, Article VII of the Constitution. A draft of a proposed Resolution giving its concurrence to the aforesaid Agreement is enclosed.

Very truly yours, (SGD.) FIDEL V. RAMOS

5 December 9, 1994 HON. EDGARDO J. ANGARA Senate President Senate Manila Dear Senate President Angara: Pursuant to the provisions of Sec. 26 (2) Article VI of the Constitution, I hereby certify to the necessity of the immediate adoption of P.S. 1083 entitled: CONCURRING IN THE RATIFICATION OF THE AGREEMENT ESTABLISHING THE WORLD TRADE ORGANIZATION to meet a public emergency consisting of the need for immediate membership in the WTO in order to assure the benefits to the Philippine economy arising from such membership. Very truly yours, (SGD.) FIDEL V. RAMOS 6 Attached as Annex A, Petition; rollo, p. 52. P.S. 1083 is the forerunner of assailed Senate Resolution No. 97. It was prepared by the Committee of the Whole on the General Agreement on Tariffs and Trade chaired by Sen. Blas F. Ople and co-chaired by Sen. Gloria Macapagal-Arroyo; see Annex C, Compliance of petitioners dated January 28, 1997. 7 The Philippines is thus considered an original or founding member of WTO, which as of July 26, 1996 had 123 members as follows: Antigua and Barbuda, Argentina, Australia, Austria, Bahrain, Bangladesh, Barbados, Belguim, Belize, Benin, Bolivia, Botswana, Brazil, Brunei Darussalam, Burkina Faso, Burundi, Cameroon, Canada, Central African Republic, Chili, Colombia, Costa Rica, Cote d'Ivoire, Cuba, Cyprus, Czech Republic, Denmark, Djibouti, Dominica, Dominican Republic, Ecuador, Egypt, El Salvador, European Community, Fiji, Finland, France, Gabon, Germany, Ghana, Greece, Grenada, Guatemala, Guinea, Guinea Bissau, Guyana, Haiti, Honduras, Honkong, Hungary, Iceland, India, Indonesia, Ireland, Israel, Italy, Jamaica, Japan, Kenya, Korea, Kuwait, Lesotho, Liechtenstein, Luxembourg, Macau, Madagascar, Malawi, Malaysia, Maldives, Mali, Malta, Mauritania, Mauritius, Mexico, Morocco, Mozambique, Myanmar, Namibia, Netherlands for the Kingdom in Europe and for the Netherlands Antilles, New Zealand, Nicaragua, Nigeria, Norway, Pakistan, Papua New Guinea, Paraguay, Peru, Philippines, Poland, Portugal, Qatar, Romania, Rwanda, Saint Kitts and Nevis, Saint Lucia, Saint Vincent & the Grenadines, Senegal, Sierra Leone, Singapore, Slovak Republic, Slovenia, Solomon Islands, South Africa, Spain, Sri Lanka, Surinam, Swaziland, Sweden, Switzerland, Tanzania, Thailand, Togo, Trinidad and Tobago, Tunisia, Turkey, Uganda, United Arab Emirates, United Kingdom, United States, Uruguay, Venezuela, Zambia, and Zimbabwe. See Annex A, Bautista Paper, infra. 8 Page 6; rollo p. 261. 9 In compliance, Ambassador Bautista submitted to the Court on August 12, 1996, a Memorandum (the "Bautista Paper") consisting of 56 pages excluding annexes. This is the same document mentioned in footnote no. 1. 10 Memorandum for Respondents, p. 13; rollo, p. 268. 11 Cf . Kilosbayan Incorporated vs. Morato, 246 SCRA 540, July 17, 1995 for a discussion on locus standi. See also the Concurring Opinion of Mr. Justice Vicente V. Mendoza in Tatad vs. Garcia, Jr., 243 SCRA 473, April 6, 1995, as well as Kilusang Mayo Uno Labor Center vs. Garcia, Jr., 239 SCRA 386, 414, December 23, 1994.

12 Aquino, Jr. vs. Ponce Enrile, 59 SCRA 183, 196, September 17, 1974, cited in Bondoc vs. Pineda, 201 SCRA 792, 795, September 26, 1991. 13 Guingona, Jr. vs. Gonzales, 219 SCRA 326, 337, March 1, 1993. 14 See Taada and Macapagal vs. Cuenco, et al., 103 Phil. 1051 for a discussion on the scope of "political question." 15 Section 1, Article VIII, (par. 2). 16 In a privilege speech on May 17, 1993, entitled "Supreme Court Potential Tyrant?" Senator Arturo Tolentino concedes that this new provision gives the Supreme Court a duty "to intrude into the jurisdiction of the Congress or the President." 17 I Record of the Constitutional Commission 436. 18 Cf . Daza vs. Singson, 180 SCRA 496, December 21, 1989. 19 Memorandum for Petitioners, pp. 14-16; rollo, pp. 204-206. 20 Par. 4, Article XVI, WTO Agreement, Uruguay Round of Multilateral Trade Negotiations, Vol. 1. p. 146. 21 Also entitled "Declaration of Principles." The nomenclature in the 1973 Charter is identical with that in the 1987's. 22 Philippine Political Law, 1962 Ed., p. 116. 23 Bernas, The Constitution of the Philippines: A Commentary, Vol. II, 1988 Ed., p. 2. In the very recent case of Manila Prince Hotel v. GSIS, G.R. No. 122156, February 3, 1997, p. 8, it was held that "A provision which lays down a general principle, such as those found in Art. II of the 1987 Constitution, is usually not self-executing." 24 246 SCRA 540, 564, July 17, 1995. See also Tolentino vs. Secretary of Finance, G.R. No. 115455 and consolidated cases, August 25, 1995. 25 197 SCRA 52, 68, May 14, 1991. 26 224 SCRA 792, 817, July 30, 1993. 27 Sec. 10, Article XII. 28 Sec. 12, Article XII. 29 Sec. 19, Art. II. 30 Sec. 13, Art. XII. 31 G.R. No. 122156, February 3, 1997, pp. 13-14. 32 Sec. 1, Art. XII. 33 Bautista Paper, p. 19. 34 Preamble, WTO Agreement p. 137, Vol. 1, Uruguay Round of Multilateral Trade Negotiations. Emphasis supplied. 35 Sec. 19, Article II, Constitution. 36 III Records of the Constitutional Commission 252. 37 Sec. 13, Article XII, Constitution. 38 Justice Isagani A. Cruz, Philippine Political Law, 1995 Ed., p. 13, quoting his own article entitled, "A Quintessential Constitution" earlier published in the San Beda Law Journal, April 1972; emphasis supplied.

39 Par. 4, Article XVI (Miscellaneous Provisions), WTO Agreement, p. 146, Vol. 1, Uruguay Round of Multilateral Trade Negotiations. 40 Memorandum for the Petitioners, p. 29; rollo, p. 219. 41 Sec. 24, Article VI, Constitution. 42 Subsection (2), Sec. 28, Article VI, Constitution. 43 Sec. 2, Article II, Constitution. 44 Cruz, Philippine Political Law, 1995 Ed., p. 55. 45 Salonga and Yap, op cit 305. 46 Salonga, op. cit., p. 287. 47 Quoted in Paras and Paras, Jr., International Law and World Politics, 1994 Ed., p. 178. 47-A Reagan vs. Commission of Internal Revenue, 30 SCRA 968, 973, December 27, 1969. 48 Trebilcock and Howse. The Regulation of International Trade, p. 14, London, 1995, cited on p. 55-56, Bautista Paper. 49 Uruguay Round of Multilateral Trade Negotiations, Vol. 31, p. 25445. 50 Item 5, Sec. 5, Article VIII, Constitution. 51 Uruguay Round of Multilateral Trade Negotiations, Vol. 31, p. 25445. 52 Bautista Paper, p. 13. 53 See footnote 3 of the text of this letter. 54 Salonga and Yap, op cit., pp. 289-290. 55 The full text, without the signatures, of the Final Act is as follows: Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations 1. Having met in order to conclude the Uruguay Round of Multilateral Trade Negotiations, representatives of the governments and of the European Communities, members of the Trade Negotiations Committee, agree that the Agreement Establishing the World Trade Organization (referred to in the Final Act as the "WTO Agreement"), the Ministerial Declarations and Decisions, and the Understanding on Commitments in Financial Services, as annexed hereto, embody the results of their negotiations and form an integral part of this Final Act. 2. By signing to the present Final Act, the representatives agree. (a) to submit, as appropriate, the WTO Agreement for the consideration of their respective competent authorities with a view to seeking approval of the Agreement in accordance with their procedures; and (b) to adopt the Ministerial Declarations and Decisions. 3. The representatives agree on the desirability of acceptance of the WTO Agreement by all participants in the Uruguay Round of Multilateral Trade Negotiations (hereinafter referred to as "participants") with a view to its entry into force by 1 January 1995, or as early as possible thereafter. Not later than late 1994, Ministers will meet, in accordance with the final paragraph of the Punta del Este Ministerial Declarations, to decide on the international implementation of the results, including the timing of their entry into force.

4. the representatives agree that the WTO Agreement shall be open for acceptance as a whole, by signature or otherwise, by all participants pursuant to Article XIV thereof. The acceptance and entry into force of a Plurilateral Trade Agreement included in Annex 4 of the WTO Agreement shall be governed by the provisions of that Plurilateral Trade Agreement. 5. Before accepting the WTO Agreement, participants which are not contracting parties to the General Agreement on Tariffs and Trade must first have concluded negotiations for their accession to the General Agreement and become contracting parties thereto. For participants which are not contracting parties to the general Agreement as of the date of the Final Act, the Schedules are not definitive and shall be subsequently completed for the purpose of their accession to the General Agreement and acceptance of the WTO Agreement. 6. This Final Act and the texts annexed hereto shall be deposited with the Director-General to the CONTRACTING PARTIES to the General Agreement on Tariffs and Trade who shall promptly furnish to each participant a certified copy thereof. DONE at Marrakesh this fifteenth day of April one thousand nine hundred and ninety-four, in a single copy, in the English, French and Spanish languages, each text being authentic. 56 Bautista Paper, p. 16. 57 Baustista Paper, p. 16. 58 Uruguay Round of Multilateral Trade Negotiations, Vol. I, pp. 137-138. 59 See footnote 3 for complete text. 60 Taken from pp. 63-85, "Respondent" Memorandum. 61 Zarate vs. Olegario, G.R. No. 90655, October 7, 1996. 62 San Sebastian College vs. Court of Appeals, 197 SCRA 138, 144, May 15, 1991; Commissioner of Internal Revenue vs. Court of Tax Appeals, 195 SCRA 444, 458 March 20, 1991; Simon vs. Civil Service Commission, 215 SCRA 410, November 5, 1992; Bustamante vs. Commissioner on Audit, 216 SCRA 134, 136, November 27, 1992. 63 Paredes vs. Civil Service Commission, 192 SCRA 84, 94, December 4, 1990. 64 Sec. 21. No treaty or international agreement shall be valid and effective unless concurred in by at least two-thirds of all the Members of the Senate." 65 Reader's Digest, December 1996 issue, p. 28. Republic of the Philippines SUPREME COURT Manila THIRD DIVISION G.R. No. 131512 January 20, 2000

LAND TRANSPORTATION OFFICE [LTO], represented by Assistant Secretary Manuel F. Bruan, LTO Regional Office, Region X represented by its Regional Director, Timoteo A. Garcia; and LTO Butuan represented by Rosita G. Sadiaga, its Registrar, petitioners, vs. CITY OF BUTUAN, represented in this case by Democrito D. Plaza II, City Mayor, respondents. VITUG, J.: The 1987 Constitution enunciates the policy that the territorial and political subdivisions shall enjoy local autonomy.1 In obedience to that mandate of the fundamental law, Republic Act ("R.A.") No. 7160, otherwise known as the Local Government Code,2 expresses that the territorial and political subdivisions of the State shall enjoy genuine and meaningful local autonomy in order to enable them to attain their fullest development as self-reliant communities and make them more effective partners in the attainment of national goals, and that it is a basic aim of the State to 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. While the Constitution seeks to strengthen local units and ensure their viability, clearly, however, it has never been the intention of that organic law to create an imperuim in imperio and install an infra sovereign political subdivision independent of a single sovereign state.

The Court is asked in this instance to resolve the issue of whether under the present set up the power of the Land Registration Office ("LTO") to register, tricycles in particular, as well as to issue licenses for the driving thereof, has likewise devolved to local government units. The Regional Trial Court (Branch 2) of Butuan City held3 that the authority to register tricycles, the grant of the corresponding franchise, the issuance of tricycle drivers' license, and the collection of fees therefor had all been vested in the Local Government Units ("LGUs"). Accordingly, it decreed the issuance of a permanent writ of injunction against LTO, prohibiting and enjoining LTO, as well as its employees and other persons acting in its behalf, from (a) registering tricycles and (b) issuing licenses to drivers of tricycles. The Court of Appeals, on appeal to it, sustained the trial court.
1wphi1.nt

The adverse rulings of both the court a quo and the appellate court prompted the LTO to file the instant petition for review on certiorari to annul and set aside the decision,4 dated 17 November 1997, of the Court of Appeals affirming the permanent injunctive writ order of the Regional Trial Court (Branch 2) of Butuan City. Respondent City of Butuan asserts that one of the salient provisions introduced by the Local Government Code is in the area of local taxation which allows LGUs to collect registration fees or charges along with, in its view, the corresponding issuance of all kinds of licenses or permits for the driving of tricycles. The 1987 Constitution provides: Each local government unit shall have the power to create its own sources of revenues and to levy taxes, fees, and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local governments.5 Sec. 129 and Section 133 of the Local Government Code read: Sec. 129. Power to Create Sources or Revenue. Each local government unit shall exercise its power to create its own sources of revenue and to levy taxes, fees, and charges subject to the provisions herein, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the 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 barangays shall not extend to the levy of the following: xxx xxx xxx

(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 thereof, except tricycles. Relying on the foregoing provisions of the law, the Sangguniang Panglungsod ("SP") of Butuan, on 16 August 1992, passed SP Ordinance No. 916-92 entitled "An Ordinance Regulating the Operation of Tricycles-for-Hire, providing mechanism for the issuance of Franchise, Registration and Permit, and imposing Penalties for Violations thereof and for other Purposes." The ordinance provided for, among other things, the payment of franchise fees for the grant of the franchise of tricycles-for-hire, fees for the registration of the vehicle, and fees for the issuance of a permit for the driving thereof. Petitioner LTO explains that one of the functions of the national government that, indeed, has been transferred to local government units is the franchising authority over tricycles-for-hire of the Land Transportation Franchising and Regulatory Board ("LTFRB") but not, it asseverates, the authority of LTO to register all motor vehicles and to issue to qualified persons of licenses to drive such vehicles. In order to settle the variant positions of the parties, the City of Butuan, represented by its City Mayor Democrito D. Plaza, filed on 28 June 1994 with the trial court a petition for "prohibition, mandamus, injunction with a prayer for preliminary restraining order ex-parte" seeking the declaration of the validity of SP Ordinance No. 962-93 and the prohibition of the registration of tricycles-for-hire and the issuance of licenses for the driving thereof by the LTO. LTO opposed the prayer in the petition. On 20 March 1995, the trial court rendered a resolution; the dispositive portion read: In view of the foregoing, let a permanent injunctive writ be issued against the respondent Land Transportation Office and the other respondents, prohibiting and enjoining them, their employees, officers, attorney's or other persons acting in their behalf from forcing or compelling Tricycles to be registered with, and drivers to secure their licenses from respondent LTO or secure franchise from LTFRB and from collecting fees thereon. It should be understood that the registration, franchise of tricycles and driver's license/permit granted or issued by the City of Butuan are valid only within the territorial limits of Butuan City. No pronouncement as to costs.6 Petitioners timely moved for a reconsideration of the above resolution but it was to no avail. Petitioners then appealed to the Court of Appeals. In its now assailed decision, the appellate court, on 17 November 1997, sustained the trial court. It ruled:

WHEREFORE, the petition is hereby DISMISSED and the questioned permanent injunctive writ issued by the court a quo dated March 20, 1995 AFFIRMED.7 Coming up to this Court, petitioners raise this sole assignment of error, to wit: The Court of Appeals [has] erred in sustaining the validity of the writ of injunction issued by the trial court which enjoined LTO from (1) registering tricycles-for-hire and (2) issuing licenses for the driving thereof since the Local Government Code devolved only the franchising authority of the LTFRB. Functions of the LTO were not devolved to the LGU's.8 The petition is impressed with merit. The Department of Transportation and Communications9 ("DOTC"), through the LTO and the LTFRB, has since been tasked with implementing laws pertaining to land transportation. The LTO is a line agency under the DOTC whose powers and functions, pursuant to Article III, Section 4 (d) [1],10 of R.A. No. 4136, otherwise known as Land Transportation and Traffic Code, as amended, deal primarily with the registration of all motor vehicles and the licensing of drivers thereof. The LTFRB, upon the other hand, is the governing body tasked by E.O. No. 202, dated 19 June 1987, to regulate the operation of public utility or "for hire" vehicles and to grant franchises or certificates of public convenience ("CPC").11 Finely put, registration and licensing functions are vested in the LTO while franchising and regulatory responsibilities had been vested in the LTFRB. Under the Local Government Code, certain functions of the DOTC were transferred to the LGUs, thusly: Sec. 458. Powers, Duties, Functions and Compensation. xxx xxx xxx

(3) Subject to the provisions of Book II of this Code, enact ordinances granting franchises and authorizing the issuance of permits or licenses, upon such conditions and for such purposes intended to promote the general welfare of the inhabitants of the city and pursuant to this legislative authority shall: xxx xxx xxx

(VI) Subject to the guidelines prescribed by the Department of Transportation and Communications, regulate the operation of tricycles and grant franchises for the operation thereof within the territorial jurisdiction of the city. (Emphasis supplied). LGUs indubitably now have the power to regulate the operation of tricycles-for-hire and to grant franchises for the operation thereof. "To regulate" means to fix, establish, or control; to adjust by rule, method, or established mode; to direct by rule or restriction; or to subject to governing principles or laws.12 A franchise is defined to be a special privilege to do certain things conferred by government on an individual or corporation, and which does not belong to citizens generally of common right.13 On the other hand, "to register" means to record formally and exactly, to enroll, or to enter precisely in a list or the like,14 and a "driver's license" is the certificate or license issued by the government which authorizes a person to operate a motor vehicle.15 The devolution of the functions of the DOTC, performed by the LTFRB, to the LGUs, as so aptly observed by the Solicitor General, is aimed at curbing the alarming increase of accidents in national highways involving tricycles. It has been the perception that local governments are in good position to achieve the end desired by the law-making body because of their proximity to the situation that can enable them to address that serious concern better than the national government. It may not be amiss to state, nevertheless, that under Article 458 (a)[3-VI] of the Local Government Code, the power of LGUs to regulate the operation of tricycles and to grant franchises for the operation thereof is still subject to the guidelines prescribed by the DOTC. In compliance therewith, the Department of Transportation and Communications ("DOTC") issued "Guidelines to Implement the Devolution of LTFRBs Franchising Authority over Tricycles-For-Hire to Local Government units pursuant to the Local Government Code." Pertinent provisions of the guidelines state: In lieu of the Land Transportation Franchising and Regulatory Board (LTFRB) in the DOTC, the Sangguniang Bayan/Sangguniang Panglungsod (SB/SP) shall perform the following: (a) Issue, amend, revise, renew, suspend, or cancel MTOP and prescribe the appropriate terms and conditions therefor; xxx Operating Conditions: 1. For safety reasons, no tricycles should operate on national highways utilized by 4 wheel vehicles greater than 4 tons and where normal speed exceed 40 KPH. However, the SB/SP may provide exceptions if there is no alternative route. 2. Zones must be within the boundaries of the municipality/city. However, existing zones within more than one municipality/city shall be maintained, provided that operators serving said zone shall secure MTOP's from each of the municipalities/cities having jurisdiction over the areas covered by the zone. 3. A common color for tricycles-for-hire operating in the same zone may be imposed. Each unit shall be assigned and bear an identification number, aside from its LTO license plate number. xxx xxx

4. An operator wishing to stop service completely, or to suspend service for more than one month, should report in writing such termination or suspension to the SB/SP which originally granted the MTOP prior thereto. Transfer to another zone may be permitted upon application. 5. The MTOP shall be valid for three (3) years, renewable for the same period. Transfer to another zone, change of ownership of unit or transfer of MTOP shall be construed as an amendment to an MTOP and shall require appropriate approval of the SB/SP. 6. Operators shall employ only drivers duly licensed by LTO for tricycles-for-hire. 7. No tricycle-for-hire shall be allowed to carry more passengers and/or goods than it is designed for. 8. A tricycle-for-hire shall be allowed to operate like a taxi service, i.e., service is rendered upon demand and without a fixed route within a zone.16 Such as can be gleaned from the explicit language of the statute, as well as the corresponding guidelines issued by DOTC, the newly delegated powers pertain to the franchising and regulatory powers theretofore exercised by the LTFRB and not to the functions of the LTO relative to the registration of motor vehicles and issuance of licenses for the driving thereof. Clearly unaffected by the Local Government Code are the powers of LTO under R.A. No. 4136 requiring the registration of all kinds of motor vehicles "used or operated on or upon any public highway" in the country. Thus Sec. 5. All motor vehicles and other vehicles must be registered. (a) No motor vehicle shall be used or operated on or upon any public highway of the Philippines unless the same is properly registered for the current year in accordance with the provisions of this Act (Article 1, Chapter II, R.A. No. 4136). The Commissioner of Land Transportation and his deputies are empowered at anytime to examine and inspect such motor vehicles to determine whether said vehicles are registered, or are unsightly, unsafe, improperly marked or equipped, or otherwise unfit to be operated on because of possible excessive damage to highways, bridges and other infrastructures.17 The LTO is additionally charged with being the central repository and custodian of all records of all motor vehicles.18 The Court shares the apprehension of the Solicitor General if the above functions were to likewise devolve to local government units; he states: If the tricycle registration function of respondent LTO is decentralized, the incidence of theft of tricycles will most certainly go up, and stolen tricycles registered in one local government could be registered in another with ease. The determination of ownership thereof will also become very difficult. Fake driver's licenses will likewise proliferate. This likely scenario unfolds where a tricycle driver, not qualified by petitioner LTO's testing, could secure a license from one municipality, and when the same is confiscated, could just go another municipality to secure another license. Devolution will entail the hiring of additional personnel charged with inspecting tricycles for road worthiness, testing drivers, and documentation. Revenues raised from tricycle registration may not be enough to meet salaries of additional personnel and incidental costs for tools and equipment.19 The reliance made by respondents on the broad taxing power of local government units, specifically under Section 133 of the Local Government Code, is tangential. Police power and taxation, along with eminent domain, are inherent powers of sovereignty which the State might share with local government units by delegation given under a constitutional or a statutory fiat. All these inherent powers are for a public purpose and legislative in nature but the similarities just about end there. The basic aim of police power is public good and welfare. Taxation, in its case, focuses an the power of government to raise revenue in order to support its existence and carry out its legitimate objectives. Although correlative to each other in many respects, the grant of one does not necessarily carry with it the grant of the other. The two powers are, by tradition and jurisprudence, separate and distinct powers, varying in their respective concepts, character, scopes and limitations. To construe the tax provisions of Section 133(1) indistinctively would result in the repeal to that extent of LTO's regulatory power which evidently has not been intended. If it were otherwise, the law could have just said so in Section 447 and 458 of Book III of the Local Government Code in the same manner that the specific devolution of LTFRB's power on franchising of tricycles has been provided. Repeal by implication is not favored. 20 The power over tricycles granted under Section 458(8)(3)(VI) of the Local Government Code to LGUs is the power to regulate their operation and to grant franchises for the operation thereof. The exclusionary clause contained in the tax provisions of Section 133(1) of the Local Government Code must not be held to have had the effect of withdrawing the express power of LTO to cause the registration of all motor vehicles and the issuance of licenses for the driving thereof. These functions of the LTO are essentially regulatory in nature, exercised pursuant to the police power of the State, whose basic objectives are to achieve road safety by insuring the road worthiness of these motor vehicles and the competence of drivers prescribed by R.A. 4136. Not insignificant is the rule that a statute must not be construed in isolation but must be taken in harmony with the extant body of laws.21 The Court cannot end this decision without expressing its own serious concern over the seeming laxity in the grant of franchises for the operation of tricycles-for-hire and in allowing the indiscriminate use by such vehicles on public highways and principal thoroughfares. Senator Aquilino C. Pimentel, Jr., the principal author and sponsor of the bill that eventually has become to be known as the Local Government Code, has aptly remarked: Tricycles are a popular means of transportation, specially in the countryside. They are, unfortunately, being allowed to drive along highways and principal thoroughfares where they pose hazards to their passengers arising from potential collisions with buses, cars and jeepneys.

The operation of tricycles within a municipality may be regulated by the Sangguniang Bayan. In this connection, the Sangguniang concerned would do well to consider prohibiting the operation of tricycles along or across highways invite collisions with faster and bigger vehicles and impede the flow of traffic.22 The need for ensuring public safety and convenience to commuters and pedestrians alike is paramount. It might be well, indeed, for public officials concerned to pay heed to a number of provisions in our laws that can warrant in appropriate cases an incurrence of criminal and civil liabilities. Thus The Revised Penal Code Art. 208. Prosecution of offenses; negligence and tolerance. The penalty of prision correccional in its minimum period and suspension shall be imposed upon any public officer, or officer of the law, who, in dereliction of the duties of his office, shall maliciously refrain from instituting prosecution for the punishment of violators of the law, or shall tolerate the commission of offenses. The Civil Code Art. 27. Any person suffering material or moral loss because a public servant or employee refuses or neglects, without just cause, to perform his official duty may file an action for damages and other relief against the latter, without prejudice to any disciplinary administrative action that may be taken.
1wphi1.nt

Art. 34. When a member of a city or municipal police force refuses or fails to render aid or protection to any person in case of danger to life or property, such peace officer shall be primarily liable for damages, and the city or municipality shall be subsidiarily responsible therefor. The civil action herein recognized shall be independent of any criminal proceedings, and a preponderance of evidence shall suffice to support such action. Art. 2189. Provinces, cities and municipalities shall be liable for damages for the death of, or injuries suffered by, any person by reason of the defective condition of roads, streets, bridges, public buildings, and other public works under their control or supervision. The Local Government Code Sec. 24. Liability for Damages. Local government units and their officials are not exempt from liability for death or injury to persons or damage to property. WHEREFORE, the assailed decision which enjoins the Land Transportation Office from requiring the due registration of tricycles and a license for the driving thereof is REVERSED and SET ASIDE. No pronouncements on costs. Let copies of this decision be likewise furnished the Department of Interior and Local Governments, the Department of Public Works and Highways and the Department of Transportation and Communication. SO ORDERED. Melo, Panganiban, Purisima and Gonzaga-Reyes, JJ., concur.

Footnotes
1

Sec. 2 Article X of the 1987 Constitution. The law was approved on 10 October 1991 and it became effective on 01 January 1992. Per Judge Rosarito Dabalos. Penned by Justice Jorge S. Imperial, concurred in by Justices Ramon U. Mabutas, Jr. and Hilarion L. Aquino. Sec. 5, Art. X. Rollo, p. 34. Rollo, p. 31.

Rollo, pp. 10-11. Book IV, Title XV, Chapter 1, Section 2 of the Administrative Code of 1987 reads:

Sec. 2. Mandate. The Department of Transportation and Communications shall be the primary policy, planning, programming, coordinating, implementing, regulating and administrative entity of the Executive Branch of the government in the promotion, development and regulation of dependable and coordinated networks of transportation and communications systems as well as in the fast, safe, efficient and reliable postal, transportation and communications services.

10 (1) With the approval of the Secretary of Public Works [Transportation] and Communications, to issue rules and regulations not in conflict with the provisions of this Act, prescribing the procedure for the examination, licensing and bonding of drivers; the registration and reregistration of motor vehicles, transfer of ownership, change of status; the replacement of lost certificates, licenses, badges, permits or number plates; and to prescribe the minimum standards and specifications including allowable gross weight, allowable length, width and height of motor vehicles, distribution of loads, allowable loads on tires, change of tire sizes, body design or carrying capacity subsequent to registration and all other special cases which may arise for which no specific provision is otherwise made in this Act. (Emphasis supplied).

11 Sec. 5. Powers and Functions of the Land Transportation Franchising and Regulatory Board. The Board shall have the following powers and functions:

a. To prescribe and regulate routes of service, economically viable capacities and zones or areas of operation of public land transportation services provided by motorized vehicles in accordance with the public land transportation development plans and programs approved by the Department of Transportation and Communications; b. To issue, amend, revise, suspend or cancel Certificates of Public Convenience or permits authorizing the operation of public land transportation services provided by motorized vehicles, and to prescribe the appropriate terms and conditions therefor;
12

Black's Law Dictionary, Sixth edition, p. 1286. Ibid., p. 658. Ibid., p. 1283. Ibid., p. 495. Rollo, pp. 153-154. Sec. 4(d)[6], Article III, Chapter I.

13

14

15

16

17

18 Sec. 4(d)[2], Article III, Chapter I, reads in full: "(2) To compile and arrange all applications, certificates, permits, licenses, and to enter, note and record thereon transfers, notifications, suspensions, revocations, or judgments of conviction rendered by competent courts concerning violations of this Act, with the end in view of preserving and making easily available such documents and records to public officers and private persons properly and legitimately interested therein."

19

Rollo, pp. 159-160.

20 In Laguna Lake Development Authority vs. Court of Appeals,20 this court has ruled that a special law cannot be repealed, amended or altered by a subsequent general law by mere supposition, and that the charter of LLDA which embodies a valid exercise of police power should prevail over the Local Government Code on matters affecting the lake.

21

Sajonas vs. CA, 258 SCRA 79. Rollo, pp. 152-153. Republic of the Philippines SUPREME COURT Manila SECOND DIVISION

22

G.R. No. L-30745 January 18, 1978 PHILIPPINE MATCH CO., LTD., plaintiff-appellant, vs. THE CITY OF CEBU and JESUS E. ZABATE, Acting City Treasurer, defendants-appellees.

Pelaez, Pelaez & Pelaez for appellant. Nazario Pacquiao, Metudio P. Belarmino & Ceferino Jomuad for appellees.

AQUINO, J.: This case is about the legality of the tax collected by the City of Cebu on sales of matches stored by the Philippine Match Co., Ltd. in Cebu City but delivered to customers outside of the City. Ordinance No. 279 of Cebu City (approved by the mayor on March 10, 1960 and also approved by the provincial board) is "an ordinance imposing a quarterly tax on gross sales or receipts of merchants, dealers, importers and manufacturers of any commodity doing business" in Cebu City. It imposes a sales tax of one percent (1%) on the gross sales, receipts or value of commodities sold, bartered, exchanged or manufactured in the city in excess of P2,000 a quarter. Section 9 of the ordinance provides that, for purposes of the tax, "all deliveries of goods or commodities stored in the City of Cebu, or if not stored are sold" in that city, "shall be considered as sales" in the city and shall be taxable. Thus, it would seem that under the tax ordinance sales of matches consummated outside of the city are taxable as long as the matches sold are taken from the company's stock stored in Cebu City. The Philippine Match Co., Ltd., whose principal office is in Manila, is engaged in the manufacture of matches. Its factory is located at Punta, Sta. Ana, Manila. It ships cases or cartons of matches from Manila to its branch office in Cebu City for storage, sale and distribution within the territories and districts under its Cebu branch or the whole Visayas-Mindanao region. Cebu City itself is just one of the eleven districts under the company's Cebu City branch office. The company does not question the tax on the matches of matches consummated in Cebu City, meaning matches sold and delivered within the city. It assails the legality of the tax which the city treasurer collected on out-of- town deliveries of matches, to wit: (1) sales of matches booked and paid for in Cebu City but shipped directly to customers outside of the city; (2) transfers of matches to newsmen assigned to different agencies outside of the city and (3) shipments of matches to provincial customers pursuant to salesmen's instructions. The company paid under protest to the city t the sum of P12,844.61 as one percent sales tax on those three classes of out-of-town deliveries of matches for the second quarter of 1961 to the second quarter of 1963. In paying the tax the company accomplished the verified forms furnished by the city treasurers office. It submitted a statement indicating the four kinds of transactions enumerated above, the total sales, and a summary of the deliveries to the different agencies, as well as the invoice numbers, names of customers, the value of the sales, the transfers of matches to salesmen outside of Cebu City, and the computation of taxes. Sales of matches booked and paid for in Cebu City but shipped directly to customers outside of the city refer to orders for matches made in the city by the company's customers, by means of personal or phone calls, for which sales invoices are issued, and then the matches are shipped from the bodega in the city, where the matches had been stored, to the place of business or residences of the customers outside of the city, duly covered by bills of lading The matches are used and consumed outside of the city. Transfers of matches to salesmen assigned to different agencies outside of the city embrace equipments of matches from the branch office in the city to the salesmen (provided with panel cars) assigned within the province of Cebu and in the different districts in the Visayas and Mindanao under the jurisdiction or supervision of the Cebu City branch office. The shipments are covered by bills of lading. No sales invoices whatever are issued. The matches received by the salesmen constitute their direct cash accountability to the company. The salesmen sell the matches within their respective territories. They issue cash sales invoices and remit the proceeds of the sales to the company's Cebu branch office. The value of the unsold matches constitutes their stock liability. The matches are used and consumed outside of the city. Shipments of matches to provincial customers pursuant to newsmens instructions embrace orders, by letter or telegram sent to the branch office by the company's salesmen assigned outside of the city. The matches are shipped from the company's bodega in the city to the customers residing outside of the city. The salesmen issue the sales invoices. The proceeds of the sale, for which the salesmen are accountable are remitted to the branch office. As in the first and seconds of transactions above-mentioned, the matches are consumed and used outside of the city. The company in its letter of April 15, 1961 to the city treasurer sought the refund of the sales tax paid for out-of-town deliveries of matches. It invoked Shell Company of the Philippines, Ltd. vs. Municipality of Sipocot, Camarines Sur, 105 Phil. 1263. In that case sales of oil and petroleum products effected outside the territorial limits of Sipocot, were held not to be subject to the tax imposed by an ordinance of that municipality. The city treasurer denied the request. His stand is that under section 9 of the ordinance all out-of-town deliveries of latches stored in the city are subject to the sales tax imposed by the ordinance. On August 12, 1963 the company filed the complaint herein, praying that the ordinance be d void insofar as it taxed the deliveries of matches outside of Cebu City, that the city be ordered to refund to the company the said sum of P12,844.61 as excess sales tax paid, and that the city treasurer be ordered to pay damages.

After hearing, the trial court sustained the tax on the sales of matches booked and paid for in Cebu City although the matches were shipped directly to customers outside of the city. The lower court held that the said sales were consummated in Cebu City because delivery to the carrier in the city is deemed to be a delivery to the customers outside of the city. But the trial court invalidated the tax on transfers of matches to salesmen assigned to different agencies outside of the city and on shipments of matches to provincial customers pursuant to the instructions of the newsmen It ordered the defendants to refund to the plaintiff the sum of P8,923.55 as taxes paid out the said out-of-town deliveries with legal rate of interest from the respective dates of payment. The trial court characterized the tax on the other two transactions as a "storage tax" and not a sales tax. It assumed that the sales were consummated outside of the city and, hence, beyond the city's taxing power. The city did not appeal from that decision. The company appealed from that portion of the decision upholding the tax on sales of matches to customers outside of the city but which sales were booked and paid for in Cebu City, and also from the dismissal of its claim for damages against the city treasurer. The issue is whether the City of Cebu can tax sales of matches which were perfected and paid for in Cebu City but the matches were delivered to customers outside of the City. We hold that the appeal is devoid of merit bemuse the city can validly tax the sales of matches to customers outside of the city as long as the orders were booked and paid for in the company's branch office in the city. Those matches can be regarded as sold in the city, as contemplated in the ordinance, because the matches were delivered to the carrier in Cebu City. Generally, delivery to the carrier is delivery to the buyer (Art. 1523, Civil Code; Behn, Meyer & Co. vs. Yangco, 38 Phil. 602). A different interpretation would defeat the tax ordinance in question or encourage tax evasion through the simple expedient of arranging for the delivery of the matches at the out. skirts of the city through the purchase were effected and paid for in the company's branch office in the city. The municipal board of Cebu City is empowered "to provide for the levy and collection of taxes for general and purposes in accordance with law" (Sec. 17[a], Commonwealth Act No. 58; Sec. 31[l], Rep. Act No. 3857, Revised Charter of Cebu city). The taxing power validly delegated to cities and municipalities is defined in the Local Autonomy Act, Republic Act No. 2264 (Pepsi-Cola Bottling Co. of the Philippines, Inc. vs. Municipality of Tanauan, Leyte, L-31156, February 27, 1976, 69 SCRA 460), which took effect on June 19, 1959 and which provides: SEC. 2. Taxation. Any provision of law to the contrary notwithstanding, all chartered cities, municipalities and municipal districts shall have authority to impose municipal license taxes or fees upon persons engaged in any occupation or business, or exercising privileges in chartered cities,. municipalities or municipal districts by requiring them to secure licenses at rates fixed by the municipal board or city council of the city, the municipal council of the municipality, or the municipal district council of the municipal district; to collect fees and charges for services rendered by the city, municipality or municipal district; to regulate and impose reasonable fees for services rendered in connection with any business, profession or occupation being conducted within the city, municipality or municipal district and otherwise to levy for public purposes, just and uniform taxes, licenses or fees; Provided, That municipalities and municipal districts shall, in no case, impose any percentage tax on sales or other taxes in any form based thereon nor impose taxes on articles subject to specific tax, except gasoline, under the provisions of the National International Revenue Code; Provided, however, That no city, municipality or municipal districts may levy or impose any of the following: (here follows an enumeration of internal revenue taxes) xxx xxx xxx * Note that the prohibition against the imposition of percentage taxes (formerly provided for in section 1 of Commonwealth Act No. 472) refers to municipalities and municipal districts but not to chartered cities. (See Local Tax Code, P.D. No. 231. Marinduque Iron Mines Agents, Inc. vs. Municipal Council of Hinabangan Samar, 120 Phil. 413; Ormoc Sugar Co., Inc. vs. Treasurer of Ormoc City, L-23794, February 17, 1968, 22 SCRA 603). Note further that the taxing power of cities, municipalities and municipal districts may be used (1) "upon any person engaged in any occupation or business, or exercising any privilege" therein; (2) for services rendered by those political subdivisions or rendered in connection with any business, profession or occupation being conducted therein, and (3) to levy, for public purposes, just and uniform taxes, licenses or fees (C. N. Hodges vs. Municipal Board of the City of Iloilo, 117 Phil. 164, 167. See sec. 31[251, Revised Charter of Cebu City). Applying that jurisdictional test to the instant case, it is at once obvious that sales of matches to customers outside oil Cebu City, which sales were booked and paid for in the company's branch office in the city, are subject to the city's taxing power. The instant case is easily distinguishable from the Shell Company case where the price of the oil sold was paid outside of the municipality of Sipocot, the entity imposing the tax. On the other hand, the ruling in Municipality of Jose Panganiban, Province of Camarines Norte vs. Shell Company of the Philippines, Ltd., L-18349, July 30, 1966, 17 SCRA 778 that the place of delivery determines the taxable situs of the property to be taxed cannot properly be invoked in this case. Republic Act No. 1435, the law which enabled the Municipality of Jose Panganiban to levy the sales tax involved in that case, specifies that the tax may be levied upon oils "distributed within the limits of the city or municipality", meaning the place where the oils were delivered. That feature of the Jose Panganiban case distinguished it from this case.

The sales in the instant case were in the city and the matches sold were stored in the city. The fact that the matches were delivered to customers, whose places of business were outside of the city, would not place those sales beyond the city's taxing power. Those sales formed part of the merchandising business being assigned on by the company in the city. In essence, they are the same as sales of matches fully consummated in the city. Furthermore, because the sellers place of business is in Cebu City, it cannot be sensibly argued that such sales should be considered as transactions subject to the taxing power of the political subdivisions where the customers resided and accepted delivery of the matches sold. The company in its second assignment of error contends that the trial court erred in not ordering defendant acting city treasurer to pay exemplary damages of P20,000 and attorney's fees. The claim for damages is predicated on articles 19, 20, 21, 27 and 2229 of the Civil Code. It is argued that the city treasurer refused and neglected without just cause to perform his duty and to act with justice and good faith. The company faults the city treasurer for not following the opinion of the city fiscals, as legal adviser of the city, that all out-of-town deliveries of matches are not subject to sales tax because such transactions were effected outside of the city's territorial limits. In reply, it is argued for defendant city treasurer that in enforcing the tax ordinance in question he was simply complying with his duty as collector of taxes (Sec. 50, Revised Charter of Cebu City). Moreover, he had no choice but to enforce the ordinance because according to section 357 of the Revised Manual of Instruction to Treasurer's "a tax ordinance win be enforced in accordance with its provisions" until d illegal or void by a competent court, or otherwise revoked by the council or board from which it originated. Furthermore, the Secretary of Finance had reminded the city treasurer that a tax ordinance approved by the provincial board is operative and must be enforced without prejudice to the right of any affected taxpayer to assail its legality in the judicial forum. The fiscals opinion on the legality of an ordinance is merely advisory and has no binding effect. Article 27 of the Civil Code provides that "any person suffering material or moral lose because a public servant or employee refuses or neglects, without just cause, to perform his official duty may file an action for damages and other relief against the latter, without prejudice to any disciplinary administrative action that may be taken." Article 27 presupposes that the refuse or omission of a public official is attributable to malice or inexcusable negligence. In this case, it cannot be said that the city treasurer acted wilfully or was grossly t in not refunding to the plaintiff the taxes which it paid under protest on out-of-town sales of matches. The record clearly reveals that the city treasurer honestly believed that he was justified under section 9 of the tax ordinance in collecting the sales tax on out-of-town deliveries, considering that the company's branch office was located in Cebu City and that all out-of-town purchase order for matches were filled up by the branch office and the sales were duly reported to it. The city treasurer acted within the scope of his authority and in consonance with his bona fide interpretation of the tax ordinance. The fact that his action was not completely sustained by the courts would not him liable for We have upheld his act of taxing sales of matches booked and paid for in the city. "As a rule, a public officer, whether judicial ,quasi-judicial or executive, is not y liable to one injured in consequence of an act performed within the scope of his official authority, and in the line of his official duty." "Where an officer is invested with discretion and is empowered to exercise his judgment in matters brought before him. he is sometimes called a quasi-judicial officer, and when so acting he is usually given immunity from liability to persons who may be injured as the result or an erroneous or mistaken decision, however erroneous his judgment may be. provided the acts complained of are done within the scope of the officer's authority and without malice, or corruption." (63 Am Jur 2nd 798, 799 cited in Philippine Racing Club, Inc. vs. Bonifacio, 109 Phil. 233, 240-241). It has been held that an erroneous interpretation of an ordinance does not constitute nor does it amount to bad faith that would entitle an aggrieved party to an award for damages (Cabungcal vs. Cordovan 120 Phil. 667, 572-3). That salutary in addition to moral temperate, liquidated or compensatory damages (Art. 2229, Civil Code). Attorney's fees are being claimed herein as actual damages. We find that it would not be just and equitable to award attorney's fees in this case against the City of Cebu and its (See Art. 2208, Civil Code). WHEREFORE, the trial court's judgment is affirmed. No costs. SO ORDERED. Fernando (Chairman), Antonio and Concepcion, Jr., JJ., concur. Santos, J., is on leave.

Separate Opinions

BARREDO, J., concurring: Anent appellant's claim for damages, it should be happy the trial court did not the city fully, which in my opinion, could have been possible.

Separate Opinions BARREDO, J., concurring: Anent appellant's claim for damages, it should be happy the trial court did not the city fully, which in my opinion, could have been possible. Footnotes * Sec. 5, Article XI of the Constitution provides that "each sale government unit shall have the power to create its own sources of revenue and to levy taxes, subject to such limitations as may be provided by law". That Constitutional provision was implemented by Presidential Decree No. 231, the Local Tax Code, which took effect on July 1, 1973. Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No. L-28138 August 13, 1986 MATALIN COCONUT CO., INC., petitioner-appellee, vs. THE MUNICIPAL COUNCIL OF MALABANG, LANAO DEL SUR, AMIR M. BALINDONG and HADJI PANGILAMUN MANALOCON, MUNICIPAL MAYOR and MUNICIPAL TREASURER OF MALABANG, LANAO DEL SUR,respondents-appellants. PURAKAN PLANTATION COMPANY, intervenor-appellee.

YAP, J.: On August 24, 1966, the Municipal Council of Malabang, Lanao del Sur, invoking the authority of Section 2 of Republic Act No. 2264, otherwise known as the Local Autonomy Act, enacted Municipal Ordinance No. 45-46, entitled "AN ORDINANCE IMPOSING A POLICE INSPECTION FEE OF P.30 PER SACK OF CASSAVA STARCH PRODUCED AND SHIPPED OUT OF THE MUNICIPALITY OF MALABANG AND IMPOSING PENALTIES FOR VIOLATIONS THEREOF." The ordinance made it unlawful for any person, company or group of persons "to ship out of the Municipality of Malabang, cassava starch or flour without paying to the Municipal Treasurer or his authorized representatives the corresponding fee fixed by (the) ordinance." It imposed a "police inspection fee" of P.30 per sack of cassava starch or flour, which shall be paid by the shipper before the same is transported or shipped outside the municipality. Any person or company or group of individuals violating the ordinance "is liable to a fine of not less than P100.00, but not more than P1,000.00, and to pay Pl.00 for every sack of flour being illegally shipped outside the municipality, or to suffer imprisonment of 20 days, or both, in the discretion of the court. The validity of the ordinance was challenged by the Matalin Coconut, Inc. in a petition for declaratory relief filed with the then Court of First Instance of Lanao del Sur against the Municipal Council, the Municipal Mayor and the Municipal Treasurer of Malabang, Lanao del Sur. Alleging among others that the ordinance is not only ultra vires, being violative of Republic Act No. 2264, but also unreasonable, oppressive and confiscatory, the petitioner prayed that the ordinance be declared null and void ab initio, and that the respondent Municipal Treasurer be ordered to refund the amounts paid by petitioner under the ordinance. The petitioner also prayed that during the pendency of the action, a preliminary injunction be issued enjoining the respondents from enforcing the ordinance. The application for preliminary injunction, however, was denied by the trial court; instead respondent Municipal Treasurer was ordered to allow payment of the taxes imposed by the ordinance under protest. Claiming that it was also adversely affected by the ordinance, Purakan Plantation Company was granted leave to intervene in the action. The intervenor alleged that while its cassava flour factory was situated in another municipality, i.e., Balabagan, Lanao del Sur, it had to transport the cassava starch and flour it produced to the seashore through the Municipality of Malabang for loading in coastwise vessels; that the effect of the enactment of Ordinance No. 45-46, is that intervenor had to refrain from transporting its products through the Municipality of Malabang in order to ship them by sea to other places.

After trial, the Court a quo rendered a decision declaring the municipal ordinance in question null and void; ordering the respondent Municipal Treasurer to refund to the petitioner the payments it made under the said ordinance from September 27, 1966 to May 2, 1967, amounting to P 25,500.00, as well as all payments made subsequently thereafter; and enjoining and prohibiting the respondents, their agents or deputies, from collecting the tax of P.30 per bag on the cassava flour or starch belonging to intervenor, Purakan Plantation Company, manufactured or milled in the Municipality of Balabagan, but shipped out through the Municipality of Malabang. After the promulgation of the decision, the Trial Court issued a writ of preliminary mandatory injunction, upon motion of petitioner, requiring the respondent Municipal Treasurer to deposit with the Philippine National Bank, Iligan Branch, in the name of the Municipality of Malabang, whatever amounts the petitioner had already paid or shall pay pursuant to the ordinance in question up to and until final termination of the case; the deposit was not to be withdrawn from the said bank without any order from the court. On motion for reconsideration by respondents, the writ was subsequently modified on July 20, 1967, to require the deposit only of amounts paid from the effectivity of the writ up to and until the final termination of the suit. From the decision of the trial court, the respondents appealed to this Court. A motion to dismiss appeal filed by petitioner-appellee, was denied by this court in its resolution of October 31, 1967. Subsequently, respondentsappellants filed a motion to dissolve the writ of preliminary mandatory injunction issued by the trial court on July 20, 1967. This motion was also denied by this Court on January 10, 1968. Of the assignments of error raised by the appellants in their Brief, only the following need be discussed: (1) that the trial court erred in adjudicating the money claim of the petitioner in an action for declaratory relief; and (2) that the trial court erred in declaring the municipal ordinance in question null and void. The respondents-appellants maintain that it was error for the trial court, in an action for declaratory relief, to order the refund to petitioner-appellee of the amounts paid by the latter under the municipal ordinance in question. It is the contention of respondents-appellants that in an action for declaratory relief, all the court can do is to construe the validity of the ordinance in question and declare the rights of those affected thereby. The court cannot declare the ordinance illegal and at the same time order the refund to petitioner of the amounts paid under the ordinance, without requiring petitioner to file an ordinary action to claim the refund after the declaratory relief judgment has become final. Respondents maintain that under Rule 64 of the Rules of Court, the court may advise the parties to file the proper pleadings and convert the hearing into an ordinary action, which was not done in this case. We find no merit in such contention. Under Sec. 6 of Rule 64, the action for declaratory relief may be converted into an ordinary action and the parties allowed to file such pleadings as may be necessary or proper, if before the final termination of the case "a breach or violation of an...ordinance, should take place." In the present case, no breach or violation of the ordinance occurred. The petitioner decided to pay "under protest" the fees imposed by the ordinance. Such payment did not affect the case; the declaratory relief action was still proper because the applicability of the ordinance to future transactions still remained to be resolved, although the matter could also be threshed out in an ordinary suit for the recovery of taxes paid (Shell Co. of the Philippines, Ltd. vs. Municipality of Sipocot, L-12680, March 20, 1959). In its petition for declaratory relief, petitioner-appellee alleged that by reason of the enforcement of the municipal ordinance by respondents it was forced to pay under protest the fees imposed pursuant to the said ordinance, and accordingly, one of the reliefs prayed for by the petitioner was that the respondents be ordered to refund all the amounts it paid to respondent Municipal Treasurer during the pendency of the case. The inclusion of said allegation and prayer in the petition was not objected to by the respondents in their answer. During the trial, evidence of the payments made by the petitioner was introduced. Respondents were thus fully aware of the petitioner's claim for refund and of what would happen if the ordinance were to be declared invalid by the court. Respondents' contention, if sustained, would in effect require a separate suit for the recovery of the fees paid by petitioner under protest. Multiplicity of suits should not be allowed or encouraged and, in the context of the present case, is clearly uncalled for and unnecessary. The main issue to be resolve in this case whether not Ordinance No. 45-66 enacted by respondent Municipal Council of Malabang, Lanao del Sur, is valid. The respondents-appellants contend that the municipality has the power and authority to approve the ordinance in question pursuant to Section 2 of the Local Autonomy Act (Republic Act No. 2264). Since the enactment of the Local Autonomy Act, a liberal rule has been followed by this Court in construing municipal ordinances enacted pursuant to the taxing power granted under Section 2 of said law. This Court has construed the grant of power to tax under the above-mentioned provision as sufficiently plenary to cover "everything, excepting those which are mentioned" therein, subject only to the limitation that the tax so levied is for public purposes, just anduniform (Nin Bay Mining Company vs. Municipality of Roxas, Province of Palawan, 14 SCRA 661; C.N. Hodges vs. Municipal Board, Iloilo City, et al., 19 SCRA 28). We agree with the finding of the trial court that the amount collected under the ordinance in question partakes of the nature of a tax, although denominated as "police inspection fee" since its undeniable purpose is to raise revenue. However, we cannot agree with the trial court's finding that the tax imposed by the ordinance is a percentage tax on sales which is beyond the scope of the municipality's authority to levy under Section 2 of the Local Autonomy Act. Under the said provision, municipalities and municipal districts are prohibited from imposing" any percentage tax on sales or other taxes in any form based thereon. " The tax imposed under the ordinance in question is not a percentage tax on sales or any other form of tax based on sales. It is a fixed tax of P.30 per bag of cassava starch or flour "shipped out" of the municipality. It is not based on sales. However, the tax imposed under the ordinance can be stricken down on another ground. According to Section 2 of the abovementioned Act, the tax levied must be "for public purposes, just and uniform" (Emphasis supplied.) As correctly held by the trial court, the so-called "police inspection fee" levied by the ordinance is "unjust and unreasonable." Said the court a quo: ... It has been proven that the only service rendered by the Municipality of Malabang, by way of inspection, is for the policeman to verify from the driver of the trucks of the petitioner passing by at the police checkpoint the number of bags loaded per trip which are to be shipped out of the municipality based on the trip tickets for the purpose of computing the total amount of tax to be collect (sic) and for no other purpose. The pretention of respondents that the police, aside from counting the number of bags shipped out, is also inspecting the cassava flour starch contained in the bags to find out if the said cassava flour starch is fit for human consumption could not be given credence by the Court because, aside from the fact that said purpose is not so stated in

the ordinance in question, the policemen of said municipality are not competent to determine if the cassava flour starch are fit for human consumption. The further pretention of respondents that the trucks of the petitioner hauling the bags of cassava flour starch from the mill to the bodega at the beach of Malabang are escorted by a policeman from the police checkpoint to the beach for the purpose of protecting the truck and its cargoes from molestation by undesirable elements could not also be given credence by the Court because it has been shown, beyond doubt, that the petitioner has not asked for the said police protection because there has been no occasion where its trucks have been molested, even for once, by bad elements from the police checkpoint to the bodega at the beach, it is solely for the purpose of verifying the correct number of bags of cassava flour starch loaded on the trucks of the petitioner as stated in the trip tickets, when unloaded at its bodega at the beach. The imposition, therefore, of a police inspection fee of P.30 per bag, imposed by said ordinance is unjust and unreasonable. The Court finally finds the inspection fee of P0.30 per bag, imposed by the ordinance in question to be excessive and confiscatory. It has been shown by the petitioner, Matalin Coconut Company, Inc., that it is merely realizing a marginal average profit of P0.40, per bag, of cassava flour starch shipped out from the Municipality of Malabang because the average production is P15.60 per bag, including transportation costs, while the prevailing market price is P16.00 per bag. The further imposition, therefore, of the tax of P0.30 per bag, by the ordinance in question would force the petitioner to close or stop its cassava flour starch milling business considering that it is maintaining a big labor force in its operation, including a force of security guards to guard its properties. The ordinance, therefore, has an adverse effect on the economic growth of the Municipality of Malabang, in particular, and of the nation, in general, and is contrary to the economic policy of the government. Having found the ordinance in question to be invalid, we find it unnecessary to rule on the other errors assigned by the appellants. WHEREFORE, petition is dismissed. The decision of the court a quo is hereby affirmed. No costs. SO ORDERED. Narvasa, Melencio-Herrera, Cruz and Paras, JJ., concur. Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-7859 December 22, 1955

WALTER LUTZ, as Judicial Administrator of the Intestate Estate of the deceased Antonio Jayme Ledesma,plaintiff-appellant, vs. J. ANTONIO ARANETA, as the Collector of Internal Revenue, defendant-appellee. Ernesto J. Gonzaga for appellant. Office of the Solicitor General Ambrosio Padilla, First Assistant Solicitor General Guillermo E. Torres and Solicitor Felicisimo R. Rosete for appellee.

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

First, to place the sugar industry in a position to maintain itself, despite the gradual loss of the preferntial position of the Philippine sugar in the United States market, and ultimately to insure its continued existence notwithstanding the loss of that market and the consequent necessity of meeting competition in the free markets of the world; Second, to readjust the benefits derived from the sugar industry by all of the component elements thereof the mill, the landowner, the planter of the sugar cane, and the laborers in the factory and in the field so that all might continue profitably to engage therein;lawphi1.net Third, to limit the production of sugar to areas more economically suited to the production thereof; and Fourth, to afford labor employed in the industry a living wage and to improve their living and working conditions: Provided, That the President of the Philippines may, until the adjourment of the next regular session of the National Assembly, make the necessary disbursements from the fund herein created (1) for the establishment and operation of sugar experiment station or stations and the undertaking of researchers (a) to increase the recoveries of the centrifugal sugar factories with the view of reducing manufacturing costs, (b) to produce and propagate higher yielding varieties of sugar cane more adaptable to different district conditions in the Philippines, (c) to lower the costs of raising sugar cane, (d) to improve the buying quality of denatured alcohol from molasses for motor fuel, (e) to determine the possibility of utilizing the other by-products of the industry, (f) to determine what crop or crops are suitable for rotation and for the utilization of excess cane lands, and (g) on other problems the solution of which would help rehabilitate and stabilize the industry, and (2) for the improvement of living and working conditions in sugar mills and sugar plantations, authorizing him to organize the necessary agency or agencies to take charge of the expenditure and allocation of said funds to carry out the purpose hereinbefore enumerated, and, likewise, authorizing the disbursement from the fund herein created of the necessary amount or amounts needed for salaries, wages, travelling expenses, equipment, and other sundry expenses of said agency or agencies. Plaintiff, Walter Lutz, in his capacity as Judicial Administrator of the Intestate Estate of Antonio Jayme Ledesma, seeks to recover from the Collector of Internal Revenue the sum of P14,666.40 paid by the estate as taxes, under section 3 of the Act, for the crop years 1948-1949 and 1949-1950; alleging that such tax is unconstitutional and void, being levied for the aid and support of the sugar industry exclusively, which in plaintiff's opinion is not a public purpose for which a tax may be constitutioally levied. The action having been dismissed by the Court of First Instance, the plaintifs appealed the case directly to this Court (Judiciary Act, section 17). The basic defect in the plaintiff's position is his assumption that the tax provided for in Commonwealth Act No. 567 is a pure exercise of the taxing power. Analysis of the Act, and particularly of section 6 (heretofore quoted in full), will show that the tax is levied with a regulatory purpose, to provide means for the rehabilitation and stabilization of the threatened sugar industry. In other words, the act is primarily an exercise of the police power. This Court can take judicial notice of the fact that sugar production is one of the great industries of our nation, sugar occupying a leading position among its export products; that it gives employment to thousands of laborers in fields and factories; that it is a great source of the state's wealth, is one of the important sources of foreign exchange needed by our government, and is thus pivotal in the plans of a regime committed to a policy of currency stability. Its promotion, protection and advancement, therefore redounds greatly to the general welfare. Hence it was competent for the legislature to find that the general welfare demanded that the sugar industry should be stabilized in turn; and in the wide field of its police power, the lawmaking body could provide that the distribution of benefits therefrom be readjusted among its components to enable it to resist the added strain of the increase in taxes that it had to sustain (Sligh vs. Kirkwood, 237 U. S. 52, 59 L. Ed. 835; Johnson vs. State ex rel. Marey, 99 Fla. 1311, 128 So. 853; Maxcy Inc. vs. Mayo, 103 Fla. 552, 139 So. 121). As stated in Johnson vs. State ex rel. Marey, with reference to the citrus industry in Florida The protection of a large industry constituting one of the great sources of the state's wealth and therefore directly or indirectly affecting the welfare of so great a portion of the population of the State is affected to such an extent by public interests as to be within the police power of the sovereign. (128 Sp. 857). Once it is conceded, as it must, that the protection and promotion of the sugar industry is a matter of public concern, it follows that the Legislature may determine within reasonable bounds what is necessary for its protection and expedient for its promotion. Here, the legislative discretion must be allowed fully play, subject only to the test of reasonableness; and it is not contended that the means provided in section 6 of the law (above quoted) bear no relation to the objective pursued or are oppressive in character. If objective and methods are alike constitutionally valid, no reason is seen why the state may not levy taxes to raise funds for their prosecution and attainment. Taxation may be made the implement of the state's police power (Great Atl. & Pac. Tea Co. vs. Grosjean, 301 U. S. 412, 81 L. Ed. 1193; U. S. vs. Butler, 297 U. S. 1, 80 L. Ed. 477; M'Culloch vs. Maryland, 4 Wheat. 316, 4 L. Ed. 579). That the tax to be levied should burden the sugar producers themselves can hardly be a ground of complaint; indeed, it appears rational that the tax be obtained precisely from those who are to be benefited from the expenditure of the funds derived from it. At any rate, it is inherent in the power to tax that a state be free to select the subjects of taxation, and it has been repeatedly held that "inequalities which result from a singling out of one particular class for taxation, or exemption infringe no constitutional limitation" (Carmichael vs. Southern Coal & Coke Co., 301 U. S. 495, 81 L. Ed. 1245, citing numerous authorities, at p. 1251). From the point of view we have taken it appears of no moment that the funds raised under the Sugar Stabilization Act, now in question, should be exclusively spent in aid of the sugar industry, since it is that very enterprise that is being protected. It may be that other industries are also in need of similar protection; that the legislature is not required by the Constitution to adhere to a policy of "all or none." As ruled in Minnesota ex rel. Pearson vs. Probate Court, 309 U. S. 270, 84 L. Ed. 744, "if the law presumably hits the evil where it is most felt, it is not to be overthrown because there are other instances to which it might have been applied;" and that "the legislative authority, exerted within its proper field, need not embrace all the evils within its reach" (N. L. R. B. vs. Jones & Laughlin Steel Corp. 301 U. S. 1, 81 L. Ed. 893). Even from the standpoint that the Act is a pure tax measure, it cannot be said that the devotion of tax money to experimental stations to seek increase of efficiency in sugar production, utilization of by-products and solution of allied problems, as well as to the improvements of living and working

conditions in sugar mills or plantations, without any part of such money being channeled directly to private persons, constitutes expenditure of tax money for private purposes, (compare Everson vs. Board of Education, 91 L. Ed. 472, 168 ALR 1392, 1400). The decision appealed from is affirmed, with costs against appellant. So ordered. Paras, C. J., Bengzon, Padilla, Reyes, A., Jugo, Bautista Angelo, Labrador, and Concepcion, JJ., concur. Republic of the Philippines SUPREME COURT Manila 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.
1wphi1. nt

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.

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 10issued 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 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 Republic Act No. 3792, is "the capital stock subscribed or paid and not, alternatively, the property and equipment.
1wphi1. nt

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.

Republic of the Philippines SUPREME COURT Manila EN BANC

G.R. No. 109289 October 3, 1994 RUFINO R. TAN, petitioner, vs. RAMON R. DEL ROSARIO, JR., as SECRETARY OF FINANCE & JOSE U. ONG, as COMMISSIONER OF INTERNAL REVENUE, respondents. G.R. No. 109446 October 3, 1994 CARAG, CABALLES, JAMORA AND SOMERA LAW OFFICES, CARLO A. CARAG, MANUELITO O. CABALLES, ELPIDIO C. JAMORA, JR. and BENJAMIN A. SOMERA, JR., petitioners, vs. RAMON R. DEL ROSARIO, in his capacity as SECRETARY OF FINANCE and JOSE U. ONG, in his capacity as COMMISSIONER OF INTERNAL REVENUE, respondents. Rufino R. Tan for and in his own behalf. Carag, Caballes, Jamora & Zomera Law Offices for petitioners in G.R. 109446.

VITUG, J.: These two consolidated special civil actions for prohibition challenge, in G.R. No. 109289, the constitutionality of Republic Act No. 7496, also commonly known as the Simplified Net Income Taxation Scheme ("SNIT"), amending certain provisions of the National Internal Revenue Code and, in G.R. No. 109446, the validity of Section 6, Revenue Regulations No. 2-93, promulgated by public respondents pursuant to said law. Petitioners claim to be taxpayers adversely affected by the continued implementation of the amendatory legislation. In G.R. No. 109289, it is asserted that the enactment of Republic Act No. 7496 violates the following provisions of the Constitution: Article VI, Section 26(1) Every bill passed by the Congress shall embrace only one subject which shall be expressed in the title thereof. Article VI, Section 28(1) The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation. Article III, Section 1 No person shall be deprived of . . . property without due process of law, nor shall any person be denied the equal protection of the laws. In G.R. No. 109446, petitioners, assailing Section 6 of Revenue Regulations No. 2-93, argue that public respondents have exceeded their rule-making authority in applying SNIT to general professional partnerships. The Solicitor General espouses the position taken by public respondents. The Court has given due course to both petitions. The parties, in compliance with the Court's directive, have filed their respective memoranda. G.R. No. 109289 Petitioner contends that the title of House Bill No. 34314, progenitor of Republic Act No. 7496, is a misnomer or, at least, deficient for being merely entitled, "Simplified Net Income Taxation Scheme for the Self-Employed and Professionals Engaged in the Practice of their Profession" (Petition in G.R. No. 109289). The full text of the title actually reads:

An Act Adopting the Simplified Net Income Taxation Scheme For The Self-Employed and Professionals Engaged In The Practice of Their Profession, Amending Sections 21 and 29 of the National Internal Revenue Code, as Amended. The pertinent provisions of Sections 21 and 29, so referred to, of the National Internal Revenue Code, as now amended, provide: Sec. 21. Tax on citizens or residents. xxx xxx xxx (f) Simplified Net Income Tax for the Self-Employed and/or Professionals Engaged in the Practice of Profession. A tax is hereby imposed upon the taxable net income as determined in Section 27 received during each taxable year from all sources, other than income covered by paragraphs (b), (c), (d) and (e) of this section by every individual whether a citizen of the Philippines or an alien residing in the Philippines who is self-employed or practices his profession herein, determined in accordance with the following schedule: Not over P10,000 3% Over P10,000 P300 + 9% but not over P30,000 of excess over P10,000 Over P30,000 P2,100 + 15% but not over P120,00 of excess over P30,000 Over P120,000 P15,600 + 20% but not over P350,000 of excess over P120,000 Over P350,000 P61,600 + 30% of excess over P350,000 Sec. 29. Deductions from gross income. In computing taxable income subject to tax under Sections 21(a), 24(a), (b) and (c); and 25 (a)(1), 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: (a) Raw materials, supplies and direct labor; (b) Salaries of employees directly engaged in activities in the course of or pursuant to the business or practice of their profession; (c) Telecommunications, electricity, fuel, light and water; (d) Business rentals; (e) Depreciation; (f) Contributions made to the Government and accredited relief organizations for the rehabilitation of calamity stricken areas declared by the President; and (g) Interest paid or accrued within a taxable year on loans contracted from accredited financial institutions which must be proven to have been incurred in connection with the conduct of a taxpayer's profession, trade or business. 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. On the basis of the above language of the law, it would be difficult to accept petitioner's view that the amendatory law should be considered as having now adopted a gross income, instead of as having still retained the net income, taxation scheme. The allowance for deductible items, it is true, may have significantly been reduced by the questioned law in comparison with that which has prevailed prior to the amendment; limiting, however, allowable deductions from gross income is neither discordant with, nor opposed to, the net income tax concept. The fact of the matter is still that various deductions, which are by no means inconsequential, continue to be well provided under the new law. Article VI, Section 26(1), of the Constitution has been envisioned so as (a) to prevent log-rolling legislation intended to unite the members of the legislature who favor any one of unrelated subjects in support of the whole act, (b) to avoid surprises or even fraud upon the legislature, and (c) to fairly apprise the people, through such publications of its proceedings as are usually made, of the subjects of legislation. 1 The above objectives of the fundamental law appear to us to have been sufficiently met. Anything else would be to require a virtual compendium of the law which could not have been the intendment of the constitutional mandate.

Petitioner intimates that Republic Act No. 7496 desecrates the constitutional requirement that taxation "shall be uniform and equitable" in that the law would now attempt to tax single proprietorships and professionals differently from the manner it imposes the tax on corporations and partnerships. The contention clearly forgets, however, that such a system of income taxation has long been the prevailing rule even prior to Republic Act No. 7496. Uniformity of taxation, like the kindred concept of equal protection, merely requires that all subjects or objects of taxation, similarly situated, are to be treated alike both in privileges and liabilities (Juan Luna Subdivision vs. Sarmiento, 91 Phil. 371). Uniformity does not forfend classification as long as: (1) the standards that are used therefor are substantial and not arbitrary, (2) the categorization is germane to achieve the legislative purpose, (3) the law applies, all things being equal, to both present and future conditions, and (4) the classification applies equally well to all those belonging to the same class (Pepsi Cola vs. City of Butuan, 24 SCRA 3; Basco vs. PAGCOR, 197 SCRA 52). What may instead be perceived to be apparent from the amendatory law is the legislative intent to increasingly shift the income tax system towards the schedular approach 2 in the income taxation of individual taxpayers and to maintain, by and large, the present global treatment 3 on taxable corporations. We certainly do not view this classification to be arbitrary and inappropriate. Petitioner gives a fairly extensive discussion on the merits of the law, illustrating, in the process, what he believes to be an imbalance between the tax liabilities of those covered by the amendatory law and those who are not. With the legislature primarily lies the discretion to determine the nature (kind), object (purpose), extent (rate), coverage (subjects) and situs (place) of taxation. This court cannot freely delve into those matters which, by constitutional fiat, rightly rest on legislative judgment. Of course, where a tax measure becomes so unconscionable and unjust as to amount to confiscation of property, courts will not hesitate to strike it down, for, despite all its plenitude, the power to tax cannot override constitutional proscriptions. This stage, however, has not been demonstrated to have been reached within any appreciable distance in this controversy before us. Having arrived at this conclusion, the plea of petitioner to have the law declared unconstitutional for being violative of due process must perforce fail. The due process clause may correctly be invoked only when there is a clear contravention of inherent or constitutional limitations in the exercise of the tax power. No such transgression is so evident to us. G.R. No. 109446 The several propositions advanced by petitioners revolve around the question of whether or not public respondents have exceeded their authority in promulgating Section 6, Revenue Regulations No. 2-93, to carry out Republic Act No. 7496. The questioned regulation reads: Sec. 6. General Professional Partnership The general professional partnership (GPP) and the partners comprising the GPP are covered by R. A. No. 7496. Thus, in determining the net profit of the partnership, only the direct costs mentioned in said law are to be deducted from partnership income. Also, the expenses paid or incurred by partners in their individual capacities in the practice of their profession which are not reimbursed or paid by the partnership but are not considered as direct cost, are not deductible from his gross income. The real objection of petitioners is focused on the administrative interpretation of public respondents that would apply SNIT to partners in general professional partnerships. Petitioners cite the pertinent deliberations in Congress during its enactment of Republic Act No. 7496, also quoted by the Honorable Hernando B. Perez, minority floor leader of the House of Representatives, in the latter's privilege speech by way of commenting on the questioned implementing regulation of public respondents following the effectivity of the law, thusly: MR. ALBANO, Now Mr. Speaker, I would like to get the correct impression of this bill. Do we speak here of individuals who are earning, I mean, who earn through business enterprises and therefore, should file an income tax return? MR. PEREZ. That is correct, Mr. Speaker. This does not apply to corporations. It applies only to individuals. (See Deliberations on H. B. No. 34314, August 6, 1991, 6:15 P.M.; Emphasis ours). Other deliberations support this position, to wit: MR. ABAYA . . . Now, Mr. Speaker, did I hear the Gentleman from Batangas say that this bill is intended to increase collections as far as individuals are concerned and to make collection of taxes equitable? MR. PEREZ. That is correct, Mr. Speaker. (Id. at 6:40 P.M.; Emphasis ours). In fact, in the sponsorship speech of Senator Mamintal Tamano on the Senate version of the SNITS, it is categorically stated, thus: This bill, Mr. President, is not applicable to business corporations or to partnerships; it is only with respect to individuals and professionals. (Emphasis ours)

The Court, first of all, should like to correct the apparent misconception that general professional partnerships are subject to the payment of income tax or that there is a difference in the tax treatment between individuals engaged in business or in the practice of their respective professions and partners in general professional partnerships. The fact of the matter is that a general professional partnership, unlike an ordinary business partnership (which is treated as a corporation for income tax purposes and so subject to the corporate income tax), is not itself an income taxpayer. The income tax is imposed not on the professional partnership, which is tax exempt, but on the partners themselves in their individual capacity computed on their distributive shares of partnership profits. Section 23 of the Tax Code, which has not been amended at all by Republic Act 7496, is explicit: Sec. 23. Tax liability of members of general professional partnerships. (a) Persons exercising a common profession in general partnership shall be liable for income tax only in their individual capacity, and the share in the net profits of the general professional partnership to which any taxable partner would be entitled whether distributed or otherwise, shall be returned for taxation and the tax paid in accordance with the provisions of this Title. (b) In determining his distributive share in the net income of the partnership, each partner (1) Shall take into account separately his distributive share of the partnership's income, gain, loss, deduction, or credit to the extent provided by the pertinent provisions of this Code, and (2) Shall be deemed to have elected the itemized deductions, unless he declares his distributive share of the gross income undiminished by his share of the deductions. There is, then and now, no distinction in income tax liability between a person who practices his profession alone or individually and one who does it through partnership (whether registered or not) with others in the exercise of a common profession. Indeed, outside of the gross compensation income tax and the final tax on passive investment income, under the present income tax system all individuals deriving income from any source whatsoever are treated in almost invariably the same manner and under a common set of rules. We can well appreciate the concern taken by petitioners if perhaps we were to consider Republic Act No. 7496 as an entirely independent, not merely as an amendatory, piece of legislation. The view can easily become myopic, however, when the law is understood, as it should be, as only forming part of, and subject to, the whole income tax concept and precepts long obtaining under the National Internal Revenue Code. To elaborate a little, the phrase "income taxpayers" is an all embracing term used in the Tax Code, and it practically covers all persons who derive taxable income. The law, in levying the tax, adopts the most comprehensive tax situs of nationality and residence of the taxpayer (that renders citizens, regardless of residence, and resident aliens subject to income tax liability on their income from all sources) and of the generally accepted and internationally recognized income taxable base (that can subject non-resident aliens and foreign corporations to income tax on their income from Philippine sources). In the process, the Code classifies taxpayers into four main groups, namely: (1) Individuals, (2) Corporations, (3) Estates under Judicial Settlement and (4) Irrevocable Trusts (irrevocable both as to corpus and as to income). Partnerships are, under the Code, either "taxable partnerships" or "exempt partnerships." Ordinarily, partnerships, no matter how created or organized, are subject to income tax (and thus alluded to as "taxable partnerships") which, for purposes of the above categorization, are by law assimilated to be within the context of, and so legally contemplated as, corporations. Except for few variances, such as in the application of the "constructive receipt rule" in the derivation of income, the income tax approach is alike to both juridical persons. Obviously, SNIT is not intended or envisioned, as so correctly pointed out in the discussions in Congress during its deliberations on Republic Act 7496, aforequoted, to cover corporations and partnerships which are independently subject to the payment of income tax. "Exempt partnerships," upon the other hand, are not similarly identified as corporations nor even considered as independent taxable entities for income tax purposes. A general professional partnership is such an example. 4 Here, the partners themselves, not the partnership (although it is still obligated to file an income tax return [mainly for administration and data]), are liable for the payment of income tax in their individual capacity computed on their respective and distributive shares of profits. In the determination of the tax liability, a partner does so as an individual, and there is no choice on the matter. In fine, under the Tax Code on income taxation, the general professional partnership is deemed to be no more than a mere mechanism or a flow-through entity in the generation of income by, and the ultimate distribution of such income to, respectively, each of the individual partners. Section 6 of Revenue Regulation No. 2-93 did not alter, but merely confirmed, the above standing rule as now so modified by Republic Act No. 7496 on basically the extent of allowable deductions applicable to all individual income taxpayers on their non-compensation income. There is no evident intention of the law, either before or after the amendatory legislation, to place in an unequal footing or in significant variance the income tax treatment of professionals who practice their respective professions individually and of those who do it through a general professional partnership. WHEREFORE, the petitions are DISMISSED. No special pronouncement on costs. SO ORDERED. Narvasa, C.J., Cruz, Feliciano, Regalado, Davide, Jr., Romero, Bellosillo, Melo, Quiason, Puno, Kapunan and Mendoza, JJ., concur. Padilla and Bidin, JJ., are on leave.

#Footnotes
1 Justice Isagani A. Cruz on Philippine Political Law 1993 edition, pp. 146-147, citing with approval Cooley on Constitutional Limitations.

2 A system employed where the income tax treatment varies and made to depend on the kind or category of taxable income of the taxpayer. 3 A system where the tax treatment views indifferently the tax base and generally treats in common all categories of taxable income of the taxpayer. 4 A general professional partnership, in this context, must be formed for the sole purpose of exercising acommon profession, no part of the income of which is derived from its engaging in any trade business; otherwise, it is subject to tax as an ordinary business partnership or, which is to say, as a corporation and thereby subject to the corporate income tax. The only other exempt partnership is a joint venture for undertaking construction projects or engaging in petroleum operations pursuant to an operating agreement under a service contract with the government (see Sections 20, 23 and 24, National Internal Revenue Code). Republic of the Philippines SUPREME COURT Manila FIRST DIVISION

G.R. No. 119252 August 18, 1997 COMMISSIONER OF INTERNAL REVENUE and COMMISSIONER OF CUSTOMS, petitioners, vs. HON. APOLINARIO B. SANTOS, in his capacity as Presiding Judge of the Regional Trial Court, Branch 67, Pasig City; ANTONIO M. MARCO; JEWELRY BY MARCO & CO., INC., and GUILD OF PHILIPPINE JEWELLERS, INC., respondents.

HERMOSISIMA, JR., J.: Of grave concern to this Court is the judicial pronouncement of the court a quo that certain provisions of the Tariff & Customs Code and the National Internal Revenue Code are unconstitutional. This provokes the issue: Can the Regional Trial Courts declare a law inoperative and without force and effect or otherwise unconstitutional? If it can, under what circumstances? In this petition, the Commissioner of Internal Revenue and the Commissioner of Customs jointly seek the reversal of the Decision, 1 dated February 16, 1995, of herein public respondent, Hon. Apolinario B. Santos, Presiding Judge of Branch 67 of the Regional Trial Court of Pasig City. The following facts, concisely related in the petition 2 of the Office of the Solicitor General, appear to be undisputed: 1. Private respondent Guild of Philippine Jewelers, Inc., is an association of Filipino jewelers engaged in the manufacture of jewelries (sic) and allied undertakings. Among its members are Hans Brumann, Inc., Miladay Jewels, Inc., Mercelles, Inc., Solid Gold International Traders, Inc., Diagem Trading Corporation, and private respondent Jewelry by Marco & Co., Inc. Private respondent Antonio M. Marco is the President of the Guild. 2. On August 5, 1988, Felicidad L. Viray, then Regional Director, Region No. 4-A of the Bureau of Internal Revenue, acting for and in behalf of the Commissioner of Internal Revenue, issued Regional Mission Order No. 109-88 to BIR officers, led by Eliseo Corcega, to conduct surveillance, monitoring, and inventory of all imported articles of Hans Brumann, Inc., and place the same under preventive embargo. The duration of the mission was from August 8 to August 20, 1988 (Exhibit "1"; Exhibit "A"). 3. On August 17, 1988, pursuant to the aforementioned Mission Order, the BIR officers proceeded to the establishment of Hans Brumann, Inc., served the Mission Order, and informed the establishment that they were going to make an inventory of the articles involved to see if the proper taxes thereon have been paid. They then made an inventory of the articles displayed in the cabinets with the assistance of an employee of the establishment. They listed down the articles, which list was signed by the assistant employee. They also requested the presentation of proof of necessary payments for excise tax and value-added tax on said articles (pp. 10-15, TSN, April 12, 1993, Exhibits "2", "2-A", "3", "3-A").

4. The BIR officers requested the establishment not to sell the articles until it can be proven that the necessary taxes thereon have been paid. Accordingly, Mr. Hans Brumann, the owner of the establishment, signed a receipt for Goods, Articles, and Things Seized under Authority of the National Internal Revenue Code (dated August 17, 1988), acknowledging that the articles inventoried have been seized and left in his possession, and promising not to dispose of the same without authority of the Commissioner of Internal Revenue pending investigation. 3

5. Subsequently, BIR officer Eliseo Corcega submitted to his superiors a report of the inventory conducted and a computation of the value-added tax and ad valorem tax on the articles for evaluation and disposition. 4 6. Mr. Hans Brumann, the owner of the establishment, never filed a protest with the BIR on the preventive embargo of the articles. 5
7. On October 17, 1988, Letter of Authority No. 0020596 was issued by Deputy Commissioner Eufracio D. Santos to BIR officers to examine the books of accounts and other accounting records of Hans Brumann, Inc., for "stocktaking investigation for excise tax purposes for the period January 1, 1988 to present" (Exhibit "C"). In a letter dated October 27, 1988, in connection with the physical count of the inventory (stocks on hand) pursuant to said Letter of Authority, Hans Brumann, Inc. was requested to prepare and make available to the BIR the documents indicated therein (Exhibit "D").

8. Hans Brumann, Inc., did not produce the documents requested by the BIR. 6 9. Similar Letter of Authority were issued to BIR officers to examine the books of accounts and other accounting records of Miladay Jewels, Inc., Mercelles, Inc., Solid Gold International Traders, Inc., (Exhibits "E", "G" and "N") and Diagem Trading Corporation 7 for "stocktaking/investigation far excise tax purpose for the period January 1, 1988 to present."
10. In the case of Miladay Jewels, Inc. and Mercelles, Inc., there is no account of what actually transpired in the implementation of the Letters of Authority.

11. In the case of Solid Gold International Traders Corporation, the BIR officers made an inventory of the articles in the establishment. 8 The same is true with respect to Diagem Traders Corporation. 9
12. On November 29, 1988, private respondents Antonio M. Marco and Jewelry By Marco & Co., Inc. filed with the Regional Trial Court, National Capital Judicial Region, Pasig City, Metro Manila, a petition for declaratory relief with writ of preliminary injunction and/or temporary restraining order against herein petitioners and Revenue Regional Director Felicidad L. Viray (docketed as Civil Case No. 56736) praying that Sections 126, 127(a) and (b) and 150(a) of the National Internal Revenue Code and Hdg. No. 71.01, 71.02, 71.03, and 71.04, Chapter 71 of the Tariff and Customs Code of the Philippines be declared unconstitutional and void, and that the Commissioner of Internal Revenue and Customs be prevented or enjoined from issuing mission orders and other orders of similar nature. . . . 13. On February 9, 1989, herein petitioners filed their answer to the petition. . . . 14 On October 16, 1989, private respondents filed a Motion with Leave to Amend Petition by including as petitioner the Guild of Philippine Jewelers, Inc., which motion was granted. . . . 15. The case, which was originally assigned to Branch 154, was later reassigned to Branch 67. 16. On February 16, 1995, public respondents rendered a decision, the dispositive portion of which reads: In view of the foregoing reflections, judgment is hereby rendered, as follows: 1. Declaring Section 104 of the Tariff and the Customs Code of the Philippines, Hdg. 71.01, 71.02, 71.03, and 71.04, Chapter 71 as amended by Executive Order No. 470, imposing three to ten (3% to 10%) percent tariff and customs duty on natural and cultured pearls and precious or semi-precious stones, and Section 150 par. (a) the National Internal Revenue Code of 1977, as amended, renumbered and rearranged by Executive Order 273, imposing twenty (20%) percent excise tax on jewelry, pearls and other precious stones, as INOPERATIVE and WITHOUT FORCE and EFFECT insofar as petitioners are concerned. 2. Enforcement of the same is hereby enjoined. No cost. SO ORDERED.

Section 150 (a) of Executive Order No. 273 reads: Sec. 150. Non-essential goods. There shall be levied, assessed and collected a tax equivalent to 20% based on the wholesale price or the value of importation used by the Bureau of Customs in determining tariff and customs duties; net of the excise tax and value-added tax, of the following goods: (a) All goods commonly or commercially known as jewelry, whether real or imitation, pearls, precious and semi-precious stones and imitations thereof; goods made of, or ornamented, mounted and fitted with, precious metals or imitations thereof or ivory (not including surgical and dental instruments, silverplated wares, frames or mountings for spectacles or eyeglasses, and dental gold or gold alloys and other precious metals used in filling, mounting or fitting of the teeth); opera glasses and lorgnettes. The term "precious metals" shall include platinum, gold, silver, and other metals of similar or greater value. The term "imitations thereof" shall include platings and alloys of such metals. Section 150 (a) of Executive Order No. 273, which took effect on January 1, 1988, amended the then Section 163 (a) of the Tax Code of 1986 which provided that: Sec. 163. Percentage tax on sales of non-essential articles. There shall be levied, assessed and collected, once only on every original sale, barter, exchange or similar transaction for nominal or valuable consideration intended to transfer ownership of, or title to, the articles herein below enumerated a tax equivalent to 50% of the gross value in money of the articles so sold, bartered, exchanged or transferred, such tax to be paid by the manufacturer or producer: (a) All articles commonly or commercially known as jewelry, whether real or imitation, pearls, precious and semi-precious stones, and imitations thereof, articles made of, or ornamented, mounted or fitted with, precious metals or imitations thereof or ivory (not including surgical and dental instruments, silverplated wares, frames or mounting for spectacles or eyeglasses, and dental gold or gold alloys and other precious metal used in filling, mounting or fitting of the teeth); opera glasses, and lorgnettes. The term "precious metals" shall include platinum, gold, silver, and other metals of similar or greater value. The term "imitations thereof" shall include platings and alloys of such metals; Section 163 (a) of the 1986 Tax Code was formerly Section 194(a) of the 1977 Tax Code and Section 184(a) of the Tax code, as amended by Presidential Decree No. 69, which took effect on January 1, 1974. It will be noted that, while under the present law, jewelry is subject to a 20% excise tax in addition to a 10% value-added tax under the old law, it was subjected to 50% percentage tax. It was even subjected to a 70% percentage tax under then Section 184(a) of the Tax Code, as amended by P.D. 69. Section 104, Hdg. Nos. 17.01, 17.02, 17.03 and 17.04, Chapter 71 of the Tariff and Customs Code, as amended by Executive Order No. 470, dated July 20, 1991, imposes import duty on natural or cultured pearls and precious or semi-precious stones at the rate of 3% to 10% to be applied in stages from 1991 to 1994 and 30% in 1995. Prior to the issuance of E.O. 470, the rate of import duty in 1988 was 10% to 50% when the petition was filed in the court a quo. In support of their petition before the lower court, the private respondents submitted a position paper purporting to be an exhaustive study of the tax rates on jewelry prevailing in other Asian countries, in comparison to tax rates levied on the same in the Philippines. 10 The following issues were thus raised therein: 1. Whether or not the Honorable Court has jurisdiction over the subject matter of the petition. 2. Whether the petition states a cause of action or whether the petition alleges a justiciable controversy between the parties. 3. Whether Section 150, par. (a) of the NIRC and Section 104, Hdg. 71.01, 71.02, 71.03 and 71.04 of the Tariff and Customs Code are unconstitutional. 4. Whether the issuance of the Mission Order and Letters of Authority is valid and legal. In the assailed decision, the public respondent held indeed that the Regional Trial Court has jurisdiction to take cognizance of the petition since "jurisdiction over the nature of the suit is conferred by law and it is determine[d] through the allegations in the petition," and that the "Court of Tax Appeals has no jurisdiction to declare a statute unconstitutional much less issue writs of certiorari and prohibition in order to correct acts of respondents allegedly committed with grave abuse of discretion amounting to lack of jurisdiction." As to the second issue, the public respondent, made the holding that there exists a justiciable controversy between the parties, agreeing with the statements made in the position paper presented by the private respondents, and considering these statements to be factual evidence, to wit: Evidence for the petitioners indeed reveals that government taxation policy treats jewelry, pearls, and other precious stones and metals as non-essential luxury items and therefore, taxed heavily; that the atmospheric cost of taxation is killing the local manufacturing jewelry industry because they cannot compete with neighboring and other countries where importation and

manufacturing of jewelry is not taxed heavily, if not at all; that while government incentives and subsidies exit, local manufacturers cannot avail of the same because officially many of them are unregistered and are unable to produce the required official documents because they operate underground, outside the tariff and tax structure; that local jewelry manufacturing is under threat of extinction, otherwise discouraged, while domestic trading has become more attractive; and as a consequence, neighboring countries, such as: Hongkong, Singapore, Malaysia, Thailand, and other foreign competitors supplying the Philippine market either through local channels or through the black market for smuggled goods are the ones who are getting business and making money, while members of the petitioner Guild of Philippine Jewelers, Inc. are constantly subjected to bureaucratic harassment instead of being given by the government the necessary support in order to survive and generate revenue for the government, and most of all fight competitively not only in the domestic market but in the arena of world market where the real contest is.

Considering the allegations of fact in the petition which were duly proven during the trial, the Court holds that the petition states a cause of action and there exists a justiciable controversy between the parties which would require determination of constitutionality of the laws imposing excise tax and customs duty on jewelry. 11(emphasis ours)
The public respondent, in addressing the third issue, ruled that the laws in question are confiscatory and oppressive. Again, virtually adopting verbatim the reasons presented by the private respondents in their position paper, the lower court stated: The Court finds that indeed government taxation policy trats(sic) hewelry(sic) as non-essential luxury item and therefore, taxed heavily. Aside from the ten (10%) percent value added tax (VAT), local jewelry manufacturers contend with the (manufacturing) excise tax of twenty (20%) percent (to be applied in stages) customs duties on imported raw materials, the highest in the AsiaPacific region. In contrast, imported gemstones and other precious metals are duty free in Hongkong, Thailand, Malaysia and Singapore. The Court elaborates further on the experiences of other countries in their treatment of the jewelry sector. MALAYSIA Duties and taxes on imported gemstones and gold and the sales tax on jewelry were abolished in Malaysia in 1984. They were removed to encourage the development of Malaysia's jewelry manufacturing industry and to increase exports of jewelry. THAILAND Gems and jewelry are Thailand's ninth most important export earner. In the past, the industry was overlooked by successive administrations much to the dismay of those involved in developing trade. Prohibitive import duties and sales tax on precious gemstones restricted the growht (sic) of the industry, resulting in most of the business being unofficial. It was indeed difficult for a government or businessman to promote an industry which did not officially exist. Despite these circumstances, Thailand's Gem business kept growing up in (sic) businessmen began to realize it's potential. In 1978, the government quietly removed the severe duties on precious stones, but imposed a sales tax of 3.5%. Little was said or done at that time as the government wanted to see if a free trade in gemstones and jewelry would increase local manufacturing and exports or if it would mean more foreign made jewelry pouring into Thailand. However, as time progressed, there were indications that local manufacturing was indeed being encouraged and the economy was earning mom from exports. The government soon removed the 3% sales tax too, putting Thailand at par with Hongkong and Singapore. In these countries, there are no more import duties and sales tax on gems. (Cited in pages 6 and 7 of Exhibit "M". The Center for Research and Communication in cooperation with the Guild of Philippine Jewelers, Inc., June 1986). To illustrate, shown hereunder is the Philippine tariff and tax structure on jewelry and other precious and semi-precious stones compared to other neighboring countries, to wit: Tariff on imported Jewelry and (Manufacturing) Sales Tax 10% (VAT) precious stones Excise tax Philippines 3% to 10% to be 20% 10% VAT applied in stages Malaysia None None None Thailand None None None Singapore None None None Hongkong None None None

In this connection, the present tariff and tax structure increases manufacturing costs and renders the local jewelry manufacturers uncompetitive against other countries even before they start manufacturing and trading. Because of the prohibitive cast (sic) of taxation, most manufacturers source from black market for smuggled goods, and that while manufacturers can avail of tax exemption and/or tax credits from the (manufacturing) excise tax, they have no documents to present when filing this exemption because, or pointed out earlier, most of them source their raw materials from the block market, and since many of them do not legally exist or operate onofficially (sic), or underground, again they have no records (receipts) to indicate where and when they will utilize such tax credits. (Cited in Exhibit "M" Buencamino Report). Given these constraints, the local manufacturer has no recourse but to the back door for smuggled goods if only to be able to compete even ineffectively, or cease manufacturing activities and instead engage in the tradinf (sic) of smuggled finished jewelry. Worthy of note is the fact that indeed no evidence was adduced by respondents to disprove the foregoing allegations of fact. Under the foregoing factual circumstances, the Court finds the questioned statutory provisions confiscatory and destructive of the proprietary right of the petitioners to engage in business in violation of Section 1, Article III of the Constitution which states, as follows:

No person shall be deprived of the life, liberty, or property without due process of law . . . . 12
Anent the fourth and last issue, the herein public respondent did not find it necessary to rule thereon, since, in his opinion, "the same has been rendered moot and academic by the aforementioned pronouncement." 13 The petitioners now assail the decision rendered by the public respondent, contending that the latter has no authority to pass judgment upon the taxation policy of the government. In addition, the petitioners impugn the decision in question by asserting that there was no showing that the tax laws on jewelry are confiscatory and destructive of private respondent's proprietary rights. We rule in favor of the petitioners. It is interesting to note that public respondent, in the dispositive portion of his decision, perhaps keeping in mind his limitations under the law as a trial judge, did not go so far as to declare the laws in question to be unconstitutional. However, therein he declared the laws to be inoperative and without force and effect insofar as the private respondents are concerned. But, respondent judge, in the body of his decision, unequivocally but wrongly declared the said provisions of law to be violative of Section 1, Article III of the Constitution. In fact, in their Supplemental Comment on the Petition for Review, 14 the private respondents insist that Judge Santos, in his capacity as judge of the Regional Trial Court, acted within his authority in passing upon the issues, to wit: A perusal of the appealed decision would undoubtedly disclose that public respondent did not pass judgment on the soundness or wisdom of the government's tax policy on jewelry. True, public respondent, in his questioned decision, observed, inter alia, that indeed government tax policy treats jewelry as non-essential item, and therefore, taxed heavily; that the present tariff and tax structure increase manufacturing cost and renders the local jewelry manufacturers uncompetitive against other countries even before they start manufacturing and trading; that many of the local manufacturers do not legally exist or operate unofficially or underground; and that the manufacturers have no recourse but to the back door for smuggled goods if only to be able to compete even if ineffectively or cease manufacturing activities. BUT, public respondent did not, in any manner, interfere with or encroach upon the prerogative of the legislature to determine what should be the tax policy on jewelry. On the other hand, the issue raised before, and passed upon by, the public respondent was whether or not Section 150, paragraph (a) of the National Internal Revenue Code (NIRC) and Section 104, Hdg. 71.01, 71.02, 71.03 and 71.04 of the Tariff and Customs Code are unconstitutional, or differently stated, whether or not the questioned statutory provisions affect the constitutional right of private respondents to engage in business. It is submitted that public respondent confined himself on this issue which is clearly a judicial question. We find it incongruous, in the face of the sweeping pronouncements made by Judge Santos in his decision, that private respondents can still persist in their argument that the former did not overreach the restrictions dictated upon him by law. There is no doubt in the Court's mind, despite protestations to the contrary, that respondent judge encroached upon matters properly falling within the province of legislative functions. In citing as basis for his decision unproven comparative data pertaining to differences between tax rates of various Asian countries, and concluding that the jewelry industry in the Philippines suffers as a result, the respondent judge took it upon himself to supplant legislative policy regarding jewelry taxation. In advocating the abolition of local tax and duty on jewelry simply because other countries have adopted such policies, the respondent judge overlooked the fact that such matters are not for him to decide. There are reasons why jewelry, a non-essential item, is taxed as it is in this country, and these reasons, deliberated upon by our legislature, are beyond the reach of judicial questioning. As held in Macasiano vs. National Housing Authority: 15 The policy of the courts is to avoid ruling on constitutional questions and to presume that the acts of the political departments are valid in the absence of a clear and unmistakable showing to the contrary. To doubt is to sustain. This presumption is based on the doctrine of separation of powers which enjoins upon each department a becoming respect for the acts of the other departments. The theory is that as the joint act of Congress and the President of the Philippines, a law has been carefully studied and determined to be in accordance with the fundamental low before it was finally enacted. (emphasis ours) What we see here is a debate on the WISDOM of the laws in question. This is a matter on which the RTC is not competent to rule. 16 As Cooley observed: "Debatable questions are for the legislature to decide. The courts do not sit to resolve the merits of conflicting issues." 17 In Angara vs. Electoral Commission, 18 Justice Laurel made it clear that "the judiciary does not pass upon questions of wisdom, justice or expediency of

legislation." And fittingly so, for in the exercise of judicial power, we are allowed only "to settle actual controversies involving rights which are legally demandable and enforceable", and may not annul an act of the political departments simply because we feel it is unwise or impractical. 19 This is not to say that Regional Trial Courts have no power whatsoever to declare a law unconstitutional. In J.M. Tuason and Co. v. Court of Appeals, 20 we said that "[p]lainly the Constitution contemplates that the inferior courts should have jurisdiction in cases involving constitutionality of any treaty or law, for it speaks of appellate review of final judgments of inferior courts in cases where such constitutionality happens to be in issue." This authority of lower courts to decide questions of constitutionality in the first instance reaffirmed in Ynos v.Intermediate Court of Appeals. 21 But this authority does not extend to deciding questions which pertain to legislative policy. The trial court is not the proper forum for the ventilation of the issues raised by the private respondents. The arguments they presented focus on the wisdom of the provisions of law which they seek to nullify. Regional Trial Courts can only look into the validity of a provision, that is, whether or not it has been passed according to the procedures laid down by law, and thus cannot inquire as to the reasons for its existence. Granting arguendo that the private respondents may have provided convincing arguments why the jewelry industry in the Philippines should not be taxed as it is, it is to the legislature that they must resort to for relief, since with the legislature primarily lies the discretion to determine the nature (kind), object (purpose), extent (rate), coverage (subjects) and situs (place) of taxation. This Court cannot freely delve into those matters which, by constitutional fiat, rightly rest on legislative judgment. 22 As succinctly put in Lim vs. Pacquing: 23 "Where a controversy may be settled on a platform other than one involving constitutional adjudication, the court should exercise becoming modesty and avoid the constitutional question." As judges, we can only interpret and apply the law and, despite our doubts about its wisdom, cannot repeal or amend it.24 The respondents presented an exhaustive study on the tax rates on jewelry levied by different Asian countries. This is meant to convince us that compared to other countries, the tax rates imposed on said industry in the Philippines is oppressive and confiscatory. This Court, however, cannot subscribe to the theory that the tax rates of other countries should be used as a yardstick in determining what may be the proper subjects of taxation in our own country. It should be pointed out that in imposing the aforementioned taxes and duties, the State, acting through the legislative and executive branches, is exercising its sovereign prerogative. It is inherent in the power to tax that the State be free to select the subjects of taxation, and it has been repeatedly held that "inequalities which result from a singling out or one particular class for taxation, or exemption, infringe no constitutional limitation." 25 WHEREFORE, premises considered, the petition is hereby GRANTED, and the Decision in Civil Case No. 56736 is hereby REVERSED and SET ASIDE. No costs. SO ORDERED. Padilla, Bellosillo, Vitug and Kapunan, JJ., concur. Footnotes 1 Civil Case No. 56736. 2 Rollo, pp. 8-29 3 TSN, April 12, 1993, pp. 18-19; Exhibit "4"; Exhibit "B." 4 TSN, April 12, 1993, pp. 20-21; Exhibits "5" & "5-A." 5 TSN, June 16, 1993, p. 16. 6 TSN, October 21, 1992, p. 11. 7 TSN, September 16, 1992, pp. 9-14; pp. 44-45. 8 TSN, December 7, 1992, pp. 6-7. 9 TSN, September 16, 1992, pp. 9-14; pp. 44-45. 10 This position paper was prepared by a certain J. Antonio Buencamino of the Corporate Planning Services Division, Center for Research and Communication, in cooperation with the Guild of Philippine Jewelers, Inc. 11 Decision, pp. 7-8, Rollo, pp. 36-37. 12 Decision, pp. 10-12; Rollo, pp. 39-41. 13 Decision, p. 13; Rollo, p. 42.

14 Rollo, pp. 146-147. 15 Macasiano vs. National Housing Authority, 224 SCRA 236 (1993), citing Garcia vs. Executive Secretary, 204 SCRA 516 (1991). 16 Ibid. 17 Ibid. 18 63 Phil. 139 (1936). 19 Macasiano vs. National Housing Authority, supra. 20 3 SCRA 696 [1961]. 21 148 SCRA 659 [1987]. 22 Tan vs. Del Rosario, Jr., 237 SCRA 324 (1994). 23 240 SCRA 649 (1995). See separate opinion. 24 Pangilinan vs. Maglaya, 225 SCRA 511 (1993). 25 Lutz vs. Araneta, 98 Phil. 148 (1955); Sison Jr. vs. Ancheta, 130 SCRA 654, 663 (1984); Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. vs. Tan, 163 SCRA 371 (1988); Tolentino vs. Secretary of Finance, 249 SCRA 628 (1995).

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[1988V539] ENGRACIO FRANCIA, petitioner, vs. INTERMEDIATE APPELLATE COURT and HO FERNANDEZ, respondents.1988 Jun 283rd DivisionG.R. No. L-67649D E C I S I O N

GUTIERREZ, JR., J.:

The petitioner invokes legal and equitable grounds to reverse the questioned decision of the Intermediate Appellate Court, to set aside the auction sale of his property which took place on December 5, 1977, and to allow him to recover a 203 square meter lot which was sold at public auction to Ho Fernandez and ordered titled in the latter's name.

The antecedent facts are as follows:

Engracio Francia is the registered owner of a residential lot and a two-story house built upon it situated at Barrio San Isidro, now District of Sta. Clara, Pasay City, Metro Manila. The lot, with an area of about 328 square meters, is described and covered by Transfer Certificate of Title No. 4739 (37795) of the Registry of Deeds of Pasay City.

On October 15, 1977, a 125 square meter portion of Francia's property was expropriated by the Republic of the Philippines for the sum of P4,116.00 representing the estimated amount equivalent to the assessed value of the aforesaid portion.

Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes. Thus, on December 5, 1977, his property was sold at public auction by the City Treasurer of Pasay City pursuant to Section 73 of Presidential Decree No. 464 known as the Real Property Tax Code in order to satisfy a tax delinquency of P2,400.00. Ho Fernandez was the highest bidder for the property.

Francia was not present during the auction sale since he was in Iligan City at that time helping his uncle ship bananas.

On March 3, 1979, Francia received a notice of hearing of LRC Case No. 1593-P "In re: Petition for Entry of New Certificate of Title" filed by Ho Fernandez, seeking the cancellation of TCT No. 4739 (37795) and the issuance in his name of a new certificate of title. Upon verification through his lawyer, Francia discovered that a Final Bill of Sale had been issued in favor of Ho Fernandez by the City Treasurer on December 11, 1978. The auction sale and the final bill of sale were both annotated at the back of TCT No. 4739 (37795) by the Register of Deeds.

On March 20, 1979, Francia filed a complaint to annul the auction sale. He later amended his complaint on January 24, 1980.

On April 23, 1981, the lower court rendered a decision, the dispositive portion of which reads:

"WHEREFORE, in view of the foregoing, judgment is hereby rendered dismissing the amended complaint and ordering:

"(a) The Register of Deeds of Pasay City to issue a new Transfer Certificate of Title in favor of the defendant Ho Fernandez over the parcel of land including the improvements thereon, subject to whatever encumbrances appearing at the back of TCT No. 4739 (37795) and ordering the same TCT No. 4739 (37795) cancelled.

"(b) The plaintiff to pay defendant Ho Fernandez the sum of P1,000.00 as attorney's fees." (p. 30, Record on Appeal)

The Intermediate Appellate Court affirmed the decision of the lower court in toto.

Hence, this petition for review.

Francia prefaced his arguments with the following assignments of grave errors of law:

I RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE ERROR OF LAW IN NOT HOLDING THAT PETITIONER'S OBLIGATION TO PAY P2,400.00 FOR SUPPOSED TAX DELINQUENCY WAS SET-OFF BY THE AMOUNT OF P4,116.00 WHICH THE GOVERNMENT IS INDEBTED TO THE FORMER.

II RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE AND SERIOUS ERROR IN NOT HOLDING THAT PETITIONER WAS NOT PROPERLY AND DULY NOTIFIED THAT AN AUCTION SALE OF HIS PROPERTY WAS TO TAKE PLACE ON DECEMBER 5, 1977 TO SATISFY AN ALLEGED TAX DELINQUENCY OF P2,400.00.

III RESPONDENT INTERMEDIATE APPELLATE COURT FURTHER COMMITTED A SERIOUS ERROR AND GRAVE ABUSE OF DISCRETION IN NOT HOLDING THAT THE PRICE OF P2,400.00 PAID BY RESPONDENT HO FERNANDEZ WAS GROSSLY INADEQUATE AS TO SHOCK ONE'S CONSCIENCE AMOUNTING TO FRAUD AND A DEPRIVATION OF PROPERTY WITHOUT DUE PROCESS OF LAW, AND CONSEQUENTLY, THE AUCTION SALE MADE THEREOF IS VOID. (pp. 10, 17, 20-21, Rollo)

We gave due course to the petition for a more thorough inquiry into the petitioner's allegations that his property was sold at public auction without notice to him and that the price paid for the property was shockingly inadequate, amounting to fraud and deprivation without due process of law.

A careful review of the case, however, discloses that Mr. Francia brought the problems raised in his petition upon himself. While we commiserate with him at the loss of his property, the law and the facts militate against the grant of his petition. We are constrained to dismiss it.

Francia contends that his tax delinquency of P2,400.00 has been extinguished by legal compensation. He claims that the government owed him P4,116.00 when a portion of his land was expropriated on October 15, 1977. Hence, his tax obligation had been set-off by operation of law as of October 15, 1977.

There is no legal basis for the contention. By legal compensation, obligations of persons, who in their own right are reciprocally debtors and creditors of each other, are extinguished (Art. 1278, Civil Code). The circumstances of the case do not satisfy the requirements provided by Article 1279, to wit:

"(1) that each one of the obligors be bound principally and that he be at the same time a principal creditor of the other;

xxx

xxx

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"(3) that the two debts be due.

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xxx

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This principal contention of the petitioner has no merit. We have consistently ruled that there can be no off-setting of taxes against the claims that the taxpayer may have against the government. A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the government.

In the case of Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court ruled that Internal Revenue Taxes can not be the subject of set-off or compensation. We stated that:

"A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under the statutes of set-off, which are construed uniformly, in the light of public policy, to exclude the remedy in an action or any indebtedness of the state or municipality to one who is liable to the state or municipality for taxes. Neither are they a proper subject of recoupment since they do not arise out of the contract or transaction sued on. . . . . (80 C.J.S., 73-74). "The general rule based on grounds of public policy is well-settled that no set-off admissible against demands for taxes levied for general or local governmental purposes. The reason on which the general rule is based, is that taxes are not in the nature of contracts between the party and party but grow out of duty to, and are the positive acts of the government to the making and enforcing of which, the personal consent of individual taxpayers is not required. . . .'"

We stated that a taxpayer cannot refuse to pay his tax when called upon by the collector because he has a claim against the governmental body not included in the tax levy.

This rule was reiterated in the case of Cordero v. Gonda (18 SCRA 331) where we stated that: ". . . internal revenue taxes can not be the subject of compensation: Reason: government and taxpayer 'are not mutually creditors and debtors of each other' under Article 1278 of the Civil Code and a "claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off."

There are other factors which compel us to rule against the petitioner. The tax was due to the city government while the expropriation was effected by the national government. Moreover, the amount of P4,116.00 paid by the national government for the 125 square meter portion of his lot was deposited with the Philippine National Bank long before the sale at public auction of his remaining property. Notice of the deposit dated September 28, 1977 was received by the petitioner on September 30, 1977. The petitioner admitted in his testimony that he knew about the P4,116.00 deposited with the bank but he did not withdraw it. It would have been an easy matter to withdraw P2,400.00 from the deposit so that he could pay the tax obligation thus aborting the sale at public auction.

Petitioner had one year within which to redeem his property although, as well be shown later, he claimed that he pocketed the notice of the auction sale without reading it.

Petitioner contends that "the auction sale in question was made without complying with the mandatory provisions of the statute governing tax sale. No evidence, oral or otherwise, was presented that the procedure outlined by law on sales of property for tax delinquency was followed. . . . Since defendant Ho Fernandez has the affirmative of this issue, the burden of proof therefore rests upon him to show that plaintiff was duly and properly notified . . . ." (Petition for Review, Rollo p. 18)

We agree with the petitioner's claim that Ho Fernandez, the purchaser at the auction sale, has the burden of proof to show that there was compliance with all the prescribed requisites for a tax sale.

The case of Valencia v. Jimenez (11 Phil. 492) laid down the doctrine that:

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xxx

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". . . [D]ue process of law to be followed in tax proceedings must be established by proof and the general rule is that the purchaser of a tax title is bound to take upon himself the burden of showing the regularity of all proceedings leading up to the sale."

There is no presumption of the regularity of any administrative action which results in depriving a taxpayer of his property through a tax sale. (Camo v. Riosa Boyco, 29 Phil. 437); Denoga v. Insular Government, 19 Phil. 261). This is actually an exception to the rule that administrative proceedings are presumed to be regular.

But even if the burden of proof lies with the purchaser to show that all legal prerequisites have been complied with, the petitioner can not, however, deny that he did receive the notice for the auction sale. The records sustain the lower court's finding that:

"[T]he plaintiff claimed that it was illegal and irregular. He insisted that he was not properly notified of the auction sale. surprisingly, however, he admitted in his testimony that he received the letter dated November 21, 1977 (Exhibit "I") as shown by his signature (Exhibit "I-A") thereof He claimed further that

he was not present on December 5, 1977 the date of the auction sale because he went to Iligan City. As long as there was substantial compliance with the requirements of the notice, the validity of the auction sale can not be assailed. . . .."

We quote the following testimony of the petitioner on cross-examination, to wit:

"Q. My question to you is this letter marked as Exhibit I for Ho Fernandez notified you that the property in question shall be sold at public auction to the highest bidder on December 5, 1977 pursuant to Sec. 74 of PD 464. Will you tell the Court whether you received the original of this letter? "A. I just signed it because I was not able to read the same. It was just sent by mail carrier.

"Q. So you admit that you received the original of Exhibit I and you signed upon receipt thereof but you did not read the contents of it? "A. Yes, sir, as I was in a hurry.

"Q. After you received that original where did you place it? "A. I placed it in the usual place where I place my mails."

Petitioner, therefore, was notified about the auction sale. It was negligence on his part when he ignored such notice. By his very own admission that he received the notice, his now coming to court assailing the validity of the auction sale loses its force.

Petitioner's third assignment of grave error likewise lacks merit. As a general rule, gross inadequacy of price is not material (De Leon v. Salvador, 36 SCRA 567; Ponce de Leon v. Rehabilitation Finance Corporation, 36 SCRA 289; Tolentino v. Agcaoili, 91 Phil. 917 Unrep.). See also Barrozo Vda. de Gordon v. Court of Appeals (109 SCRA 388) we held that "alleged gross inadequacy of price is not material when the law gives the owner the right to redeem as when a sale is made at public auction, upon the theory that the lesser the price, the easier it is for the owner to effect redemption." In Velasquez v. Coronel (5 SCRA 985), this Court held:

". . . [R]espondent treasurer now claims that the prices for which the lands were sold are unconscionable considering the wide divergence between their assessed values and the amounts for which they had been actually sold. However, while in ordinary sales for reasons of equity a transaction may be invalidated on the ground of inadequacy of price, or when such inadequacy shocks one's conscience as to justify the courts to interfere, such does not follow when the law gives to the owner the right to redeem, as when a sale is made at public auction, upon the theory that the lesser the price the easier it is for the owner to effect the redemption. And so it was aptly said: 'When there is the right to redeem, inadequacy of price should not be material, because the judgment debtor may reacquire the property or also sell his right to redeem and thus recover the loss he claims to have suffered by reason of the price obtained at the auction sale."

The reason behind the above rulings is well enunciated in the case of Hilton et. ux. v. De Long, et al. (188 Wash. 162, 61 P. 2d, 1290):

"If mere inadequacy of price is held to be a valid objection to a sale for taxes, the collection of taxes in this manner would be greatly embarrassed, if not rendered altogether impracticable. In Black on Tax Titles (2nd Ed.) 238, the correct rule is stated as follows: 'where land is sold for taxes, the inadequacy of the price given is not a valid objection to the sale.' This rule arises from necessity, for, if a fair price for the land were essential to the sale, it would be useless to offer the property. Indeed, it is notorious that the prices habitually paid by purchasers at tax sales are grossly out of proportion to the value of the land." (Rothchild Bros. v. Rollinger, 32 Wash. 307, 73 P. 367, 369).

In this case now before us, we can aptly use the language of McGuire, et al. v. Bean, et al. (267 P. 555):

"Like most cases of this character there is here a certain element of hardship from which we would be glad to relieve, but do so would unsettle long-established rules and lead to uncertainty and difficulty in the collection of taxes which are the life blood of the state. We are convinced that the present rules are just, and that they bring hardship only to those who have invited it by their own neglect."

We are inclined to believe the petitioner's claim that the value of the lot has greatly appreciated in value. Precisely because of the widening of Buendia Avenue in Pasay City, which necessitated the expropriation of adjoining areas, real estate values have gone up in the area. However, the price quoted by the petitioner for a 203 square meter lot appears quite exaggerated. At any rate, the foregoing reasons which answer the petitioner's claims lead us to deny the petition.

And finally, even if we are inclined to give relief to the petitioner on equitable grounds, there are no strong considerations of substantial justice in his favor. Mr. Francia failed to pay his taxes for 14 years from 1963 up to the date of the auction sale. He claims to have pocketed the notice of sale without reading it which, if true, is still an act of inexplicable negligence. He did not withdraw from the expropriation payment deposited with the Philippine National Bank an amount sufficient to pay for the back taxes. The petitioner did not pay attention to another notice sent by the City Treasurer on November 3, 1978, during the period of redemption, regarding his tax delinquency. There is furthermore no showing of bad faith or collusion in the purchase of the property by Mr. Fernandez. The petitioner has no standing to invoke equity in his attempt to regain the property by belatedly asking for the annulment of the sale.

WHEREFORE, IN VIEW OF THE FOREGOING, the petition for review is DISMISSED. The decision of the respondent court is affirmed.

SO ORDERED.

Fernan (Chairman), Feliciano, Bidin and Cortes, JJ., concur.

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([1988V539] ENGRACIO FRANCIA, petitioner, vs. INTERMEDIATE APPELLATE COURT and HO FERNANDEZ, respondents., G.R. No. L-67649, 1988 Jun 28, 3rd Division)

Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No. L-35238 April 21, 1989

REPUBLIC OF THE PHILIPPINES, petitioner, vs. HON. JUDGE VICENTE G. ERICTA and SAMPAGUITA PICTURES, INC., respondents. The Solicitor General for petitioner. Domingo E. De Lara and Floro D. Carpio for respondent Sampaguita Pictures, Inc.

NARVASA, J.: This case has to do with the so-called "back pay certificates" issued by the Philippine Government in the aftermath of the Pacific War, pursuant to Republic Act No. 304, as amended by Republic Act No. 800. These enactments generally recognized the right of persons who at the outbreak of the war were employed in the classified and unclassified civil service as well as in government-owned or controlled corporations, and those who had served in the free local civil governments organized for purposes of resistance against the invaders, to salaries, wages, emoluments, per diems, not received by them by reason of the war. The Treasurer of the Philippines was empowered to receive applications for back pay and to issue in favor of the applicants certificates of indebtedness redeemable by the Government within ten years for the amounts determined to be justly due them. It appears that in relation to its business of producing motion pictures, Sampaguita Pictures, Inc., hereafter simply Sampaguita, came to incur an obligation for percentage, withholding and amusement taxes in the amount of P10,268.41 in favor of the Republic of the Philippines. 1 In satisfaction thereof, and of another obligation of the same nature due from Vera-Perez Corporation, Sampaguita Pictures, Inc. tendered and delivered to the Office of the Municipal Treasurer of Bocaue, Bulacan, on June 9, 1961, sixteen (16) back pay negotiable certificates of indebtedness in the aggregate sum of P16,763.60, which had earlier been negotiated to them by the original holders thereof, and official receipts therefor were duly issued. 2 Thirteen (13) days later, however, the Assistant Regional Director of the BIR wrote to Vera-Perez Corporation (his letter is dated June 22, 1961) advising that the acceptance of the Negotiable Certificates of Indebtedness in payment of amusement, percentage and withholding taxes (in the total sum of P16,753.50) was erroneous and the payment was invalid, because actually said certificates were "not acceptable as payments of internal revenue taxes in accordance with the provisions of .. General Circular No. V-289 dated May 8, 1959." Request was thus made for the payment of the tax liabilities in cash. 3 Evidently neither corporations responded one way or the other to this letter. Anyway, the next letter adverted to by the Government is that dated August 18, 1967, written by the Acting Deputy Commissioner of Internal Revenue to both Sampaguita and Vera-Perez Corporation. 4 That letter gave the corporations "a last 15-day period within which to pay the said amount of P16,763.50 in cash or certified check." Again, no acceptable response seems to have been made by the corporations. So on June 9, 1969, eight (8) years to the day when the negotiable certificates of indebtedness were accepted in payment of taxes by the Municipal Treasurer at Bocaue, Bulacan, the Solicitor General brought suit in behalf of the Republic of the Philippines in relation thereto. 5 The case was docketed as Civil Case No. Q-13270 of the Court of First Instance at Quezon City, and assigned to Branch XVIII thereof, then presided over by herein respondent, Hon. Vicente G. Ericta. 6 The Solicitor General's complaint 7 impleaded only Sampaguita as defendant. Why he excluded the other corporation is not disclosed by the record. In his complaint he alleged that Sampaguita's essayed payment was void since it was "not the original holder of the .. certificates .. but .. only a mere assignee thereof," and tinder the law," only original holders of back pay certificates .. are allowed to use the same in payment of their own taxes," invoking this Court's decision to that effect in de Borja v. Gella 8 promulgated on July 31, 1963. Sampaguita's answer admitted the basic facts, but asserted that the plaintiffs cause of action had already prescribed; that the tender of the certificates in 1961 had been "made in absolute good faith," "prior to the promulgation of the decision .. (in) de Borja vs. Vicente Gella et al. on July 31, 1963;" that the certificates "having duly matured .. in the year 1958, (and) plaintiff .. (being then) already duty bound to redeem them and pay for their value," Sampaguita and the Republic became "mutual creditors and debtors of each other for the amount of P10,268.41" with the result that their obligations were extinguished by legal compensation." These averments were inter alia reproduced and set up also as a counterclaim, with the additional plea that "in the remote possibility that ..(it [Sampaguita 1) be still required .. to pay plaintiff the amount of P10,268.41 for alleged unpaid taxes, the plaintiff be ordered to pay the defendant the same amount of Pl 0,268.41 representing the face value of the negotiable certificates of indebtedness." On December 29, 1971, judgment was rendered by the Trial Judge "dismissing both the complaint and the counterclaim without pronouncement as to costs." 9 His Honor held that delivery of the back pay certificates by Sampaguita had not produced the effect of payment in view of the doctrine in Borja v. Gella 10 that "the right to use backpay certificates of indebtedness in the settlement of taxes is given only to original holders and not to mere assignees thereof;" this notwithstanding, Sampaguita, as assignee of the certificates of indebtedness, had "succeeded to the original rights of the holders thereof," and was therefore authorized to demand payment by the Republic of the indebtedness thereby represented; and while there was "opinion that (legal) compensation cannot take place against the Republic with respect to taxes, fees, duties and similar forced contributions due to it (Civil Code, Volume IV, p. 349, Tolentino; Gasperi 204; 2 Von Tuhr Obligaciones, p. 165), there could be no gainsaying the proposition that, under the facts, Sampaguita was entitled to judgment upon its counterclaim for the payment by the Republic of its indebtedness in virtue of the back pay certificates in question, with the "ultimate result .. that the claim and counter-claim of the plaintiff and the defendant, respectively will offset each other." The Solicitor General presented a motion of reconsideration. When this was denied, he appealed to this Court by certiorari positing reversible legal error on the part of respondent Judge in holding that (1) the Republic's claim is offset by Sampaguita's counterclaim, and (2) the negotiable certificates of indebtedness in question were "long overdue and redeemable." The petitioner's postulations are untenable. 1. The Trial Court ruled that the taxes sought to be collected by the Republic from Sampaguita were still unpaid, its tender of the certificates of indebtedness in question not constituting payment; hence, it ought properly to be sentenced to pay the taxes. It also ruled that even assuming the contrary, legal compensation as a mode of extinguishing an obligation to pay taxes was nonetheless unavailing against the government, conformably with de Borja v. Gella.

On the other hand, according to the Trial Court, at least as of date of judgment, more than 10 years from June 18, 1958, the date when, as expressly stated in the certificates of indebtedness, the same were redeemable, the obligation thereby evidenced was unquestionably already due and payable; hence, Sampaguita was entitled to a judgment against the Republic for the payment of the face value of the certificates, the same having already been presented and surrendered within the said period of ten years (on June 9, 1961) to the Treasurer of the Philippines (thru the Municipal Treasurer of Bocaue, Bulacan ) 11 This is correct. In other words, even if as the Solicitor General points out, "there is no certainty when the certificates are actually redeemable" because the law say "that they are redeemable .. within ten years from the date of issuance " 12 there can be no question that after the lapse of ten (10) years from the declared date of redeemability, payment of the indebtedness was already exigible The Trial Court was saying in effect that while judgment should be rendered in favor of the Republic against Sampaguita for unpaid taxes in the amount of P10,268.41, judgment ought at the same time to issue for Sampaguita commanding payment to it by the Republic of the same sum, representing the face value of the certificates of indebtedness assigned to it and for recovery of which it had specifically prayed in its counterclaim. 2. What has just been said confutes the petitioner's second argument that redemption of the certificates of indebtedness was not yet demandable of it because "there is no certainty when the certificates are actually redeemable, within the meaning of the law." It is true that, as the Solicitor General contends, "the law does not say that they are redeemable from its approval on June 18, 1958 but 'within ten years from the date of issuance' of the certificates, " 13 the ineludible ineluctable fact is that more than ten (10) years have already elapsed since their issuance and demand for payment had been made within said 10-year period. It is useless to quibble about the precise time "within ten years" when an obligation becomes demandable, when that period of ten years has already expired. Whatever inexactitude might inhere in the phrase, "within ten years," as fixing the time of exibility of the obligation in question, there can be no debate about the proposition that the obligation became due and demandable after ten years. It would be absurd and unfair to sanction the theory subsumed in the Republic's petition that its obligation was not demandable within ten years because of inexactitude yet became time-barred upon the lapse of that self-same period. WHEREFORE, the petition is DENIED, and the judgment subject thereof, being in accord with the facts and the law, is AFFIRMED in toto. No costs. SO ORDERED. Cruz, Gancayco, Grio-Aquino and Medialdea, JJ., concur.

Footnotes 1 Rollo, pp. 25-34. 2 Id., pp. 25, 28, 29, 34, 107 (Sampaguita's Brief, p.13). 3 Id., pp. 28 (copy attached as annex to the Republic's complaint dated June 9,1969,infra) 107 (Sampaguita's Brief, p. 13). 4 Id., p. 29. 5 Id., pp. 25-29. 6 Later, Associate Justice of the Supreme Court. 7 The complaint was signed by then Solicitor General Felix V. Makasiar and three (3) others, and was verified by Commissioner of Internal Revenue Misael P. Vera. 8 G.R. No. L-18330, 62 O.G. (37) p. 6645. 9 Rollo, pp. 34-38. 10 Supra, footnote 8. 11 The certificate recites that it "is redeemable on June 18, 1958, without interest upon its presentation and surrender to the Treasurer of the Philippines" (Rollo, p. 107: Brief for Sampaguita, p. 7). 12 Rollo, p. 86; Petitioner's Brief, p. 8. 13 Again citing de Borja v. Gella supra. Republic of the Philippines SUPREME COURT Manila

THIRD DIVISION

G.R. No. 125704 August 28, 1998 PHILEX MINING CORPORATION, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, COURT OF APPEALS, and THE COURT OF TAX APPEALS,respondents.

ROMERO, J.: Petitioner Philex Mining Corp. assails the decision of the Court of Appeals promulgated on April 8, 1996 in CA-G.R. SP No. 36975 1 affirming the Court of Tax Appeals decision in CTA Case No. 4872 dated March 16, 1995 2 ordering it to pay the amount of P110,677,668.52 as excise tax liability for the period from the 2nd quarter of 1991 to the 2nd quarter of 1992 plus 20% annual interest from August 6, 1994 until fully paid pursuant to Sections 248 and 249 of the Tax Code of 1977.
The facts show that on August 5, 1992, the BIR sent a letter to Philex asking it to settle its tax liabilities for the 2nd, 3rd and 4th quarter of 1991 as well as the 1st and 2nd quarter of 1992 in the total amount of P123,821.982.52 computed as follows: PERIOD COVERED BASIC TAX 25% SURCHARGE INTEREST TOTAL EXCISE TAX DUE 2nd Qtr., 1991 12,911,124.60 3,227,781.15 3,378,116.16 19,517,021.91 3rd Qtr., 1991 14,994,749.21 3,748,687.30 2,978,409.09 21,721,845.60 4th Qtr., 1991 19,406,480.13 4,851,620.03 2,631,837.72 26,889,937.88

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

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

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

90,325,895.64 22,581,473.91 10,914,612.97 123,821,982.52 3

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

In a letter dated August 20, 1992, 4 Philex protested the demand for payment of the tax liabilities stating that it has pending claims for VAT input credit/refund for the taxes it paid for the years 1989 to 1991 in the amount of P119,977,037.02 plus interest. Therefore these claims for tax credit/refund should be applied against the tax liabilities, citing our ruling inCommissioner of Internal Revenue v. Itogon-Suyoc Mines, Inc. 5

In reply, the BIR, in a letter dated September 7, 1992, 6 found no merit in Philex's position. Since these pending claims have not yet been established or determined with certainty, it follows that no legal compensation can take place. Hence, the BIR reiterated its demand that Philex settle the amount plus interest within 30 days from the receipt of the letter. In view of the BIR's denial of the offsetting of Philex's claim for VAT input credit/refund against its excise tax obligation, Philex raised the issue to the Court of Tax Appeals on November 6, 1992. 7 In the course of the proceedings, the BIR issued Tax Credit Certificate SN 001795 in the amount of P13,144,313.88 which, applied to the total tax liabilities of Philex of P123,821,982.52; effectively lowered the latter's tax obligation to P110,677,688.52.
Despite the reduction of its tax liabilities, the CTA still ordered Philex to pay the remaining balance of P110,677,688.52 plus interest, elucidating its reason, to wit:

Thus, for legal compensation to take place, both obligations must be liquidated and demandable. "Liquidated" debts are those where the exact amount has already been determined (PARAS, Civil Code of the Philippines, Annotated, Vol. IV, Ninth Edition, p. 259). In the instant case, the claims of the Petitioner for VAT refund is still pending litigation, and still has to be determined by this Court (C.T.A. Case No. 4707). A fortiori, theliquidated debt of the Petitioner to the government cannot, therefore, be set-off against the unliquidated claim which Petitioner conceived to exist in its favor (see Compaia General de Tabacos vs. French and Unson, No. 14027, November 8, 1918, 39 Phil. 34). 8

Moreover, the Court of Tax Appeals ruled that "taxes cannot be subject to set-off on compensation since claim for taxes is not a debt or contract." 9 The dispositive portion of the CTA decision 10 provides:
In all the foregoing, this Petition for Review is hereby DENIED for lack of merit and Petitioner is hereby ORDERED to PAY the Respondent the amount of P110,677,668.52 representing excise tax liability for the period from the 2nd quarter of 1991 to the 2nd quarter of 1992 plus 20% annual interest from August 6, 1994 until fully paid pursuant to Section 248 and 249 of the Tax Code, as amended.

Aggrieved with the decision, Philex appealed the case before the Court of Appeals docketed as CA-GR. CV No. 36975. 11Nonetheless, on April 8, 1996, the Court of Appeals a Affirmed the Court of Tax Appeals observation. The pertinent portion of which reads: 12
WHEREFORE, the appeal by way of petition for review is hereby DISMISSED and the decision dated March 16, 1995 is AFFIRMED.

Philex filed a motion for reconsideration which was, nevertheless, denied in a Resolution dated July 11, 1996. 13 However, a few days after the denial of its motion for reconsideration, Philex was able to obtain its VAT input credit/refund not only for the taxable year 1989 to 1991 but also for 1992 and 1994, computed as follows: 14
Period Covered Tax Credit Date By Claims For Certificate of VAT refund/credit Number Issue Amount 1994 (2nd Quarter) 007730 11 July 1996 P25,317,534.01 1994 (4th Quarter) 007731 11 July 1996 P21,791,020.61 1989 007732 11 July 1996 P37,322,799.19 1990-1991 007751 16 July 1996 P84,662,787.46 1992 (1st-3rd Quarter) 007755 23 July 1996 P36,501,147.95

In view of the grant of its VAT input credit/refund, Philex now contends that the same should, ipso jure, off-set its excise tax liabilities 15 since both had already become "due and demandable, as well as fully liquidated;" 16 hence, legal compensation can properly take place.
We see no merit in this contention.

In several instances prior to the instant case, we have already made the pronouncement that taxes cannot be subject to compensation for the simple reason that the government and the taxpayer are not creditors and debtors of each other. 17There is a material distinction between a tax and debt. Debts are due to the Government in its corporate capacity, while taxes are due to the Government in its sovereign capacity. 18 We find no cogent reason to deviate from the aforementioned distinction. Prescinding from this premise, in Francia v. Intermediate Appellate Court, 19 we categorically held that taxes cannot be subject to set-off or compensation, thus:
We have consistently ruled that there can be no off-setting of taxes against the claims that the taxpayer may have against the government. A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the government.

The ruling in Francia has been applied to the subsequent case of Caltex Philippines, Inc. v. Commission on Audit, 20which reiterated that:
. . . a taxpayer may not offset taxes due from the claims that he may have against the government. Taxes cannot be the subject of compensation because the government and taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off.

Further, Philex's reliance on our holding in Commissioner of Internal Revenue v. Itogon-Suyoc Mines Inc., wherein we ruled that a pending refund may be set off against an existing tax liability even though the refund has not yet been approved by the Commissioner, 21 is no longer without any support in statutory law. It is important to note, that the premise of our ruling in the aforementioned case was anchored on Section 51 (d) of the National Revenue Code of 1939. However, when the National Internal Revenue Code of 1977 was enacted, the same provision upon which the Itogon-Suyoc pronouncement was based was omitted. 22 Accordingly, the doctrine enunciated inItogon-Suyoc cannot be invoked by Philex. Despite the foregoing rulings clearly adverse to Philex's position, it asserts that the imposition of surcharge and interest for the non-payment of the excise taxes within the time prescribed was unjustified. Philex posits the theory that it had no obligation to pay the excise tax liabilities within the prescribed period since, after all, it still has pending claims for VAT input credit/refund with BIR. 23 We fail to see the logic of Philex's claim for this is an outright disregard of the basic principle in tax law that taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. 24 Evidently, to countenance Philex's whimsical reason would render ineffective our tax collection system. Too simplistic, it finds no support in law or in jurisprudence. To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the ground that it has a pending tax claim for refund or credit against the government which has not yet been granted. It must be noted that a distinguishing feature of a tax is that it is compulsory rather than a matter of bargain. 25 Hence, a tax does not depend upon the consent of the taxpayer. 26 If any taxpayer can defer the payment of taxes by raising the defense that it still has a pending claim for refund or credit, this would adversely affect the government revenue system. A taxpayer cannot refuse to pay his taxes when they fall due simply because he has a claim against the government or that the collection of the tax is contingent on the result of the lawsuit it filed against the government. 27 Moreover, Philex's theory that would automatically apply its VAT input credit/refund against its tax liabilities can easily give rise to

confusion and abuse, depriving the government of authority over the manner by which taxpayers credit and offset their tax liabilities. Corollarily, the fact that Philex has pending claims for VAT input claim/refund with the government is immaterial for the imposition of charges and penalties prescribed under Section 248 and 249 of the Tax Code of 1977. The payment of the surcharge is mandatory and the BIR is not vested with any authority to waive the collection thereof. 28 The same cannot be condoned for flimsy reasons, 29 similar to the one advanced by Philex in justifying its non-payment of its tax liabilities. Finally, Philex asserts that the BIR violated Section 106 (e) 30 of the National Internal Revenue Code of 1977, which requires the refund of input taxes within 60 days, 31 when it took five years for the latter to grant its tax claim for VAT input credit/refund. 32 In this regard, we agree with Philex. While there is no dispute that a claimant has the burden of proof to establish the factual basis of his or her claim for tax credit or refund, 33 however, once the claimant has submitted all the required documents it is the function of the BIR to assess these documents with purposeful dispatch. After all, since taxpayers owe honestly to government it is but just that government render fair service to the taxpayers. 34 In the instant case, the VAT input taxes were paid between 1989 to 1991 but the refund of these erroneously paid taxes was only granted in 1996. Obviously, had the BIR been more diligent and judicious with their duty, it could have granted the refund earlier. We need not remind the BIR that simple justice requires the speedy refund of wrongly-held taxes. 35 Fair dealing and nothing less, is expected by the taxpayer from the BIR in the latter's discharge of its function. As aptly held inRoxas v. Court of Tax Appeals: 36
The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg" And, in order to maintain the general public's trust and confidence in the Government this power must be used justly and not treacherously.

Despite our concern with the lethargic manner by which the BIR handled Philex's tax claim, it is a settled rule that in the performance of governmental function, the State is not bound by the neglect of its agents and officers. Nowhere is this more true than in the field of taxation. 37 Again, while we understand Philex's predicament, it must be stressed that the same is not a valid reason for the non-payment of its tax liabilities. To be sure, this is not to state that the taxpayer is devoid of remedy against public servants or employees, especially BIR examiners who, in investigating tax claims are seen to drag their feet needlessly. First, if the BIR takes time in acting upon the taxpayer's claim for refund, the latter can seek judicial remedy before the Court of Tax Appeals in the manner prescribed by law. 38 Second, if the inaction can be characterized as willful neglect of duty, then recourse under the Civil Code and the Tax Code can also be availed of.
Art. 27 of the Civil Code provides: Art. 27. Any person suffering material or moral loss because a public servant or employee refuses or neglects, without just cause, to perform his official duty may file an action for damages and other relief against the latter, without prejudice to any disciplinary action that may be taken. More importantly, Section 269 (c) of the National Internal Revenue Act of 1997 states: xxx xxx xxx (c) Wilfully neglecting to give receipts, as by law required for any sum collected in the performance of duty or wilfully neglecting to perform, any other duties enjoyed by law.

Simply put, both provisions abhor official inaction, willful neglect and unreasonable delay in the performance of official duties. 39 In no uncertain terms must we stress that every public employee or servant must strive to render service to the people with utmost diligence and efficiency. Insolence and delay have no place in government service. The BIR, being the government collecting arm, must and should do no less. It simply cannot be apathetic and laggard in rendering service to the taxpayer if it wishes to remain true to its mission of hastening the country's development. We take judicial notice of the taxpayer's generally negative perception towards the BIR; hence, it is up to the latter to prove its detractors wrong.
In sum, while we can never condone the BIR's apparent callousness in performing its duties, still, the same cannot justify Philex's non-payment of its tax liabilities. The adage "no one should take the law into his own hands" should have guided Philex's action. WHEREFORE, in view of the foregoing, the instant petition is hereby DISMISSED. The assailed decision of the Court of Appeals dated April 8, 1996 is hereby AFFIRMED. SO ORDERED. Narvasa, C.J., Kapunan and Purisima, JJ., concur.

Footnotes
1 Penned by Justice Artemon D. Luna, concurred in by Justices Ramon A. Barcelona and Portia Alino-Hormachuelos. 2 Penned by Associate Judge Manuel K. Gruba. concurred in by Presiding Judge Ernesto D. Acosta and Associate Judge Ramon O. De Veyra. 3 CTA Records, pp. 34-35. 4 Rollo, pp. 172-174. 5 28 SCRA 867 (1969). 6 Id., pp. 175-176. 7 Docketed as Case No. 4872. Rollo, pp. 177-187. 8 Rollo, p. 55. 9 CTA Decision, Rollo, p. 59. 10 Rollo, pp. 59-60. 11 Rollo, pp. 87-101. 12 Rollo, p. 45. 13 Rollo, p. 48. 14 Rollo, pp. 112-116. 15 Memorandum, Rollo, pp. 307-308. 16 Ibid. 17 Cordero v. Gonda, 18 SCRA 331 (1966). 18 Commissioner of Internal Revenue v. Palanca, 18 SCRA 496 (1966).

19 162 SCRA 753 (1988). 20 208 SCRA 726 (1992). 21 Rollo, p. 33. 22 Aban, Law on Basic Taxation, 1994, p. 19. 23 Memorandum, Rollo, p. 389. 24 Commissioner of Internal Revenue v. Algue, Inc., 158 SCRA 9 (1988). 25 I Cooley, Taxation, 22. 26 Ibid. 27 Supra, note 19. 28 Republic v. Philippine Bank of Commerce, 34 SCRA 361 (1970). 29 Jamora v. Meer, 74 Phil. 22 (1942). 30 (e) Period within which refund of input taxes may be made by the Commissioner. The Commissioner shall refund input taxes within 60 days from the date the application for refund was filed with him or his duly authorized representative. No refund of input taxes shall be allowed unless the VAT-registered person files an application for refund within the period prescribed in paragraphs (a), (b) and (c) as the case may be. 31 Rollo, pp. 32-33. 32 This provision has been amended by Section 112 (D) of Republic Act 8424 entitled the "National Internal Revenue Act of 1997." "(D) Period within which Refund or Tax Credit of Input Taxes shall be Made. In proper cases, the Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within one hundred twenty (120) days from the date of submission of complete documents in support of the application filed in accordance with Subsections (A) and (B) hereof. In case of full of partial denial of the claim for tax refund or tax credit, or the failure on the part of the Commissioner to act on the application within the period prescribed above, the taxpayer affected, within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the one hundred twenty day-period, appeal the decision or the unacted claim with the Court of Tax Appeals." 33 Commissioner of Internal Revenue v. Tokyo Shipping Co. Ltd., 244 SCRA 332 (1995). 34 Ibid. 35 Citibank of N.A. v. Court of Appeals. G.R. No. 107434, October 10, 1997. 36 23 SCRA 276 (1968). 37 Commissioner of Internal Revenue v. Proctor and Gamble PMC, 160 SCRA 560 (1988). 38 Insular Lumber Co. v. Court of Appeals, 104 SCRA 721 (1981); Commissioner of Internal Revenue v. Victoria Milling Co., Inc., 22 SCRA 12 (1968). 39 Tolentino, Civil Code of the Philippines, Vol. 1, 1983, p. 117. Republic of the Philippines SUPREME COURT Manila EN BANC

G.R. No. L-18994

June 29, 1963

MELECIO R. DOMINGO, as Commissioner of Internal Revenue, petitioner, vs. HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court of First Instance of Leyte, and SIMEONA K. PRICE, as Administratrix of the Intestate Estate of the late Walter Scott Price, respondents. Office of the Solicitor General and Atty. G. H. Mantolino for petitioner. Benedicto and Martinez for respondents. LABRADOR, J.: This is a petition for certiorari and mandamus against the Judge of the Court of First Instance of Leyte, Ron. Lorenzo C. Garlitos, presiding, seeking to annul certain orders of the court and for an order in this Court directing the respondent court below to execute the judgment in favor of the Government against the estate of Walter Scott Price for internal revenue taxes. It appears that in Melecio R. Domingo vs. Hon. Judge S. C. Moscoso, G.R. No. L-14674, January 30, 1960, this Court declared as final and executory the order for the payment by the estate of the estate and inheritance taxes, charges and penalties, amounting to P40,058.55, issued by the Court of First Instance of Leyte in, special proceedings No. 14 entitled "In the matter of the Intestate Estate of the Late Walter Scott Price." In order to enforce the claims against the estate the fiscal presented a petition dated June 21, 1961, to the court below for the execution of the judgment. The petition was, however, denied by the court which held that the execution is not justifiable as the Government is indebted to the estate under administration in the amount of P262,200. The orders of the court below dated August 20, 1960 and September 28, 1960, respectively, are as follows: Atty. Benedicto submitted a copy of the contract between Mrs. Simeona K. Price, Administratrix of the estate of her late husband Walter Scott Price and Director Zoilo Castrillo of the Bureau of Lands dated September 19, 1956 and acknowledged before Notary Public Salvador V. Esguerra, legal adviser in Malacaang to Executive Secretary De Leon dated December 14, 1956, the note of His Excellency, Pres. Carlos P. Garcia, to Director Castrillo dated August 2, 1958, directing the latter to pay to Mrs. Price the sum ofP368,140.00, and an extract of page 765 of Republic Act No. 2700 appropriating the sum of P262.200.00 for the payment to the Leyte Cadastral Survey, Inc., represented by the administratrix Simeona K. Price, as directed in the above note of the President. Considering these facts, the Court orders that the payment of inheritance taxes in the sum of P40,058.55 due the Collector of Internal Revenue as ordered paid by this Court on July 5, 1960 in accordance with the order of the Supreme Court promulgated July 30, 1960 in G.R. No. L-14674, be deducted from the amount of P262,200.00 due and payable to the Administratrix Simeona K. Price, in this estate, the balance to be paid by the Government to her without further delay. (Order of August 20, 1960) The Court has nothing further to add to its order dated August 20, 1960 and it orders that the payment of the claim of the Collector of Internal Revenue be deferred until the Government shall have paid its accounts to the administratrix herein amounting to P262,200.00. It may not be amiss to repeat that it is only fair for the Government, as a debtor, to its accounts to its citizens-creditors before it can insist in the prompt payment of the latter's account to it, specially taking into consideration that the amount due to the Government draws interests while the credit due to the present state does not accrue any interest. (Order of September 28, 1960) The petition to set aside the above orders of the court below and for the execution of the claim of the Government against the estate must be denied for lack of merit. The ordinary procedure by which to settle claims of indebtedness against the estate of a deceased person, as an inheritance tax, is for the claimant to present a claim before the probate court so that said court may order the administrator to pay the amount thereof. To such effect is the decision of this Court in Aldamiz vs. Judge of the Court of First Instance of Mindoro, G.R. No. L-2360, Dec. 29, 1949, thus: . . . a writ of execution is not the proper procedure allowed by the Rules of Court for the payment of debts and expenses of administration. The proper procedure is for the court to order the sale of personal estate or the sale or mortgage of real property of the deceased and all debts or expenses of administrator and with the written notice to all the heirs legatees and devisees residing in the Philippines, according to Rule 89, section 3, and Rule 90, section 2. And when sale or mortgage of real estate is to be made, the regulations contained in Rule 90, section 7, should be complied with.
1wph1.t

Execution may issue only where the devisees, legatees or heirs have entered into possession of their respective portions in the estate prior to settlement and payment of the debts and expenses of administration and it is later ascertained that there are such debts and expenses to be paid, in which case "the court having jurisdiction of the estate may, by order for that purpose, after hearing, settle the amount of their several liabilities, and order how much and in what manner each person shall contribute, and may issue execution if circumstances require" (Rule 89, section 6; see also Rule 74, Section 4; Emphasis supplied.) And this is not the instant case. The legal basis for such a procedure is the fact that in the testate or intestate proceedings to settle the estate of a deceased person, the properties belonging to the estate are under the jurisdiction of the court and such jurisdiction continues until said properties have been distributed among the heirs entitled thereto. During the pendency of the proceedings all the estate is in custodia legis and the proper procedure is not to allow the sheriff, in case of the court judgment, to seize the properties but to ask the court for an order to require the administrator to pay the amount due from the estate and required to be paid. Another ground for denying the petition of the provincial fiscal is the fact that the court having jurisdiction of the estate had found that the claim of the estate against the Government has been recognized and an amount of P262,200 has already been appropriated for the purpose by a corresponding law (Rep. Act No. 2700). Under the above circumstances, both the claim of the Government for inheritance taxes and the claim of the intestate for services rendered have already become overdue and demandable is well as fully liquidated. Compensation, therefore, takes place by operation of law, in accordance with the provisions of Articles 1279 and 1290 of the Civil Code, and both debts are extinguished to the concurrent amount, thus:

ART. 1200. When all the requisites mentioned in article 1279 are present, compensation takes effect by operation of law, and extinguished both debts to the concurrent amount, eventhough the creditors and debtors are not aware of the compensation. It is clear, therefore, that the petitioner has no clear right to execute the judgment for taxes against the estate of the deceased Walter Scott Price. Furthermore, the petition for certiorari and mandamus is not the proper remedy for the petitioner. Appeal is the remedy. The petition is, therefore, dismissed, without costs. Padilla, Bautista Angelo, Concepcion, Barrera, Paredes, Dizon, Regala and Makalintal, JJ., concur. Bengzon, C.J., took no part. Republic of the Philippines SUPREME COURT Manila THIRD DIVISION G.R. No. L-36081 April 24, 1989 PROGRESSIVE DEVELOPMENT CORPORATION, petitioner , vs. QUEZON CITY, respondent. Jalandoni, Herrera, Del Castillo & Associates for petitioner.

FELICIANO, J.: On 24 December 1969, the City Council of respondent Quezon City adopted Ordinance No. 7997, Series of 1969, otherwise known as the Market Code of Quezon City, Section 3 of which provided:

Sec. 3. Supervision Fee.- Privately owned and operated public markets shall submit monthly to the Treasurer's Office, a certified list of stallholders showing the amount of stall fees or rentals paid daily by each stallholder, ... and shall pay 10% of the gross receipts from stall rentals to the City, ... , as supervision fee. Failure to submit said list and to pay the corresponding amount within the period herein prescribed shall subject the operator to the penalties provided in this Code ... including revocation of permit to operate. ... .1
The Market Code was thereafter amended by Ordinance No. 9236, Series of 1972, on 23 March 1972, which reads: SECTION 1. There is hereby imposed a five percent (5 %) tax on gross receipts on rentals or lease of space in privately-owned public markets in Quezon City. xxx xxx xxx SECTION 3. For the effective implementation of this Ordinance, owners of privately owned public markets shall submit ... a monthly certified list of stallholders of lessees of space in their markets showing ... : a. name of stallholder or lessee; b. amount of rental; c. period of lease, indicating therein whether the same is on a daily, monthly or yearly basis. xxx xxx xxx SECTION 4. ... In case of consistent failure to pay the percentage tax for the (3) consecutive months, the City shall revoke the permit of the privately-owned market to operate and/or take any other appropriate action or remedy allowed by law for the collection of the overdue percentage tax and surcharge.

xxx xxx xxx 2

On 15 July 1972, petitioner Progressive Development Corporation, owner and operator of a public market known as the "Farmers Market & Shopping Center" filed a Petition for Prohibition with Preliminary Injunction against respondent before the then Court of First Instance of Rizal on the ground that the supervision fee or license tax imposed by the above-mentioned ordinances is in reality a tax on income which respondent may not impose, the same being expressly prohibited by Republic Act No. 2264, as amended. In its Answer, respondent, through the City Fiscal, contended that it had authority to enact the questioned ordinances, maintaining that the tax on gross receipts imposed therein is not a tax on income. The Solicitor General also filed an Answer arguing that petitioner, not having paid the ten percent (10%) supervision fee prescribed by Ordinance No. 7997, had no personality to question, and was estopped from questioning, its validity; that the tax on gross receipts was not a tax on income but one imposed for the enjoyment of the privilege to engage in a particular trade or business which was within the power of respondent to impose. In its Supplemental Petition of 23 September 1972, petitioner alleged having paid under protest the five percent (5%) tax under Ordinance No. 9236 for the months of June to September 1972. Two (2) days later, on 25 September 1972, petitioner moved for judgment on the pleadings, alleging that the material facts had been admitted by the parties. On 21 October 1972, the lower court dismissed the petition, ruling 3 that the questioned imposition is not a tax on income, but rather a privilege tax or license fee which local governments, like respondent, are empowered to impose and collect. Having failed to obtain reconsideration of said decision, petitioner came to us on the present Petition for Review. The only issue to be resolved here is whether the tax imposed by respondent on gross receipts of stall rentals is properly characterized as partaking of the nature of an income tax or, alternatively, of a license fee. We begin with the fact that Section 12, Article III of Republic Act No. 537, otherwise known as the Revised Charter of Quezon City, authorizes the City Council: xxx xxx xxx (b) To provide for the levy and collection of taxes and other city revenues and apply the same to the payment of city expenses in accordance with appropriations. (c) To tax, fix the license fee, and regulate the business of the following:

... preparation and sale of meat, poultry, fish, game, butter, cheese, lard vegetables, bread and other provisions. 4
The scope of legislative authority conferred upon the Quezon City Council in respect of businesses like that of the petitioner, is comprehensive: the grant of authority is not only" [to] regulate" and "fix the license fee," but also " to tax" 5 Moreover, Section 2 of Republic Act No. 2264, as amended, otherwise known as the Local Autonomy Act, provides that:

Any provision of law to the contrary notwithstanding, all chartered cities, municipalities and municipal districtsshall have authority to impose municipal license taxes or fees upon persons engaged in any occupation or business, or exercising privileges in chartered cities, municipalities or municipal districts by requiring them to secure licenses at rates fixed by the municipal board or city council of the city, the municipal council of the municipality, or the municipal district council of the municipal district; to collect fees and charges for service rendered by the city, municipality or municipal district; to regulate and impose reasonable fees for services rendered in connection with any business, profession or occupation being conducted within the city, municipality or municipal district and otherwise to levy for public purposes just and uniform taxes licenses or fees: ... 6
It is now settled that Republic Act No. 2264 confers upon local governments broad taxing authority extending to almost "everything, excepting those which are mentioned therein," provided that the tax levied is "for public purposes, just and uniform," does not transgress any constitutional provision and is not repugnant to a controlling statute. 7 Both the Local Autonomy Act and the Charter of respondent clearly show that respondent is authorized to fix the license fee collectible from and regulate the business of petitioner as operator of a privately-owned public market. Petitioner, however, insist that the "supervision fee" collected from rentals, being a return from capital invested in the construction of the Farmers Market, practically operates as a tax on income, one of those expressly excepted from respondent's taxing authority, and thus beyond the latter's competence. Petitioner cites the same Section 2 of the Local Autonomy Act which goes on to state: 8

... Provided, however, That no city, municipality or municipal district may levy or impose any of the following: xxx xxx xxx (g) Taxes on income of any kind whatsoever; The term "tax" frequently applies to all kinds of exactions of monies which become public funds. It is often loosely used to include levies for revenue as well as levies for regulatory purposes such that license fees are frequently called taxes although license fee is a legal concept distinguishable from tax: the former is imposed in the exercise of police power primarily for purposes of regulation, while the latter is imposed under the taxing power primarily for purposes of raising revenues. 9 Thus, if the generating 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 incidentally revenue is also obtained does not make the imposition a tax. 10 To be considered a license fee, the imposition questioned must relate to an occupation or activity that so engages the public interest in health, morals, safety and development as to require regulation for the protection and promotion of such public interest; the imposition must also bear a reasonable relation to the probable expenses of regulation, taking into account not only the costs of direct regulation but also its incidental consequences as well. 11 When an activity, occupation or profession is of such a character that inspection or supervision by public officials is reasonably necessary for the safeguarding and furtherance of public health, morals and safety, or the general welfare, the legislature may provide that such inspection or supervision or other form of regulation shall be carried out at the expense of the persons engaged in such occupation or performing such activity, and that no one shall engage in the occupation or carry out the activity until a fee or charge sufficient to cover the cost of the inspection or supervision has been paid. 12 Accordingly, a charge of a fixed sum which bears no relation at all to the cost of inspection and regulation may be held to be a tax rather than an exercise of the police power. 13 In the case at bar, the "Farmers Market & Shopping Center" was built by virtue of Resolution No. 7350 passed on 30 January 1967 by respondents's local legislative body authorizing petitioner to establish and operate a market with a permit to sell fresh meat, fish, poultry and other foodstuffs. 14 The same resolution imposed upon petitioner, as a condition for continuous operation, the obligation to "abide by and comply with the ordinances, rules and regulations prescribed for the establishment, operation and maintenance of markets in Quezon City." 15 The "Farmers' Market and Shopping Center" being a public market in the' sense of a market open to and inviting the patronage of the general public, even though privately owned, petitioner's operation thereof required a license issued by the respondent City, the issuance of which, applying the standards set forth above, was done principally in the exercise of the respondent's police power. 16 The operation of a privately owned market is, as correctly noted by the Solicitor General, equivalent to or quite the same as the operation of a government-owned market; both are established for the rendition of service to the general public, which warrants close supervision and control by the respondent City, 17 for the protection of the health of the public by insuring, e.g., the maintenance of sanitary and hygienic conditions in the market, compliance of all food stuffs sold therein with applicable food and drug and related standards, for the prevention of fraud and imposition upon the buying public, and so forth. We believe and so hold that the five percent (5%) tax imposed in Ordinance No. 9236 constitutes, not a tax on income, not a city income tax (as distinguished from the national income tax imposed by the National Internal Revenue Code) within the meaning of Section 2 (g) of the Local Autonomy Act, but rather a license tax or fee for the regulation of the business in which the petitioner is engaged. While it is true that the amount imposed by the questioned ordinances may be considered in determining whether the exaction is really one for revenue or prohibition, instead of one of regulation under the police power, 18 it nevertheless will be presumed to be reasonable. Local' governments are allowed wide discretion in determining the rates of imposable license fees even in cases of purely police power measures, in the absence of proof as to particular municipal conditions and the nature of the business being taxed as well as other detailed factors relevant to the issue of arbitrariness or unreasonableness of the questioned rates. 19Thus:

[A]n ordinance carries with it the presumption of validity. The question of reasonableness though is open to judicial inquiry. Much should be left thus to the discretion of municipal authorities. Courts will go slow in writing off an ordinance as unreasonable unless the amount is so excessive as to be prohibitory, arbitrary, unreasonable, oppressive, or confiscatory. A rule which has gained acceptance is that factors relevant to such an inquiry are the municipal conditions as a whole and the nature of the business made subject to imposition.20
Petitioner has not shown that the rate of the gross receipts tax is so unreasonably large and excessive and so grossly disproportionate to the costs of the regulatory service being performed by the respondent as to compel the Court to characterize the imposition as a revenue measure exclusively. The lower court correctly held that the gross receipts from stall rentals have been used only as a basis for computing the fees or taxes due respondent to cover the latter's administrative expenses, i.e., for regulation and supervision of the sale of foodstuffs to the public. The use of the gross amount of stall rentals as basis for determining the collectible amount of license tax, does not by itself, upon the one hand, convert or render the license tax into a prohibited city tax on income. Upon the other hand, it has not been suggested that such basis has no reasonable relationship to the probable costs of regulation and supervision of the petitioner's kind of business. For, ordinarily, the higher the amount of stall rentals, the higher the aggregate volume of foodstuffs and related items sold in petitioner's privately owned market; and the higher the volume of goods sold in such private market, the greater the extent and frequency of inspection and supervision that may be reasonably required in the interest of the buying public. Moreover, what we started with should be recalled here: the authority conferred upon the respondent's City Council is not merely "to regulate" but also embraces the power "to tax" the petitioner's business. Finally, petitioner argues that respondent is without power to impose a gross receipts tax for revenue purposes absent an express grant from the national government. As a general rule, there must be a statutory grant for a local government unit to impose lawfully a gross receipts tax, that unit not having the inherent power of taxation. 21 The rule, however, finds no application in the instant case where what is involved is an exercise of, principally, the regulatory power of the respondent City and where that regulatory power is expressly accompanied by the taxing power.

ACCORDINGLY, the Decision of the then Court of First Instance of Rizal, Quezon City, Branch 18, is hereby AFFIRMED and the Court Resolved to DENY the Petition for lack of merit. SO ORDERED. Fernan, C.J., Gutierrez, Jr., Bidin and Cortes, JJ., concur.

Footnotes 1 Rollo, p. 102; Italics supplied. 2 Records on Appeal, pp. 14-15; Underscoring supplied. 3 Ibid, pp. 58-68. 4 46 Official Gazette 4732 (1950); Italics supplied. Certain portions of the Charter had been amended by R.A. 5541, 65 Official Gazette, p. 7126 (1968). The amendatory law, however, did not introduce any change to the portion quoted above. 5 See, in this connection, Pacific Commercial Co. v. Romualdez, et al., 49 Phil. 917 (1927). 6 Section 2 of R.A. 2264 has been amended by R.A. 4497, 62 Official Gazette, p. 8616 (1966); Underscoring supplied. R.A. 2264 was further amended by P.D. No. 145, 69 Official Gazette, p 2418 (1973), which however did not affect the abovequoted portion. 7 Nin Bay Mining Co. v. Municipality of Roxas, 14 SCRA 660 (1965); See also C.N. Hodges v. Municipal Board of the City of Iloilo, et. al., 19 SCRA 28 (1967); and Villanueva v. City of Iloilo, 26 SCRA 578 (1968). 8 supra, note 6; underscoring supplied. 9 Compania General de Tabacos de Filipinas v. City of Manila, 118 Phil. 383; 8 SCRA 370 (1963); Pacific Commercial Co. v. Romualdez, 49 Phil, 917 (1927). 10 Manila Electric Company v. El Auditor General y La Comision de Servicios Publicos, 73 Phil. 133 (1941); Republic v. Philippine Rabbit Bus Lines, 32 SCRA 215 (1970). 11 City of Iloilo v. Villanueva, 105 Phil. 337 (1959). 12 Manila Electric Company vs. El Auditor General y la Comision de Servicios Publicos, supra, at 134-135. 13 Serafin Saldana v. City of Iloilo, 104 Phil, 28. (1958). 14 Record on Appeal, p. 10. 15 Ibid. 16 In City of Jacksonville, et al. v. Ledwith 7 So. at 892 [1890]; 26 Fla. 163, it was held that a permit to establish a market was: "from the nature of a market, a license. It is a permit to do something which could not be done before without such permit, and hence is the grant of a license. x x x [T]he power to establish markets is within the police power, and [thus is] x x x the power to charge, as a police regulation, a fee for the permit or license for selling meats or vegetables therein, x x x. The fee, however, is not a tax for revenue, but a charge under the police power, and its amount is to be controlled by the principles governing in such cases." 17 Brief for the Respondent, pp. 6-7; Rollo, p. 172. 18 E.g., Calalang v. Lorenzo and Villar, 97 Phil. 212 (1955).

19 Procter & Gamble PMC v. Municipality of Jagna 94 SCRA 894 (1979); Northern Phil. Tobacco Co. v. Municipality of Agoo, 31 SCRA 304 (1970); and San Miguel Brewery, Inc. v. City of Cebu, 43 SCRA 275 (1972). 20 Victorias Milling Co., Inc. v. Municipality of Victorias, Negros Occidental, 25 SCRA 192 at 205 (1968), citing 9 McQuillin Municipal Corporations, 3rd ed., at 65. In Atkins v. Philips, 8 So. at 431 (1890); 26 Fla. 281, the Supreme Court of Florida held: 21 City of Ozamis v. Lumapas, 65 SCRA 33 (1975). Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. Nos. L-28508-9 July 7, 1989 ESSO STANDARD EASTERN, INC., (formerly, Standard-Vacuum Oil Company), petitioner, vs. THE COMMISSIONER OF INTERNAL REVENUE, respondent. Padilla Law Office for petitioner.

CRUZ, J.: On appeal before us is the decision of the Court of Tax Appeals 1 denying petitioner's claims for refund of overpaid income taxes of P102,246.00 for 1959 and P434,234.93 for 1960 in CTA Cases No. 1251 and 1558 respectively. I In CTA Case No. 1251, petitioner ESSO deducted from its gross income for 1959, as part of its ordinary and necessary business expenses, the amount it had spent for drilling and exploration of its petroleum concessions. This claim was disallowed by the respondent Commissioner of Internal Revenue on the ground that the expenses should be capitalized and might be written off as a loss only when a "dry hole" should result. ESSO then filed an amended return where it asked for the refund of P323,279.00 by reason of its abandonment as dry holes of several of its oil wells. Also claimed as ordinary and necessary expenses in the same return was the amount of P340,822.04, representing margin fees it had paid to the Central Bank on its profit remittances to its New York head office. On August 5, 1964, the CIR granted a tax credit of P221,033.00 only, disallowing the claimed deduction for the margin fees paid. In CTA Case No. 1558, the CR assessed ESSO a deficiency income tax for the year 1960, in the amount of P367,994.00, plus 18% interest thereon of P66,238.92 for the period from April 18,1961 to April 18, 1964, for a total of P434,232.92. The deficiency arose from the disallowance of the margin fees of Pl,226,647.72 paid by ESSO to the Central Bank on its profit remittances to its New York head office. ESSO settled this deficiency assessment on August 10, 1964, by applying the tax credit of P221,033.00 representing its overpayment on its income tax for 1959 and paying under protest the additional amount of P213,201.92. On August 13, 1964, it claimed the refund of P39,787.94 as overpayment on the interest on its deficiency income tax. It argued that the 18% interest should have been imposed not on the total deficiency of P367,944.00 but only on the amount of P146,961.00, the difference between the total deficiency and its tax credit of P221,033.00. This claim was denied by the CIR, who insisted on charging the 18% interest on the entire amount of the deficiency tax. On May 4,1965, the CIR also denied the claims of ESSO for refund of the overpayment of its 1959 and 1960 income taxes, holding that the margin fees paid to the Central Bank could not be considered taxes or allowed as deductible business expenses. ESSO appealed to the CTA and sought the refund of P102,246.00 for 1959, contending that the margin fees were deductible from gross income either as a tax or as an ordinary and necessary business expense. It also claimed an overpayment of its tax by P434,232.92 in 1960, for the same reason. Additionally, ESSO argued that even if the amount paid as margin fees were not legally deductible, there was still an overpayment by P39,787.94 for 1960, representing excess interest. After trial, the CTA denied petitioner's claim for refund of P102,246.00 for 1959 and P434,234.92 for 1960 but sustained its claim for P39,787.94 as excess interest. This portion of the decision was appealed by the CIR but was affirmed by this Court in Commissioner of Internal Revenue v. ESSO, G.R. No. L-28502- 03, promulgated on April 18, 1989. ESSO for its part appealed the CTA decision denying its claims for the refund of the margin fees P102,246.00 for 1959 and P434,234.92 for 1960. That is the issue now before us.

II The first question we must settle is whether R.A. 2009, entitled An Act to Authorize the Central Bank of the Philippines to Establish a Margin Over Banks' Selling Rates of Foreign Exchange, is a police measure or a revenue measure. If it is a revenue measure, the margin fees paid by the petitioner to the Central Bank on its profit remittances to its New York head office should be deductible from ESSO's gross income under Sec. 30(c) of the National Internal Revenue Code. This provides that all taxes paid or accrued during or within the taxable year and which are related to the taxpayer's trade, business or profession are deductible from gross income. The petitioner maintains that margin fees are taxes and cites the background and legislative history of the Margin Fee Law showing that R.A. 2609 was nothing less than a revival of the 17% excise tax on foreign exchange imposed by R.A. 601. This was a revenue measure formally proposed by President Carlos P. Garcia to Congress as part of, and in order to balance, the budget for 1959-1960. It was enacted by Congress as such and, significantly, properly originated in the House of Representatives. During its two and a half years of existence, the measure was one of the major sources of revenue used to finance the ordinary operating expenditures of the government. It was, moreover, payable out of the General Fund. On the claimed legislative intent, the Court of Tax Appeals, quoting established principles, pointed out that We are not unmindful of the rule that opinions expressed in debates, actual proceedings of the legislature, steps taken in the enactment of a law, or the history of the passage of the law through the legislature, may be resorted to as an aid in the interpretation of a statute which is ambiguous or of doubtful meaning. The courts may take into consideration the facts leading up to, coincident with, and in any way connected with, the passage of the act, in order that they may properly interpret the legislative intent. But it is also well-settled jurisprudence that only in extremely doubtful matters of interpretation does the legislative history of an act of Congress become important. As a matter of fact, there may be no resort to the legislative history of the enactment of a statute, the language of which is plain and unambiguous, since such legislative history may only be resorted to for the purpose of solving doubt, not for the purpose of creating it. [50 Am. Jur. 328.] Apart from the above consideration, there are at least two cases where we have held that a margin fee is not a tax but an exaction designed to curb the excessive demands upon our international reserve. In Caltex (Phil.) Inc. v. Acting Commissioner of Customs, 2 the Court stated through Justice Jose P. Bengzon: A margin levy on foreign exchange is a form of exchange control or restriction designed to discourage imports and encourage exports, and ultimately, 'curtail any excessive demand upon the international reserve' in order to stabilize the currency. Originally adopted to cope with balance of payment pressures, exchange restrictions have come to serve various purposes, such as limiting non-essential imports, protecting domestic industry and when combined with the use of multiple currency rates providing a source of revenue to the government, and are in many developing countries regarded as a more or less inevitable concomitant of their economic development programs. The different measures of exchange control or restriction cover different phases of foreign exchange transactions, i.e., in quantitative restriction, the control is on the amount of foreign exchange allowable. In the case of the margin levy, the immediate impact is on the rate of foreign exchange; in fact, its main function is to control the exchange rate without changing the par value of the peso as fixed in the Bretton Woods Agreement Act. For a member nation is not supposed to alter its exchange rate (at par value) to correct a merely temporary disequilibrium in its balance of payments. By its nature, the margin levy is part of the rate of exchange as fixed by the government. As to the contention that the margin levy is a tax on the purchase of foreign exchange and hence should not form part of the exchange rate, suffice it to state that We have already held the contrary for the reason that a tax is levied to provide revenue for government operations, while the proceeds of the margin fee are applied to strengthen our country's international reserves. Earlier, in Chamber of Agriculture and Natural Resources of the Philippines v. Central Bank, 3 the same idea was expressed, though in connection with a different levy, through Justice J.B.L. Reyes: Neither do we find merit in the argument that the 20% retention of exporter's foreign exchange constitutes an export tax. A tax is a levy for the purpose of providing revenue for government operations, while the proceeds of the 20% retention, as we have seen, are applied to strengthen the Central Bank's international reserve. We conclude then that the margin fee was imposed by the State in the exercise of its police power and not the power of taxation. Alternatively, ESSO prays that if margin fees are not taxes, they should nevertheless be considered necessary and ordinary business expenses and therefore still deductible from its gross income. The fees were paid for the remittance by ESSO as part of the profits to the head office in the Unites States. Such remittance was an expenditure necessary and proper for the conduct of its corporate affairs. The applicable provision is Section 30(a) of the National Internal Revenue Code reading as follows: 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; traveling expenses while away from home in the pursuit of a trade or business; and rentals or other payments required to be made as a

condition to the continued use or possession, for the purpose of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity. (2) Expenses allowable to non-resident alien individuals and foreign corporations. In the case of a non-resident alien individual or a foreign corporation, the expenses deductible are the necessary expenses paid or incurred in carrying on any business or trade conducted within the Philippines exclusively. In the case of Atlas Consolidated Mining and Development Corporation v. Commissioner of Internal Revenue, 4 the Court laid down the rules on the deductibility of business expenses, thus: 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) (1) 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. While it is true that there is a number of decisions in the United States delving on the interpretation of the terms 'ordinary and necessary' as used in the federal tax laws, no adequate or satisfactory definition of those terms is possible. Similarly, this Court has never attempted to define with precision the terms 'ordinary and necessary.' There are however, certain guiding principles worthy of serious consideration in the proper adjudication of conflicting claims. Ordinarily, an expense will be considered 'necessary' where the expenditure is appropriate and helpful in the development of the taxpayer's business. It is 'ordinary' when it connotes a payment which is normal in relation to the business of the taxpayer and the surrounding circumstances. The term 'ordinary' does not require that the payments be habitual or normal in the sense that the same taxpayer will have to make them often; the payment may be unique or non-recurring to the particular taxpayer affected. There is thus no hard and fast rule on the matter. The right to a deduction depends in each case on the particular facts and the relation of the payment to the type of business in which the taxpayer is engaged. The intention of the taxpayer often may be the controlling fact in making the determination. Assuming that the expenditure is ordinary and necessary in the operation of the taxpayer's business, the answer to the question as to whether the expenditure is an allowable deduction as a business expense must be determined from the nature of the expenditure itself, which in turn depends on the extent and permanency of the work accomplished by the expenditure. In the light of the above explanation, we hold that the Court of Tax Appeals did not err when it held on this issue as follows: Considering the foregoing test of what constitutes an ordinary and necessary deductible expense, it may be asked: Were the margin fees paid by petitioner on its profit remittance to its Head Office in New York appropriate and helpful in the taxpayer's business in the Philippines? Were the margin fees incurred for purposes proper to the conduct of the affairs of petitioner's branch in the Philippines? Or were the margin fees incurred for the purpose of realizing a profit or of minimizing a loss in the Philippines? Obviously not. As stated in the Lopez case, the margin fees are not expenses in connection with the production or earning of petitioner's incomes in the Philippines. They were expenses incurred in the disposition of said incomes; expenses for the remittance of funds after they have already been earned by petitioner's branch in the Philippines for the disposal of its Head Office in New York which is already another distinct and separate income taxpayer. xxx Since the margin fees in question were incurred for the remittance of funds to petitioner's Head Office in New York, which is a separate and distinct income taxpayer from the branch in the Philippines, for its disposal abroad, it can never be said therefore that the margin fees were appropriate and helpful in the development of petitioner's business in the Philippines exclusively or were incurred for purposes proper to the conduct of the affairs of petitioner's branch in the Philippines exclusively or for the purpose of realizing a profit or of minimizing a loss in the Philippines exclusively. If at all, the margin fees were incurred for purposes proper to the conduct of the corporate affairs of Standard Vacuum Oil Company in New York, but certainly not in the Philippines. ESSO has not shown that the remittance to the head office of part of its profits was made in furtherance of its own trade or business. The petitioner merely presumed that all corporate expenses are necessary and appropriate in the absence of a showing that they are illegal or ultra vires. This is error. The public respondent is correct when it asserts that "the paramount rule is that claims for deductions are a matter of legislative grace and do not turn on mere equitable considerations ... . The taxpayer in every instance has the burden of justifying the allowance of any deduction claimed." 5 It is clear that ESSO, having assumed an expense properly attributable to its head office, cannot now claim this as an ordinary and necessary expense paid or incurred in carrying on its own trade or business.

WHEREFORE, the decision of the Court of Tax Appeals denying the petitioner's claims for refund of P102,246.00 for 1959 and P434,234.92 for 1960, is AFFIRMED, with costs against the petitioner. SO ORDERED. Narvasa (Chairman), Gancayco, Grio-Aquino and Medialdea, JJ., concur.

Footnotes 1 Penned by Associate Judge E. Alvarez, with Presiding Judge Umali and Associate Judge Avancena concurring. 2 22 SCRA 779. 3 14 SCRA 630. 4 102 SCRA 246. 5 Mertens, Law of Federal Income Taxation, Section 25.03.
Exemption From Taxation Assessment

In 1937, an ordinance (Ord. 137) was passed in the City of Baguio. The said ordinance sought to assess properties of property owners within the defined city limits. APMP, on the other hand, is a religious corporation duly established under Philippine laws. Pursuant to the ordinance, it contributed a total amount of P1,019.37. It filed the said contribution in protest. APMP later averred that it should be exempt from the said special contribution since as a religious institution, it has a constitutionally guaranteed right not to be taxed including its properties. ISSUE: Whether or not APMP is exempt from taxes. HELD: The test of exemption from taxation is the use of the property for purposes mentioned in the Constitution. Based on Justice Cooleys words: "While the word 'tax' in its broad meaning, includes both general taxes and special assessments, and in a general sense a tax is an assessment, and an assessment is a tax, yet there is a recognized distinction between them in that assessment is confined to local impositions upon property for the payment of the cost of public improvements in its immediate vicinity and levied with reference to special benefits to the property assessed. The differences between a special assessment and a tax are that (1) a special assessment can be levied only on land; (2) a special assessment cannot (at least in most states) be made a personal liability of the person assessed; (3) a special assessment is based wholly on benefits; and (4) a special assessment is exceptional both as to time and locality. The imposition of a charge on all property, real and personal, in a prescribed area, is a tax and not an assessment, although the purpose is to make a local improvement on a street or highway. A charge imposed only on property owners benefited is a special assessment rather than a tax notwithstanding the statute calls it a tax." In the case at bar, the Prefect cannot claim exemption because the assessment is not taxation per se but rather a system for the benefits of the inhabitants of the city.

Republic of the Philippines SUPREME COURT Manila EN BANC GR No. L-47252 April 18, 1941 THE APOSTOLIC PREFECT OF THE MOUNTAIN Province, plaintiff-appellant vs. THE TREASURER OF THE CITY OF BAGUIO, defendant-appellee. Mr. Cavanna, Jasmine and Tianco for appellant. The Attorney General for appellee. IMPERIAL, J. : The claimants brought this action to recover from the defendant the sum of P1, 019.37 to pay under protest as a special tax on their property in Baguio City for the year 1937.Appealed the ruling of the Court of First Instance of the city, which dismissed his claim, without costs. The parties submitted the matter with the following stipulation of facts in part:

1. The applicant is a sole proprietorship of a religious corporation organized under the Philippine Leye, based in Baguio City; 2. The defendant is a public functionaries of the city of Baguio and acts as treasurer and collector of that city; 3. The defendant demanded and collection of the applicant on June 25, 1937 the sum of One thousand and nineteen dollars and thirtyseven cents (P1, 019.37), Philippine currency, under the provisions of Ordinance No. 137, as it has been reformed and amended by Ordinance No. 263, 277, 283, 297, 311, 325, 348, 367, 387, 419, 471, 45, 455, 466, 512, 552, 591, 592, and Resolution of the Council of the City of Baguio No. 10 dated January 22, 1918.And all such ordinances, as well as Resolution No. 10, series 1918, are integral parts of this agreement. 4. That the payment made by the applicant p1, 019.37 for the year 1937 under protest was made in a letter dated June 25, 1937 in which he discussed the reasons for the portesta and asked for a favorable resolution protest and refund the amount paid; 5. The defendant denied the protest; 6. The land affected by the payment of P1, 019.37 is land ownership of the applicant's property for worship and teaching during 1937 and prior years; 7. That the City of Baguio built according to the ordinance cited above in paragraph 2. Number of this provision a system of drainage and sewerage; 8. That the plaintiff paid in previous years came to 1937, without protest, the amounts that the city required under the ordinance and referred, for the first time in 1937 protest, protest is the subject of this litigation; 9. No. That was included in Ordinance No. 137 an account of properties valued at Baguio City and that relationship became a part of Ordinance No. 137 and was called and turned into "SPECIAL ASSESSMENT LIST OF BAGUIO CITY" for the purposes of that ordinance and that the affected property in payment were protesting the applicant and are included in this list and have not been excluded so far by virtue of any ordinance Post No. 137; 10. that the construction of drainage and sewerage system has benefited and is benefiting directly and specially to all owners whose lots and land are included in the "SPECIAL ASSESSMENT LIST OF BAGUIO CITY" including the grounds of the plaintiff here affected the list and payment under protest and that the sewer system and sewer cleaning and has promoted the health condition of the land of that list. 11. The parties reserve the right to further testing. The appellant claims error in his remarks the following propositions: (1) your real estate and mojor in Baguio City to find exempted from paying any tax by the Constitution and existing laws must be equally exempt from the special contribution that the respondent has claimed and paid under protest, (2) the Ordinance No. 137 as amended, under which special tax has been collected, exclusive of its provisions properties exempt from payment of all tax, (3) that the assumption that those ordinances do not exclude their property to pay the special tax, they are void and ineffective, and (4), assuming that those ordinances were legal, the respondent, Treasurer of the City of Baguio, the contribution charge illegally Appellant special payment under protest, for the reason that the payment date and the appellant had satisfied his participation in the costs of drainage and sewerage system that caused the imposition of special tax. The first proposition involves the question of whether properties on which the special tax collection are effectively exempt from such payment.The tax charge for PROFESSIONALS are appealed under the provisions of Articles 2 and 5 of Ordinance No. 137 providing: HAVING It Been heretofore ascertained That Will Benefit Each said work and all owners or possessors or property subject to taxation situated, lying and Being Within the corporate limits of the City, it is hereby Declared That Will Benefit from said work to accrue Each and all said persons, and said persons to pay compensation for Marshall said benefit. The City Assessor HAVING heretofore compiled from the City Assessment and Valuation aforesaid and certified to the City Treasurer to list and setting forth Containing the total amount of property Within the corporate limits of the City subject to Assessment and Levy for the Purposes recited in this Ordinance, the total amount of properties owned and possessed Individually, and the name of owner and possessor Each individual, the rate per centum, to wit: ONE PER CENTUM total ad valorem value of said Which is NECESSARY for the Purposes forth in Section III September hereof, is hereby made the amount to be paid Individually Each owner or possessor by as historical share, and the above-Mentioned list is hereby made part hereof and named "SPECIAL ASSESSMENT LIST," and said list is hereby Declared to be, and made the City official list and basis for Assessing, and Collecting levying the rate of compensation from the aboveaforesaid owners and possessors Referred, owner or possessor and Each is required to, and pay the amount in Marshall said historical individual as List State share to the City Treasurer on or After the first of March and not later Than 30th June, 1914. The appellant Sosti their properties are exempt from the special contribution both as provided in Article 2 of Ordinance No. 137 as so estatuve Article 14, (3), Title VI of the Constitution of the Philippines reads as follows: (3) The cemeteries, churches, parishes and convents attached to these, and all land, buildings and improvements used exclusively for religious, charitable or educational purposes shall be exempt from taxation.

It is alleged that under Article 2 of Ordinance No. 137 should only pay the special contribution that the properties are not exempt from paying a tax and that under the constitutional provision cited the appellant's properties are exempted from payment of the special contribution be devoted to religious purposes.This claim needs to be resolved, first, if the special tax imposed by Ordinance No. 13 is a tax in its legal acceptation.It is a well-established rule regarding espeicales tax contributions that are created and charged to recoup costs caused Extremely works, including drainage and sewerage system, which benefit a special way the people is not a tax on their sense legal.According to the ordinance the special contribution levied on properties located in Baguio City, was created to recoup the extra costs that caused the drainage and sewerage system to be built, designed to benefit a special way to all propietarior it city.Judge Cooley, to draw the distinction between taxes and special assessments in the tax treaty, is expressed in these terms: While the word "tax" in STI broad Meaning, includes general taxes and special Both Assessments, and in a general sense to tax is an assessment, and an Assessment is a tax, There Is a Recognized yet Distinction Between Them In That Assessment is confined to local impositions upon property for the payment of the cost of public Improvements in STI Immediate vicinity and with reference to special levier Benefits to the property assess.The Difference Between a Special Assessment and a tax are that (1) special Assessment Can Be levier only on land, (2) a special Assessment can not (at least in MOST states) be made to personal liability of the person Assessed, (3 ) is a special Assessment Wholly based on Benefits, and (4) is exceptional to special Assessment Both as to Time and locality.The imposition of a charge on all property, real and personal, in a prescribed area, is a tax and not an assessment, although the purpose is to make a local improvement on a street or highway.A charge on property owners only imposer Benefit Assessment is a special Rather Than to tax notwithstanding the statute calls it a tax. If the special tax charged to the appellant is not strictly a tax payment of which is exempt from the same, it is clear that neither under the ordinance or the constitution the appellant referred to the web sites except the payment of special contribution. Moreover, according to the stipulation of facts, the appellant can not successfully invoke the exemption established by the Constitution because it has not admitted or proven their Property exactly who paid the special tax is used exclusively for religious purposes.True states that the properties were dedicated to religious purposes, but not agreed nor proved that such use was exclusive, and may therefore be that most of the properties to be dedicated to religious purposes intended and also use for other purposes nonreligious. As for the validity of Ordinance No. 137 and its amendments, it is undeniable that the City of Baguio is authorized by Article 8 (1) of Law No. 1963, now Article 2553 (1) of the Revised Administrative Code, to discussed creating the special tax to repay the cats caused by drainage and sewerage system that was built for the benefit of all inhabitants of that city. The appellant's pretension ultama is valid assuming Ordinance No. 137 and its amendments and he is not obliged to pay special tax in view of already met in previous years to 1937, which corresponded aliquot of this special contribution.The pretension is EQUAL unfounded, because it's Exhibit 1 that the cost of drainage and sewerage system amounts to P502, 750.75 and the city only charges for special tax until the year 1937 the sum of P291, 290.08, resulting in the cost of the system in 1937, was not yet totally satisfied. Finding himself in accordance with law the sentence appeal, confirming the same in all its parts, the costs of this instance against the appellant.So ordered. Avancea, CJ, Diaz, Laurel, and Horrilleno, MM., concur. Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-47252 April 18, 1941

THE APOSTOLIC PREFECT OF THE MOUNTAIN PROVINCE, demandante-apelante, vs. EL TESORERO DE LA CIUDAD DE BAGUIO, demandado-apelado. Sres. Cavanna, Jasmines y Tianco en representacion del apelante. El Procurador General en representacion del apelado. IMPERIAL, J.: El demandante ejercito esta accion para recobrar del demandado la suma de P1,019.37 que pago bajo protesta como contribucion especial sobre sus propiedades en la Ciudad de Baguio, correspondiente al ao 1937. Apelo de la sentencia del Juzgado de Primera Instancia de dicha ciudad que sobreseyo su demanda, sin costas. Las partes sometieron el asunto mediante la siguiente estipulacion parcial de hechos: 1. La demandante es un corporacion unipersonal de caracter religioso, organizada de acuerdo con las leye de Filipinas, con residencia en la ciudad de Baguio;

2. El demandado es un functionario publico de la ciudad de Baguio y actua como tesorero y colector de dicha ciudad; 3. Que el demandado exigio y cobro de la demandante el 25 de junio de 1937 la suma de Mil diez y nueve pesos con treinta y siete centimos (P1,019.37), moneda filipina, en virtud de las disposiciones de la Ordenanza No. 137, tal como ha sido reformada y enmendada por las Ordenanzas No. 263, 277, 283, 297, 311, 325, 348, 367, 387, 419, 471, 45, 455, 466, 512, 552, 591, 592, y Resolucion del Consejo de la Ciudad de Baguio No. 10 de fecha 22 de enero de 1918. Todas las referidas ordenanzas, asi como la resolucion No. 10, serie de 1918, se hacen partes integrantes de este convenio. 4. Que el pago hecho por la demandante de p1,019.37 corresponde al ao 1937 y se hizo bajo protesta formulada en carta fechada el 25 de junio de 1937 en la que se expuso los motivos de la portesta y se pidio la resolucion favorable de la protesta y la devolucion de la cantidad pagada; 5. Que el demandado denego la protesta; 6. Los terrenos afectados con el pago de P1,019.37 son terrenos de la propiedad de la propiedad de la demandante dedicados al culto y enseanza durante el ao 1937 y en aos anteriores; 7. Que la Ciudad de Baguio construyo de acuerdo con las ordenanzas arriba citadas en el parrafo 2. de esta estipulacion un sistema de desague y alcantarillado; 8. Que la demandante vino pagando en aos anteriores a 1937, sin protesta, las sumas que la ciudad exigia de acuerdo con las ordenanzas y referidas; y por primera vez protesto el ao 1937, protesta que es objeto de este litigio; 9. Que se incluyo en la Ordenanza No. 137 una relacion de las propiedades avaluadas en la ciudad de Baguio y esa relacion se hizo parte de la Ordenanza No. 137 y fue llamada y convertida en "SPECIAL ASSESSMENT LIST, CITY OF BAGUIO", a los efectos de la referida ordenanza y que las propiedades afectadas en el pago protesta de la demandante estaban y estan incluidas en dicha lista y no han sido excluidas hasta el presente por virtud de ninguna ordenanza posterior a la No. 137; 10. Que la construccion del sistema de desague y alcantarillado ha beneficiado y esta beneficiando directa y especialmente a todos los propietarios cuyos lotes y terrenos estan incluidos en la "SPECIAL ASSESSMENT LIST, CITY OF BAGUIO" inclusive los terrenos de la aqui demandante afectados en dicha lista y en el pago bajo protest y que este sistema de desague y alcantarillado ha promovido la limpieza y condicion sanitaria de los terrenos de la referida lista. 11. Que las partes se reservan el derecho de practicar pruebas adicionales. El apelante sostiene en sus sealamientos de error las siguientes proposiciones: (1) que sus propiedades inmuebles y sus mojoras en la Ciudad de Baguio por hallarse exceptuadas de pago de todo impuesto por la Constitucion y por las leyes vigentes deben estar igualmente exentas del pago de la contribucion especial que le ha cobrado el apelado y el ha pagado bajo protesta; (2) que la Ordenanza No. 137 y sus enmiendas, bajo las cuales la contribucion especial se ha cobrado, excluyen de sus disposiciones sus propiedades exenas del pago de todo impuesto; (3) que en el supuesto de que las citadas ordenanzas no excluyen sus propiedades del pago de la contribucion especial, las mismas son nulas e ineficaces; y (4) que en el supuesto de que las mencionadas ordenanzas fuesen legales el apelado, como Tesorero de la Ciudad de Baguio, cobro ilegalmente la la contribucion especial que el apelante pago bajo protesta, por la razon de que en la fecha del pago el apelante ya habia satisfecho su participacion en los gastos del sistema de desague y alcantarillado que ocasiono la imposicion de la contribucion especial. La primera proposicion envuelve la cuestion de si las propiedades sobre las cuales se cobro la contribucion especial estan efectivamente exentas de dicho pago. La contribucion expecial se cobro por el apelado en virtud de las disposiciones de los articulos 2 y 5 de la Ordenanza No. 137 que proveen: It having heretofore been ascertained that said work will benefit each and all owners or possessors or property subject to taxation situated, lying and being within the corporate limits of the City, it is hereby declared that benefit will accrue from said work to each and all said persons, and said persons shall pay a compensation for said benefit. The City Assessor having heretofore compiled from the City Assessment and Valuation aforesaid and certified to the City Treasurer a list containing and setting forth the total amount of property within the corporate limits of the City subject to assessment and levy for the purposes in this Ordinance recited, the total amount of properties individually owned and possessed, and the name of each individual owner and possessor, the rate per centum, to wit: ONE PER CENTUM ad valorem of said total value which is necessary for the purposes set forth in Section III hereof, is hereby made the amount to be paid individually by each owner or possessor as his share, and the abovementioned list is hereby made part hereof and named "SPECIAL ASSESSMENT LIST," and said list is hereby declared to be, and made the City official list and basis for assessing, levying and collecting the rate of compensation aforesaid from the above-referred owners and possessors, and each owner or possessor is required to, and shall pay the amount in said list stated as his individual share to the City Treasurer on or after the first of March and not later than June 30th, 1914. El apelante sostien que sus propiedades estan exentas del pago de la contribucion especial tanto por lo que dispone el articulo 2 de la Ordenanza No. 137 como por lo que estatuve el articulo 14, (3), Titulo VI, de la Constitucion de Filipinas que se lee como sigue: (3) Los cementarios, iglesias, parroquias y conventos adheridos a estas, y todos los terrenos, edificios y mejoras usados exclusivamente para fines religiosos, caritativos o educacionales, estaran exentos de tributacion.

Se alega que segun el articulo 2 de la Ordenanza No. 137 solamente deben pagar la contribucion especial las propiedades que no estan exentes del pago de un impuesto y que de acuerdo con el precepto constitucional citado las propiedades del apelante se hallan exceptuadas del pago de la contribucion especial por hallarse dedicadas a fines religiosos. Esta pretension requiere que se resuelva, en primer termino, si la contribucion especial impuesta por la Ordenanza No. 13 es un impuesto en su acepcion legal. Es una regla bien establecida en materia de impuesto que las contribuciones espeicales que se crean y cobran para amortizar gastos extraodinarios que ocasionan obras, como el sistema de desague y alcantarillado, que benefician de un modo especial a los habitantes no es un impuesto en su sentido legal. Segun la ordenanza la contribucion especial que se cobro a las propiedades situadas en la Ciudad de Baguio, se creo para amortizar los gastos extraordinarios que ocasiono el sistema de desague y alcantarillado que se construyo, obra que beneficio de modo especial a todos los propietarior se la ciudad. El Juez Cooley, al trazar la distincion entre impuestos y contribuciones especiales en su tratado sobre impuestos, se expresa en estos terminos: While the word "tax" in its broad meaning, includes both general taxes and special assessments, and in a general sense a tax is an assessment, and an assessment is a tax, yet there is a recognized distinction between them in that assessment is confined to local impositions upon property for the payment of the cost of public improvements in its immediate vicinity and levied with reference to special benefits to the property assessed. The differences between a special assessment and a tax are that (1) a special assessment can be levied only on land; (2) a special assessment cannot (at least in most states) be made a personal liability of the person assessed; (3) a special assessment is based wholly on benefits; and (4) a special assessment is exceptional both as to time and locality. The imposition of a charge on all property, real and personal, in a prescribed area, is a tax and not an assessment, although the purpose is to make a local improvement on a street or highway. A charge imposed only on property owners benefited is a special assessment rather than a tax notwithstanding the statute calls it a tax. Si la contribucion especial que se cobro al apelante no es estrictamente hablando un impuesto de cuyo pago esta exento el mismo, es evidente que ni bajo la ordenanza ni la Constitucion el referido apelante esta exeptuado del pago de la contribucion especial. Ademas, de acuerdo con la estipulacion de hechos, el apelante no puede invocar con exito la exencion establecida por la Constitucion porque no se ha admitido ni probado que sus porpiedades que pagaron la contribucion especial se usaban exclusivamente para fines religiosos. Cierto que se estipulo que las propiedades estaban dedicadas a fines religiosos, mas, no se convino ni se probo que semejante uso era exclusivo, pudiendo por tanto ocurrir que las propiedades a mas de estar dedicadas a fines religiosos se destinaran y usaran igualmente a otros fines no religiosos. En cuanto a la validez de l a Ordenanza No. 137 y sus enmiendas, es innegable que la Ciudad de Baguio esta autorizada por el articulo 8 (1) de la Ley No. 1963, hoy articulo 2553 (1) del Codigo Administrativo Revisado, para crear la contribucion especial discutida con el fin de amortizar los gatos ocasionados por el sistema de desague y alcantarillado que se construyo para el beneficio de todos los habitantes de la mencionada ciudad. La ultama pretension del apelante es que suponiendo validas la Ordenanza No. 137 y sus enmiendas el no esta ya obligado a pagar contribucion especial en vista de que ya satisfizo en aos anteriores a 1937 la parte alicuota que le correspondio de dicha contribucion especial. La pretension es equalmente infundada, porque resulta del Exhibit 1 que el costo del sistema de desague y alcantarillado asciende a P502,750.75 y la ciudad solo cobro por contribucion especial hasta el ao 1937 la suma de P291,290.08; resultando que el costo del sistema, en el ao 1937, no estaba aun totalmente satisfecho. Hallandose ajustada a derecho la sentencia recurrida, se confirma la misma en todas sus partes, con las costas de esta instancia al apelante. Asi se ordena. Avancea, Pres., Diaz, Laurel, y Horrilleno, MM., estan conformes. Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-53961 June 30, 1987 NATIONAL DEVELOPMENT COMPANY, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, respondent.

CRUZ, J.: We are asked to reverse the decision of the Court of Tax Appeals on the ground that it is erroneous. We have carefully studied it and find it is not; on the contrary, it is supported by law and doctrine. So finding, we affirm. Reduced to simplest terms, the background facts are as follows. The national Development Company entered into contracts in Tokyo with several Japanese shipbuilding companies for the construction of twelve ocean-going vessels. 1 The purchase price was to come from the proceeds of bonds issued by the Central Bank. 2 Initial payments were made in cash and through irrevocable letters of credit. 3 Fourteen promissory notes were signed for the balance by the NDC and, as required by the shipbuilders,

guaranteed by the Republic of the Philippines. 4 Pursuant thereto, the remaining payments and the interests thereon were remitted in due time by the NDC to Tokyo. The vessels were eventually completed and delivered to the NDC in Tokyo. 5 The NDC remitted to the shipbuilders in Tokyo the total amount of US$4,066,580.70 as interest on the balance of the purchase price. No tax was withheld. The Commissioner then held the NDC liable on such tax in the total sum of P5,115,234.74. Negotiations followed but failed. The BIR thereupon served on the NDC a warrant of distraint and levy to enforce collection of the claimed amount. 6 The NDC went to the Court of Tax Appeals. The BIR was sustained by the CTA except for a slight reduction of the tax deficiency in the sum of P900.00, representing the compromise penalty. 7 The NDC then came to this Court in a petition for certiorari. The petition must fail for the following reasons. The Japanese shipbuilders were liable to tax on the interest remitted to them under Section 37 of the Tax Code, thus: SEC. 37. Income from sources within the Philippines. (a) Gross income from sources within the Philippines. The following items of gross income shall be treated as gross income from sources within the Philippines: (1) Interest. Interest derived from sources within the Philippines, and interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise; xxx xxx xxx The petitioner argues that the Japanese shipbuilders were not subject to tax under the above provision because all the related activities the signing of the contract, the construction of the vessels, the payment of the stipulated price, and their delivery to the NDC were done in Tokyo. 8 The law, however, does not speak of activity but of "source," which in this case is the NDC. This is a domestic and resident corporation with principal offices in Manila. As the Tax Court put it: It is quite apparent, under the terms of the law, that the Government's right to levy and collect income tax on interest received by foreign corporations not engaged in trade or business within the Philippines is not planted upon the condition that 'the activity or labor and the sale from which the (interest) income flowed had its situs' in the Philippines. The law specifies: 'Interest derived from sources within the Philippines, and interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise.' Nothing there speaks of the 'act or activity' of non-resident corporations in the Philippines, or place where the contract is signed. The residence of the obligor who pays the interest rather than the physical location of the securities, bonds or notes or the place of payment, is the determining factor of the source of interest income. (Mertens, Law of Federal Income Taxation, Vol. 8, p. 128, citing A.C. Monk & Co. Inc. 10 T.C. 77; Sumitomo Bank, Ltd., 19 BTA 480; Estate of L.E. Mckinnon, 6 BTA 412; Standard Marine Ins. Co., Ltd., 4 BTA 853; Marine Ins. Co., Ltd., 4 BTA 867.) Accordingly, if the obligor is a resident of the Philippines the interest payment paid by him can have no other source than within the Philippines. The interest is paid not by the bond, note or other interest-bearing obligations, but by the obligor. (See mertens, Id., Vol. 8, p. 124.) Here in the case at bar, petitioner National Development Company, a corporation duly organized and existing under the laws of the Republic of the Philippines, with address and principal office at Calle Pureza, Sta. Mesa, Manila, Philippines unconditionally promised to pay the Japanese shipbuilders, as obligor in fourteen (14) promissory notes for each vessel, the balance of the contract price of the twelve (12) ocean-going vessels purchased and acquired by it from the Japanese corporations, including the interest on the principal sum at the rate of five per cent (5%) per annum. (See Exhs. "D", D-1" to "D-13", pp. 100-113, CTA Records; par. 11, Partial Stipulation of Facts.) And pursuant to the terms and conditions of these promisory notes, which are duly signed by its Vice Chairman and General Manager, petitioner remitted to the Japanese shipbuilders in Japan during the years 1960, 1961, and 1962 the sum of $830,613.17, $1,654,936.52 and $1,541.031.00, respectively, as interest on the unpaid balance of the purchase price of the aforesaid vessels. (pars. 13, 14, & 15, Partial Stipulation of Facts.)

The law is clear. Our plain duty is to apply it as written. The residence of the obligor which paid the interest under consideration, petitioner herein, is Calle Pureza, Sta. Mesa, Manila, Philippines; and as a corporation duly organized and existing under the laws of the Philippines, it is a domestic corporation, resident of the Philippines. (Sec. 84(c), National Internal Revenue Code.) The interest paid by petitioner, which is admittedly a resident of the Philippines, is on the promissory notes issued by it. Clearly, therefore, the interest remitted to the Japanese shipbuilders in Japan in 1960, 1961 and 1962 on the unpaid balance of the purchase price of the vessels acquired by petitioner is interest derived from sources within the Philippines subject to income tax under the then Section 24(b)(1) of the National Internal Revenue Code. 9
There is no basis for saying that the interest payments were obligations of the Republic of the Philippines and that the promissory notes of the NDC were government securities exempt from taxation under Section 29(b)[4] of the Tax Code, reading as follows:

SEC. 29. Gross Income. xxxx xxx xxx xxx (b) Exclusion from gross income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxx xxx xxx (4) Interest on Government Securities. Interest upon the obligations of the Government of the Republic of the Philippines or any political subdivision thereof, but in the case of such obligations issued after approval of this Code, only to the extent provided in the act authorizing the issue thereof. (As amended by Section 6, R.A. No. 82; emphasis supplied) The law invoked by the petitioner as authorizing the issuance of securities is R.A. No. 1407, which in fact is silent on this matter. C.A. No. 182 as amended by C.A. No. 311 does carry such authorization but, like R.A. No. 1407, does not exempt from taxes the interests on such securities. It is also incorrect to suggest that the Republic of the Philippines could not collect taxes on the interest remitted because of the undertaking signed by the Secretary of Finance in each of the promissory notes that:

Upon authority of the President of the Republic of the Philippines, the undersigned, for value received, hereby absolutely and unconditionally guarantee (sic), on behalf of the Republic of the Philippines, the due and punctual payment of both principal and interest of the above note. 10
There is nothing in the above undertaking exempting the interests from taxes. Petitioner has not established a clear waiver therein of the right to tax interests. Tax exemptions cannot be merely implied but must be categorically and unmistakably expressed. 11 Any doubt concerning this question must be resolved in favor of the taxing power. 12 Nowhere in the said undertaking do we find any inhibition against the collection of the disputed taxes. In fact, such undertaking was made by the government in consonance with and certainly not against the following provisions of the Tax Code: Sec. 53(b). Nonresident aliens. All persons, corporations and general co-partnership (companies colectivas), in whatever capacity acting, including lessees or mortgagors of real or personal capacity, executors, administrators, receivers, conservators, fiduciaries, employers, and all officers and employees of the Government of the Philippines having control, receipt, custody; disposal or payment of interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or categorical 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 cases provided for in subsection (a) of this section) deduct and withhold from such annual or periodical gains, profits and income a tax to twenty (now 30%) per centum thereof: ... 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 thirty (now 35%) per centumthereof, and such tax shall be returned and paid in the same manner and subject to the same conditions as provided in that section:.... Manifestly, the said undertaking of the Republic of the Philippines merely guaranteed the obligations of the NDC but without diminution of its taxing power under existing laws. In suggesting that the NDC is merely an administrator of the funds of the Republic of the Philippines, the petitioner closes its eyes to the nature of this entity as a corporation. As such, it is governed in its proprietary activities not only by its charter but also by the Corporation Code and other pertinent laws. The petitioner also forgets that it is not the NDC that is being taxed. The tax was due on the interests earned by the Japanese shipbuilders. It was the income of these companies and not the Republic of the Philippines that was subject to the tax the NDC did not withhold. In effect, therefore, the imposition of the deficiency taxes on the NDC is a penalty for its failure to withhold the same from the Japanese shipbuilders. Such liability is imposed by Section 53(c) of the Tax Code, thus: Section 53(c). Return and Payment. Every person required to deduct and withhold any tax under this section shall make return thereof, in duplicate, on or before the fifteenth day of April of each year, and, on or before the time fixed by law for the payment of the tax, shall pay the amount withheld to the officer of the Government of the Philippines authorized to receive it. Every such person is made personally liable for such tax, and is indemnified against the claims and demands of any person for the amount of any payments made in accordance with the provisions of this section. (As amended by Section 9, R.A. No. 2343.) In Philippine Guaranty Co. v. The Commissioner of Internal Revenue and the Court of Tax Appeals, 13 the Court quoted with approval the following regulation of the BIR on the responsibilities of withholding agents:

In case of doubt, a withholding agent may always protect himself by withholding the tax due, and promptly causing a query to be addressed to the Commissioner of Internal Revenue for the determination whether or not the income paid to an individual is not subject to withholding. In case the Commissioner of Internal Revenue decides that the income paid to an individual is not subject to withholding, the withholding agent may thereupon remit the amount of a tax withheld. (2nd par., Sec. 200, Income Tax Regulations). "Strict observance of said steps is required of a withholding agent before he could be released from liability," so said Justice Jose P. Bengson, who wrote the decision. "Generally, the law frowns upon exemption from taxation; hence, an exempting provision should be construed strictissimi juris." 14 The petitioner was remiss in the discharge of its obligation as the withholding agent of the government an so should be held liable for its omission. WHEREFORE, the appealed decision is AFFIRMED, without any pronouncement as to costs. It is so ordered. Teehankee, C.J., Yap, Fernan, Narvasa, Melencio-Herrera, Gutierrez, Jr., Paras, Feliciano, Gancayno, Padilla, Bidin, Sarmiento and Cortez, JJ., concur

Footnotes 1 Partial Stipulation of Facts, pars. 3-4. 2 Ibid., par. 8. 3 Id., par. 10. 4 Id., par. 11, Exhs. "D", "D-1" to "D-13". 5 Partial Stipulation of Facts, pars. 7, 13-15. 6 Decision, pp. 1, 4-5. 7 Ibid., pp. 19-21. 8 Rollo, pp. 12-13. 9 Decision, pp. 7-9. 10 Exhs. "D", "D-1" to "D-13". 11 Asiatic Petroleum Co. v. Llanes, 49 Phil. 466, 471; Union Garment Co., Inc. v. CTA, 4 SCRA 304; Phil. Acetylene Co., Inc. v. Comm. of Internal Revenue, 20 SCRa 1056; Republic Flour Mills, Inc. v. Comm. of Internal Revenue, 31 SCRa 520; Comm. of Customs v. Phil. Acetylene Co., Inc., 39 SCRA 71; Davao Light and Power Co., Inc. v. Comm. of Customs, 44 SCRA 122. 12 Asiatic Petroleum Co. v. Llanes, supra; Meralco v. Comm. of Internal Revenue, 67 SCRa 351. 13 15 SCRA 1. 14 Ibid.; La Carlota Sugar Central v. Jimenez, 2 SCRA 295.

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[1965V132E] REPUBLIC OF THE PHILIPPINES, plaintiff-appellee, vs. BLAS GONZALES, defendantappellant.1965 Apr 30En BancG.R. No. L-17962D E C I S I O N

REGALA, J.:

This is an appeal from the decision of the Court of First Instance of Manila under Civil Case No. 42912 the dispositive portion of which provided: "IN VIEW OF THE FOREGOING, judgment is hereby rendered in favor of the plaintiff and against the defendant, ordering said defendant to pay plaintiff the sums of P106,226.75 and P37,849.58 as deficiency income taxes for the years 1946 and 1947, respectively, (each inclusive of the 50% surcharge, plus the 50% surcharge and 1% monthly interest on the aforesaid amount from June 15, 1957 until the whole amount is fully paid, and cost of this suit." The records of this case disclose that since 1946, the defendant- appellant, Blas Gonzales, has been a private concessionaire in the U.S. Military Base at Clark Field, Angeles City. He was engaged in the manufacture of furniture and, per agreement with the base authorities, supplied them with his manufactured articles. On March 1, 1947 and March 1, 1948, the appellant filed his income tax returns for the years 1946 and 1947, respectively, with the then Municipal Treasurer of Angeles, Pampanga. In the return for 1946, he declared a net income of P9,352.84 and income tax liability at P111.17 while for the year 1947, he declared as net income the amount of P16,829.10 and a tax liability therefor in the sum of P1,395.95. In the above two returns, he declared the sums of P80,459.75 and P1,707,355.57 as his total sales for the said two years, respectively, or an aggregate sales of P1,787,848.32 for both years. Upon investigation, however, the Bureau of Internal Revenue discovered that for the years 1946 and 1947, the appellant had been paid a total of P2,199,920.50 for furniture delivered by him to the base authorities. The appellant does not deny the above amount which, for the record, was furnished by the Purchasing Officer of the Clark Field Air Base on the Bureau of Internal Revenue's representation. Compared against the sales figure provided by the base authorities, therefore, the amount of P1,787,848.32 declared by the appellant as his total sales for the two tax years in question was short or underdeclared by some P412,072.18. Accordingly, the appellee considered this last mentioned amount as unreported item of income of the appellant for 1946. Further investigation into the appellant's 1946 profit and loss statement disclosed "local sales," that is, sales to persons other than the United States Army, in the amount of P124,510.43. As a result, the appellee likewise considered the said amount as unreported income for the said year. The full amount of P124,510.43 was considered as taxable income because the appellant could not produce the books of account on the same upon which any deduction could be based. Adding up the above two items considered as unreported income, the appellee assessed the appellant the total sum of P340,179.84, broken down as follows:

Net income as per return Add: Sales to US Army P492,531.93 Local Sales 124,510.43

P 9,352.84

536,582.61 545,935.45 4,500.000

Net income as per investigation Less: Personal & additional exemptions Net taxable income Tax due thereon Less: Tax already assessed Deficiency tax due 50% surcharge

P541,435.45 P226,897.73 111.17 P226,786.56 113,393.28 P340,179.34

TOTAL AMOUNT DUE & COLLECTIBLE

On November 14, 1953, the Bureau of Internal Revenue sent a letter of demand to the appellant for the above amount as deficiency income tax, the sum of P300.00 as compromise for his failure to keep the required journal and ledger, and finally, the sum of P153.75 as additional residence tax, all for the year 1946. On March 31, 1954, on request of the appellant, the Bureau of Internal Revenue reinvestigated the case. At the end of this new inquest, however, the appellee, thru the then Collector of Internal Revenue, insisted on the payment of the original assessment of P340,179.84. It suggested, though, that if the appellant disagreed with the said finding he could submit the same for study, review and decision by the Conference Staff of the Bureau of Internal Revenue. In due time, the above assessment was heard before the said body which, subsequently, recommended a reduction of the same to P249,289.26, a deficiency income tax for the year 1946. After the recommendation was approved by the Bureau, the corresponding assessment notice for the sum of P249,289.26 as deficiency income tax and 50% surcharge for the year 1946 and 1% monthly interest and penalty incident to delinquency was forthwith issued to the appellant. On May 21, 1957, the above assessment was further revised by segregating the appellant's tax liability for the two years in question. Pursuant to a memorandum of the BIR Regional Director of San Fernando, Pampanga, another demand was made upon the appellant for the payment of P106,226.75 and P37,849.58 as income taxes due from him for the years 1946 and 1947, respectively, or a total of P144,076.33. When the appellant failed to pay the above demand, the appellee instituted the present suit on April 7, 1960. The appellant filed his answer on July 7, 1960 and amended it on July 19, 1960.

Prior to the trial of the case, the appellant filed with the court below a motion to dismiss grounded on prescription and lack of jurisdiction. The same was, however, denied by the lower court as unmeritorious. Moreover, for failure of the appellant or his counsel to appear at the scheduled hearing, the defendant-appellant was declared in default. The motion for reconsideration of this last order declaring the appellant in default for failure to appear was also denied by the trial court for lack of merit. On November 7, 1960, after the appellee had presented its documentary evidence against the appellant, the lower court rendered the decision under appeal. The appellant ascribes several errors to the decision of the court a quo, the more fundamental of which is the claim that as a concessionaire in an American Air Base, he is not subject to Philippine tax laws pursuant to the United States - Philippine Military Bases Agreement. In support of the claim, the following provision of the above Bases Agreement is invoked: "ARTICLE XVIII. Sales and Services within the Bases.

"1. It is mutually agreed that the United States shall have the right to establish on bases, free of all license; fees; sales excise or other taxes or imposts; Government agencies including concessions, such as sales, commissaries and post exchanges, masses and social clubs, for the exclusive use of the United States military forces and authorized civilian personnel and their families. The merchandise or services sold or dispensed by such agencies shall be free of all taxes, duties and inspection by the Philippine authorities. Administrative measures shall be taken by the appropriate authorities of the United States to prevent the sale of goods which are sold under the provisions of this Article to persons not entitled to buy goods at such agencies, and, generally, to prevent abuse of the privileges granted under this Article. There shall be cooperation between such authorities and the Philippines to this end. "2. Except as may be provided in any other agreements, no persons shall habitually render any professional services in a base except to or for the United States or to or for the persons mentioned in the preceding paragraph. No business shall be established in a base, it being understood that the Government agencies mentioned in the preceding paragraph shall not be regarded as businesses for the purpose of this Article." The contention is clearly unmeritorious. The above provision of the Military Bases Agreement has already been interpreted by this Court in at least two cases, namely: Canlas vs. Republic, G.R. No. L-11035, May 31, 1958 and Naguiast vs. J. A. Araneta, G.R. No. l-11594, December 22, 1958. In the latter case this Court said: "The provision relied upon by the appellant plainly contemplates limiting the exemption from the licenses, fees and taxes enumerated therein to the right to establish Government agencies, including concessions, and to the merchandise or services sold or dispensed by such agencies. The income tax, which is certainly not on the right to establish agencies or on the merchandise or services sold or dispensed thereby, but on the owner or operator of such agencies, is logically excluded. The payment by

the latter of the income tax is perfectly consistent with and would not frustrate the obvious objective of the agreement, namely, to enable the members of the United States Military Forces and authorized civilian personnel and their families to procure merchandise or services within the bases at reduced prices. This construction is unmistakably borne out by the fact that, in dealing particularly with the matter of income tax, the Military Bases Agreement provides as follows: 'INTERNAL REVENUE TAX EXEMPTION '1. No member of the United States armed forces, except Filipino citizens, serving in the Philippines in connection with the bases and residing in the Philippines by reason of such services or his dependents, shall be liable to pay income tax in the Philippines except in respect of income derived from Philippine sources. '2. No national of the United States serving in or employed in the Philippines in connection with the maintenance, operation or defense of the bases and residing in the Philippines by reason only of such employment, or his spouse, and minor children and dependent parents of either spouses, shall be liable to pay income tax in the Philippines except in respect of income derived from Philippine source or sources than the United States source. '3. No persons referred to in paragraphs 1 and 2 of this article shall be liable to pay the Government or local authorities of the Philippines any poll or residence tax, or any import or export duty, or any other tax on personal property imported for his own use; provided that privately owned vehicles shall be subject to the payment of the following only; When certified as being used for military purposes by appropriate United States authorities, the normal license plate and registration fees. '4. No national of the United States, or corporation organized under the laws of the United States, resident in the United States, shall be liable to pay income tax in the Philippines in respect of any profits derived under a contract made in the United States in connection with the construction, maintenance, operation and defense of the bases, or any tax in the nature of a license in respect of any service or work for the United States in connection with the construction, maintenance, operation and defense of the bases.' "None of the above-quoted covenants shields a concessionaire, like the appellant, from the payment of the income tax. For one thing, even the exemption in favor of members of the United States Armed Forces and nationals of the United States does not include income derived from Philippine sources. "The appellant cannot seek refuge in the use of 'excise' or 'other taxes or imposts' in paragraph 1 of Article XVIII of the Military Bases Agreement, because, as already stated, said terms are employed with specific application to the right to establish agencies and concessions within the bases and to the merchandise or services sold or dispensed by such agencies or concessions." The same conclusion was reached in the case of Canlas vs. Republic, supra.

The appellant maintains, however, that the rulings in the above two cases are inapplicable to the suit at bar because the said cases involved the income of public utility operators in the Air Base who were not "concessionaires" like him. The above contention is as unmeritorious as it is untrue. In the case of Araneta vs. Manila Pencil Company, Inc., G.R. No. L-8182, June 29, 1957, this Court already ruled that operators of freight and bus services are within the meaning of the word "concession" appearing in the Military Bases Agreement. Thus, in the Canlas case above, We said: "There is no dispute as to the fact that defendant Manila Pencil Company, as successor-in-interest of the Philippine Company, as successor-in-interest of the Philippine Consolidated Freight Lines, Inc., was engaged in and duly licensed by the U.S. Military authorities to operate a freight and bus service within the Clark Field Air Base, a military reservation established in conformity with the agreement concluded between the Government of the Philippines and the United States on March 14, 1947 (43 O.G., No. 3, p. 1020). And as such grantee of a franchise, which the Court was held to be embraced within the meaning of the word 'concession' appearing in the treaty and was declared exempted from the payment of the contractor's tax (Araneta vs. Manila Pencil Company, G. R. No. L-10507, May 30, 1958) . . ." It is very clear, therefore, that the rulings of this Court in the two cases above cited are applicable to this appeal under consideration. . The other point raised by the appellant on this appeal pertains to the refusal of the trial court to reconsider its order declaring him in default for the failure of his counsel to appear at the scheduled trial despite due notice. He complains that when the trial proceeded in his absence, he was denied his day in court. In the premises, his counsel insists that his absence then was for a good and reasonable cause. Suffice it to say in regard to the above that the matter complained of is beyond this Court to disturb. The matter of adjournments, postponements, continuances and reconsideration of orders of default lie within the discretion of courts and will not be interfered with either by mandamus or appeal (Samson vs. Naval, 41 Phil. 838) unless a showing of grave abuse can be made against said courts. Moreover, where absence of a party from the trial was due to his own fault, he should not be heard to complain that he was deprived of his day in court. (Sandejas vs. Robles, 81 Phil. 421; Siojo vs. Tecson, 88 Phil. 531) The counsel's excuse for his absence at the trial was alleged "lack of transportation facilities in his place of residence at Gagalangin, Tondo, Manila, on that morning of August 8, when torrential rain poured down in his locality." The lower court did not deem this as a sufficiently valid explanation because it observed that despite such torrential rain, the counsel for the plaintiff-appellee, a lady attorney who was then a resident of a usually inundated area of Sampaloc, Manila, somehow made it to the court. Under these circumstances, the trial court's ruling can hardly be considered as an abuse of his discretion. Finally, the appellant disputes the lower court's finding of fraud against him in this incident. He argues that the facts invoked by the lower court do not sufficiently establish the same.

As rightly argued by the Solicitor General's office, since fraud is a state of mind, it need not be proved by direct evidence but may be inferred from the circumstances of the case. The failure of the appellant to declare for taxation purposes his true and actual income derived from his furniture business at the Clark Field Air Base for two consecutive years is an indication of his fraudulent intent to cheat the Government of its due taxes. "The substantial under declaration of income in the income tax returns of the appellant for four consecutive years, coupled with his intentional overstatement of deductions made the imposition of the fraud penalty proper." (Eugenio Perez vs. Court of Tax Appeal and the Collector of Internal Revenue, G. R. No L-10507, May 30, 1958.) IN VIEW OF ALL THE FOREGOING, judgment is hereby rendered affirming in full the decision here appealed from, with costs against the defendant-appellant. So ordered. Bengzon, C.J., Bautista Angelo, Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon, Makalintal, Bengzon, J.P., and Zaldivar, JJ., concur.

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([1965V132E] REPUBLIC OF THE PHILIPPINES, plaintiff-appellee, vs. BLAS GONZALES, defendantappellant., G.R. No. L-17962, 1965 Apr 30, En Banc)

Republic of the Philippines SUPREME COURT Manila THIRD DIVISION G.R. No. L-69259 January 26, 1988 DELPHER TRADES CORPORATION, and DELPHIN PACHECO, petitioners, vs. INTERMEDIATE APPELLATE COURT and HYDRO PIPES PHILIPPINES, INC., respondents.

GUTIERREZ, JR., J.: The petitioners question the decision of the Intermediate Appellate Court which sustained the private respondent's contention that the deed of exchange whereby Delfin Pacheco and Pelagia Pacheco conveyed a parcel of land to Delpher Trades Corporation in exchange for 2,500 shares of stock was actually a deed of sale which violated a right of first refusal under a lease contract.

Briefly, the facts of the case are summarized as follows: In 1974, Delfin Pacheco and his sister, Pelagia Pacheco, were the owners of 27,169 square meters of real estate Identified as Lot. No. 1095, Malinta Estate, in the Municipality of Polo (now Valenzuela), Province of Bulacan (now Metro Manila) which is covered by Transfer Certificate of Title No. T-4240 of the Bulacan land registry. On April 3, 1974, the said co-owners leased to Construction Components International Inc. the same property and providing that during the existence or after the term of this lease the lessor should he decide to sell the property leased shall first offer the same to the lessee and the letter has the priority to buy under similar conditions (Exhibits A to A-5) On August 3, 1974, lessee Construction Components International, Inc. assigned its rights and obligations under the contract of lease in favor of Hydro Pipes Philippines, Inc. with the signed conformity and consent of lessors Delfin Pacheco and Pelagia Pacheco (Exhs. B to B-6 inclusive) The contract of lease, as well as the assignment of lease were annotated at he back of the title, as per stipulation of the parties (Exhs. A to D-3 inclusive) On January 3, 1976, a deed of exchange was executed between lessors Delfin and Pelagia Pacheco and defendant Delpher Trades Corporation whereby the former conveyed to the latter the leased property (TCT No.T-4240) together with another parcel of land also located in Malinta Estate, Valenzuela, Metro Manila (TCT No. 4273) for 2,500 shares of stock of defendant corporation with a total value of P1,500,000.00 (Exhs. C to C-5, inclusive) (pp. 44-45, Rollo) On the ground that it was not given the first option to buy the leased property pursuant to the proviso in the lease agreement, respondent Hydro Pipes Philippines, Inc., filed an amended complaint for reconveyance of Lot. No. 1095 in its favor under conditions similar to those whereby Delpher Trades Corporation acquired the property from Pelagia Pacheco and Delphin Pacheco. After trial, the Court of First Instance of Bulacan ruled in favor of the plaintiff. The dispositive portion of the decision reads: ACCORDINGLY, the judgment is hereby rendered declaring the valid existence of the plaintiffs preferential right to acquire the subject property (right of first refusal) and ordering the defendants and all persons deriving rights therefrom to convey the said property to plaintiff who may offer to acquire the same at the rate of P14.00 per square meter, more or less, for Lot 1095 whose area is 27,169 square meters only. Without pronouncement as to attorney's fees and costs. (Appendix I; Rec., pp. 246- 247). (Appellant's Brief, pp. 1-2; p. 134, Rollo) The lower court's decision was affirmed on appeal by the Intermediate Appellate Court. The defendants-appellants, now the petitioners, filed a petition for certiorari to review the appellate court's decision. We initially denied the petition but upon motion for reconsideration, we set aside the resolution denying the petition and gave it due course. The petitioners allege that: The denial of the petition will work great injustice to the petitioners, in that: 1. Respondent Hydro Pipes Philippines, Inc, ("private respondent") will acquire from petitioners a parcel of industrial land consisting of 27,169 square meters or 2.7 hectares (located right after the Valenzuela, Bulacan exit of the toll expressway) for only P14/sq. meter, or a total of P380,366, although the prevailing value thereof is approximately P300/sq. meter or P8.1 Million; 2. Private respondent is allowed to exercise its right of first refusal even if there is no "sale" or transfer of actual ownership interests by petitioners to third parties; and 3. Assuming arguendo that there has been a transfer of actual ownership interests, private respondent will acquire the land not under "similar conditions" by which it was transferred to petitioner Delpher Trades Corporation, as provided in the same contractual provision invoked by private respondent. (pp. 251-252, Rollo) The resolution of the case hinges on whether or not the "Deed of Exchange" of the properties executed by the Pachecos on the one hand and the Delpher Trades Corporation on the other was meant to be a contract of sale which, in effect, prejudiced the private respondent's right of first refusal over the leased property included in the "deed of exchange." Eduardo Neria, a certified public accountant and son-in-law of the late Pelagia Pacheco testified that Delpher Trades Corporation is a family corporation; that the corporation was organized by the children of the two spouses (spouses Pelagia Pacheco and Benjamin Hernandez and spouses Delfin Pacheco and Pilar Angeles) who owned in common the parcel of land leased to Hydro Pipes Philippines in order to perpetuate their control over the property through the corporation and to avoid taxes; that in order to accomplish this end, two pieces of real estate, including Lot No. 1095 which had been leased to Hydro Pipes Philippines, were transferred to the corporation; that the leased property was transferred to the corporation by virtue of a deed of exchange of property; that in exchange for these properties, Pelagia and Delfin acquired 2,500 unissued no par value shares of stock which are equivalent to a 55% majority in the corporation because the other owners only owned 2,000 shares; and that at the time of incorporation, he knew

all about the contract of lease of Lot. No. 1095 to Hydro Pipes Philippines. In the petitioners' motion for reconsideration, they refer to this scheme as "estate planning." (p. 252, Rollo) Under this factual backdrop, the petitioners contend that there was actually no transfer of ownership of the subject parcel of land since the Pachecos remained in control of the property. Thus, the petitioners allege: "Considering that the beneficial ownership and control of petitioner corporation remained in the hands of the original co-owners, there was no transfer of actual ownership interests over the land when the same was transferred to petitioner corporation in exchange for the latter's shares of stock. The transfer of ownership, if anything, was merely in form but not in substance. In reality, petitioner corporation is a mere alter ego or conduit of the Pacheco co-owners; hence the corporation and the co-owners should be deemed to be the same, there being in substance and in effect an Identity of interest." (p. 254, Rollo) The petitioners maintain that the Pachecos did not sell the property. They argue that there was no sale and that they exchanged the land for shares of stocks in their own corporation. "Hence, such transfer is not within the letter, or even spirit of the contract. There is a sale when ownership is transferred for a price certain in money or its equivalent (Art. 1468, Civil Code) while there is a barter or exchange when one thing is given in consideration of another thing (Art. 1638, Civil Code)." (pp. 254-255, Rollo) On the other hand, the private respondent argues that Delpher Trades Corporation is a corporate entity separate and distinct from the Pachecos. Thus, it contends that it cannot be said that Delpher Trades Corporation is the Pacheco's same alter ego or conduit; that petitioner Delfin Pacheco, having treated Delpher Trades Corporation as such a separate and distinct corporate entity, is not a party who may allege that this separate corporate existence should be disregarded. It maintains that there was actual transfer of ownership interests over the leased property when the same was transferred to Delpher Trades Corporation in exchange for the latter's shares of stock. We rule for the petitioners. After incorporation, one becomes a stockholder of a corporation by subscription or by purchasing stock directly from the corporation or from individual owners thereof (Salmon, Dexter & Co. v. Unson, 47 Phil, 649, citing Bole v. Fulton [1912], 233 Pa., 609). In the case at bar, in exchange for their properties, the Pachecos acquired 2,500 original unissued no par value shares of stocks of the Delpher Trades Corporation. Consequently, the Pachecos became stockholders of the corporation by subscription "The essence of the stock subscription is an agreement to take and pay for original unissued shares of a corporation, formed or to be formed." (Rohrlich 243, cited in Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines, Vol. III, 1980 Edition, p. 430) It is significant that the Pachecos took no par value shares in exchange for their properties. A no-par value share does not purport to represent any stated proportionate interest in the capital stock measured by value, but only an aliquot part of the whole number of such shares of the issuing corporation. The holder of no-par shares may see from the certificate itself that he is only an aliquot sharer in the assets of the corporation. But this character of proportionate interest is not hidden beneath a false appearance of a given sum in money, as in the case of par value shares. The capital stock of a corporation issuing only no-par value shares is not set forth by a stated amount of money, but instead is expressed to be divided into a stated number of shares, such as, 1,000 shares. This indicates that a shareholder of 100 such shares is an aliquot sharer in the assets of the corporation, no matter what value they may have, to the extent of 100/1,000 or 1/10. Thus, by removing the par value of shares, the attention of persons interested in the financial condition of a corporation is focused upon the value of assets and the amount of its debts. (Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines, Vol. III, 1980 Edition, p. 107). Moreover, there was no attempt to state the true or current market value of the real estate. Land valued at P300.00 a square meter was turned over to the family's corporation for only P14.00 a square meter. It is to be stressed that by their ownership of the 2,500 no par shares of stock, the Pachecos have control of the corporation. Their equity capital is 55% as against 45% of the other stockholders, who also belong to the same family group. In effect, the Delpher Trades Corporation is a business conduit of the Pachecos. What they really did was to invest their properties and change the nature of their ownership from unincorporated to incorporated form by organizing Delpher Trades Corporation to take control of their properties and at the same time save on inheritance taxes. As explained by Eduardo Neria: xxx xxx xxx ATTY. LINSANGAN: Q Mr. Neria, from the point of view of taxation, is there any benefit to the spouses Hernandez and Pacheco in connection with their execution of a deed of exchange on the properties for no par value shares of the defendant corporation? A Yes, sir. COURT: Q What do you mean by "point of view"?

A To take advantage for both spouses and corporation in entering in the deed of exchange. ATTY. LINSANGAN: Q (What do you mean by "point of view"?) What are these benefits to the spouses of this deed of exchange? A Continuous control of the property, tax exemption benefits, and other inherent benefits in a corporation. Q What are these advantages to the said spouses from the point of view of taxation in entering in the deed of exchange? A Having fulfilled the conditions in the income tax law, providing for tax free exchange of property, they were able to execute the deed of exchange free from income tax and acquire a corporation. Q What provision in the income tax law are you referring to? A I refer to Section 35 of the National Internal Revenue Code under par. C-sub-par. (2) Exceptions regarding the provision which I quote: "No gain or loss shall also be recognized if a person exchanges his property for stock in a corporation of which as a result of such exchange said person alone or together with others not exceeding four persons gains control of said corporation." Q Did you explain to the spouses this benefit at the time you executed the deed of exchange? A Yes, sir Q You also, testified during the last hearing that the decision to have no par value share in the defendant corporation was for the purpose of flexibility. Can you explain flexibility in connection with the ownership of the property in question? A There is flexibility in using no par value shares as the value is determined by the board of directors in increasing capitalization. The board can fix the value of the shares equivalent to the capital requirements of the corporation. Q Now also from the point of taxation, is there any flexibility in the holding by the corporation of the property in question? A Yes, since a corporation does not die it can continue to hold on to the property indefinitely for a period of at least 50 years. On the other hand, if the property is held by the spouse the property will be tied up in succession proceedings and the consequential payments of estate and inheritance taxes when an owner dies. Q Now what advantage is this continuity in relation to ownership by a particular person of certain properties in respect to taxation? A The property is not subjected to taxes on succession as the corporation does not die. Q So the benefit you are talking about are inheritance taxes? A Yes, sir. (pp. 3-5, tsn., December 15, 1981) The records do not point to anything wrong or objectionable about this "estate planning" scheme resorted to by the Pachecos. "The legal right of a taxpayer to decrease the amount of what otherwise could be his taxes or altogether avoid them, by means which the law permits, cannot be doubted." (Liddell & Co., Inc. v. The collector of Internal Revenue, 2 SCRA 632 citing Gregory v. Helvering, 293 U.S. 465, 7 L. ed. 596). The "Deed of Exchange" of property between the Pachecos and Delpher Trades Corporation cannot be considered a contract of sale. There was no transfer of actual ownership interests by the Pachecos to a third party. The Pacheco family merely changed their ownership from one form to another. The ownership remained in the same hands. Hence, the private respondent has no basis for its claim of a light of first refusal under the lease contract. WHEREFORE, the instant petition is hereby GRANTED, The questioned decision and resolution of the then Intermediate Appellate Court are REVERSED and SET ASIDE. The amended complaint in Civil Case No. 885-V-79 of the then Court of First Instance of Bulacan is DISMISSED. No costs.

SO ORDERED. Fernan (Chairman), Bidin and Cortes, JJ., concur. Feliciano, J., took no part. Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No. 119176 March 19, 2002

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. LINCOLN PHILIPPINE LIFE INSURANCE COMPANY, INC. (now JARDINE-CMA LIFE INSURANCE COMPANY, INC.) and THE COURT OF APPEALS, respondents. KAPUNAN, J.: This is a petition for review on certiorari filed by the Commission on Internal Revenue of the decision of the Court of Appeals dated November 18, 1994 in C.A. G.R. SP No. 31224 which reversed in part the decision of the Court of Tax Appeals in C.T.A. Case No. 4583. The facts of the case are undisputed. Private respondent Lincoln Philippine Life Insurance Co., Inc., (now Jardine-CMA Life Insurance Company, Inc.) is a domestic corporation registered with the Securities and Exchange Commission and engaged in life insurance business. In the years prior to 1984, private respondent issued a special kind of life insurance policy known as the "Junior Estate Builder Policy," the distinguishing feature of which is a clause providing for an automatic increase in the amount of life insurance coverage upon attainment of a certain age by the insured without the need of issuing a new policy. The clause was to take effect in the year 1984. Documentary stamp taxes due on the policy were paid by petitioner only on the initial sum assured. In 1984, private respondent also issued 50,000 shares of stock dividends with a par value of P100.00 per share or a total par value of P5,000,000.00. The actual value of said shares, represented by its book value, wasP19,307,500.00. Documentary stamp taxes were paid based only on the par value of P5,000,000.00 and not on the book value.
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Subsequently, petitioner issued deficiency documentary stamps tax assessment for the year 1984 in the amounts of (a) P464,898.75, corresponding to the amount of automatic increase of the sum assured on the policy issued by respondent, and (b) P78,991.25 corresponding to the book value in excess of the par value of the stock dividends. The computation of the deficiency documentary stamp taxes is as follows: On Policies Issued:

Total policy issued during the year Documentary stamp tax due thereon (P1,360,054,000.00 divided by P200.00 multiplied by P0.35)

P1,360,054,000.00

P 2,380,094.50 Less: Payment Deficiency Add: Compromise Penalty P 1,915,495.75 P 464,598.75 300.00 ----------------------TOTAL AMOUNT DUE & COLLECTIBLE P 464,898.75

Private respondent questioned the deficiency assessments and sought their cancellation in a petition filed in the Court of Tax Appeals, docketed as CTA Case No. 4583. On March 30, 1993, the Court of Tax Appeals found no valid basis for the deficiency tax assessment on the stock dividends, as well as on the insurance policy. The dispositive portion of the CTAs decision reads:

WHEREFORE, the deficiency documentary stamp tax assessments in the amount of P464,898.76 andP78,991.25 or a total of P543,890.01 are hereby cancelled for lack of merit. Respondent Commissioner of Internal Revenue is ordered to desist from collecting said deficiency documentary stamp taxes for the same are considered withdrawn. SO ORDERED.1 Petitioner appealed the CTAs decision to the Court of Appeals. On November 18, 1994, the Court of Appeals promulgated a decision affirming the CTAs decision insofar as it nullified the deficiency assessment on the insurance policy, but reversing the same with regard to the deficiency assessment on the stock dividends. The CTA ruled that the correct basis of the documentary stamp tax due on the stock dividends is the actual value or book value represented by the shares. The dispositive portion of the Court of Appeals decision states: IN VIEW OF ALL THE FOREGOING, the decision appealed from is hereby REVERSED with respect to the deficiency tax assessment on the stock dividends, but AFFIRMED with regards to the assessment on the Insurance Policies. Consequently, private respondent is ordered to pay the petitioner herein the sum ofP78,991.25, representing documentary stamp tax on the stock dividends it issued. No costs pronouncement. SO ORDERED.2 A motion for reconsideration of the decision having been denied,3 both the Commissioner of Internal Revenue and private respondent appealed to this Court, docketed as G.R. No. 118043 and G.R. No. 119176, respectively. In G.R. No. 118043, private respondent appealed the decision of the Court of Appeals insofar as it upheld the validity of the deficiency tax assessment on the stock dividends. The Commissioner of Internal Revenue, on his part, filed the present petition questioning that portion of the Court of Appeals decision which invalidated the deficiency assessment on the insurance policy, attributing the following errors: THE HONORABLE COURT OF APPEALS ERRED WHEN IT RULED THAT THERE IS A SINGLE AGREEMENT EMBODIED IN THE POLICY AND THAT THE AUTOMATIC INCREASE CLAUSE IS NOT A SEPARATE AGREEMENT, CONTRARY TO SECTION 49 OF THE INSURANCE CODE AND SECTION 183 OF THE REVENUE CODE THAT A RIDER, A CLAUSE IS PART OF THE POLICY. THE HONORABLE COURT OF APPEALS ERRED IN NOT COMPUTING THE AMOUNT OF TAX ON THE TOTAL VALUE OF THE INSURANCE ASSURED IN THE POLICY INCLUDING THE ADDITIONAL INCREASE ASSURED BY THE AUTOMATIC INCREASE CLAUSE DESPITE ITS RULING THAT THE ORIGINAL POLICY AND THE AUTOMATIC CLAUSE CONSTITUTED ONLY A SINGULAR TRANSACTION.4 Section 173 of the National Internal Revenue Code on documentary stamp taxes provides: Sec. 173. Stamp taxes upon documents, instruments and papers. - Upon documents, instruments, loan agreements, and papers, and upon acceptances, assignments, sales, and transfers of the obligation, right or property incident thereto, there shall be levied, collected and paid for, and in respect of the transaction so had or accomplished, the corresponding documentary stamp taxes prescribed in the following section of this Title, by the person making, signing, issuing, accepting, or transferring the same wherever the document is made, signed, issued, accepted, or transferred when the obligation or right arises from Philippine sources or the property is situated in the Philippines, and at the same time such act is done or transaction had: Provided, That whenever one party to the taxable document enjoys exemption from the tax herein imposed, the other party thereto who is not exempt shall be the one directly liable for the tax. (As amended by PD No. 1994) The basis for the value of documentary stamp taxes to be paid on the insurance policy is Section 183 of the National Internal Revenue Code which states in part: The basis for the value of documentary stamp taxes to be paid on the insurance policy is Section 183 of the National Internal Revenue Code which states in part: Sec. 183. Stamp tax on life insurance policies. - On all policies of insurance or other instruments by whatever name the same may be called, whereby any insurance shall be made or renewed upon any life or lives, there shall be collected a documentary stamp tax of thirty (now 50c) centavos on each Two hundred pesos per fractional part thereof, of the amount insured by any such policy. Petitioner claims that the "automatic increase clause" in the subject insurance policy is separate and distinct from the main agreement and involves another transaction; and that, while no new policy was issued, the original policy was essentially re-issued when the additional obligation was assumed upon the effectivity of this "automatic increase clause" in 1984; hence, a deficiency assessment based on the additional insurance not covered in the main policy is in order. The Court of Appeals sustained the CTAs ruling that there was only one transaction involved in the issuance of the insurance policy and that the "automatic increase clause" is an integral part of that policy. The petition is impressed with merit. Section 49, Title VI of the Insurance Code defines an insurance policy as the written instrument in which a contract of insurance is set forth.5 Section 50 of the same Code provides that the policy, which is required to be in printed form, may contain any word, phrase, clause, mark, sign, symbol, signature, number, or word necessary to complete the contract of insurance.6 It is thus clear that any rider, clause, warranty or endorsement pasted or attached to the policy is considered part of such policy or contract of insurance.

The subject insurance policy at the time it was issued contained an "automatic increase clause." Although the clause was to take effect only in 1984, it was written into the policy at the time of its issuance. The distinctive feature of the "junior estate builder policy" called the "automatic increase clause" already formed part and parcel of the insurance contract, hence, there was no need for an execution of a separate agreement for the increase in the coverage that took effect in 1984 when the assured reached a certain age. It is clear from Section 173 that the payment of documentary stamp taxes is done at the time the act is done or transaction had and the tax base for the computation of documentary stamp taxes on life insurance policies under Section 183 is the amount fixed in policy, unless the interest of a person insured is susceptible of exact pecuniary measurement.7 What then is the amount fixed in the policy? Logically, we believe that the amount fixed in the policy is the figure written on its face and whatever increases will take effect in the future by reason of the "automatic increase clause" embodied in the policy without the need of another contract. Here, although the automatic increase in the amount of life insurance coverage was to take effect later on, the date of its effectivity, as well as the amount of the increase, was already definite at the time of the issuance of the policy. Thus, the amount insured by the policy at the time of its issuance necessarily included the additional sum covered by the automatic increase clause because it was already determinable at the time the transaction was entered into and formed part of the policy. The "automatic increase clause" in the policy is in the nature of a conditional obligation under Article 1181,8 by which the increase of the insurance coverage shall depend upon the happening of the event which constitutes the obligation. In the instant case, the additional insurance that took effect in 1984 was an obligation subject to a suspensive obligation,9 but still a part of the insurance sold to which private respondent was liable for the payment of the documentary stamp tax. The deficiency of documentary stamp tax imposed on private respondent is definitely not on the amount of the original insurance coverage, but on the increase of the amount insured upon the effectivity of the "Junior Estate Builder Policy." Finally, it should be emphasized that while tax avoidance schemes and arrangements are not prohibited,10 tax laws cannot be circumvented in order to evade the payment of just taxes. In the case at bar, to claim that the increase in the amount insured (by virtue of the automatic increase clause incorporated into the policy at the time of issuance) should not be included in the computation of the documentary stamp taxes due on the policy would be a clear evasion of the law requiring that the tax be computed on the basis of the amount insured by the policy. WHEREFORE, the petition is hereby given DUE COURSE. The decision of the Court of Appeals is SET ASIDE insofar as it affirmed the decision of the Court of Tax Appeals nullifying the deficiency stamp tax assessment petitioner imposed on private respondent in the amount of P464,898.75 corresponding to the increase in 1984 of the sum under the policy issued by respondent.
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SO ORDERED. Davide, Jr., C.J. and Ynares-Santiago, J., concur. Puno, J., on official leave.

Footnote
1

Court of Appeals (CA) Rollo. p. 16, Annex "B." Rollo, p. 47. CA Rollo, p. 218. Rollo, p. 19. SEC. 49. The written instrument in which a contract of insurance is set forth, is called a policy of insurance.

6 SEC. 50. The policy shall be in printed form which may contain blank spaces; and any word, phrase, clause, mark, sign, symbol, signature, number, or word necessary to complete the contract of insurance shall be written on the blank spaces provided therein.

Any rider, clause, warranty or endorsement purporting to be part of the contract of insurance and which is pasted or attached to said policy is not binding on the insured, unless the descriptive title or name of the rider, clause, warranty, or endorsement is also mentioned and written on the blank spaces provided in the policy. Unless applied for by the insured or owner, any rider, clause, warranty or endorsement issued after the original policy shall be countersigned by the insured or owner, which counter-signature shall be taken as his agreement to the contents of such rider, clause, warranty or endorsement. Group insurance and group annuity policies, however, may be typewritten and need not be in printed form.

7 Sec. 183. Insurance Code of the Phils. Unless the interest of a person insured is capable of exact pecuniary measurement, the measure of indemnity under a policy of insurance upon life or health is the sum fixed in the policy.

8 Art. 1181. In conditional obligations, the acquisition of rights, as well as the extinguishment or loss of those already acquired, shall depend upon the happening of the event which constitutes the condition.

Article 18 of the Civil Code provides that "on matters which are governed by the Code of Commerce and special laws, their deficiency shall be supplied by the provision of this Code." Delpher Trades Corporation vs. Intermediate Appellate Court, 157 SCRA 349 (1988).

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