Contents

Philippine guaranty v CIR.................1

Vera vs fernandez.............................4
Commissioner vs algue....................6
CIR vs Pineda....................................9
NAPOCOR vs City of Cabanatuan*. .10
CREBA vs Romulo*.........................19
Gomez vs Palomar..........................46
Lorenzo vs Posadas........................51
Icard vs City of Baguio....................56
CIR vs Fortune Tobacco...................58
Tio vs Videogram Regulatory Board72
Meralco vs Yatco.............................76
PAL vs EDU.....................................78
Lutz vs Araneta..............................84
Manila Memorial Park vs Secretary*86
//Carlos Superdrug vs Secretary...101
Gerochi vs Department of Energy *108
BRITISH AMERICAN TOBACCO, G.R. No. 163583

118

///Tan vs Del Rosario.....................131

Paseo Realty vs CA.......................135
Roxas vs CTA................................140
1

Planters Products vs Fertiphil Corporation*

144

Kapatiran vs Tan...........................169
Tolentino vs Secretary..................173
Republic vs IAC.............................187
Juan Luna Subdivision vs Sarmiento190
Surigao Consolidated Mining vs CIR192
Mactan Cebu Intl Airport vs Marcos194
Manila Railroad vs Collector.........213
Commissioner vs Firemans fund..214
Sea-Land vs CA............................218
Maceda vs Macaraig *..................220
Commissioner vs Pilipinas Shell....237
Commissioner vs Estate of Toda...242
Delpher Trades vs IAC...................247

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

Philippine guaranty v CIR

G.R. No. L-22074
THE
PHILIPPINE
INC., petitioner,

BENGZON, J.P., J.:

April 30, 1965

GUARANTY

Josue H. Gustilo and Ramirez and Ortigas for petitioner.

Office of the Solicitor General and Attorney V.G.
Saldajena for respondents.

CO.,

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
Assurance Corp., Ltd., Socieded Anonima de Reaseguros
Alianza, Tokio Marino & Fire Insurance Co., Ltd., Union
Assurance Society Ltd., Swiss Reinsurance Company and
Tariff Reinsurance Limited. Philippine Guaranty Co.,
Inc., thereby agreed to cede to the foreign reinsurers a
portion of the premiums on insurance it has originally
underwritten in the Philippines, in consideration for the
assumption by the latter of liability on an equivalent
portion of the risks insured. Said reinsurrance contracts
were signed by Philippine Guaranty Co., Inc. in Manila
and by the foreign reinsurers outside the Philippines,

except the contract with Swiss Reinsurance Company,

which was signed by both parties in Switzerland.

Gross
premium
investigation . . . . . . . . . .

The reinsurance contracts made the commencement of

the reinsurers' liability simultaneous with that of
Philippine Guaranty Co., Inc. under the original
insurance. Philippine Guaranty Co., Inc. was required to
keep a register in Manila where the risks ceded to the
foreign reinsurers where entered, and entry therein was
binding upon the reinsurers. A proportionate amount of
taxes on insurance premiums not recovered from the
original assured were to be paid for by the foreign
reinsurers. The foreign reinsurers further agreed, in
consideration for managing or administering their affairs
in the Philippines, to compensate the Philippine Guaranty
Co., Inc., in an amount equal to 5% of the reinsurance
premiums. Conflicts and/or differences between the
parties under the reinsurance contracts were to be
arbitrated in Manila. Philippine Guaranty Co., Inc. and
Swiss Reinsurance Company stipulated that their contract
shall be construed by the laws of the Philippines.

Withholding tax
24% . . . . . . . .

Pursuant to the aforesaid reinsurance contracts,

Philippine Guaranty Co., Inc. ceded to the foreign
reinsurers the following premiums:
1953 . . . . . . . . . . . . . . . . . . . . .

P842,466.71

1954 . . . . . . . . . . . . . . . . . . . . .

721,471.85

Said premiums were excluded by Philippine Guaranty

Co., Inc. from its gross income when it file its income tax
returns for 1953 and 1954. Furthermore, it did not
withhold or pay tax on them. Consequently, 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

due

per
thereon

at

P768,580.00
P184,459.00

25%
surcharge . . . . . . . . . . . . . . . . . . . . . . . . 46,114.00
..
Compromise
for
non-filing
of
withholding
100.00
income
tax
return . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL
AMOUNT
COLLECTIBLE . . . .

DUE

& P230,673.00
=========
=

1954
Gross
premium
investigation . . . . . . . . . .
Withholding tax
24% . . . . . . . .

due

per
thereon

at

P780.880.68
P184,411.00

25%
surcharge . . . . . . . . . . . . . . . . . . . . . . . . P184,411.00
..
Compromise
for
non-filing
of
withholding
100.00
income
tax
return . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL
AMOUNT
COLLECTIBLE . . . .

DUE

& P234,364.00
=========
=

Philippine Guaranty Co., Inc., protested the assessment

on the ground that reinsurance premiums ceded to foreign

reinsurers not doing business in the Philippines are not

subject to withholding tax. Its protest was denied and it
appealed to the Court of Tax Appeals.
On July 6, 1963, the Court of Tax Appeals rendered
judgment with this dispositive portion:
IN
VIEW
OF
THE
FOREGOING
CONSIDERATIONS, petitioner Philippine
Guaranty Co., Inc. is hereby ordered to pay to
the Commissioner of Internal Revenue the
respective sums of P202,192.00 and
P173,153.00 or the total sum of P375,345.00 as
withholding income taxes for the years 1953
and 1954, plus the statutory delinquency
penalties thereon. With costs against petitioner.
Philippine Guaranty Co, Inc. has appealed, questioning
the legality of the Commissioner of Internal Revenue's
assessment for withholding tax on the reinsurance
premiums ceded in 1953 and 1954 to the foreign
reinsurers.
Petitioner maintain that the reinsurance premiums in
question did not constitute income from sources within
the Philippines because the foreign reinsurers did not
engage in business in the Philippines, nor did they have
office here.
The reinsurance contracts, however, show that the
transactions or activities that constituted the undertaking
to reinsure Philippine Guaranty Co., Inc. against loses
arising from the original insurances in the Philippines
were performed in the Philippines. The liability of the
foreign reinsurers commenced simultaneously with the
liability of Philippine Guaranty Co., Inc. under the
original insurances. Philippine Guaranty Co., Inc. kept in
Manila a register of the risks ceded to the foreign
reinsurers. Entries made in such register bound the
foreign resinsurers, localizing in the Philippines the
actual cession of the risks and premiums and assumption

of the reinsurance undertaking by the foreign reinsurers.

Taxes on premiums imposed by Section 259 of the Tax
Code for the privilege of doing insurance business in the
Philippines were payable by the foreign reinsurers when
the same were not recoverable from the original assured.
The foreign reinsurers paid Philippine Guaranty Co., Inc.
an amount equivalent to 5% of the ceded premiums, in
consideration for administration and management by the
latter of the affairs of the former in the Philippines in
regard to their reinsurance activities here. Disputes and
differences between the parties were subject to arbitration
in the City of Manila. All the reinsurance contracts,
except that with Swiss Reinsurance Company, were
signed by Philippine Guaranty Co., Inc. in the Philippines
and later signed by the foreign reinsurers abroad.
Although the contract between Philippine Guaranty Co.,
Inc. and Swiss Reinsurance Company was signed by both
parties in Switzerland, the same specifically provided that
its provision shall be construed according to the laws of
the Philippines, thereby manifesting a clear intention of
the parties to subject themselves to Philippine law.
Section 24 of the Tax Code subjects foreign corporations
to tax on their income from sources within the
Philippines. The word "sources" has been interpreted as
the activity, property or service giving rise to the
income.1 The reinsurance premiums were income created
from the undertaking of the foreign reinsurance
companies to reinsure Philippine Guaranty Co., Inc.,
against liability for loss under original insurances. Such
undertaking, as explained above, took place in the
Philippines. These insurance premiums, therefore, came
from sources within the Philippines and, hence, are
subject to corporate income tax.
The foreign insurers' place of business should not be
confused with their place of activity. Business should not
be continuity and progression of transactions 2 while
activity may consist of only a single transaction. An
activity may occur outside the place of business. Section
24 of the Tax Code does not require a foreign corporation
to engage in business in the Philippines in subjecting its

income to tax. It suffices that the activity creating the

income is performed or done in the Philippines. What is
controlling, therefore, is not the place of business but the
place ofactivity 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.1wph1.t

In respect to the question of whether or not reinsurance

premiums ceded to foreign reinsurers not doing business
in the Philippines are subject to withholding tax under
Section 53 and 54 of the Tax Code, suffice it to state that
this question has already been answered in the
affirmative in Alexander Howden & Co., Ltd. vs.
Collector of Internal Revenue, L-19393, April 14, 1965.
Finally, petitioner contends that the withholding tax
should be computed from the amount actually remitted to
the foreign reinsurers instead of from the total amount
ceded. And since it did not remit any amount to its
foreign insurers in 1953 and 1954, no withholding tax
was due.

The 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 improvement designed for the enjoyment
of the citizenry and those which come within the State's
territory, and facilities and protection which a
government is supposed to provide. Considering that the
reinsurance premiums in question were afforded
protection by the government and the recipient foreign
reinsurers exercised rights and privileges guaranteed by
our laws, such reinsurance premiums and reinsurers
should share the burden of maintaining the state.

The pertinent section of the Tax Code States:

Petitioner would wish to stress that its reliance in good

faith on the rulings of the Commissioner of Internal
Revenue requiring no withholding of the tax due on the
reinsurance premiums in question relieved it of the duty
to pay the corresponding withholding tax thereon. This
defense of petitioner may free if from the payment of
surcharges or penalties imposed for failure to pay the
corresponding withholding tax, but it certainly would not
exculpate if from liability to pay such withholding tax
The Government is not estopped from collecting taxes by
the mistakes or errors of its agents.3

The applicable portion of Section 53 provides:

Sec. 54. Payment of corporation income tax at

source. In the case of foreign corporations
subject to taxation under this Title not engaged
in trade or business within the Philippines and
not having any office or place of business
therein, there shall be deducted and withheld at
the source in the same manner and upon the
same items as is provided in Section fifty-three
a tax equal to twenty-four per centum thereof,
and such tax shall be returned and paid in the
same manner and subject to the same
conditions as provided in that section.

(b) Nonresident aliens. All persons,

corporations and general copartnerships
(compaias colectivas), in what ever capacity
acting, including lessees or mortgagors of real
or personal property, trustees acting in any trust
capacity, executors, administrators, receivers,
conservators, fiduciaries, employers, and all
officers and employees of the Government of
the Philippines having the control, receipt,

custody, disposal, or payment of interest,

dividends, rents, salaries, wages, premiums,
annuities,
compensation,
remunerations,
emoluments, or other fixed or determinable
annual or periodical gains, profits, and income
of any nonresident alien individual, not
engaged in trade or business within the
Philippines and not having any office or place
of business therein, shall (except in the case
provided for in subsection [a] of this section)
deduct and withhold from such annual or
periodical gains, profits, and income a tax
equal
to
twelve per
centum thereof: Provided That no deductions or
withholding shall be required in the case of
dividends paid by a foreign corporation unless
(1) such corporation is engaged in trade or
business within the Philippines or has an office
or place of business therein, and (2) more than
eighty-five per centum of the gross income of
such corporation for the three-year period
ending with the close of its taxable year
preceding the declaration of such dividends (or
for such part of such period as the corporation
has been in existence)was derived from sources
within the Philippines as determined under the
provisions
of
section
thirtyseven: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. According, in computing the
withholding tax due on the reinsurance premium in
question, no deduction shall be recognized.
WHEREFORE, in affirming the decision appealed from,
the Philippine Guaranty Co., Inc. is hereby ordered to pay
to the Commissioner of Internal Revenue the sums of

P202,192.00 and P173,153.00, or a total amount of

P375,345.00, as withholding tax for the years 1953 and
1954, respectively. If the amount of P375,345.00 is not
paid within 30 days from the date this judgement
becomes final, there shall be collected a surcharged of
5% on the amount unpaid, plus interest at the rate of 1%
a month from the date of delinquency to the date of
payment, provided that the maximum amount that may
be collected as interest shall not exceed the amount
corresponding to a period of three (3) years. With costs
againsts petitioner.
Bengzon, C.J., Bautista Angelo, Concepcion, Reyes,
J.B.L., Barrera, Paredes, Dizon and Regala, JJ., concur.
Makalintal and Zaldivar, JJ., took no part.

Vera vs fernandez
G.R. No. L-31364 March 30, 1979
MISAEL P. VERA, as Commissioner of Internal
Revenue, and JAIME ARANETA, as Regional
Director, Revenue Region No. 14, Bureau of Internal
Revenue, petitioners,
vs.
HON. JOSE F. FERNANDEZ, Judge of the Court of
First Instance of Negros Occidental, Branch V, and
FRANCIS A. TONGOY, Administrator of the Estate
of the late LUIS D. TONGOY respondents.

DE CASTRO, J.:
Appeal from two orders of the Court of First Instance of
Negros Occidental, Branch V in Special Proceedings No.
7794, entitled: "Intestate Estate of Luis D. Tongoy," the
first dated July 29, 1969 dismissing the Motion for

Allowance of Claim and for an Order of Payment of

Taxes by the Government of the Republic of the
Philippines against the Estate of the late Luis D. Tongoy,
for deficiency income taxes for the years 1963 and 1964
of the decedent in the total amount of P3,254.80,
inclusive 5% surcharge, 1% monthly interest and
compromise penalties, and the second, dated October 7,
1969, denying the Motion for reconsideration of the
Order of dismissal.
The Motion for allowance of claim and for payment of
taxes dated May 28, 1969 was filed on June 3, 1969 in
the abovementioned special proceedings, (par. 3, Annex
A, Petition, pp. 1920, Rollo). The claim represents the
indebtedness to the Government of the late Luis D.
Tongoy for deficiency income taxes in the total sum of
P3,254.80 as above stated, covered by Assessment
Notices Nos. 11-50-29-1-11061-21-63 and 11-50-291-1
10875-64, to which motion was attached Proof of Claim
(Annex B, Petition, pp. 21-22, Rollo). The Administrator
opposed the motion solely on the ground that the claim
was barred under Section 5, Rule 86 of the Rules of
Court (par. 4, Opposition to Motion for Allowance of
Claim, pp. 23-24, Rollo). Finding the opposition wellfounded, the respondent Judge, Jose F. Fernandez,
dismissed the motion for allowance of claim filed by
herein petitioner, Regional Director of the Bureau of
Internal Revenue, in an order dated July 29, 1969 (Annex
D, Petition, p. 26, Rollo). On September 18, 1969, a
motion for reconsideration was filed, of the order of July
29, 1969, but was denied in an Order dated October 7,
1969.
Hence, this appeal on certiorari, petitioner assigning the
following errors:

1. The lower court erred in holding

that the claim for taxes by the
government against the estate of Luis
D. Tongoy was filed beyond the
period provided in Section 2, Rule 86
of the Rules of Court.
2. The lower court erred in holding
that the claim for taxes of the
government was already barred under
Section 5, Rule 86 of the Rules of
Court.
which raise the sole issue of whether or not the statute of
non-claims Section 5, Rule 86 of the New Rule of Court,
bars claim of the government for unpaid taxes, still
within the period of limitation prescribed in Section 331
and 332 of the National Internal Revenue Code.
Section 5, Rule 86, as invoked by the respondent
Administrator in hid Oppositions to the Motion for
Allowance of Claim, etc. of the petitioners reads as
follows:
All claims for money against the
decedent, arising from contracts,
express or implied, whether the same
be due, not due, or contingent, all
claims for funeral expenses and
expenses for the last sickness of the
decedent, and judgment for money
against the decedent, must be filed
within the time limited in they notice;
otherwise they are barred forever,
except that they may be set forth as
counter claims in any action that the
executor or administrator may bring

against the claimants. Where the

executor or administrator commence
an action, or prosecutes an action
already commenced by the deceased
in his lifetime, the debtor may set
forth may answer the claims he has
against the decedents, instead of
presenting them independently to the
court has herein provided, and mutual
claims may be set off against each
other in such action; and in final
judgment is rendered in favored of
the decedent, the amount to
determined shall be considered the
true balance against the estate, as
though the claim has been presented
directly before the court in the
administration proceedings. Claims
not yet due, or contingent may be
approved at their present value.
A perusal of the aforequoted provisions shows that it
makes no mention of claims for monetary obligation of
the decedent created by law, such as taxes which is
entirely of different character from the claims expressly
enumerated therein, such as: "all claims for money
against the decedent arising from contract, express or
implied, whether the same be due, not due or contingent,
all claim for funeral expenses and expenses for the last
sickness of the decedent and judgment for money against
the decedent." Under the familiar rule of statutory
construction of expressio unius est exclusio alterius, the
mention of one thing implies the exclusion of another
thing not mentioned. Thus, if a statute enumerates the
things upon which it is to operate, everything else must
necessarily, and by implication be excluded from its

operation and effect (Crawford, Statutory Construction,

pp. 334-335).
In the case of Commissioner of Internal Revenue vs.
Ilagan Electric & Ice Plant, et al., G.R. No. L-23081,
December 30, 1969, it was held that the assessment,
collection and recovery of taxes, as well as the matter of
prescription thereof are governed by the provisions of the
National Internal revenue Code, particularly Sections 331
and 332 thereof, and not by other provisions of law. (See
also Lim Tio, Dy Heng and Dee Jue vs. Court of Tax
Appeals & Collector of Internal Revenue, G.R. No. L10681, March 29, 1958). Even without being specifically
mentioned, the provisions of Section 2 of Rule 86 of the
Rules of Court may reasonably be presumed to have been
also in the mind of the Court as not affecting the
aforecited Section of the National Internal Revenue
Code.
In the case of Pineda vs. CFI of Tayabas, 52 Phil. 803, it
was even more pointedly held that "taxes assessed against
the estate of a deceased person ... need not be submitted
to the committee on claims in the ordinary course of
administration. In the exercise of its control over the
administrator, the court may direct the payment of such
taxes upon motion showing that the taxes have been
assessed against the estate." The abolition of the
Committee on Claims does not alter the basic ruling laid
down giving exception to the claim for taxes from being
filed as the other claims mentioned in the Rule should be
filed before the Court. Claims for taxes may be collected
even after the distribution of the decedent's estate among
his heirs who shall be liable therefor in proportion of
their share in the inheritance. (Government of the
Philippines vs. Pamintuan, 55 Phil. 13).

The reason for the more liberal treatment of claims for

taxes against a decedent's estate in the form of exception
from the application of the statute of non-claims, is not
hard to find. Taxes are the lifeblood of the Government
and their prompt and certain availability are imperious
need. (Commissioner of Internal Revenue vs. Pineda, G.
R. No. L-22734, September 15, 1967, 21 SCRA 105).
Upon taxation depends the Government ability to serve
the people for whose benefit taxes are collected. To
safeguard such interest, neglect or omission of
government officials entrusted with the collection of
taxes should not be allowed to bring harm or detriment to
the people, in the same manner as private persons may be
made to suffer individually on account of his own
negligence, the presumption being that they take good
care of their personal affairs. This should not hold true to
government officials with respect to matters not of their
own personal concern. This is the philosophy behind the
government's exception, as a general rule, from the
operation of the principle of estoppel. (Republic vs.
Caballero, L-27437, September 30, 1977, 79 SCRA 177;
Manila Lodge No. 761, Benevolent and Protective Order
of the Elks Inc. vs. Court of Appeals, L-41001,
September 30, 1976, 73 SCRA 162; Sy vs. Central Bank
of the Philippines, L-41480, April 30,1976, 70 SCRA
571; Balmaceda vs. Corominas & Co., Inc., 66 SCRA
553; Auyong Hian vs. Court of Tax Appeals, 59 SCRA
110; Republic vs. Philippine Rabbit Bus Lines, Inc., 66
SCRA 553; Republic vs. Philippine Long Distance
Telephone Company, L-18841, January 27, 1969, 26
SCRA 620; Zamora vs. Court of Tax Appeals, L-23272,
November 26, 1970, 36 SCRA 77; E. Rodriguez, Inc. vs.
Collector of Internal Revenue, L- 23041, July 31, 1969,
28 SCRA 119.) As already shown, taxes may be collected
even after the distribution of the estate of the decedent
among his heirs (Government of the Philippines vs.
Pamintuan, supra; Pineda vs. CFI of Tayabas,supra Clara

Diluangco Palanca vs. Commissioner of Internal

Revenue, G. R. No. L-16661, January 31, 1962).
Furthermore, as held in Commissioner of Internal
Revenue vs. Pineda, supra, citing the last paragraph of
Section 315 of the Tax Code payment of income tax shall
be a lien in favor of the Government of the Philippines
from the time the assessment was made by the
Commissioner of Internal Revenue until paid with
interests, penalties, etc. By virtue of such lien, this court
held that the property of the estate already in the hands of
an heir or transferee may be subject to the payment of the
tax due the estate. A fortiori before the inheritance has
passed to the heirs, the unpaid taxes due the decedent
may be collected, even without its having been presented
under Section 2 of Rule 86 of the Rules of Court. It may
truly be said that until the property of the estate of the
decedent has vested in the heirs, the decedent,
represented by his estate, continues as if he were still
alive, subject to the payment of such taxes as would be
collectible from the estate even after his death. Thus in
the case above cited, the income taxes sought to be
collected were due from the estate, for the three years
1946, 1947 and 1948 following his death in May, 1945.
Even assuming arguendo that claims for taxes have to be
filed within the time prescribed in Section 2, Rule 86 of
the Rules of Court, the claim in question may be filed
even after the expiration of the time originally fixed
therein, as may be gleaned from the italicized portion of
the Rule herein cited which reads:
Section 2. Time within which claims
shall be filed. - In the notice provided
in the preceding section, the court
shall state the time for the filing of
claims against the estate, which shall

not be more than twelve (12) nor less

than six (6) months after the date of
the first publication of the
notice. However, at any time before
an order of distribution is entered, on
application of a creditor who has
failed to file his claim within the time
previously limited the court may, for
cause shown and on such terms as
are equitable, allow such claim to be
flied within a time not exceeding one
(1) month. (Emphasis supplied)
In the instant case, petitioners filed an application
(Motion for Allowance of Claim and for an Order of
Payment of Taxes) which, though filed after the
expiration of the time previously limited but before an
order of the distribution is entered, should have been
granted by the respondent court, in the absence of any
valid ground, as none was shown, justifying denial of the
motion, specially considering that it was for allowance Of
claim for taxes due from the estate, which in effect
represents a claim of the people at large, the only reason
given for the denial that the claim was filed out of the
previously limited period, sustaining thereby private
respondents' contention, erroneously as has been
demonstrated.
WHEREFORE, the order appealed from is reverse. Since
the Tax Commissioner's assessment in the total amount of
P3,254.80 with 5 % surcharge and 1 % monthly interest
as provided in the Tax Code is a final one and the
respondent estate's sole defense of prescription has been
herein overruled, the Motion for Allowance of Claim is
herein granted and respondent estate is ordered to pay
and discharge the same, subject only to the limitation of

the interest collectible thereon as provided by the Tax

Code. No pronouncement as to costs.
SO ORDERED.

Commissioner vs algue
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," 9being "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.

suggests a tax dodge, an attempt to evade a legitimate

assessment by involving an imaginary deduction.

there shall be allowed as deductions

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

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.

(a) Expenses:

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

We agree with the respondent court that the amount of

the promotional fees was not excessive. The total
commission paid by the Philippine Sugar Estate
Development Co. to the private respondent was
P125,000.00. 21After deducting the said fees, Algue still
had a balance of P50,000.00 as clear profit from the
transaction. The amount of P75,000.00 was 60% of the
total commission. This was a reasonable proportion,
considering that it was the payees who did practically
everything, from the formation of the Vegetable Oil
Investment Corporation to the actual purchase by it of the
Sugar Estate properties. This finding of the respondent
court is in accord with the following provision of the Tax
Code:
SEC. 30. Deductions from gross
income.--In computing net income

(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.

CIR vs Pineda
G.R. No. L-22734

September 15, 1967

COMMISSIONER
OF
INTERNAL
REVENUE, petitioner,
vs.
MANUEL B. PINEDA, as one of the heirs of deceased
ATANASIO PINEDA, respondent.
Office of the Solicitor General for petitioner.
Manuel B. Pineda for and in his own behalf as
respondent.

BENGZON, J.P., J.:

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

10

1945 P135.83
1946 436.95
1947 1,206.91
P1,779.69
Add: 5% surcharge
88.98
1%
monthly
interest
from
November 30, 1953 to April 15,
1957
720.77
Compromise for late filing
80.00
Compromise for late payment
40.00
Total amount due
2. Additional residence tax for 1945

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:

P2,707.44
===========
P14.50
===========

3. Real Estate dealer's tax for the fourth

quarter of 1946 and the whole year of P207.50
1947
===========
Manuel B. Pineda, who received the assessment,
contested the same. Subsequently, he appealed to the
Court of Tax Appeals alleging that he was appealing
"only that proportionate part or portion pertaining to him
as one of the heirs."
After hearing the parties, the Court of Tax Appeals
rendered judgment reversing the decision of the
Commissioner on the ground that his right to assess and
collect the tax has prescribed. The Commissioner
appealed and this Court affirmed the findings of the Tax
Court in respect to the assessment for income tax for the
year 1947 but held that the right to assess and collect the
taxes for 1945 and 1946 has not prescribed. For 1945 and
1946 the returns were filed on August 24, 1953;
assessments for both taxable years were made within five
years therefrom or on October 19, 1953; and the action to
collect the tax was filed within five years from the latter
date, on August 7, 1957. For taxable year 1947, however,
the return was filed on March 1, 1948; the assessment
was made on October 19, 1953, more than five years
from the date the return was filed; hence, the right to
assess income tax for 1947 had prescribed. Accordingly,

Deficiency income tax

1945
P135.83
1946
436.95
Real estate dealer's fixed tax
4th quarter of 1946 and whole
year of 1947
P187.50

The Commissioner of Internal Revenue has appealed to

Us and has proposed to hold Manuel B. Pineda liable for
the payment of all the taxes found by the Tax Court to be
due from the estate in the total amount of P760.28 instead
of only for the amount of taxes corresponding to his share
in the estate.1awphl.nt
Manuel B. Pineda opposes the proposition on the ground
that as an heir he is liable for unpaid income tax due the
estate only up to the extent of and in proportion to any
share he received. He relies on Government of the
Philippine Islands v. Pamintuan2 where We held that
"after the partition of an estate, heirs and distributees are
liable individually for the payment of all lawful
outstanding claims against the estate in proportion to the
amount or value of the property they have respectively
received from the estate."
We hold that the Government can require Manuel B.
Pineda to pay the full amount of the taxes assessed.

Pineda is liable for the assessment as an heir and as a

holder-transferee of property belonging to the
estate/taxpayer. As an heir he is individually answerable
for the part of the tax proportionate to the share he
received from the inheritance. 3 His liability, however,
cannot exceed the amount of his share.4
As a holder of property belonging to the estate, Pineda is
liable for he tax up to the amount of the property in his
possession. The reason is that the Government has a lien
on the P2,500.00 received by him from the estate as his
share in the inheritance, for unpaid income taxes 4a 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, jointaccount (cuenta en participacion), association,
or insurance company liable to pay the income
tax, neglects or refuses to pay the same after
demand, the amount shall be a lien in favor of
the Government of the Philippines from the
time when the assessment was made by the
Commissioner of Internal Revenue until paid
with interest, penalties, and costs that may
accrue in addition thereto upon all property and
rights to property belonging to the taxpayer: . . .
By virtue of such lien, the Government has the right to
subject the property in Pineda's possession, i.e., the
P2,500.00, to satisfy the income tax assessment in the
sum of P760.28. After such payment, Pineda will have a
right of contribution from his co-heirs, 5 to achieve an
adjustment of the proper share of each heir in the
distributable estate.
All told, the Government has two ways of collecting the
tax in question. One, by going after all the heirs and
collecting from each one of them the amount of the tax
proportionate to the inheritance received. This remedy
was adopted in Government of the Philippine Islands v.
Pamintuan, supra. In said case, the Government filed an

11

action against all the heirs for the collection of the tax.
This action rests on the concept that hereditary property
consists only of that part which remains after the
settlement of all lawful claims against the estate, for the
settlement of which the entire estate is first liable. 6 The
reason why in case suit is filed against all the heirs the
tax due from the estate is levied proportionately against
them is to achieve thereby two results: first, payment of
the tax; and second, adjustment of the shares of each heir
in the distributed estate as lessened by the tax.
Another remedy, pursuant to the lien created by Section
315 of the Tax Code upon all property and rights to
property belonging to the taxpayer for unpaid income tax,
is by subjecting said property of the estate which is in the
hands of an heir or transferee to the payment of the tax
due, the estate. This second remedy is the very avenue
the Government took in this case to collect the tax. The
Bureau of Internal Revenue should be given, in instances
like the case at bar, the necessary discretion to avail itself
of the most expeditious way to collect the tax as may be
envisioned in the particular provision of the Tax Code
above quoted, because taxes are the lifeblood of
government and their prompt and certain availability is
an imperious need.7 And as afore-stated in this case the
suit seeks to achieve only one objective: payment of the
tax. The adjustment of the respective shares due to the
heirs from the inheritance, as lessened by the tax, is left
to await the suit for contribution by the heir from whom
the Government recovered said tax.
WHEREFORE, the decision appealed from is modified.
Manuel B. Pineda is hereby ordered to pay to the
Commissioner of Internal Revenue the sum of P760.28 as
deficiency income tax for 1945 and 1946, and real estate
dealer's fixed tax for the fourth quarter of 1946 and for
the whole year 1947, without prejudice to his right of
contribution for his co-heirs. No costs. So ordered.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal,
Zaldivar, Sanchez, Castro, Angeles and Fernando, JJ.,
concur.

NAPOCOR vs City of
Cabanatuan*

representing 75% of 1% of the latter's gross receipts for

the preceding year.9

G.R. No. 149110

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:

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,

"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,

12

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.13Respondent 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
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

13

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 governmentowned or controlled corporations except local
water districts xxx are hereby withdrawn.' The
repeal is direct and unequivocal, not implied.
IN VIEW WHEREOF, the motion
reconsideration is hereby DENIED.

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

for

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.

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

14

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

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
Corporation26 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)

15

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

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.

Petitioner contends that section 193 of Rep. Act No.

7160, withdrawing the tax privileges of governmentowned 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

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

16

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 196739 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:
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

17

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;

18

(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

(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

19

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 governmentowned 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

20

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 governmentowned 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.

CREBA vs Romulo*
CHAMBER OF REAL G.R. No. 160756
ESTATE AND BUILDERS
ASSOCIATIONS, INC.,
Petitioner, Present:
P
U
N
O,
C.
J.,
C
A
R
PI
O,
CORONA,
C
A
R
PI
O
M
O

21

R
A
L
E
S,

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

DECISION

Petitioner assails the validity of the imposition of

minimum corporate income tax (MCIT) on corporations

VELASCO, JR.,
NACHURA,
- v e r s u s - LEONARDO-DE CASTRO,
BRION,
PERALTA,

CORONA, J.:

and creditable withholding tax (CWT) on sales of real

properties classified as ordinary assets.

In this original petition for certiorari and mandamus,

ERSA
MIN,

DEL CASTILLO,
ABAD,
VILLARAMA, JR.,
PEREZ and
MENDOZA, JJ.

[1]

petitioner Chamber of Real Estate and Builders

Associations, Inc. is questioning the constitutionality of

Section 27 (E) of Republic Act (RA) 8424 [2] and the
revenue regulations (RRs) issued by the Bureau of

THE HON. EXECUTIVE

SECRETARY ALBERTO ROMULO,
THE HON. ACTING SECRETARY OF
FINANCE JUANITA D. AMATONG,
and THE HON. COMMISSIONER OF
INTERNAL REVENUE GUILLERMO
PARAYNO, JR.,
Respondents. Promulgated
:

Internal Revenue (BIR) to implement said provision and

those involving creditable withholding taxes.[3]

ar
ch
9,
20
10

builders

in

the

Philippines. It

impleaded

former

Executive Secretary Alberto Romulo, then acting

Secretary of Finance Juanita D. Amatong and then
Commissioner of Internal Revenue Guillermo Parayno,
Jr. as respondents.

on domestic corporations and is implemented by RR 998. Petitioner argues that the MCIT violates the due
process clause because it levies income tax even if there
is no realized gain.

Petitioner also seeks to nullify Sections 2.57.2(J) (as

Petitioner is an association of real estate developers and

M

Section 27(E) of RA 8424 provides for MCIT

amended by RR 6-2001) and 2.58.2 of RR 2-98, and

Section 4(a)(ii) and (c)(ii) of RR 7-2003, all of which
prescribe the rules and procedures for the collection of
CWT on the sale of real properties categorized as
ordinary assets. Petitioner contends that these revenue
regulations are contrary to law for two reasons: first, they
ignore the different treatment by RA 8424 of ordinary

22

assets and capital assets and second, respondent Secretary

(2) whether or not the imposition of the MCIT

of Finance has no authority to collect CWT, much less, to

on

base the CWT on the gross selling price or fair market

unconstitutional and

value of the real properties classified as ordinary assets.

domestic

corporations

is

(3) whether or not the imposition of CWT on

income from sales of real properties

Petitioner also asserts that the enumerated provisions of

classified as ordinary assets under RRs
the subject revenue regulations violate the due process
2-98,

6-2001

and

7-2003,

is

I
L
E
D
P
R
O
V
I
S
I
O
N
S

clause because, like the MCIT, the government collects

unconstitutional.
income tax even when the net income has not yet been

Under the MCIT scheme, a corporation,

determined. They contravene the equal protection clause

as well because the CWT is being levied upon real estate
enterprises but not on other business enterprises, more
particularly those in the manufacturing sector.

The issues to be resolved are as follows:

(1) whether or not this Court should take
cognizance of the present case;

O
V
E
R
V
I
E
W
O
F
T
H
E
A
S
S
A

beginning on its fourth year of operation, is assessed an

MCIT of 2% of its gross income when such MCIT is
greater than the normal corporate income tax imposed
under Section 27(A).[4] If the regular income tax is higher
than the MCIT, the corporation does not pay the
MCIT. Any excess of the MCIT over the normal tax shall
be carried forward and credited against the normal
income tax for the three immediately succeeding taxable
years. Section 27(E) of RA 8424 provides:
Section 27 (E). [MCIT] on Domestic
Corporations. -

23

(3)
(1)

(2)

Imposition of Tax.
A [MCIT] of two
percent (2%) of the
gross income as of
the end of the
taxable year, as
defined herein, is
hereby imposed on a
corporation taxable
under this Title,
beginning on the
fourth taxable year
immediately
following the year in
which
such
corporation
commenced
its
business operations,
when the minimum
income tax is greater
than
the
tax
computed
under
Subsection (A) of
this Section for the
taxable year.
Carry Forward of
Excess
Minimum
Tax. Any excess of
the [MCIT] over the
normal income tax
as computed under
Subsection (A) of
this Section shall be
carried forward and
credited against the
normal income tax
for the three (3)
immediately
succeeding taxable
years.

Relief from the

[MCIT]
under
certain conditions.
The Secretary of
Finance is hereby
authorized
to
suspend
the
imposition of the
[MCIT] on any
corporation which
suffers losses on
account
of
prolonged
labor
dispute, or because
of force majeure, or
because
of
legitimate business
reverses.
The
Secretary of Finance
is hereby authorized
to promulgate, upon
recommendation of
the
Commissioner,
the necessary rules
and regulations that
shall define the terms
and conditions under
which
he
may
suspend
the
imposition of the
[MCIT]
in
a
meritorious case.

(4)

Gross
Income
Defined.
For
purposes of applying
the
[MCIT]
provided
under
Subsection
(E)
hereof, the term
gross income shall

mean gross sales

less sales returns,
discounts
and
allowances and cost
of goods sold. Cost
of goods sold shall
include all business
expenses
directly
incurred to produce
the merchandise to
bring them to their
present location and
use.
For trading
or
merchandising
concern, cost of
goods sold shall
include the invoice
cost of the goods
sold, plus import
duties, freight in
transporting
the
goods to the place
where the goods are
actually
sold
including insurance
while the goods are
in transit.
For
a
manufacturing
concern, cost of
goods manufactured
and sold shall include
all
costs
of
production
of
finished goods, such
as raw materials
used, direct labor and
manufacturing
overhead,
freight
cost,
insurance

24

premiums and other

costs incurred to
bring
the
raw
materials
to
the
factory or warehouse.
In the case
of taxpayers engaged
in the sale of service,
gross income means
gross receipts less
sales
returns,
allowances, discounts
and
cost
of
services. Cost
of
services shall mean
all direct costs and
expenses necessarily
incurred to provide
the services required
by the customers and
clients including (A)
salaries
and
employee benefits of
personnel,
consultants
and
specialists
directly
rendering the service
and (B)
cost
of
facilities
directly
utilized in providing
the service such as
depreciation or rental
of equipment used
and
cost
of
supplies: Provided,
however, that in the
case of banks, cost of
services shall include
interest expense.

whenever
the
amount of minimum
corporate income tax
is greater than the
normal income tax
due
from
such
corporation.

On August 25, 1998, respondent Secretary of Finance

(Secretary), on the recommendation of the Commissioner
of Internal Revenue (CIR), promulgated RR 9-98
implementing Section 27(E).[5] The pertinent portions

For
purposes of these
Regulations,
the
term, normal income
tax means the income
tax rates prescribed
under Sec. 27(A) and
Sec. 28(A)(1) of the
Code xxx at 32%
effective January 1,
2000 and thereafter.

thereof read:
Sec. 2.27(E) [MCIT] on Domestic
Corporations.
(1)

Imposition of the
Tax. A [MCIT] of
two percent (2%) of
the gross income as
of the end of the
taxable
year
(whether calendar or
fiscal
year,
depending on the
accounting
period
employed) is hereby
imposed upon any
domestic corporation
beginning the fourth
(4th) taxable year
immediately
following the taxable
year in which such
corporation
commenced
its
business operations.
The MCIT shall be
imposed whenever
such corporation has
zero or negative
taxable income or

xxx xxx xxx

(2)

Carry forward of
excess [MCIT]. Any
excess
of
the
[MCIT] over the
normal income tax
as computed under
Sec. 27(A) of the
Code
shall
be
carried forward on
an annual basis and
credited against the
normal income tax
for the three (3)
immediately
succeeding taxable
years.
xxx xx
x xxx

25

Meanwhile, on April 17, 1998, respondent Secretary,

upon recommendation of respondent CIR, promulgated
RR 2-98 implementing certain provisions of RA 8424
involving the withholding of taxes.[6] Under Section
2.57.2(J) of RR No. 2-98, income payments from the
sale, exchange or transfer of real property, other than
capital assets, by persons residing in the Philippines and
habitually engaged in the real estate business were
subjected to CWT:

(J) Gross selling price or

total amount of consideration or its
equivalent paid to the seller/owner
for the sale, exchange or transfer of.
Real property, other than capital
assets, sold by an individual,
corporation, estate, trust, trust fund or
pension fund and the seller/transferor
is habitually engaged in the real
estate business in accordance with
the following schedule

xxx xxx xxx

Those which are exempt from a
withholding tax at source as
prescribed in Sec. 2.57.5 of
these regulations.

Exempt

With a selling price of five

hundred
thousand
pesos
(P500,000.00) or less.

1.5%

With a selling price of more

than five hundred thousand
pesos (P500,000.00) but not
more than two million pesos
(P2,000,000.00).

3.0%

With selling price of more than

two
million
pesos
(P2,000,000.00)

5.0%

However, if the buyer is engaged in

trade or business, whether a
corporation or otherwise, the tax shall
be deducted and withheld by the
buyer on every installment.

xxx xxx xxx

Gross selling price shall mean the
consideration stated in the sales
document or the fair market value
determined in accordance with
Section 6 (E) of the Code, as
amended, whichever is higher. In an
exchange, the fair market value of the
property received in exchange, as
determined in the Income Tax
Regulations shall be used.
Where the consideration or part
thereof is payable on installment, no
withholding tax is required to be
made on the periodic installment
payments where the buyer is an
individual not engaged in trade or

Sec.
2.57.2. Income
payment subject to [CWT] and rates
prescribed thereon:

business. In such a case, the

applicable rate of tax based on the
entire consideration shall be withheld
on the last installment or installments
to be paid to the seller.

This provision was amended by RR 6-2001 on

July 31, 2001:
Sec.
2.57.2. Income
payment subject to [CWT] and rates
prescribed thereon:
xxx xxx xxx
(J)

Gross selling price

or total amount of
consideration or its
equivalent paid to
the seller/owner for
the sale, exchange or
transfer
of
real
property classified
as ordinary asset. - A
[CWT] based on the
gross
selling
price/total amount of
consideration or the
fair market value
determined
in
accordance
with
Section 6(E) of the
Code, whichever is
higher, paid to the
seller/owner for the
sale, transfer or

26

exchange of real
property, other than
capital asset, shall be
imposed upon the
withholding
agent,/buyer,
in
accordance with the
following schedule:
Where the seller/transferor is
exempt from [CWT] in
accordance with Sec. 2.57.5
of these regulations.
Upon the following values of
real property, where the
seller/transferor is habitually
engaged in the real estate
business.
With a selling price of Five
Hundred Thousand Pesos
(P500,000.00) or less.
With a selling price of more
than Five Hundred Thousand
Pesos (P500,000.00) but not
more than Two Million Pesos
(P2,000,000.00).
With a selling price of more
than
two
Million
Pesos (P2,000,000.00).
xxx xxx xxx
Gross selling price shall
remain the consideration stated in
the sales document or the fair
market
value
determined
in
accordance with Section 6 (E) of the
Code, as amended, whichever is
higher. In an exchange, the fair
market value of the property

received in exchangeshall
considered as the consideration.

be

xxx xxx xxx

However, if the buyer is
engaged in trade or business,
whether a corporation or otherwise,
these rules shall apply:
(i) If the sale is
a
sale
of
property on the
installment plan
(that
is,
payments in the
year of sale do
not exceed 25%
of the selling
price), the tax
shall
be
deducted
and
withheld by the
buyer on every
installment.
(ii) If, on the
other hand, the
sale is on a cash
basis or is a
deferredpayment
sale
not
on
the
installment
plan (that
is,
payments in the
year of sale
exceed 25% of
the
selling
price), the buyer
shall withhold
the tax based on
the gross selling

price or fair
market value of
the
property,
whichever
is
higher, on the
first installment.
In any case, no Certificate
Authorizing Registration (CAR) shall
be issued to the buyer unless the
[CWT] due on the sale, transfer or
exchange of real property other than
capital asset has been fully
paid. (Underlined amendments in the
original)

Section 2.58.2 of RR 2-98 implementing

Section 58(E) of RA 8424 provides that any sale, barter
or exchange subject to the CWT will not be recorded by
the Registry of Deeds until the CIR has certified that such
transfers and conveyances have been reported and the
taxes thereof have been duly paid:[7]
Sec. 2.58.2. Registration with the
Register of Deeds. Deeds of
conveyances of land or land and
building/improvement
thereon
arising from sales, barters, or
exchanges subject to the creditable
expanded withholding tax shall not
be recorded by the Register of
Deeds unless the [CIR] or his duly
authorized
representative
has
certified that such transfers and

27

conveyances have been reported and

the expanded withholding tax,
inclusive of the documentary stamp
tax, due thereon have been fully paid
xxxx.

On

February

11,

2003,

RR

No.

engaged in trade or
business in the
Philippines;
x
x
x
x
x
x

7-2003[8] was

promulgated, providing for the guidelines in determining

x
x
x

whether a particular real property is a capital or an

ordinary asset for purposes of imposing the MCIT,
among others. The pertinent portions thereof state:
Section
4. Applicable taxes on
sale, exchange or other
disposition
of
real
property. - Gains/Income
derived
from
sale,
exchange,
or
other
disposition
of
real
properties shall, unless
otherwise exempt, be
subject to applicable
taxes imposed under the
Code, depending on
whether the subject
properties are classified
as capital assets or
ordinary assets;
a.

In the case of
individual citizen
(including estates
and
trusts),
resident aliens, and
non-resident aliens

(ii)

The
sale of
real
proper
ty
locate
d in
the
Philip
pines,
classif
ied as
ordina
ry
assets,
shall
be
subjec
t
to
the
[CWT
]
(expa
nded)
under
Sec.
2.57..

2(J) of
[RR
2-98],
as
amend
ed,
based
on the
gross
selling
price
or
curren
t fair
marke
t
value
as
deter
mined
in
accord
ance
with
Sectio
n 6(E)
of the
Code,
which
ever is
higher
, and
conse
quentl
y, to
the
ordina
ry
incom
e tax
impos
ed
under

28

Sec.
24(A)
(1)(c)
or
25(A)
(1) of
the
Code,
as the
case
may
be,
based
on net
taxabl
e
incom
e.

located in the
Philippines,
shall be subject
to the [CWT]
(expanded)
under
Sec.
2.57.2(J) of [RR
2-98],
as
amended,
and
consequently, to
the
ordinary
income
tax
under
Sec.
27(A) of the
Code. In lieu of
the
ordinary
income
tax,
however,
domestic
corporations
may
become
subject to the
[MCIT] under
Sec. 27(E) of the
Code, whichever
is applicable.

x
xx xx
x xxx
c.

In the case
corporations.

of

domestic
xxx xx

x xxx

xxx xx
x xxx

(ii)

The sale of
land
and/or
building
classified
as
ordinary asset
and other real
property (other
than land and/or
building treated
as capital asset),
regardless of the
classification
thereof, all of
which
are

We shall now tackle the issues raised.

Courts will not assume jurisdiction over a

constitutional question unless the following requisites are
satisfied: (1) there must be an actual case calling for the
exercise of judicial review; (2) the question before the
court

must

be

ripe

for

adjudication; (3) the person challenging the validity of th

e act must have standing to do so; (4) the question of
constitutionality must have been raised at the earliest
opportunity and (5) the issue of constitutionality must be
the very lis mota of the case.[9]

Respondents aver that the first three requisites

are absent in this case. According to them, there is no
actual case calling for the exercise of judicial power and
it is not yet ripe for adjudication because

EXISTENCE
OF
A
JUSTICIABLE
CONTROVERS
Y

[petitioner] did not allege that

CREBA, as a corporate entity, or any
of its members, has been assessed by
the BIR for the payment of [MCIT]
or [CWT] on sales of real
property. Neither did petitioner allege
that its members have shut down
their businesses as a result of the
payment
of
the
MCIT
or

29

CWT. Petitioner has raised concerns

in mere abstract and hypothetical
form without any actual, specific and
concrete instances cited that the
assailed law and revenue regulations
have actually and adversely affected
it. Lacking empirical data on which
to base any conclusion, any
discussion on the constitutionality of
the MCIT or CWT on sales of real
property is essentially an academic
exercise.
Perceived or alleged hardship to
taxpayers alone is not an adequate
justification for adjudicating abstract
issues.
Otherwise,
adjudication
would be no different from the giving
of advisory opinion that does not
really settle legal issues.[10]

An actual case or controversy involves a

Contrary to respondents assertion, we do not

have to wait until petitioners members have shut down
their operations as a result of the MCIT or CWT. The
assailed provisions are already being implemented. As
we

stated

in Didipio

Earth-Savers

Multi-Purpose

Association, Incorporated (DESAMA) v. Gozun:[13]

By the mere enactment of
the questioned law or the approval of
the challenged act, the dispute is said
to have ripened into a judicial
controversy even without any other
overt act. Indeed, even a singular
violation of the Constitution and/or
the law is enough to awaken judicial
duty.[14]

distinguished from a hypothetical or abstract difference

or dispute.[11] On the other hand, a question is considered

Legal standing or locus standi is a partys

personal and substantial interest in a case such that it has
sustained or will sustain direct injury as a result of the
governmental act being challenged. [16] In Holy Spirit
Homeowners Association, Inc. v. Defensor,[17] we held
that the association had legal standing because its
members stood to be injured by the enforcement of the
assailed provisions:

conflict of legal rights or an assertion of opposite legal

claims which is susceptible of judicial resolution as

Philippines. Petitioners did not allege

that [it] itself is in the real estate
business. It did not allege any
material interest or any wrong that it
may suffer from the enforcement of
[the assailed provisions].[15]

If the assailed provisions are indeed unconstitutional,

there is no better time than the present to settle such
question once and for all.

ripe for adjudication when the act being challenged has a

Respondents next argue that petitioner has no legal

direct adverse effect on the individual challenging it. [12]

standing to sue:
Petitioner is an association
of some of the real estate developers
and
builders
in
the

Petitioner association has

the legal standing to institute the
instant petition xxx. There is no
dispute that the individual members
of petitioner association are residents
of the NGC. As such they are covered
and stand to be either benefited or
injured by the enforcement of the
IRR, particularly as regards the
selection process of beneficiaries and
lot
allocation
to
qualified
beneficiaries.
Thus,
petitioner
association
may
assail
those
provisions in the IRR which it
believes to be unfavorable to the

30

rights of its members. xxx Certainly,

petitioner and its members have
sustained direct injury arising from
the enforcement of the IRR in that
they have been disqualified and
eliminated from the selection
process.[18]

In any event, this Court has the discretion to take

cognizance of a suit which does not satisfy the
requirements of an actual case, ripeness or legal standing
when paramount public interest is involved. [19] The
questioned MCIT and CWT affect not only petitioners
but practically all domestic corporate taxpayers in our
country. The transcendental importance of the issues

N
D

difficult to control and enforce. It is a means to

R
A
T
I
O
N
A
L
E

ensure that

[20]

C
O
N
C
E
P
T
A

will

make

some

minimum

contribution to the support of the public sector. The

congressional deliberations on this are illuminating:
Senator Enrile. Mr. President, we are
not unmindful of the practice of
certain corporations of reporting
constantly a loss in their operations to
avoid the payment of taxes, and thus
avoid sharing in the cost of
government. In this regard, the Tax
Reform Act introduces for the first
time a new concept called the
[MCIT] so as to minimize tax
evasion,
tax
avoidance,
tax
manipulation in the country and for
administrative convenience. This will
go a long way in ensuring that
corporations will pay their just share
in supporting our public life and our
economic advancement.[22]

O
F
T
H
E
M
C
I
T

raised and their overreaching significance to society

make it proper for us to take cognizance of this petition.

everyone

The MCIT on domestic corporations is a new

concept introduced by RA 8424 to the Philippine taxation

Domestic corporations owe their corporate

system. It came about as a result of the perceived

existence and their privilege to do business to the

inadequacy of the self-assessment system in capturing the

government. They also benefit from the efforts of the

true income of corporations.[21]It was devised as a

government to improve the financial market and to

relatively simple and effective revenue-raising instrument

ensure a favorable business climate. It is therefore fair for

compared to the normal income tax which is more

31

the government to require them to make a reasonable

operations of a corporation or consistent reports of

[25]

contribution to the public expenses.

minimal net income render its financial statements and its

first and make its ventures viable before it is subjected to

tax payments suspect. For sure, certain tax avoidance

the MCIT.[26]

This grace period allows a new business to stabilize

Congress intended to put a stop to the practice

schemes resorted to by corporations are allowed in our
of corporations which, while having large turn-overs,

Second, the law allows the carrying forward of

jurisdiction. The MCIT serves to put a cap on such tax

report minimal or negative net income resulting in

any excess of the MCIT paid over the normal income tax
shelters. As a tax on gross income, it prevents tax evasion

minimal or zero income taxes year in and year out,

which shall be credited against the normal income tax for

and minimizes tax avoidance schemes achieved through
the three immediately succeeding years. [27]

through under-declaration of income or over-deduction of

sophisticated and artful manipulations of deductions and
expenses otherwise called tax shelters.[23]
Mr. Javier (E.) [This] is what the
Finance Dept. is trying to remedy,
that is why they have proposed the
[MCIT]. Because from experience
too, you have corporations which
have been losing year in and year out
and paid no tax. So, if the corporation
has been losing for the past five years
to ten years, then that corporation has
no business to be in business. It is
dead. Why continue if you are losing
year in and year out? So, we have
this provision to avoid this type of
tax shelters, Your Honor.[24]

Third,

since

certain

businesses

may be

other stratagems. Since the tax base was broader, the tax
incurring genuine repeated losses, the law authorizes the
rate was lowered.
Secretary of Finance to suspend the imposition of MCIT
To further emphasize the corrective nature of the MCIT,

if a corporation suffers losses due to prolonged labor

the following safeguards were incorporated into the law:

dispute, force majeure and legitimate business reverses.

[28]

First, recognizing the birth pangs of businesses

Even before the legislature introduced the
and the reality of the need to recoup initial major capital
MCIT to the Philippine taxation system, several other
expenditures, the imposition of the MCIT commences
countries already had their own system of minimum

The primary purpose of any legitimate business

only on the fourth taxable year immediately following the

is to earn a profit. Continued and repeated losses after

year in which the corporation commenced its operations.

corporate income taxation. Our lawmakers noted that

most developing countries, particularly Latin American

32

and Asian countries, have the same form of safeguards as

we do. As pointed out during the committee hearings:
[Mr. Medalla:] Note that most
developing countries where you
have of course quite a bit of room
for underdeclaration of gross
receipts have this same form of
safeguards.
In the case of Thailand, half a
percent (0.5%), theres a minimum of
income tax of half a percent (0.5%)
of gross assessable income. In Korea
a 25% of taxable income before
deductions and exemptions. Of
course the different countries have
different basis for that minimum
income tax.
The other thing youll notice is the
preponderance of Latin American
countries that employed this
method. Okay, those are additional
Latin American countries.[29]

At present, the United States of America, Mexico,

Argentina, Tunisia, Panama and Hungary have their own
versions of the MCIT.[30]

M
C
I
T

I
S
N
O
T
V
I
O
L
A
T
I
V
E
O
F
D
U
E

deprivation of property without due process of law. It

explains that gross income as defined under said
provision only considers the cost of goods sold and other
direct expenses; other major expenditures, such as
administrative and interest expenses which are equally
necessary to produce gross income, were not taken into
account.[31] Thus, pegging the tax base of the MCIT to a
corporations gross income is tantamount to a confiscation
of capital because gross income, unlike net income, is not
realized gain.[32]

We disagree.
P
R
O
C
E
S
S

Taxes

are

the

lifeblood

of

the

government. Without taxes, the government can neither

exist nor endure. The exercise of taxing power derives its

Petitioner claims that the MCIT under Section 27(E) of

source from the very existence of the State whose social

RA 8424 is unconstitutional because it is highly

contract with its citizens obliges it to promote public

oppressive, arbitrary and confiscatory which amounts to

interest and the common good.[33]

33

[34]

Taxation is an inherent attribute of sovereignty.

constitutional limitations. At the same time, like any

not a fixed rule but rather a broad standard, there is a

It is a power that is purely legislative. [35] Essentially,

other statute, tax legislation carries a presumption of

need for proof of such persuasive character.[43]

this means that in the legislature primarily lies the

constitutionality.
Petitioner is correct in saying that income is

discretion to determine the nature (kind), object

The constitutional safeguard of due process is

distinct from capital.[44] Income means all the wealth

embodied in the fiat [no] person shall be deprived of life,

which flows into the taxpayer other than a mere return on

liberty or property without due process of law. In Sison,

capital. Capital is a fund or property existing at one

Jr. v. Ancheta, et al.,[38] we held that the due process

distinct point in time while income denotes a flow of

clause may properly be invoked to invalidate, in

wealth during a definite period of time. [45] Income is gain

appropriate cases, a revenue measure [39] when it amounts

derived and severed from capital. [46] For income to be

to a confiscation of property.[40] But in the same case, we

taxable, the following requisites must exist:

(purpose), extent (rate), coverage (subjects) and situs

(place) of taxation. [36] It has the authority to prescribe a
certain tax at a specific rate for a particular public
purpose on persons or things within its jurisdiction. In
other words, the legislature wields the power to define
what tax shall be imposed, why it should be imposed,
how much tax shall be imposed, against whom (or what)
also explained that we will not strike down a revenue
(1) there must be gain;

it shall be imposed and where it shall be imposed.

measure as unconstitutional (for being violative of the

(2) the gain must be realized or received and

As a general rule, the power to tax is plenary and

due process clause) on the mere allegation of

(3) the gain must not be excluded by law or

unlimited in its range, acknowledging in its very nature

[41]

arbitrariness by the taxpayer.

There must be a factual

treaty from

no limits, so that the principal check against its abuse is

foundation to such an unconstitutional taint.

[42]

This
taxation.[47]

to be found only in the responsibility of the legislature

merely adheres to the authoritative doctrine that, where

(which imposes the tax) to its constituency who are to

the due process clause is invoked, considering that it is

pay

it.[37] Nevertheless,

it

is

circumscribed

by

Certainly, an income tax is arbitrary and confiscatory if it

taxes capital because capital is not income. In other

34

Statutes
taxing
the gross "receipts," "earnings," or
"income" of
particular
corporations are found in many
jurisdictions. Tax thereon is generally
held to be within the power of a state
to impose; or constitutional, unless it
interferes with interstate commerce
or violates the requirement as to
uniformity of taxation.[50]

words, it is income, not capital, which is subject to

income tax. However, the MCIT is not a tax on capital.
The MCIT is imposed on gross income which
is arrived at by deducting the capital spent by a
corporation in the sale of its goods, i.e., the cost of
goods[48] and

other

direct

expenses

from

gross

sales. Clearly, the capital is not being taxed.

Furthermore, the MCIT is not an additional tax

tax, and only if the normal income tax is suspiciously

low. The MCIT merely approximates the amount of net
income tax due from a corporation, pegging the rate at a
very much reduced 2% and uses as the base the
corporations gross income.

Besides, 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.

[49]

xxx xxx xxx

We thus join a number of other courts
in upholding the constitutionality of
the [AMT]. xxx [It] is a rational
means of obtaining a broad-based
tax, and therefore is constitutional.[54]

The United States has a similar alternative

minimum tax (AMT) system which is generally

The U.S. Court declared that the congressional intent to

characterized by a lower tax rate but a broader tax base.

ensure that corporate taxpayers would contribute a

[51]

imposition. It is imposed in lieu of the normal net income

general taxpayer distrust of the

system growing from large numbers
of taxpayers with large incomes who
were yet paying no taxes.

Since our income tax laws are of American origin,

minimum amount of taxes was a legitimate governmental

interpretations by American courts of our parallel tax

end to which the AMT bore a reasonable relation. [55]

laws have persuasive effect on the interpretation of these

American courts have also emphasized that Congress has

laws.[52] Although our MCIT is not exactly the same as

the power to condition, limit or deny deductions from

the AMT, the policy behind them and the procedure of

gross income in order to arrive at the net that it chooses

their implementation are comparable. On the question of

to tax.[56] This is because deductions are a matter of

the AMTs constitutionality, the United States Court of

legislative grace.[57]

Appeals for the Ninth Circuit stated in Okin v.

Commissioner:

Absent

any

other

valid

objection,

the

[53]

In enacting the minimum tax,

Congress attempted to remedy

assignment of gross income, instead of net income, as the

tax base of the MCIT, taken with the reduction of the tax

35

rate

from

32%

to

2%,

is

not

constitutionally

objectionable.
Moreover, petitioner does not cite any actual,
specific and concrete negative experiences of its
members nor does it present empirical data to show that
the implementation of the MCIT resulted in the
confiscation of their property.
In sum, petitioner failed to support, by any
factual or legal basis, its allegation that the MCIT is
arbitrary and confiscatory. The Court cannot strike down
a law as unconstitutional simply because of its yokes.
[58]

Taxation is necessarily burdensome because, by its

nature, it adversely affects property rights. [59] The party

alleging the laws unconstitutionality has the burden to
demonstrate the supposed violations in understandable

9
9
8
M
E
R
E
L
Y
C
L
A
R
I
F
I
E
S
S
E
C
T
I
O
N
2
7
(
E
)

terms.[60]
O
F
R
R

R
A

8
4
2
4

Petitioner alleges that RR 9-98 is a deprivation

of property without due process of law because the MCIT
is being imposed and collected even when there is
actually a loss, or a zero or negative taxable income:
Sec. 2.27(E) [MCIT] on Domestic
Corporations.
(1) Imposition of the Tax. xxx The
MCIT shall be imposed whenever
such corporation has zero or
negative
taxable
income or
whenever the amount of [MCIT] is
greater than the normal income tax
due
from
such
corporation. (Emphasis supplied)

RR 9-98, in declaring that MCIT should be

imposed whenever such corporation has zero or negative
taxable income, merely defines the coverage of Section
27(E). This means that even if a corporation incurs a net
loss in its business operations or reports zero income after

36

deducting its expenses, it is still subject to an MCIT of

(c) tax-free covenant bonds. Petitioner is concerned with

upon consummation of the sale via the CWT, contrary to

2% of its gross income. This is consistent with the law

the second category (CWT) and maintains that the

RA 8424 which calls for the payment of the net income at

which

revenue regulations on the collection of CWT on sale of

the end of the taxable period.[63]

imposes

the

MCIT

on

gross

income

notwithstanding the amount of the net income. But the

real

estate

categorized

law also states that the MCIT is to be paid only if it is

unconstitutional.

as

ordinary

assets

are

greater than the normal net income. Obviously, it may

Petitioner theorizes that since RA 8424 treats

capital assets and ordinary assets differently, respondents
cannot disregard the distinctions set by the legislators as

Petitioner, after enumerating the distinctions

well be the case that the MCIT would be less than the net

regards the tax base, modes of collection and payment of

between capital and ordinary assets under RA 8424,

income of the corporation which posts a zero or negative

taxes on income from the sale of capital and ordinary

contends that Sections 2.57.2(J) and 2.58.2 of RR 2-98

taxable income.

assets.
and Sections 4(a)(ii) and (c)(ii) of RR 7-2003 were
Petitioners arguments have no merit.

We now proceed to the issues involving the

CWT.

promulgated with grave abuse of discretion amounting to

lack of jurisdiction and patently in contravention of
law[62] because they ignore such distinctions. Petitioners

The withholding tax system is a procedure

conclusion is based on the following premises: (a) the
through which taxes (including income taxes) are
revenue regulations use gross selling price (GSP) or fair
collected.[61] Under Section 57 of RA 8424, the types of
market value (FMV) of the real estate as basis for
income subject to withholding tax are divided into three
determining the income tax for the sale of real estate
categories: (a) withholding of final tax on certain
classified as ordinary assets and (b) they mandate the
incomes; (b) withholding of creditable tax at source and
collection of income tax on a per transaction basis, i.e.,

A
U
T
H
O
R
I
T
Y
O
F
T
H
E

37

S
E
C
R
E
T
A
R
Y
O
F
F
I
N
A
N
C
E
T
O
O
R
D
E
R
T
H
E
C
O
L
L
E
C

T
I
O
N
O
F
C
W
T
O
N
S
A
L
E
S
O
F
R
E
A
L
P
R
O
P
E
R
T
Y
C
O
N

S
I
D
E
R
E
D
A
S
O
R
D
I
N
A
R
Y
A
S
S
E
T
S

The Secretary of Finance is granted, under

Section 244 of RA 8424, the authority to promulgate the
necessary rules and regulations for the effective
enforcement of the provisions of the law. Such authority
is subject to the limitation that the rules and regulations
must not override, but must remain consistent and in

38

harmony with, the law they seek to apply and implement.

[64]

It is well-settled that an administrative agency cannot

amend an act of Congress.[65]

require the withholding of a tax on items of income

We have long recognized that the method of withholding

57(B) of RA 8424 which provides:
tax at source is a procedure of collecting income tax
which is sanctioned by our tax laws. [66] The withholding
tax system was devised for three primary reasons: first, to
provide the taxpayer a convenient manner to meet his
probable income tax liability; second, to ensure the
collection of income tax which can otherwise be lost or
substantially reduced through failure to file the
corresponding returns and third, to improve the
governments cash flow.[67] This results in administrative
savings, prompt and efficient collection of taxes,
of

delinquencies

and

reduction

of

governmental effort to collect taxes through more

complicated means and remedies.[68]

The questioned provisions of RR 2-98, as

payable to any person, national or juridical, residing in

the Philippines. Such authority is derived from Section

prevention

of the taxpayer for

the taxable year.

Respondent Secretary has the authority to

SEC. 57. Withholding of Tax at

Source.

amended, are well within the authority given by Section

57(B) to the Secretary, i.e., the graduated rate of 1.5%5% is between the 1%-32% range; the withholding tax is
imposed on the income payable and the tax is creditable

xxx xxx xxx

(B)

Withholding
of
Creditable Tax at
Source. The
[Secretary]
may,
upon
the
recommendation of
the [CIR], require
the withholding of a
tax on the items of
income payable to
natural or juridical
persons, residing in
the Philippines, by
payorcorporation/persons
as provided for by
law, at the rate of
not less than one
percent (1%) but
not
more
than
thirty-two percent
(32%)
thereof,
which shall be
credited against the
income tax liability

against the income tax liability of the taxpayer for the

taxable year.

E
F
F
E
C
T
O
F
R
R
S
O
N
T
H
E

39

T
A
X
B
A
S
E
F
O
R
T
H
E
I
N
C
O
M
E
T
A
X
O
F
I
N
D
I
V
I
D
U
A

L
S
O
R
C
O
R
P
O
R
A
T
I
O
N
S

T
A
T
E
B
U
S
I
N
E
S
S

Petitioner maintains that RR 2-98, as amended, arbitrarily

E
N
G
A
G
E
D

shifted the tax base of a real estate business income tax

I
N

The taxes withheld are in the nature of advance tax

from net income to GSP or FMV of the property sold.

Petitioner is wrong.

payments by a taxpayer in order to extinguish its possible

T
H
E
R
E
A
L
E
S

tax obligation. [69] They are installments on the annual tax

which may be due at the end of the taxable year.[70]
Under RR 2-98, the tax base of the income tax
from the sale of real property classified as ordinary assets
remains to be the entitys net income imposed under

40

xxx xxx xxx

Section 24 (resident individuals) or Section 27 (domestic

corporations) in relation to Section 31 of RA
8424, i.e. gross income less allowable deductions. The
CWT is to be deducted from the net income tax payable
by the taxpayer at the end of the taxable year.
[71]

Precisely, Section 4(a)(ii) and (c)(ii) of RR 7-2003

reiterate that the tax base for the sale of real property
classified as ordinary assets remains to be the net taxable
income:
Section 4. Applicable taxes on sale,
exchange or other disposition of
real
property.
- Gains/Income
derived from sale, exchange, or
other disposition of real properties
shall unless otherwise exempt, be
subject to applicable taxes imposed
under the Code, depending on
whether the subject properties are
classified as capital assets or
ordinary assets;
xxx xxx xxx
a. In the case of individual
citizens (including estates
and trusts), resident aliens,
and non-resident aliens
engaged in trade or
business
in
the
Philippines;

(ii) The sale of real property located

in the Philippines, classified as
ordinary assets, shall be subject
to the [CWT] (expanded) under Sec.
2.57.2(j) of [RR 2-98], as amended,
based on the [GSP] or current
[FMV] as determined in accordance
with Section 6(E) of the Code,
whichever
is
higher,
and
consequently,
to the ordinary
income tax imposed under Sec.
24(A)(1)(c) or 25(A)(1) of the
Code, as the case may be, based on
net taxable income.

shall file its income tax return and credit the taxes
withheld (by the withholding agent/buyer) against its tax
due. If the tax due is greater than the tax withheld, then
the taxpayer shall pay the difference. If, on the other
hand, the tax due is less than the tax withheld, the
taxpayer

will

be

entitled

to

refund

or

tax

credit. Undoubtedly, the taxpayer is taxed on its net

xxx xxx xxx

c. In the
corporations.

Accordingly, at the end of the year, the taxpayer/seller

case

of

domestic

The sale of land and/or building

classified as ordinary asset and other
real property (other than land and/or
building treated as capital asset),
regardless of the classification
thereof, all of which are located in
the Philippines, shall be subject
to the [CWT] (expanded) under Sec.
2.57.2(J) of [RR 2-98], as amended,
and consequently, to the ordinary
income tax under Sec. 27(A) of the
Code. In lieu of the ordinary income
tax, however, domestic corporations
may become subject to the [MCIT]
under Sec. 27(E) of the same Code,
whichever is applicable.(Emphasis
supplied)

income.
The use of the GSP/FMV as basis to determine
the withholding taxes is evidently for purposes of
practicality and convenience. Obviously, the withholding
agent/buyer who is obligated to withhold the tax does not
know, nor is he privy to, how much the taxpayer/seller
will have as its net income at the end of the taxable
year. Instead, said withholding agents knowledge and
privity are limited only to the particular transaction in
which he is a party. In such a case, his basis can only be

41

the GSP or FMV as these are the only factors reasonably

known or knowable by him in connection with the
performance of his duties as a withholding agent.
N
O
B
L
U
R
R
I
N
G
O
F
D
I
S
T
I
N
C
T
I
O
N
S
B
E
T
W
E

E
N
O
R
D
I
N
A
R
Y
A
S
S
E
T
S
A
N
D
C
A
P
I
T
A
L
A
S
S
E
T
S

RR 2-98 imposes a graduated CWT on income based on

the GSP or FMV of the real property categorized as
ordinary assets. On the other hand, Section 27(D)(5) of
RA 8424 imposes a final tax and flat rate of 6% on the
gain presumed to be realized from the sale of a capital
asset based on its GSP or FMV. This final tax is also
withheld at source.[72]
The differences between the two forms of
withholding tax, i.e., creditable and final, show that
ordinary assets are not treated in the same manner as
capital assets. Final withholding tax (FWT) and CWT are
distinguished as follows:

FWT
a) The amount of income tax withheld by the
withholding agent is constituted as a full and
final payment of the income tax due from the
payee on the said income.

CWT
a) Taxes with
are intended
the tax due of

b)The liability for payment of the tax rests

primarily on the payor as a withholding agent.

b) Payee of
income and/o
tax withheld
income. The
for a refund
the tax due.

42

c) The payee is not required to file an income

tax return for the particular income.[73]

of the FWT are distinct from those of the CWT. The

withholding agent/buyers act of collecting the tax at the
time of the transaction by withholding the tax due from

As previously stated, FWT is imposed on the sale of

capital assets. On the other hand, CWT is imposed on the

the income payable is the essence of the withholding tax

contention that ordinary assets are being lumped together

with, and treated similarly as, capital assets in
contravention of the pertinent provisions of RA 8424.

Petitioner insists that the levy, collection and

payment of CWT at the time of transaction are contrary
to the provisions of RA 8424 on the manner and time of
filing of the return, payment and assessment of income
tax involving ordinary assets.[75]
The fact that the tax is withheld at source does
not automatically mean that it is treated exactly the same
way as capital gains. As aforementioned, the mechanics

C
A
N
B
E

method of tax collection.

sale of ordinary assets. The inherent and substantial

differences between FWT and CWT disprove petitioners

M
E
S

N
O
R
U
L
E
T
H
A
T
O
N
L
Y
P
A
S
S
I
V
E
I
N
C
O

S
U
B
J
E
C
T
T
O
C
W
T

Petitioner submits that only passive income can

be subjected to withholding tax, whether final or
creditable. According to petitioner, the whole of Section
57 governs the withholding of income tax on passive
income. The enumeration in Section 57(A) refers to
passive income being subjected to FWT. It follows that

43

Section 57(B) on CWT should also be limited to passive

income:

more than thirty-two percent (32%)

thereof, which shall be credited
against the income tax liability of the
taxpayer
for
the
taxable
year. (Emphasis supplied)

(B) Withholding
of Creditable
Tax at Source. The [Secretary] may,
upon the recommendation of the
[CIR], require the withholding of
a tax on the items of income
payable to natural or juridical
persons, residing in the Philippines,
by payor-corporation/persons as
provided for by law, at the rate of not
less than one percent (1%) but not

or

juridical

persons,

residing

in

the

Philippines. There is no requirement that this income be

passive income. If that were the intent of Congress, it

SEC. 57. Withholding of Tax at

Source.
(A) Withholding of Final Tax on
Certain Incomes. Subject to rules and
regulations, the [Secretary] may
promulgate,
upon
the
recommendation of the [CIR],
requiring the filing of income tax
return by certain income payees,
the tax imposed or prescribed by
Sections 24(B)(1), 24(B)(2), 24(C),
24(D)(1); 25(A)(2), 25(A)(3), 25(B),
25(C), 25(D), 25(E); 27(D)(1), 27(D)
(2), 27(D)(3), 27(D)(5); 28(A)(4),
28(A)(5), 28(A)(7)(a), 28(A)(7)(b),
28(A)(7)(c), 28(B)(1), 28(B)(2),
28(B)(3), 28(B)(4), 28(B)(5)(a),
28(B)(5)(b), 28(B)(5)(c); 33; and
282 of this Code on specified items
of income shall be withheld by
payor-corporation and/or person and
paid in the same manner and subject
to the same conditions as provided in
Section 58 of this Code.

natural

This line of reasoning is non sequitur.

could have easily said so.

Section 57(A) expressly states that final tax can

Indeed, Section 57(A) and (B) are distinct. Section 57(A)

be imposed on certain kinds of income and enumerates

refers to FWT while Section 57(B) pertains to CWT. The

these as passive income. The BIR defines passive income

former covers the kinds of passive income enumerated

by stating what it is not:

therein and the latter encompasses any income other than

if the income is generated

in the active pursuit and performance
of the corporations primary purposes,
the same is not passive income[76]

those listed in 57(A).Since the law itself makes

distinctions, it is wrong to regard 57(A) and 57(B) in the
same way.

It is income generated by the taxpayers assets. These

To repeat, the assailed provisions of RR 2-98,

assets can be in the form of real properties that return

as amended, do not modify or deviate from the text of

rental income, shares of stock in a corporation that earn

Section 57(B). RR 2-98 merely implements the law by

dividends or interest income received from savings.

specifying what income is subject to CWT. It has been

On the other hand, Section 57(B) provides that

the Secretary can require a CWT on income payable to

held that, where a statute does not require any particular

procedure to be followed by an administrative agency, the

44

agency may adopt any reasonable method to carry out its

functions.[77] Similarly, considering that the law uses the
general term income, the Secretary and CIR may specify
the kinds of income the rules will apply to based on what
is

feasible. In

addition,

administrative

rules

and

regulations ordinarily deserve to be given weight and

respect by the courts[78] in view of the rule-making
authority given to those who formulate them and their
specific expertise in their respective fields.

N
O
D
E
P
R
I
V
A
T
I
O
N

P
R
O
P
E
R
T
Y
W
I
T
H
O
U
T

result, the government is collecting tax from net income

not yet gained or earned.
Again, it is stressed that the CWT is creditable against the
tax due from the seller of the property at the end of the
taxable year. The seller will be able to claim a tax refund
if its net income is less than the taxes withheld. Nothing
is taken that is not due so there is no confiscation of

D
U
E

property repugnant to the constitutional guarantee of due

process. More importantly, the due process requirement

P
R
O
C
E
S
S

applies to the power to tax. [79] The CWT does not impose
new taxes nor does it increase taxes. [80] It relates entirely
to the method and time of payment.
Petitioner avers that the imposition of CWT on

GSP/FMV of real estate classified as ordinary assets

deprives its members of their property without due
process of law because, in their line of business, gain is
never assured by mere receipt of the selling price. As a

O
F

Petitioner protests that the refund remedy does

not make the CWT less burdensome because taxpayers
have to wait years and may even resort to litigation
before they are granted a refund. [81] This argument is
misleading. The practical problems encountered in
claiming a tax refund do not affect the constitutionality

45

L
and validity of the CWT as a method of collecting the

government. Besides, the CWT is applied only on the

tax.

amounts actually received or receivable by the real estate

P
R
O
T
E
C
T
I
O
N

Petitioner complains that the amount withheld

entity. Sales on installment are taxed on a per-installment

would have otherwise been used by the enterprise to pay

basis.[83] Petitioners desire to utilize for its operational

labor wages, materials, cost of money and other expenses

and capital expenses money earmarked for the payment

which can then save the entity from having to obtain

of taxes may be a practical business option but it is not a

loans entailing considerable interest expense. Petitioner

fundamental right which can be demanded from the court

Petitioner claims that the revenue regulations are

also lists the expenses and pitfalls of the trade which add

or from the government.

violative of the equal protection clause because the CWT

to the burden of the realty industry: huge investments and

borrowings; long

gestation

period; sudden

and

unpredictable interest rate surges; continually spiraling

development/construction

costs;

heavy

taxes

and

prohibitive up-front regulatory fees from at least 20

government agencies.[82]
Petitioners lamentations will not support its
attack on the constitutionality of the CWT. Petitioners
complaints are essentially matters of policy best
addressed to the executive and legislative branches of the

is
N
O
V
I
O
L
A
T
I
O
N
O
F
E
Q
U
A

being

levied

enterprises. Specifically,

only

on

petitioner

real
points

estate
out

that

manufacturing enterprises are not similarly imposed a

CWT on their sales, even if their manner of doing
business is not much different from that of a real estate
enterprise. Like a manufacturing concern, a real estate
business is involved in a continuous process of
production and it incurs costs and expenditures on a
regular basis. The only difference is that goods produced
by the real estate business are house and lot units. [84]

46

Again, we disagree.

The

equal

protection

clause

under

for taxation, or exemption, infringe no constitutional

and substantial amounts. To require the customers of

limitation.[88] The real estate industry is, by itself, a class

manufacturing enterprises, at present, to withhold the

and can be validly treated differently from other business

taxes on each of their transactions with their tens or

enterprises.

hundreds of suppliers may result in an inefficient and

the

Constitution means that no person or class of persons

shall be deprived of the same protection of laws which is
unmanageable system of taxation and may well defeat the
enjoyed by other persons or other classes in the same

Petitioner, in insisting that its industry should be treated

place and in like circumstances. [85] Stated differently, all

similarly as manufacturing enterprises, fails to realize

persons belonging to the same class shall be taxed

that what distinguishes the real estate business from other

alike. It follows that the guaranty of the equal protection

manufacturing enterprises, for purposes of the imposition

of the laws is not violated by legislation based on a

of the CWT, is not their production processes but the

reasonable classification. Classification, to be valid, must

prices of their goods sold and the number of transactions

purpose of the withholding tax system.

Petitioner counters that there are other businesses
wherein

expensive

items

are

also

sold

infrequently, e.g. heavy equipment, jewelry, furniture,

appliance and other capital goods yet these are not
similarly subjected to the CWT.[89] As already discussed,
(1) rest on substantial distinctions; (2) be germane to the

involved. The income from the sale of a real property is

purpose of the law; (3) not be limited to existing

bigger and its frequency of transaction limited, making it

the Secretary may adopt any reasonable method to carry

out its functions.[90] Under Section 57(B), it may choose
conditions only and (4) apply equally to all members of

less cumbersome for the parties to comply with the

the same class.[86]

withholding tax scheme.

what to subject to CWT.

A reading of Section 2.57.2 (M) of RR 2-98 will also
The taxing power has the authority to make reasonable

On the other hand, each manufacturing enterprise may

show that petitioners argument is not accurate. The sales

classifications for purposes of taxation. [87] Inequalities

have tens of thousands of transactions with several

of manufacturers who have clients within the top 5,000

which result from a singling out of one particular class

thousand customers every month involving both minimal

corporations, as specified by the BIR, are also subject to

47

CWT for their transactions with said 5,000 corporations.

[91]

S
E
C
T
I
O
N

L
Y
I
M
P
L
E
M
E
N
T
S

2
.
5
8
.
2

S
E
C
T
I
O
N

O
F

5
8

R
R

O
F

N
O
.

R
A

2
9
8
M
E
R
E

not effect the regisration of any document transferring

real property unless a certification is issued by the CIR
that the withholding tax has been paid. Petitioner proffers
hardly any reason to strike down this rule except to rely
on its contention that the CWT is unconstitutional. We
have ruled that it is not. Furthermore, this provision uses
almost exactly the same wording as Section 58(E) of RA
8424 and is unquestionably in accordance with it:
Sec. 58. Returns and Payment of
Taxes Withheld at Source.
(E) Registration with Register of
Deeds. - No registration of any
document
transferring
real
property shall be effected by the
Register of Deeds unless the [CIR]
or
his
duly
authorized
representative has certified that
such transfer has been reported,
and the capital gains or [CWT], if
any, has been paid: xxxx any
violation of this provision by the
Register of Deeds shall be subject to
the penalties imposed under Section
269 of this Code. (Emphasis
supplied)

8
4
2
4

Lastly, petitioner assails Section 2.58.2 of RR

2-98, which provides that the Registry of Deeds should

CONCLUSION

48

The renowned genius Albert Einstein was once quoted as

saying [the] hardest thing in the world to understand is
the

income

tax.[92] When

party

questions

the

constitutionality of an income tax measure, it has to

contend not only with Einsteins observation but also with
the vast and well-established jurisprudence in support of
the

plenary

powers

of

Congress

to

impose

taxes. Petitioner has miserably failed to discharge its

burden of convincing the Court that the imposition of
MCIT and CWT is unconstitutional.
WHEREFORE,

the

petition

hereby DISMISSED.

Costs against petitioner.

SO ORDERED.

Gomez vs Palomar
G.R. No. L-23645

October 29, 1968

is

BENJAMIN
P.
GOMEZ, petitioner-appellee,
vs.
ENRICO PALOMAR, in his capacity as Postmaster
General, HON. BRIGIDO R. VALENCIA, in his
capacity as Secretary of Public Works and
Communications, and DOMINGO GOPEZ, in his
capacity as Acting Postmaster of San Fernando,
Pampanga, respondent-appellants.
Lorenzo P. Navarro and Narvaro Belar S. Navarro for
petitioner-appellee.
Office of the Solicitor General Arturo A. Alafriz,
Assistant Solicitor General Frine C. Zaballero and
Solicitor Dominador L. Quiroz for respondentsappellants.
CASTRO, J.:
This appeal puts in issue the constitutionality of Republic
Act 1635,1 as amended by Republic Act 2631, 2 which
provides as follows:
To help raise funds for the Philippine
Tuberculosis Society, the Director of Posts
shall order for the period from August nineteen
to September thirty every year the printing and
issue of semi-postal stamps of different
denominations with face value showing the
regular postage charge plus the additional
amount of five centavos for the said purpose,
and during the said period, no mail matter shall
be accepted in the mails unless it bears such
semi-postal stamps: Provided, That no such
additional charge of five centavos shall be
imposed on newspapers. The additional
proceeds realized from the sale of the semipostal stamps shall constitute a special fund

and be deposited with the National Treasury to

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

xxx

xxx

During the period from August 19 to

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

49

In the case of second-class mails and mails

prepaid by means of mail permits or
impressions of postage meters, each piece of
such mail shall bear at least one such semipostal stamp if posted during the period above
stated starting with the year 1958, in addition to
being charged the usual postage prescribed by
existing regulations. In the case of business
reply envelopes and cards mailed during said
period, such stamp should be collected from the
addressees at the time of delivery. Mails
entitled to franking privilege like those from
the office of the President, members of
Congress, and other offices to which such
privilege has been granted, shall each also bear
one such semi-postal stamp if posted during the
said period.
Mails posted during the said period starting in
1958, which are found in street or post-office
mail boxes without the required semi-postal
stamp, shall be returned to the sender, if
known, with a notation calling for the affixing
of such stamp. If the sender is unknown, the
mail matter shall be treated as nonmailable and
forwarded to the Dead Letter Office for proper
disposition.
Adm. Order 7, amending the fifth paragraph of Adm.
Order 3, reads as follows:
In the case of the following categories of mail
matter and mails entitled to franking privilege
which are not exempted from the payment of
the five centavos intended for the Philippine
Tuberculosis Society, such extra charge may be
collected in cash, for which official receipt

(General Form No. 13, A) shall be issued,

instead of affixing the semi-postal stamp in the
manner hereinafter indicated:
1. Second-class mail. Aside from the
postage at the second-class rate, the extra
charge of five centavos for the Philippine
Tuberculosis Society shall be collected on each
separately-addressed piece of second-class mail
matter, and the total sum thus collected shall be
entered in the same official receipt to be issued
for the postage at the second-class rate. In
making such entry, the total number of pieces
of second-class mail posted shall be stated,
thus: "Total charge for TB Fund on 100 pieces .
.. P5.00." The extra charge shall be entered
separate from the postage in both of the official
receipt and the Record of Collections.
2. First-class and third-class mail permits.
Mails to be posted without postage affixed
under permits issued by this Bureau shall each
be charged the usual postage, in addition to the
five-centavo extra charge intended for said
society. The total extra charge thus received
shall be entered in the same official receipt to
be issued for the postage collected, as in
subparagraph 1.
3. Metered mail. For each piece of mail
matter impressed by postage meter under
metered mail permit issued by this Bureau, the
extra charge of five centavos for said society
shall be collected in cash and an official receipt
issued for the total sum thus received, in the
manner indicated in subparagraph 1.

4. Business reply cards and envelopes. Upon

delivery of business reply cards and envelopes
to holders of business reply permits, the fivecentavo charge intended for said society shall
be collected in cash on each reply card or
envelope delivered, in addition to the required
postage which may also be paid in cash. An
official receipt shall be issued for the total
postage and total extra charge received, in the
manner shown in subparagraph 1.
5. Mails entitled to franking privilege.
Government agencies, officials, and other
persons entitled to the franking privilege under
existing laws may pay in cash such extra
charge intended for said society, instead of
affixing the semi-postal stamps to their mails,
provided that such mails are presented at the
post-office window, where the five-centavo
extra charge for said society shall be collected
on each piece of such mail matter. In such case,
an official receipt shall be issued for the total
sum thus collected, in the manner stated in
subparagraph 1.
Mail under permits, metered mails and franked
mails not presented at the post-office window
shall be affixed with the necessary semi-postal
stamps. If found in mail boxes without such
stamps, they shall be treated in the same way as
herein provided for other mails.
Adm. Order 9, amending Adm. Order 3, as amended,
exempts "Government and its Agencies and
Instrumentalities Performing Governmental Functions."
Adm. Order 10, amending Adm. Order 3, as amended,
exempts "copies of periodical publications received for

50

mailing under any class of mail matter, including

newspapers and magazines admitted as second-class
mail."
The FACTS. On September l5, 1963 the petitioner
Benjamin P. Gomez mailed a letter at the post office in
San Fernando, Pampanga. Because this letter, addressed
to a certain Agustin Aquino of 1014 Dagohoy Street,
Singalong, Manila did not bear the special anti-TB stamp
required by the statute, it was returned to the petitioner.
In view of this development, the petitioner brough suit
for declaratory relief in the Court of First Instance of
Pampanga, to test the constitutionality of the statute, as
well as the implementing administrative orders issued,
contending that it violates the equal protection clause of
the Constitution as well as the rule of uniformity and
equality of taxation. The lower court declared the statute
and the orders unconstitutional; hence this appeal by the
respondent postal authorities.
For the reasons set out in this opinion, the judgment
appealed from must be reversed.
I.
Before reaching the merits, we deem it necessary to
dispose of the respondents' contention that declaratory
relief is unavailing because this suit was filed after the
petitioner had committed a breach of the statute. While
conceding that the mailing by the petitioner of a letter
without the additional anti-TB stamp was a violation of
Republic Act 1635, as amended, the trial court
nevertheless refused to dismiss the action on the ground
that under section 6 of Rule 64 of the Rules of Court, "If
before the final termination of the case a breach or

violation of ... a statute ... should take place, the action

may thereupon be converted into an ordinary action."
The prime specification of an action for declaratory relief
is that it must be brought "before breach or violation" of
the statute has been committed. Rule 64, section 1 so
provides. Section 6 of the same rule, which allows the
court to treat an action for declaratory relief as an
ordinary action, applies only if the breach or violation
occurs after the filing of the action but before the
termination thereof.3
Hence, if, as the trial court itself admitted, there had been
a breach of the statute before the firing of this action,
then indeed the remedy of declaratory relief cannot be
availed of, much less can the suit be converted into an
ordinary action.
Nor is there merit in the petitioner's argument that the
mailing of the letter in question did not constitute a
breach of the statute because the statute appears to be
addressed only to postal authorities. The statute, it is true,
in terms provides that "no mail matter shall be accepted
in the mails unless it bears such semi-postal stamps." It
does not follow, however, that only postal authorities can
be guilty of violating it by accepting mails without the
payment of the anti-TB stamp. It is obvious that they can
be guilty of violating the statute only if there are people
who use the mails without paying for the additional antiTB stamp. Just as in bribery the mere offer constitutes a
breach of the law, so in the matter of the anti-TB stamp
the mere attempt to use the mails without the stamp
constitutes a violation of the statute. It is not required that
the mail be accepted by postal authorities. That
requirement is relevant only for the purpose of fixing the
liability of postal officials.

Nevertheless, we are of the view that the petitioner's

choice of remedy is correct because this suit was filed not
only with respect to the letter which he mailed on
September 15, 1963, but also with regard to any other
mail that he might send in the future. Thus, in his
complaint, the petitioner prayed that due course be given
to "other mails without the semi-postal stamps which he
may deliver for mailing ... if any, during the period
covered by Republic Act 1635, as amended, as well as
other mails hereafter to be sent by or to other mailers
which bear the required postage, without collection of
additional charge of five centavos prescribed by the same
Republic Act." As one whose mail was returned, the
petitioner is certainly interested in a ruling on the validity
of the statute requiring the use of additional stamps.
II.
We now consider the constitutional objections raised
against the statute and the implementing orders.
1. It is said that the statute is violative of the equal
protection clause of the Constitution. More specifically
the claim is made that it constitutes mail users into a class
for the purpose of the tax while leaving untaxed the rest
of the population and that even among postal patrons the
statute discriminatorily grants exemption to newspapers
while Administrative Order 9 of the respondent
Postmaster General grants a similar exemption to offices
performing governmental functions. .
The five centavo charge levied by Republic Act 1635, as
amended, is in the nature of an excise tax, laid upon the
exercise of a privilege, namely, the privilege of using the
mails. As such the objections levelled against it must be
viewed in the light of applicable principles of taxation.

51

To begin with, it is settled that the legislature has the

inherent power to select the subjects of taxation and to
grant exemptions.4 This power has aptly been described
as "of wide range and flexibility."5 Indeed, it is said that
in the field of taxation, more than in other areas, the
legislature possesses the greatest freedom in
classification.6 The reason for this is that traditionally,
classification has been a device for fitting tax programs
to local needs and usages in order to achieve an equitable
distribution of the tax burden.7
That legislative classifications must be reasonable is of
course undenied. But what the petitioner asserts is that
statutory classification of mail users must bear some
reasonable relationship to the end sought to be attained,
and that absent such relationship the selection of mail
users is constitutionally impermissible. This is altogether
a different proposition. As explained in Commonwealth v.
Life Assurance Co.:8
While the principle that there must be a
reasonable relationship between classification
made by the legislation and its purpose is
undoubtedly true in some contexts, it has no
application to a measure whose sole purpose is
to raise revenue ... So long as the classification
imposed is based upon some standard capable
of reasonable comprehension, be that standard
based upon ability to produce revenue or some
other legitimate distinction, equal protection of
the law has been afforded. See Allied Stores of
Ohio, Inc. v. Bowers, supra, 358 U.S. at 527,
79 S. Ct. at 441; Brown Forman Co. v.
Commonwealth of Kentucky, 2d U.S. 56, 573,
80 S. Ct. 578, 580 (1910).

We are not wont to invalidate legislation on equal

protection grounds except by the clearest demonstration
that it sanctions invidious discrimination, which is all that
the Constitution forbids. The remedy for unwise
legislation must be sought in the legislature. Now, the
classification of mail users is not without any reason. It is
based on ability to pay, let alone the enjoyment of a
privilege, and on administrative convinience. In the
allocation of the tax burden, Congress must have
concluded that the contribution to the anti-TB fund can
be assured by those whose who can afford the use of the
mails.
The classification is likewise based on considerations of
administrative convenience. For it is now a settled
principle of law that "consideration of practical
administrative convenience and cost in the administration
of tax laws afford adequate ground for imposing a tax on
a well recognized and defined class."9 In the case of the
anti-TB stamps, undoubtedly, the single most important
and influential consideration that led the legislature to
select mail users as subjects of the tax is the relative ease
and convenienceof collecting the tax through the post
offices. The small amount of five centavos does not
justify the great expense and inconvenience of collecting
through the regular means of collection. On the other
hand, by placing the duty of collection on postal
authorities the tax was made almost self-enforcing, with
as little cost and as little inconvenience as possible.
And then of course it is not accurate to say that the statute
constituted mail users into a class. Mail users were
already a class by themselves even before the enactment
of the statue and all that the legislature did was merely to
select their class. Legislation is essentially empiric and
Republic Act 1635, as amended, no more than reflects a
distinction that exists in fact. As Mr. Justice Frankfurter

said, "to recognize differences that exist in fact is living

law; to disregard [them] and concentrate on some abstract
identities is lifeless logic."10
Granted the power to select the subject of taxation, the
State's power to grant exemption must likewise be
conceded as a necessary corollary. Tax exemptions are
too common in the law; they have never been thought of
as raising issues under the equal protection clause.
It is thus erroneous for the trial court to hold that because
certain mail users are exempted from the levy the law and
administrative officials have sanctioned an invidious
discrimination offensive to the Constitution. The
application of the lower courts theory would require all
mail users to be taxed, a conclusion that is hardly tenable
in the light of differences in status of mail users. The
Constitution does not require this kind of equality.
As the United States Supreme Court has said, the
legislature may withhold the burden of the tax in order to
foster what it conceives to be a beneficent
enterprise.11 This is the case of newspapers which, under
the amendment introduced by Republic Act 2631, are
exempt from the payment of the additional stamp.
As for the Government and its instrumentalities, their
exemption rests on the State's sovereign immunity from
taxation. The State cannot be taxed without its consent
and such consent, being in derogation of its sovereignty,
is to be strictly construed. 12 Administrative Order 9 of the
respondent Postmaster General, which lists the various
offices and instrumentalities of the Government exempt
from the payment of the anti-TB stamp, is but a
restatement of this well-known principle of constitutional
law.

52

The trial court likewise held the law invalid on the

ground that it singles out tuberculosis to the exclusion of
other diseases which, it is said, are equally a menace to
public health. But it is never a requirement of equal
protection that all evils of the same genus be eradicated
or none at all.13 As this Court has had occasion to say, "if
the law presumably hits the evil where it is most felt, it is
not to be overthrown because there are other instances to
which it might have been applied."14
2. The petitioner further argues that the tax in question is
invalid, first, because it is not levied for a public purpose
as no special benefits accrue to mail users as taxpayers,
and second, because it violates the rule of uniformity in
taxation.
The eradication of a dreaded disease is a public purpose,
but if by public purpose the petitioner means benefit to a
taxpayer as a return for what he pays, then it is sufficient
answer to say that the only benefit to which the taxpayer
is constitutionally entitled is that derived from his
enjoyment of the privileges of living in an organized
society, established and safeguarded by the devotion of
taxes to public purposes. Any other view would preclude
the levying of taxes except as they are used to
compensate for the burden on those who pay them and
would involve the abandonment of the most fundamental
principle of government that it exists primarily to
provide for the common good.15
Nor is the rule of uniformity and equality of taxation
infringed by the imposition of a flat rate rather than a
graduated tax. A tax need not be measured by the weight
of the mail or the extent of the service rendered. We have
said that considerations of administrative convenience
and cost afford an adequate ground for classification. The
same considerations may induce the legislature to impose

a flat tax which in effect is a charge for the transaction,

operating equally on all persons within the class
regardless of the amount involved. 16 As Mr. Justice
Holmes said in sustaining the validity of a stamp act
which imposed a flat rate of two cents on every $100 face
value of stock transferred:

3. Finally, the claim is made that the statute is so broadly

drawn that to execute it the respondents had to issue
administrative orders far beyond their powers. Indeed,
this is one of the grounds on which the lower court
invalidated Republic Act 1631, as amended, namely, that
it constitutes an undue delegation of legislative power.

One of the stocks was worth $30.75 a share of

the face value of $100, the other $172. The
inequality of the tax, so far as actual values are
concerned, is manifest. But, here again equality
in this sense has to yield to practical
considerations and usage. There must be a
fixed and indisputable mode of ascertaining a
stamp tax. In another sense, moreover, there is
equality. When the taxes on two sales are equal,
the same number of shares is sold in each case;
that is to say, the same privilege is used to the
same extent. Valuation is not the only thing to
be considered. As was pointed out by the court
of appeals, the familiar stamp tax of 2 cents on
checks, irrespective of income or earning
capacity, and many others, illustrate the
necessity and practice of sometimes
substituting count for weight ...17

Administrative Order 3, as amended by Administrative

Orders 7 and 10, provides that for certain classes of mail
matters (such as mail permits, metered mails, business
reply cards, etc.), the five-centavo charge may be paid in
cash instead of the purchase of the anti-TB stamp. It
further states that mails deposited during the period
August 19 to September 30 of each year in mail boxes
without the stamp should be returned to the sender, if
known, otherwise they should be treated as nonmailable.

According to the trial court, the money raised from the

sales of the anti-TB stamps is spent for the benefit of the
Philippine Tuberculosis Society, a private organization,
without appropriation by law. But as the Solicitor
General points out, the Society is not really the
beneficiary but only the agency through which the State
acts in carrying out what is essentially a public function.
The money is treated as a special fund and as such need
not be appropriated by law.18

The anti-TB stamp is a distinctive stamp which shows on

its face not only the amount of the additional charge but
also that of the regular postage. In the case of business
reply cards, for instance, it is obvious that to require
mailers to affix the anti-TB stamp on their cards would
be to make them pay much more because the cards
likewise bear the amount of the regular postage.

It is true that the law does not expressly authorize the

collection of five centavos except through the sale of
anti-TB stamps, but such authority may be implied in so
far as it may be necessary to prevent a failure of the
undertaking. The authority given to the Postmaster
General to raise funds through the mails must be liberally
construed, consistent with the principle that where the
end is required the appropriate means are given. 19

It is likewise true that the statute does not provide for the
disposition of mails which do not bear the anti-TB stamp,
but a declaration therein that "no mail matter shall be

53

accepted in the mails unless it bears such semi-postal

stamp" is a declaration that such mail matter is
nonmailable within the meaning of section 1952 of the
Administrative Code. Administrative Order 7 of the
Postmaster General is but a restatement of the law for the
guidance of postal officials and employees. As for
Administrative Order 9, we have already said that in
listing the offices and entities of the Government exempt
from the payment of the stamp, the respondent
Postmaster General merely observed an established
principle, namely, that the Government is exempt from
taxation.
ACCORDINGLY, the judgment a quo is reversed, and
the complaint is dismissed, without pronouncement as to
costs.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal,
Sanchez, Angeles and Capistrano, JJ., concur.
Zaldivar, J., is on leave.

Lorenzo vs Posadas
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 defendantappellant.
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

54

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,
giftmortis 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

55

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

56

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).

(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, . . . ."

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."

A trustee, no doubt, is entitled to receive a fair

compensation for his services (Barney vs. Saunders, 16

(d) The defendant levied and assessed the inheritance tax

due from the estate of Thomas Hanley under the

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.

57

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

58

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
thecestui 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.

59

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.

Icard vs City of Baguio

G.R. No. L-1281

May 31, 1949

JOSEPH
E.
ICARD, petitioner-appellee,
vs.
THE CITY COUNCIL OF BAGUIO and the city of
baguio, respondent-appellants.
Jose
P.
Flores
Francisco S. Reyes for appellee.

for

appellants.

REYES, J.:
This an appeal from a decision of the court of First
Instance of the Mountain Province.
The facts are not in dispute. The City of Baguio has
enacted the following ordinances:
1. No. 6-v, providing among other things for an
amusement tax of P0.20 for every person
entering a night club licensed to do business in
the city;

60

2. No. 11-V, providing for a property tax on

motor vehicles kept and operated in the city;
and
3. No. 12-V, imposing a graduated license fee
on every admission ticket sold by enterprises
enumerated in said ordinance among them,
cinematographs.
Petitioner, a resident of the City of Baguio is holder of a
municipal license for the operation of a night club called
"El Club Monaco. " As owner and operator of said night
club, he has to pay to the National Government an
amusement tax on its total gross receipts under section
260 of the Internal Revenue Code, and to the City of
Baguio the annual license fee provided for in said
Ordinance No. 6-V. But in addition to said amusement
tax and license fee, he has also been required to pay the
amusement tax imposed in that same ordinance, which,
on the basis of P0.20 per person entering the night club,
amounted to the total sum of P254,80 for the first quarter
of 1946. This sum he paid under protest.
As owner of a six-passenger automobile for private use a
Chevrolet Ford or Sedan kept and operated in the City of
Baguio petitioner has already paid the sum of P37 as
registration fee for 1946 under the Revised Motor Vehicle
Law. But pursuant to Ordinance No. 11-V of said city he
would also have to pay in addition an annual property tax
of P15 on the same automobile.
There is no showing that petitioner has any business
subject to the payment of the graduated license fee on
admission tickets imposed by Ordinance No. 12-V of the
City of Baguio.

Contending that the ordinance above mentioned are

unjust and ultra vires, petitioner brought the present
action for declaratory relief to have the said ordinance
declared void and also for the refund of the sum of
P254,80 which he has paid to the city under protest.
In an able and well-considered decision the lower court
presided over by Judge Conrado Sanchez to ordinance
No. 12-V on the ground that petitioner had not been
shown to be the owner or operator of any of the
enterprises therein enumerated but declared null and void
Ordinance No. 11-V and also that portion of Ordinance
No. 6-V which provides for an amusement tax of P0.20
on every person entering a night club, without
pronouncement as to the legality or illegality of the
remainder of the said ordinance. And in consequence the
city of Baguio was ordered to refund to petitioner the
sum of P254. 80 paid as amusement tax under Ordinance
No. 6-V, without special pronouncement as to costs.
Appealing from the above decision the city Attorney of
Baguio as counsel for the respondents, presents the case
here on the following assignment of errors:
1. The lower court erred in declaring null and
void Ordinance No. 11-V.
2. The lower court erred in declaring null and
void that portion of Ordinance No. 6-V
providing for an amusement tax of P0.20 per
person entering a night club; and
3. The lower court erred in ordering the
respondent-appellant the city of Baguio to
refund to the petitioner-appellee the sum of
P254,80 paid as amusement tax under
Ordinance No. 6-V.

The whole case boils down to this question: Is the City of

Baguio empowered to levy a property tax on motor and
an amusement tax on night clubs?
It is settled that a municipal corporation unlike a
sovereign state is clothed with no inherent power of
taxation. The charter or statute must plainly show an
intent to confer that power or the municipality, cannot
assume it. And the power when granted is to be construed
in strictissimi juris. Any doubt or ambiguity that power
must be resolved against the municipality. Inferences,
implications, deductions all these have no place in the
interpretation of the taxing power of a municipal
corporation (Cu Unjieng vs. Patstone, 42 Phil., pp. 818,
830; Pacific Commercial Co.vs. Romualdez, 49 Phil., pp.
917, 924; Batangas Transportation Co. vs. Provincial
Treasure of Batangas , 52 Phil., pp. 190,196;
Baldwin vs. Coty Council 53 Ala., p. 437; State vs. Smith
31 Lowa, p. 493; 38 Am Jur pp. 68, 72-73). With the
above principle in mind let us now inquire into the
authority of the City of Baguio to levy taxes. That part of
the charter of this city which deal with the subject of
taxation is found in section 2553 (b) of the Revised
Administrative Code which empowers its city council. To
provide for the levy and collection of taxes and other city
revenues, as provided by law and apply the same to the
payment of the municipal expenses in accordance with
appropriations."
As the lower court has correctly interpreted it this
provision simply means that the city of Baguio may
impose taxes only in those cases specifically provided in
any law. In other words for authority to levy a tax on
specific subjects one must look elsewhere in the statute
book. For had the provision been meant as a blanket
authority to levy taxes, their would have been no need for
the phrase "as provided by law." The insertion of that

61

phrase be speaks the legislative intent to have the city

exercise the law may provide.
There is of course no question as to the authority of the
City of Baguio to collect a license fee on dance halls and
night clubs such authority being specifically given by
section 260 of the Internal Revenue Code . As a matter of
fact petitioner has been paying such license fee without
objection or protest. But what is objected to is the tax of
P0.20 for every person entering those amusement places
as provided for in Ordinance No. 6-V and this tax is apart
and distinct from the license fee, for the ordinance itself
says that it shall be in addition to the latter. This tax is not
authorized by any Act of the Legislature. It is therefore
beyond the power of the City of Baguio to levy.
Our attention has been invited to the fact that the charter
of the city of Manila contains specific provision naming
the subject on which the said may levy taxes and the
argument is made that the absence of such specific
provision from the Character of the City of baguio is
indicative of the legislative intent to grand the latter city
the general power of taxation. The argument is clearly
untenable. The Manila character also contains a provision
(section 2444 [a] of the Revised Administration Code)
empowering that city "to provide for the levy and
collection of taxes for general and special purposes in
accordance with law." This is the counterpart of the
provision in the Baguio Charter (section 2553 [b]of the
Revised Administrative Code) already quoted above.
Though differently worded the two provision mean
exactly the same thing. If those provision were meant to
grant an over-all authority to levy taxes, surely there
would have been no need for those specific provisions in
the Manila Chapter which authorize the imposition of
taxes in certain given cases. Those specific provisions are
proof that the said city is to exercise the power of

taxation granted it by section 2444 (a) of the Revised

Administrative Code "in accordance with law" or in the
wording of the Baguio Charter, as provided by law." In
other words, there must be specific legislative authority
for the tax. Applying these consideration to the City of
Baguio the logical conclusion is that where a given tax is
not expressly authorized by law that city may not impose
it despite the provision of section 2553 (b) of the Revised
Administrative Code. This accords with the principle
already stated that the power of a municipal corporation
to tax, in order to exist, must be granted expressly, never
impliedly or inferentially.
To the plea that the power of taxation is essential to the
continued existence of a city government, the answer is
that the City of Baguio is amply provided for by its
Charter. It is authorized to levy and collect license fees
on a long list of occupations (section 2253, id.). In
addition, the city derives income from the sale of public
lands within its limits and from the operation of its water
system and electric plant. The city is thus provided with
ample means with which to carry on the functions of
government.
Having come to the conclusion that the City of Baguio
may not levy taxes as it pleases but only as the
Legislature may specifically provide, we have looked in
the charter of that city for specific provision empowering
it to levy an amusement tax on night clubs and have
found none. On the other hand, as the lower court points
out, that power is expressly granted to the City of Manila
by section 2444 (m) of the Revised Administrative Code.
When it is recollected that, as already explained, both
cities may, under a general provision of their charters,
levy taxes onlyas the law authorizes, the absence of a
similar express grant in the case of the city of Baguio is

proof that the power to levy this particular tax has been
intentionally withheld from it.
Coming now to Ordinance No. 11-V, a reading of its
terms strikes us that what is therein designated as a
property tax on Motor vehicles kept in the City of Baguio
has all the earmarks of a municipal license fee, a thing
expressly forbidden by section 70 (b) of the Revised
Motor Vehicle Law. But assuming that it is a property tax
(since the point is not raised), we find that, like in the
case of the amusement tax on cabarets and dance halls,
there is no legal provision authorizing its levy by the City
of Baguio. It is true that the section of the Revised Motor
Vehicle Law just cited contains a proviso to the effect
that nothing in that statute shall be construed to exempt
any motor vehicle from the payment of any lawful and
equitable insular, local or municipal property tax imposed
thereon. But here against the question arises as to
whether this proviso is in itself an authorization form any
municipal authority to provide for the imposition of a tax.
The wording of the proviso obviously refers to a tax
lawfully imposed so that, in accord with the views we
have expressed above, the City of Baguio may not collect
the tax in the absence of a specific legal provision
authorizing it to do so. It may be remarked in this
connection that the charter of the City of Manila does
contain such a provision (section 2444 [n]), Rev. Adm.
Code), which is added proof that the provision under
consideration does not of itself authorize the imposition
of the tax.
In view of the foregoing, it is our conclusion that
Ordinance No. 6-V, in so far as it provides for an
amusement tax of P0.20 for each person entering a night
club, and Ordinance No. 11-V, which provides for a
property tax on motor vehicles, should be declared illegal

62

and void as beyond the authority of the City of Baguio to

enact.

CORPORATION, Promulgated:
Respondent.

Wherefore, in so far as the judgment below makes that

declaration and orders the City of Baguio to refund to
petitioner-appellee the sum of P254.80 paid as
amusement tax under Ordinance No. 6-V, the same is
hereby affirmed, without special pronouncement as to
costs.

the Commissioner of Internal Revenue (Commissioner)

in this petition.

July 21, 2008

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

The following undisputed facts, summarized by the Court

of Appeals, are quoted in the assailed Decision [1] dated 28
September 2004:

Moral, C.J., Paras, Feria, Pablo, Perfecto, Bengzon,

Tuason and Montemayor, JJ., concur.

DECISION

CIR vs Fortune Tobacco

CAG.R. SP No. 80675

COMMISSIONER OF INTERNAL G.R. Nos. 167274-75

REVENUE,

TINGA, J.:

xxxx

Simple and uncomplicated is the central issue involved,

Petitioner[2] is a domestic
corporation duly organized and
existing under and by virtue of the
laws
of
the
Republic
of
the Philippines,
with
principal
address
at Fortune
Avenue,
Parang, Marikina City.

Petitioner, Present:

QUISUMBING, J.,
Chairperson,

yet whopping is the amount at stake in this case.

YNARES-SANTIAGO,
- versus - CARPIO MORALES,

and

After much wrangling in the Court of Tax Appeals (CTA)

TINGA,
and the Court of Appeals, Fortune Tobacco Corporation
(Fortune Tobacco) was granted a tax refund or tax credit
VELASCO,
JR., JJ. representing specific taxes erroneously collected from its

FORTUNE TOBACCO

Petitioner
is
the
manufacturer/producer of, among
others, the following cigarette
brands, with tax rate classification
based on net retail price prescribed

tobacco products. The tax refund is being re-claimed by

63

by Annex D to R.A. No. 4280, to

wit:

[S]ection
142
thereof,
now
renumbered as Sec. 145 of the Tax
Code of 1997, pertinent provisions
of which are quoted thus:

Brand Tax Rate

Champion M 100 P1.00

(C) Cigarettes
packed
by
machine.
There shall be levied,
assessed and collected on
cigarettes
packed
by
machine a tax at the rates
prescribed below:

Salem M 100 P1.00

Salem M King P1.00
Camel F King P1.00
Camel
20s P1.00

Lights

Box

Camel
20s P1.00

Filters

Box

Section 145. Cigars and Cigarettes-

Winston F Kings P5.00

Winston Lights P5.00

Immediately
prior
to January 1, 1997, the abovementioned cigarette brands were
subject to ad valorem tax pursuant to
then Section 142 of the Tax Code of
1977,
as
amended. However,
on January 1, 1997, R.A. No. 8240
took effect whereby a shift from the
ad valoremtax (AVT) system to the
specific tax system was made and
subjecting the aforesaid cigarette
brands to specific tax under

(A) Cigars.
There shall be levied,
assessed and collected on
cigars a tax of One peso
(P1.00) per cigar.

(B) Cigarettes
packed by hand. There
shall be levied, assessesed
and collected on cigarettes
packed by hand a tax of
Forty centavos (P0.40) per
pack.

(1) If the net

retail price (excluding the
excise tax and the valueadded tax) is above Ten
pesos (P10.00) per pack,
the tax shall be Twelve
(P12.00) per pack;
(2) If the net
retail price (excluding the
excise tax and the value
added tax) exceeds Six
pesos and Fifty centavos
(P6.50) but
does
not
exceed Ten pesos (P10.00)
per pack, the tax shall
be Eight Pesos (P8.00) per
pack.

(3) If the net

retail price (excluding the
excise tax and the valueadded tax) is Five pesos
(P5.00) but does not
exceed Six Pesos and fifty
centavos (P6.50) per pack,

64

the tax shall be Five pesos

(P5.00) per pack;
(4) If the net
retail price (excluding the
excise tax and the valueadded tax) is below Five
pesos (P5.00) per pack, the
tax shall be One peso
(P1.00) per pack;
Variants
of
existing
brands
of
cigarettes
which
are
introduced in the domestic
market
after
the
effectivity of R.A. No.
8240 shall be taxed under
the highest classification of
any variant of that brand.
The excise tax
from
any brand
of
cigarettes within the next
three (3) years from the
effectivity of R.A. No.
8240 shall not be lower
than the tax, which is due
from
each
brand
on October
1,
1996.
Provided, however, that in
cases were (sic) the excise
tax rate imposed in
paragraphs (1), (2), (3) and
(4) hereinabove will result
in an increase in excise tax
of more than seventy

percent (70%), for a brand

of cigarette, the increase
shall take effect in two
tranches: fifty percent
(50%) of the increase shall
be effective in 1997 and
one
hundred
percent
(100%) of the increase
shall be effective in 1998.

Duly registered
or existing brands of
cigarettes or new brands
thereof packed by machine
shall only be packed in
twenties.
The rates of
excise tax on cigars and
cigarettes
under
paragraphs (1), (2) (3)
and (4) hereof, shall be
increased
by
twelve
percent
(12%)
on January
1,
2000.
(Emphasis supplied)
New brands shall
be classified according to
their current net retail
price.

For the above

purpose, net
retail
price shall mean the price
at which the cigarette is
sold on retail in twenty
(20) major supermarkets in
Metro Manila (for brands
of cigarettes marketed
nationally), excluding the
amount intended to cover
the applicable excise tax
and value-added tax. For
brands which are marketed
only
outside
Metro
[M]anila, the net retail
price shall mean the price
at which the cigarette is
sold in five (5) major
supermarkets in the region
excluding the amount
intended to cover the
applicable excise tax and
the value-added tax.
The classification
of each brand of cigarettes
based on its average retail
price as of October 1,
1996, as set forth in Annex
D, shall remain in force
until revised by Congress.
Variant of a
brand shall refer to a
brand on which a modifier
is prefixed and/or suffixed
to the root name of the

65

brand and/or a different

brand which carries the
same logo or design of the
existing brand.
To
implement
the
provisions for a twelve percent
(12%) increase of excise tax on,
among others, cigars and cigarettes
packed by machines by January 1,
2000, the Secretary of Finance, upon
recommendation of the respondent
Commissioner of Internal Revenue,
issued Revenue Regulations No. 1799, dated December 16, 1999, which
provides the increase on the
applicable tax rates on cigar and
cigarettes as follows:

SE
CT
IO
N

DES
CRIP
TION
OF
ARTI
CLES

PR
ES
EN
T
SP
ECI
FIC
TA
X
RA

NE
W
SPE
CIFI
C
TAX
RAT
E
EFF
ECT

145

(A)

(B)Ci
garett
es
packe
d by
machi
ne
(1)
Net
retail
price
(exclu
ding
VAT
and
excise
)
excee
dsP10
.00

TE
PRI
OR
TO
JA
N.
1,
200
0

IVE
JAN
. 1,
2000

P1.
00/c
igar

P1.1
2/cig
ar

P12
.00/
pac
k

P13.
44/
pack

P8.
00/p
ack

P5.
00/p
ack

P8.9
6/pa
ck

P5.6
0/pa
ck

per
pack
(2)
Excee
ds P1
0.00
per
pack

P1.
00/p
ack

P1.1
2/pa
ck

(3)
Net
retail
price
(exclu
ding
VAT
and
excise
)
is P5.
00
toP6.5
0 per
pack
(4)
Net
Retail
Price
(exclu
ding
VAT
and
excise
)
is

66

below
P5.00
per
pack

Revenue
Regulations
No. 17-99 likewise provides in the
last paragraph of Section 1 thereof,
(t)hat the new specific tax rate
for any existing brand of cigars,
cigarettes packed by machine,
distilled spirits, wines and
fermented liquor shall not be
lower than the excise tax that is
actually being paid prior
to January 1, 2000.
For
the
period
covering January 1-31, 2000,
petitioner allegedly paid specific
taxes on all brands manufactured
and removed in the total amounts
of P585,705,250.00.

On February 7, 2000,
petitioner filed with respondents
Appellate Division a claim for
refund or tax credit of its
purportedly overpaid excise tax for
the month of January 2000 in the
amount of P35,651,410.00

refund
is
subject
to
administrative
routinary
investigation/ex
amination by
the Bureau;
5.

The amount
of P35,651,410
being claimed
by petitioner as
alleged
overpaid excise
tax for the
month
of
January 2000
was
not
properly
documented.

6.

In an action
for tax refund,
the burden of
proof is on the
taxpayer
to
establish
its
right to refund,
and failure to
sustain
the
burden is fatal
to its claim for
refund/credit.

7.

Petitioner
must show that
it has complied

On June 21, 2001,

petitioner filed with respondents
Legal Service a letter dated June
20, 2001 reiterating all the claims
for refund/tax credit of its overpaid
excise taxes filed on various dates,
including the present claim for the
month of January 2000 in the
amount ofP35,651,410.00.
As there was no action
on the part of the respondent,
petitioner filed the instant petition
for review with this Court
on December 11, 2001, in order to
comply with the two-year period
for filing a claim for refund.
In his answer filed
on January 16, 2002, respondent
raised the following Special and
Affirmative Defenses;
4. Petitioners
claim

alleged
for

67

with
the
provisions of
Section 204(C)
in relation [to]
Section 229 of
the Tax Code
on
the
prescriptive
period
for
claiming
tax
refund/credit;
8.

9.

Claims
for
refund
are
construed
strictly against
the claimant for
the
same
partake of tax
exemption
from taxation;
and
The
last
paragraph
of
Section 1 of
Revenue
Regulation[s]
[No.]17-99 is a
valid
implementing
regulation
which has the
force and effect
of law.

excise tax for the month of January

2000.
xxxx
CA G.R. SP No. 83165
The petition contains
essentially similar facts, except that
the said case questions the CTAs
December 4, 2003 decision in CTA
Case
No.
6612
granting
respondents[3] claim for refund of the
amount
of P355,385,920.00
representing erroneously or illegally
collected specific taxes covering the
period January 1, 2002 to December
31, 2002, as well as its March 17,
2004
Resolution
denying
a
reconsideration thereof.
xxxx
In both CTA Case Nos. 6365 & 6383
and CTA No. 6612, the Court of Tax
Appeals reduced the issues to be
resolved into two as stipulated by
the parties, to wit: (1) Whether or not the
last paragraph of Section 1 of Revenue
Regulation[s] [No.] 17-99 is in
accordance with the pertinent provisions
of Republic Act [No.] 8240, now
incorporated in Section 145 of the Tax
Code of 1997; and (2) Whether or not
petitioner is entitled to a refund
of P35,651,410.00 as alleged overpaid

Hence, the respondent CTA in its

assailed October
21,
2002 [twin]
Decisions[s] disposed in CTA Case Nos.
6365 & 6383:
WHEREFORE, in view of
the foregoing, the
court finds the
instant
petition
meritorious and in
accordance with
law. Accordingly,
respondent
is
hereby ORDERED
to REFUND to
petitioner
the
amount
of P35,651.410.00
representing
erroneously paid
excise taxes for the
period January 1
to January
31,
2000.
SO ORDERED.
Herein petitioner sought reconsideration
of the above-quoted decision. In [twin]
resolution[s] [both] dated July 15, 2003,
the Tax Court, in an apparent change of
heart,
granted
the
petitioners

68

consolidated
motions
for
reconsideration, thereby denying the
respondents claim for refund.

However, on consolidated motions for

reconsideration filed by the respondent
in CTA Case Nos. 6363 and 6383,
the July 15, 2002 resolution was set
aside, and the Tax Court ruled, this time
with a semblance of finality, that the
respondent is entitled to the refund
claimed. Hence, in a resolution
dated November 4, 2003, the tax court
reinstated its December 21, 2002
Decision and disposed as follows:
WHEREFORE, our
Decisions
in
CTA Case Nos.
6365 and 6383
are
hereby
REINSTATED.
Accordingly,
respondent
is
hereby
ORDERED to
REFUND
petitioner
the
total
amount
of P680,387,025.

00 representing
erroneously paid
excise taxes for
the
period January 1,
2000 to January
31,
2000 and Februa
ry
1,
2000 to Decemb
er 31, 2001.
SO ORDERED.
Meanwhile, on December 4, 2003, the
Court of Tax Appeals rendered decision
in CTA Case No. 6612 granting the
prayer for the refund of the amount
of P355,385,920.00
representing
overpaid excise tax for the period
covering January 1, 2002 to December
31, 2002. The tax court disposed of the
case as follows:
IN

VIEW OF THE
FOREGOING,
the Petition for
Review
is
GRANTED. Accor
dingly, respondent
is
hereby
ORDERED
to
REFUND
to
petitioner
the
amount
of P355,385,920.0
0
representing

overpaid excise tax

for the period
covering January
1,
2002 to December
31, 2002.
SO ORDERED.
Petitioner sought reconsideration of the
decision, but the same was denied in a
Resolution dated March 17, 2004.
[4]
(Emphasis
supplied)
(Citations
omitted)

The Commissioner appealed the aforesaid decisions of

the CTA. The petition questioning the grant of refund in
the amount of P680,387,025.00 was docketed as CAG.R. SP No. 80675, whereas that assailing the grant of
refund in the amount ofP355,385,920.00 was docketed as
CA-G.R. SP No. 83165. The petitions were consolidated
and eventually denied by the Court of Appeals. The
appellate court also denied reconsideration in its
Resolution[5] dated 1 March 2005.
In its Memorandum[6] 22 dated November 2006, filed on
behalf of the Commissioner, the Office of the Solicitor

69

retail price as indicated in par.

C, sub-par. (1)-(4), Sec. 145 of
the Tax Code even if the
resulting figure will be lower
than the amount already being
paid at the end of the transition
period. This
is
the
interpretation followed by both
the CTA and the Court of
Appeals.[7]

General (OSG) seeks to convince the Court that the

literal interpretation given by the CTA and the Court of
Appeals of Section 145 of the Tax Code of 1997 (Tax
Code) would lead to a lower tax imposable on 1 January
2000

than

that

imposable

during

the

transition

period. Instead of an increase of 12% in the tax rate

effective on 1 January 2000 as allegedly mandated by the

Regulation No. 17-99, which effectively created a

separate classification for cigarettes based on the excise
tax actually being paid prior to January 1, 2000.[9]

It should be mentioned at the outset that there is no

dispute between the fact of payment of the taxes sought

Tax Code, the appellate courts ruling would result in a

to be refunded and the receipt thereof by the Bureau of

significant decrease in the tax rate by as much as 66%.

This being so, the interpretation which will give life to
The OSG argues that Section 145 of the Tax Code admits

the legislative intent to raise revenue should govern, the

of several interpretations, such as:

OSG stresses.

Internal Revenue (BIR). There is also no question about

the mathematical accuracy of Fortune Tobaccos claim
since the documentary evidence in support of the refund
has not been controverted by the revenue agency.

1.

2.

3.

That by January 1, 2000, the

excise tax on cigarettes should
be the higher tax imposed
under the specific tax system
and the tax imposed under
the ad valorem tax system plus
the 12% increase imposed by
par. 5, Sec. 145 of the Tax
Code;
The increase of 12% starting
on January 1, 2000 does not
apply to the brands of cigarettes
listed under Annex D referred
to in par. 8, Sec. 145 of the Tax
Code;
The 12% increment shall be
computed based on the net

Finally, the OSG asserts that a tax refund is in the nature

Likewise, the claims have been made and the actions

of a tax exemption and must, therefore, be construed

have been filed within the two (2)-year prescriptive

strictly against the taxpayer, such as Fortune Tobacco.

period provided under Section 229 of the Tax Code.

In its Memorandum[8] dated 10 November 2006, Fortune

The power to tax is inherent in the State, such

Tobacco argues that the CTA and the Court of Appeals

power being inherently legislative, based on the principle

merely followed the letter of the law when they ruled that

that taxes are a grant of the people who are taxed, and the

the basis for the 12% increase in the tax rate should be

grant must be made by the immediate representatives of

the net retail price of the cigarettes in the market as

the people; and where the people have laid the power,

outlined in paragraph C, sub paragraphs (1)-(4), Section

there it must remain and be exercised.[10]

145 of the Tax Code. The Commissioner allegedly has

gone beyond his delegated rule-making power when he
promulgated,

enforced

and

implemented

Revenue

This entire controversy revolves around the interplay

between Section 145 of the Tax Code and Revenue

70

Regulation 17-99. The main issue is an inquiry into

packed by machine a tax at the rates

prescribed below:

whether the revenue regulation has exceeded the

allowable limits of legislative delegation.
For ease of reference, Section 145 of the Tax Code is
again reproduced in full as follows:

Section 145. Cigars and Cigarettes-

(A) Cigars.There shall be

levied, assessed and collected on
cigars a tax of One peso (P1.00) per
cigar.

(B). Cigarettes packed by

hand.There shall be levied, assessed
and collected on cigarettes packed
by hand a tax of Forty centavos
(P0.40) per pack.

(C) Cigarettes packed by

machine.There shall be levied,
assessed and collected on cigarettes

(1) If the net retail price

(excluding the excise tax and the
value-added tax) is above Ten pesos
(P10.00) per pack, the tax shall be
Twelve pesos (P12.00) per pack;
(2) If the net retail price
(excluding the excise tax and the
value added tax) exceeds Six pesos
and Fifty centavos (P6.50) but does
not exceed Ten pesos (P10.00) per
pack, the tax shall be Eight Pesos
(P8.00) per pack.

(3) If the net retail price

(excluding the excise tax and the
value-added tax) is Five pesos
(P5.00) but does not exceed Six
Pesos and fifty centavos (P6.50) per
pack, the tax shall be Five pesos
(P5.00) per pack;
(4) If the net retail price
(excluding the excise tax and the
value-added tax) is below Five pesos
(P5.00) per pack, the tax shall be
One peso (P1.00) per pack;
Variants of existing brands
of cigarettes which are introduced in
the domestic market after the

effectivity of R.A. No. 8240 shall be

taxed under the highest classification
of any variant of that brand.
The excise tax from any
brand of cigarettes within the next
three (3) years from the effectivity of
R.A. No. 8240 shall not be lower
than the tax, which is due from each
brand on October 1, 1996. Provided,
however, That in cases where the
excise tax rates imposed in
paragraphs (1), (2), (3) and (4)
hereinabove will result in an increase
in excise tax of more than seventy
percent (70%), for a brand of
cigarette, the increase shall take
effect in two tranches: fifty percent
(50%) of the increase shall be
effective in 1997 and one hundred
percent (100%) of the increase shall
be effective in 1998.

Duly registered or existing

brands of cigarettes or new brands
thereof packed by machine shall
only be packed in twenties.
The rates of excise tax on
cigars and cigarettes under
paragraphs (1), (2) (3) and (4)
hereof, shall be increased by
twelve percent (12%) on January
1, 2000.

71

New brands shall be

classified according to their current
net retail price.
For the above purpose, net
retail price shall mean the price at
which the cigarette is sold on retail
in twenty (20) major supermarkets in
Metro Manila (for brands of
cigarettes marketed nationally),
excluding the amount intended to
cover the applicable excise tax and
value-added tax. For brands which
are marketed only outside Metro
Manila, the net retail price shall
mean the price at which the cigarette
is sold in five (5) major intended to
cover the applicable excise tax and
the value-added tax.

Revenue Regulation 17-99, which was issued pursuant to

is P5.00 toP6.50 per pack

(4) Net
Retail Price
(excluding VAT and excise)
is belowP5.00 per pack)

promulgate rules and regulations for the effective

implementation of the Tax Code, [12] interprets the abovequoted provision and reflects the 12% increase in excise

P1.00/pack

taxes in the following manner:

SECTION

This table reflects Section 145 of the Tax Code insofar as

DESCRIPTION OF

it mandates a 12% increase effective on 1 January 2000

ARTICLES

based on the taxes indicated under paragraph C, subparagraph (1)-(4). However, Revenue Regulation No. 17-

The classification of each

brand of cigarettes based on its
average retail price as of October 1,
1996, as set forth in Annex D, shall
remain in force until revised by
Congress.
Variant of a brand shall
refer to a brand on which a modifier
is prefixed and/or suffixed to the root
name of the brand and/or a different
brand which carries the same logo or
design of the existing brand. [11]
(Emphasis supplied)

P5.00/pack

the unquestioned authority of the Secretary of Finance to

145

99 went further and addedthat [T]he new specific tax rate

(A) Cigars

for any existing brand of cigars, cigarettes packed by

(B)Cigarettes
Machine

packed

by

machine,

distilled

spirits,

wines

and

fermented

liquor shall not be lower than the excise tax that is

(1) Net
Retail Price
(excluding VAT and Excise)
exceedsP10.00 per pack

actually being paid prior to January 1, 2000.[13]

(2) Net
Retail Price
(excluding VAT and Excise)
is P6.51 up to P10.00 per
pack

transition period, i.e., within the next three (3) years from

(3) Net
Retail Price
(excluding VAT and excise)

Parenthetically, Section 145 states that during the

the effectivity of the Tax Code, the excise tax from any
brand of cigarettes shall not be lower than the tax due
from each brand on 1 October 1996. This qualification,
however, is conspicuously absent as regards the 12%

72

increase which is to be applied on cigars and cigarettes

provisions of the law it administers, and it cannot engraft

packed by machine, among others, effective on 1 January

2000. Clearly and unmistakably, Section 145 mandates a

In Commissioner of Internal Revenue v. Reyes,

additional

requirements

not

contemplated

by the

respondent was not informed in writing of the law and

legislature. The Court emphasized that tax administrators

new rate of excise tax for cigarettes packed by machine

the facts on which the assessment of estate taxes was

are not allowed to expand or contract the legislative

due to the 12% increase effective on 1 January

made pursuant to Section 228 of the 1997 Tax Code, as

mandate and that the plain meaning rule or verba legis in

2000 without regard to whether the revenue collection

amended by Republic Act (R.A.) No. 8424. She was

statutory construction should be applied such that where

starting from this period may turn out to be lower than

merely notified of the findings by the Commissioner,

the words of a statute are clear, plain and free from

that collected prior to this date.

who had simply relied upon the old provisions of the law

ambiguity, it must be given its literal meaning and

and Revenue Regulation No. 12-85 which was based on

applied without attempted interpretation.

By adding the qualification that the tax due after the 12%
increase becomes effective shall not be lower than the tax
actually paid prior to 1 January 2000, Revenue
Regulation No. 17-99 effectively imposes a tax which is
the higher amount between thead valorem tax being paid
at the end of the three (3)-year transition period and the
specific tax under paragraph C, sub-paragraph (1)-(4), as

[14]

the old provision of the law. The Court held that in case
of discrepancy between the law as amended and the
implementing regulation based on the old law, the former
necessarily prevails. The law must still be followed, even
though the existing tax regulation at that time provided
for a different procedure.[15]

As we have previously declared, rule-making power must

be confined to details for regulating the mode or
proceedings in order to carry into effect the law as it has
been enacted, and it cannot be extended to amend or
expand the statutory requirements or to embrace matters
not covered by the statute. Administrative regulations

increased by 12%a situation not supported by the plain

In Commissioner of Internal Revenue v. Central Luzon

must always be in harmony with the provisions of the law

wording of Section 145 of the Tax Code.

Drug Corporation,[16] the tax authorities gave the term tax

because any resulting discrepancy between the two will

credit in Sections 2(i) and 4 of Revenue Regulation 2-94

always be resolved in favor of the basic law.[17]

a meaning utterly disparate from what R.A. No. 7432

provides. Their interpretation muddled up the intent of
Congress to grant a mere discount privilege and not a
This is not the first time that national revenue officials

sales discount. The Court, striking down the revenue

had ventured in the area of unauthorized administrative

regulation, held that an administrative agency issuing

legislation.

regulations may not enlarge, alter or restrict the

In Commissioner of Internal Revenue v. Michel

J. Lhuillier Pawnshop, Inc.,[18] Commissioner Jose Ong
issued Revenue Memorandum Order (RMO) No. 15-91,
as well as the clarificatory Revenue Memorandum
Circular (RMC) 43-91, imposing a 5% lending investors

73

tax under the 1977 Tax Code, as amended by Executive

ruling that the BIR did not simply interpret the law;

August 1986 and not assessments made to that

Order (E.O.) No. 273, on pawnshops. The Commissioner

rather it legislated guidelines contrary to the statute

date. Resolving the issue in the negative, the Court held:

anchored the imposition on the definition of lending

passed by Congress.The Court held:

investors provided in the 1977 Tax Code which,

according to him, was broad enough to include pawnshop
operators. However, the Court noted that pawnshops and
lending investors were subjected to different tax
treatments under the Tax Code prior to its amendment by
the executive order; that Congress never intended to treat
pawnshops in the same way as lending investors; and that
the particularly involved section of the Tax Code
explicitly subjected lending investors and dealers in
securities only to percentage tax. And so the Court
affirmed the invalidity of the challenged circulars,
stressing that administrative issuances must not override,
supplant or modify the law, but must remain consistent
with the law they intend to carry out.[19]
In Philippine Bank of Communications v.
Commissioner of Internal Revenue,
Commissioner

issued

RMC

[20]

7-85,

the then acting

changing

the

prescriptive period of two years to ten years for claims of

excess quarterly income tax payments, thereby creating a
clear inconsistency with the provision of Section 230 of

It bears repeating that Revenue

memorandum-circulars
are
considered administrative rulings (in
the sense of more specific and less
general interpretations of tax laws)
which are issued from time to time
by the Commissioner of Internal
Revenue. It is widely accepted that
the interpretation placed upon a
statute by the executive officers,
whose duty is to enforce it, is
entitled to great respect by the
courts. Nevertheless,
such
interpretation is not conclusive and
will be ignored if judicially found to
be erroneous. Thus, courts will not
countenance
administrative
issuances that override, instead of
remaining consistent and in harmony
with, the law they seek to apply and
implement.[21]
In Commissioner of Internal Revenue v. CA, et al.,[22] the
central issue was the validity of RMO 4-87 which had
construed the amnesty coverage under E.O. No. 41
(1986) to include only assessments issued by the BIR

x x x all such issuances

must not override, but must remain
consistent and in harmony with, the
law they seek to apply and
implement. Administrative rules and
regulations are intended to carry out,
neither to supplant nor to modify, the
law.[23]

xxx

If, as the Commissioner

argues, Executive Order No. 41 had
not been intended to include 19811985 tax liabilities already assessed
(administratively) prior to 22 August
1986, the law could have simply so
provided in its exclusionary clauses.
It did not. The conclusion is
unavoidable, and it is that the
executive order has been designed to
be in the nature of a general grant of
tax amnesty subject only to the cases
specifically excepted by it.[24]

after the promulgation of the executive order on 22

the 1977 Tax Code. The Court nullified the circular,

74

In the case at bar, the OSGs argument that by 1 January

their net retail price into low, medium or high, obviously

cannot disregard the letter of the law on the pretext of

2000, the excise tax on cigarettes should be the higher tax

remain the bases for the application of the increase in

pursuing its spirit.[26]

imposed under the specific tax system and the tax

excise tax rates effective on 1 January 2000.

Finally, the Commissioners contention that a

imposed under the ad valorem tax system plus the 12%

increase imposed by paragraph 5, Section 145 of the Tax
Code, is an unsuccessful attempt to justify what is clearly
an

impermissible

incursion

into

the

limits

of

administrative legislation. Such an interpretation is not

supported by the clear language of the law and is
obviously only meant to validate the OSGs thesis that
Section 145 of the Tax Code is ambiguous and admits of
several interpretations.

The foregoing leads us to conclude that Revenue

tax refund partakes the nature of a tax exemption does

Regulation No. 17-99 is indeed indefensibly flawed. The

not apply to the tax refund to which Fortune Tobacco is

Commissioner cannot seek refuge in his claim that the

entitled. There is parity between tax refund and tax

purpose behind the passage of the Tax Code is to generate

exemption only when the former is based either on a tax

additional

government. Revenue

exemption statute or a tax refund statute. Obviously, that

generation has undoubtedly been a major consideration in

is not the situation here. Quite the contrary, Fortune

the passage of the Tax Code. However, as borne by the

Tobaccos claim for refund is premised on its erroneous

legislative record,[25] the shift from the ad valorem system

payment of the tax, or better still the governments

to

exaction in the absence of a law.

revenues

the

for

the

specific

tax

system

The contention that the increase of 12% starting on 1

is likewise meant to promotefair competition among the

January 2000 does not apply to the brands of cigarettes

players in the industries concerned, to ensure an equitable

listed

distribution of the tax burden and to simplify tax

Tax exemption is a result of legislative

8,

administration by classifying cigarettes, among others,

grace. And he who claims an exemption from the burden

Section 145 of the Tax Code simply states that, [T]he

into high, medium and low-priced based on their net

of taxation must justify his claim by showing that the

classification of each brand of cigarettes based on its

retail price and accordingly graduating tax rates.

legislature intended to exempt him by words too plain to

under

Annex

D is likewise unmeritorious, absurd even. Paragraph

be mistaken.[27] The rule is that tax exemptions must be

average net retail price as of October 1, 1996, as set forth

in Annex D, shall remain in force until revised by
Congress. This declaration certainly does not lend itself
to the interpretation given to it by the OSG. As plainly
worded, the average net retail prices of the listed brands

At any rate, this advertence to the legislative record is

merely gratuitous because, as we have held, the meaning
of the law is clear on its face and free from the

strictly construed such that the exemption will not be held

to be conferred unless the terms under which it is granted
clearly and distinctly show that such was the intention. [28]

ambiguities that the Commissioner imputes. We simply

under Annex D, which classify cigarettes according to

75

A claim for tax refund may be based on statutes

what it has erroneously collected. [33]If the State expects

imposed without clear and express words for that

granting tax exemption or tax refund. In such case, the

its taxpayers to observe fairness and honesty in paying

purpose. Accordingly, the general rule of requiring

rule of strict interpretation against the taxpayer is

their taxes, it must hold itself against the same standard

adherence to the letter in construing statutes applies with

applicable as the claim for refund partakes of the nature

in refunding excess (or erroneous) payments of such

peculiar strictness to tax laws and the provisions of a

of an exemption, a legislative grace, which cannot be

taxes. It should not unjustly enrich itself at the expense of

taxing act are not to be extended by implication. In

[34]

allowed unless granted in the most explicit and

taxpayers.

And so, given its essence, a claim for tax

answering the question of who is subject to tax statutes, it

categorical language. The taxpayer must show that the

refund necessitates only preponderance of evidence for

is basic that in case of doubt, such statutes are to be

legislature intended to exempt him from the tax by words

its approbation like in any other ordinary civil case.

construed most strongly against the government and in

too plain to be mistaken.[29]

favor of the subjects or citizens because burdens are not

to be imposed nor presumed to be imposed beyond what

Tax refunds (or tax credits), on the other hand, are not

Under the Tax Code itself, apparently in

statutes expressly and clearly import.[36] As burdens, taxes

founded principally on legislative grace but on the legal

recognition of the pervasive quasi-contract principle, a

should not be unduly exacted nor assumed beyond the

principle which underlies all quasi-contracts abhorring a

claim for tax refund may be based on the following: (a)

plain meaning of the tax laws.[37]

persons unjust enrichment at the expense of another.

erroneously or illegally assessed or collected internal

[30]

The dynamic of erroneous payment of tax fits to a tee

revenue taxes; (b) penalties imposed without authority;

WHEREFORE, the petition is DENIED. The Decision of

the prototypic quasi-contract, solutio indebiti, which

and (c) any sum alleged to have been excessive or in any

the Court of Appeals in CA G.R. SP No. 80675, dated 28

manner wrongfully collected.[35]

September 2004, and its Resolution, dated 1 March 2005,

[31]

covers not only mistake in fact but also mistake in law.

are AFFIRMED. No pronouncement as to costs.

What is controlling in this case is the well-settled

doctrine of strict interpretation in the imposition of taxes,
The Government is not exempt from the

not the similar doctrine as applied to tax exemptions. The

application of solutio indebiti.[32] Indeed, the taxpayer

rule in the interpretation of tax laws is that a statute will

expects fair dealing from the Government, and the latter

not be construed as imposing a tax unless it does so

has the duty to refund without any unreasonable delay

clearly, expressly, and unambiguously. A tax cannot be

SO ORDERED.

Tio vs Videogram
Regulatory Board
G.R. No. L-75697 June 18, 1987

76

VALENTIN TIO doing business under the name and

style
of
OMI
ENTERPRISES, petitioner,
vs.
VIDEOGRAM REGULATORY BOARD, MINISTER
OF FINANCE, METRO MANILA COMMISSION,
CITY MAYOR and CITY TREASURER OF
MANILA, respondents.
Nelson Y. Ng for petitioner.
The City Legal Officer for respondents City Mayor and
City Treasurer.

MELENCIO-HERRERA, J.:
This petition was filed on September 1, 1986 by
petitioner on his own behalf and purportedly on behalf of
other videogram operators adversely affected. It assails
the constitutionality of Presidential Decree No. 1987
entitled "An Act Creating the Videogram Regulatory
Board" with broad powers to regulate and supervise the
videogram industry (hereinafter briefly referred to as the
BOARD). The Decree was promulgated on October 5,
1985 and took effect on April 10, 1986, fifteen (15) days
after completion of its publication in the Official Gazette.
On November 5, 1985, a month after the promulgation of
the abovementioned decree, Presidential Decree No.
1994 amended the National Internal Revenue Code
providing, inter alia:
SEC. 134. Video Tapes. There
shall be collected on each processed
video-tape cassette, ready for

playback, regardless of length, an

annual tax of five pesos; Provided,
That locally manufactured or
imported blank video tapes shall be
subject to sales tax.
On October 23, 1986, the Greater Manila Theaters
Association, Integrated Movie Producers, Importers and
Distributors Association of the Philippines, and
Philippine Motion Pictures Producers Association,
hereinafter collectively referred to as the Intervenors,
were permitted by the Court to intervene in the case, over
petitioner's opposition, upon the allegations that
intervention was necessary for the complete protection of
their rights and that their "survival and very existence is
threatened by the unregulated proliferation of film
piracy." The Intervenors were thereafter allowed to file
their Comment in Intervention.
The rationale behind the enactment of the DECREE, is
set out in its preambular clauses as follows:
1. WHEREAS, the proliferation and
unregulated
circulation
of
videograms including, among others,
videotapes, discs, cassettes or any
technical improvement or variation
thereof, have greatly prejudiced the
operations of moviehouses and
theaters, and have caused a sharp
decline in theatrical attendance by at
least forty percent (40%) and a
tremendous drop in the collection of
sales,
contractor's
specific,
amusement and other taxes, thereby
resulting in substantial losses

estimated at P450 Million annually in

government revenues;
2.
WHEREAS,
videogram(s)
establishments collectively earn
around P600 Million per annum from
rentals, sales and disposition of
videograms, and such earnings have
not been subjected to tax, thereby
depriving the Government of
approximately P180 Million in taxes
each year;
3. WHEREAS, the unregulated
activities
of
videogram
establishments have also affected the
viability of the movie industry,
particularly the more than 1,200
movie houses and theaters throughout
the country, and occasioned industrywide
displacement
and
unemployment due to the shutdown
of numerous moviehouses and
theaters;
4. "WHEREAS, in order to ensure
national economic recovery, it is
imperative for the Government to
create an environment conducive to
growth and development of all
business industries, including the
movie industry which has an
accumulated investment of about P3
Billion;
5. WHEREAS, proper taxation of the
activities
of
videogram

77

establishments will not only alleviate

the dire financial condition of the
movie industry upon which more
than 75,000 families and 500,000
workers depend for their livelihood,
but also provide an additional source
of revenue for the Government, and
at the same time rationalize the
heretofore uncontrolled distribution
of videograms;
6. WHEREAS, the rampant and
unregulated showing of obscene
videogram features constitutes a clear
and present danger to the moral and
spiritual well-being of the youth, and
impairs the mandate of the
Constitution for the State to support
the rearing of the youth for civic
efficiency and the development of
moral character and promote their
physical, intellectual, and social wellbeing;
7. WHEREAS, civic-minded citizens
and groups have called for remedial
measures to curb these blatant
malpractices which have flaunted our
censorship and copyright laws;
8. WHEREAS, in the face of these
grave emergencies corroding the
moral values of the people and
betraying the national economic
recovery program, bold emergency
measures must be adopted with

dispatch;
...
(Numbering
paragraphs supplied).

of

Petitioner's attack on the constitutionality of the

DECREE rests on the following grounds:
1. Section 10 thereof, which imposes
a tax of 30% on the gross receipts
payable to the local government is a
RIDER and the same is not germane
to the subject matter thereof;
2. The tax imposed is harsh,
confiscatory, oppressive and/or in
unlawful restraint of trade in
violation of the due process clause of
the Constitution;
3. There is no factual nor legal basis
for the exercise by the President of
the vast powers conferred upon him
by Amendment No. 6;
4. There is undue delegation of power
and authority;
5. The Decree is an ex-post facto law;
and
6. There is over regulation of the
video industry as if it were a
nuisance, which it is not.
We shall consider the foregoing objections in seriatim.

1. The Constitutional requirement that "every bill shall

embrace only one subject which shall be expressed in the
title thereof" 1 is sufficiently complied with if the title be
comprehensive enough to include the general purpose
which a statute seeks to achieve. It is not necessary that
the title express each and every end that the statute
wishes to accomplish. The requirement is satisfied if all
the parts of the statute are related, and are germane to the
subject matter expressed in the title, or as long as they are
not inconsistent with or foreign to the general subject and
title.2 An act having a single general subject, indicated in
the title, may contain any number of provisions, no
matter how diverse they may be, so long as they are not
inconsistent with or foreign to the general subject, and
may be considered in furtherance of such subject by
providing for the method and means of carrying out the
general object." 3 The rule also is that the constitutional
requirement as to the title of a bill should not be so
narrowly construed as to cripple or impede the power of
legislation. 4 It should be given practical rather than
technical construction. 5
Tested by the foregoing criteria, petitioner's contention
that the tax provision of the DECREE is a rider is without
merit. That section reads, inter alia:
Section 10. Tax on Sale, Lease or
Disposition of Videograms.
Notwithstanding any provision of law
to the contrary, the province shall
collect a tax of thirty percent (30%)
of the purchase price or rental rate, as
the case may be, for every sale, lease
or disposition of a videogram
containing a reproduction of any
motion picture or audiovisual
program. Fifty percent (50%) of the

78

proceeds of the tax collected shall

accrue to the province, and the other
fifty percent (50%) shall acrrue to the
municipality where the tax is
collected; PROVIDED, That in
Metropolitan Manila, the tax shall be
shared
equally
by
the
City/Municipality
and
the
Metropolitan Manila Commission.

regulates, discourages, or even definitely deters the

activities taxed. 8 The power to impose taxes is one so
unlimited in force and so searching in extent, that the
courts scarcely venture to declare that it is subject to any
restrictions whatever, except such as rest in the discretion
of the authority which exercises it. 9 In imposing a tax,
the legislature acts upon its constituents. This is, in
general, a sufficient security against erroneous and
oppressive taxation. 10

xxx xxx xxx

The tax imposed by the DECREE is not only a regulatory

but also a revenue measure prompted by the realization
that earnings of videogram establishments of around
P600 million per annum have not been subjected to tax,
thereby depriving the Government of an additional
source of revenue. It is an end-user tax, imposed on
retailers for every videogram they make available for
public viewing. It is similar to the 30% amusement tax
imposed or borne by the movie industry which the
theater-owners pay to the government, but which is
passed on to the entire cost of the admission ticket, thus
shifting the tax burden on the buying or the viewing
public. It is a tax that is imposed uniformly on all
videogram operators.

The foregoing provision is allied and germane to, and is

reasonably necessary for the accomplishment of, the
general object of the DECREE, which is the regulation of
the video industry through the Videogram Regulatory
Board as expressed in its title. The tax provision is not
inconsistent with, nor foreign to that general subject and
title. As a tool for regulation 6 it is simply one of the
regulatory and control mechanisms scattered throughout
the DECREE. The express purpose of the DECREE to
include taxation of the video industry in order to regulate
and rationalize the heretofore uncontrolled distribution of
videograms is evident from Preambles 2 and 5, supra.
Those preambles explain the motives of the lawmaker in
presenting the measure. The title of the DECREE, which
is the creation of the Videogram Regulatory Board, is
comprehensive enough to include the purposes expressed
in its Preamble and reasonably covers all its provisions. It
is unnecessary to express all those objectives in the title
or that the latter be an index to the body of the
DECREE. 7
2. Petitioner also submits that the thirty percent (30%) tax
imposed is harsh and oppressive, confiscatory, and in
restraint of trade. However, it is beyond serious question
that a tax does not cease to be valid merely because it

The levy of the 30% tax is for a public purpose. It was

imposed primarily to answer the need for regulating the
video industry, particularly because of the rampant film
piracy, the flagrant violation of intellectual property
rights, and the proliferation of pornographic video tapes.
And while it was also an objective of the DECREE to
protect the movie industry, the tax remains a valid
imposition.
The public purpose of a tax may
legally exist even if the motive which
impelled the legislature to impose the

tax was to favor one industry over

another. 11
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 "inequities which result
from a singling out of one particular
class for taxation or exemption
infringe
no
constitutional
limitation". 12 Taxation has been
made the implement of the state's
police power. 13
At bottom, the rate of tax is a matter better addressed to
the taxing legislature.
3. Petitioner argues that there was no legal nor factual
basis for the promulgation of the DECREE by the former
President under Amendment No. 6 of the 1973
Constitution providing that "whenever in the judgment of
the President ... , there exists a grave emergency or a
threat or imminence thereof, or whenever the interim
Batasang Pambansa or the regular National Assembly
fails or is unable to act adequately on any matter for any
reason that in his judgment requires immediate action, he
may, in order to meet the exigency, issue the necessary
decrees, orders, or letters of instructions, which shall
form part of the law of the land."
In refutation, the Intervenors and the Solicitor General's
Office aver that the 8th "whereas" clause sufficiently
summarizes the justification in that grave emergencies
corroding the moral values of the people and betraying
the national economic recovery program necessitated
bold emergency measures to be adopted with dispatch.
Whatever the reasons "in the judgment" of the then

79

President, considering that the issue of the validity of the

exercise of legislative power under the said Amendment
still pends resolution in several other cases, we reserve
resolution of the question raised at the proper time.
4. Neither can it be successfully argued that the DECREE
contains an undue delegation of legislative power. The
grant in Section 11 of the DECREE of authority to the
BOARD to "solicit the direct assistance of other agencies
and units of the government and deputize, for a fixed and
limited period, the heads or personnel of such agencies
and units to perform enforcement functions for the
Board" is not a delegation of the power to legislate but
merely a conferment of authority or discretion as to its
execution, enforcement, and implementation. "The true
distinction is between the delegation of power to make
the law, which necessarily involves a discretion as to
what it shall be, and conferring authority or discretion as
to its execution to be exercised under and in pursuance of
the law. The first cannot be done; to the latter, no valid
objection can be made." 14 Besides, in the very language
of the decree, the authority of the BOARD to solicit such
assistance is for a "fixed and limited period" with the
deputized agencies concerned being "subject to the
direction and control of the BOARD." That the grant of
such authority might be the source of graft and corruption
would not stigmatize the DECREE as unconstitutional.
Should the eventuality occur, the aggrieved parties will
not be without adequate remedy in law.
5. The DECREE is not violative of the ex post
facto principle. An ex post facto law is, among other
categories, one which "alters the legal rules of evidence,
and authorizes conviction upon less or different
testimony than the law required at the time of the
commission of the offense." It is petitioner's position that
Section 15 of the DECREE in providing that:

All videogram establishments in the

Philippines are hereby given a period
of forty-five (45) days after the
effectivity of this Decree within
which to register with and secure a
permit from the BOARD to engage in
the videogram business and to
register with the BOARD all their
inventories of videograms, including
videotapes, discs, cassettes or other
technical improvements or variations
thereof, before they could be sold,
leased, or otherwise disposed of.
Thereafter any videogram found in
the possession of any person engaged
in the videogram business without
the required proof of registration by
the BOARD, shall be prima facie
evidence of violation of the Decree,
whether the possession of such
videogram be for private showing
and/or public exhibition.

human conduct, and enacting what

evidence shall be sufficient to
overcome such presumption of
innocence" (People vs. Mingoa 92
Phil. 856 [1953] at 858-59, citing 1
COOLEY, A TREATISE ON THE
CONSTITUTIONAL
LIMITATIONS, 639-641). And the
"legislature may enact that when
certain facts have been proved that
they shall be prima facie evidence of
the existence of the guilt of the
accused and shift the burden of proof
provided there be a rational
connection between the facts proved
and the ultimate facts presumed so
that the inference of the one from
proof of the others is not
unreasonable and arbitrary because of
lack of connection between the two
in common experience". 16

The argument is untenable. As this Court held in the

recent case of Vallarta vs. Court of Appeals, et al. 15

Applied to the challenged provision, there is no question

that there is a rational connection between the fact
proved, which is non-registration, and the ultimate fact
presumed which is violation of the DECREE, besides the
fact that the prima facie presumption of violation of the
DECREE attaches only after a forty-five-day period
counted from its effectivity and is, therefore, neither
retrospective in character.

... it is now well settled that "there is

no constitutional objection to the
passage of a law providing that the
presumption of innocence may be
overcome by a contrary presumption
founded upon the experience of

6. We do not share petitioner's fears that the video

industry is being over-regulated and being eased out of
existence as if it were a nuisance. Being a relatively new
industry, the need for its regulation was apparent. While
the underlying objective of the DECREE is to protect the
moribund movie industry, there is no question that public

raises immediately a prima facie evidence of violation of

the DECREE when the required proof of registration of
any videogram cannot be presented and thus partakes of
the nature of an ex post facto law.

80

welfare is at bottom of its enactment, considering "the

unfair competition posed by rampant film piracy; the
erosion of the moral fiber of the viewing public brought
about by the availability of unclassified and unreviewed
video tapes containing pornographic films and films with
brutally violent sequences; and losses in government
revenues due to the drop in theatrical attendance, not to
mention the fact that the activities of video
establishments are virtually untaxed since mere payment
of Mayor's permit and municipal license fees are required
to engage in business. 17
The enactment of the Decree since April 10, 1986 has not
brought about the "demise" of the video industry. On the
contrary, video establishments are seen to have
proliferated in many places notwithstanding the 30% tax
imposed.
In the last analysis, what petitioner basically questions is
the necessity, wisdom and expediency of the DECREE.
These considerations, however, are primarily and
exclusively a matter of legislative concern.
Only congressional power or
competence, not the wisdom of the
action taken, may be the basis for
declaring a statute invalid. This is as
it ought to be. The principle of
separation of powers has in the main
wisely allocated the respective
authority of each department and
confined its jurisdiction to such a
sphere. There would then be intrusion
not allowable under the Constitution
if on a matter left to the discretion of
a coordinate branch, the judiciary
would substitute its own. If there be

adherence to the rule of law, as there

ought to be, the last offender should
be courts of justice, to which rightly
litigants submit their controversy
precisely to maintain unimpaired the
supremacy of legal norms and
prescriptions. The attack on the
validity of the challenged provision
likewise insofar as there may be
objections, even if valid and cogent
on
its
wisdom
cannot
be
sustained. 18
In fine, petitioner has not overcome the presumption of
validity which attaches to a challenged statute. We find
no clear violation of the Constitution which would justify
us in pronouncing Presidential Decree No. 1987 as
unconstitutional and void.

MORAN, J.:
In 1935, plaintiff Manila Electric Company, a corporation
organized and existing under the laws of the Philippines,
with its principal office and place of business in the City
of Manila, insured with the city of New York Insurance
Company and the United States Guaranty Company,
certain real and personal properties situated in the
Philippines. The insurance was entered into in behalf of
said plaintiff by its broker in New York City. The
insurance companies are foreign corporations not
licensed to do business in the Philippines and having no
agents therein. The policies contained provisions for the
settlement and payment of losses upon the occurence of
any risk insured against, a sample of which is policy No.
20 of the New York insurance Company attached to and
made an integral part of the agreed statement of facts.

WHEREFORE, the instant Petition is hereby dismissed.

No costs.
SO ORDERED.

Meralco vs Yatco
G.R. No. 45697

November 1, 1939

MANILA ELECTRIC COMPANY, plaintiff-appellant,

vs.
A.L.
YATCO,
Collector
of
Internal
Revenue, defendant-appellee.
Ross, Lawrence, Selph and Carrascoso for appellant.
Office of the Solicitor-General Tuason for appellee.

Plaintiff through its broker paid, in New York, to said

insurance company premiums in the sum of P91,696. The
Collector of Internal Revenue, under the authority of
section 192 of act No. 2427, as amended, assessed and
levied a tax of one per centum on said premiums, which
plaintiff paid under protest. The protest having been
overruled, plaintiff instituted the present action to recover
the tax. The trial court dismissed the complaint, and from
the judgment thus rendered, plaintiff took the instant
appeal.
The pertinent portions of the Act here involved read:
SEC. 192. It shall be unlawful for any person,
company or corporation, or forward
applications for insurance in or to issue or to
deliver or accept policies of or for any

81

company or companies not having been legally

authorized to transact business in the Philippine
Islands, as provided in this chapter; and any
such person, company or corporation violating
the provisions of this section shall be deemed
guilty of a penal offense, and upon conviction
thereof, shall for each such offense be punished
by a fine of two hundred pesos, or
imprisonment for two months, or both in the
discretion not authorized to transact business in
the Philippine Island may be placed upon terms
and conditions as follows:
xxx

xxx

xxx

. . . . And provided further, that the prohibitions

of this section shall not affect the right of an
owner of property to apply for and obtain for
himself policies in foreign companies in cases
were said owner does not make use of the
services of any agent, company or corporation
residing or doing business in the Philippine
Islands. In all case where owners of property
obtain insurance directly with foreign
companies, it shall be the duty of said owners
to report to the insurance commissioner and to
the Collector of Internal Revenue each case
where insurance has been so effected, and shall
pay the tax of one per centum on premium
paid, in the manner required by law of
insurance companies, and shall be subject to
the same penalties for failure to do so.
Appellant maintains that the second paragraph of the
provisions of the Act aforecited is unconstitutional, and
has been so declared by the Supreme Court of the United
States in the case of Compania General de Tabacos v.

Collector of Internal Revenue, 275 U.S., 87, 48 Sup. Ct.

Rep., 100, 72 Law. ed., 177.
The case relied upon involves a suit to recover from the
Collector of Internal Revenue certain taxes in connection
with insurance premiums which the Tobacco Barcelona,
Spain, paid to the Guardian Insurance Company of
London, England, and to Le Comite des Assurances
Maritimes de Paris, of Paris, France. The Tobacco
Company, through its head office in Barcelona, insured
against fire with the London Company the merchandise it
had in deposit in the warehouse in the Philippines. As the
merchandise were from time to time shipped to Europe,
the head office at Barcelona insured the same with the
Paris Company against marine risks while such
merchandise were in transit from the Philippines to
Spain. The London Company, unlike the Paris Company,
was licensed to do insurance business in the Philippines
and had an agent therein. Losses, if any, on policies were
to be paid to the Tobacco Company in Paris. The tax
assessed and levied by the Collector of Internal Revenue,
under the same law now involved, was challenged as
unconstitutional. The Supreme Court of the united States
sustained the tax with respect to premiums paid to the
London Company and held it erroneous with respect to
premiums paid to the Paris Company.lawphi1.net
The factual basis upon which the imposition of the tax on
premiums paid to the Paris Company was declared
erroneous, is stated by the Supreme Court of the United
States thus:
Coming then to the tax on the premiums paid to
the Paris Company the contract of insurance on
which the premium was paid was made at
Barcelona in Spain, the headquarters of the
Tobacco Company between the Tobacco

Company and the Paris Company, and any

losses arising thereunder were to be paid in
Paris. The Paris Company had no
communication whatever with anyone in the
Philippine Islands. The collection of this tax
involves an ex-action upon a company of Spain
lawfully doing business in the Philippine
Islands effected by reason of a contract made
by that company with a company in Paris on
merchandise shipped from the Philippine
Islands for delivery in Barcelona. It is an
imposition upon a contract not made in the
Philippines and having no situs there and to be
measured by money paid as premiums in Paris,
with the place of payment of loss, if any, in
Paris. We are very clear that the contract and
the premiums paid under it are not within the
jurisdiction of the government of the Philippine
Islands.
And, upon the authority of the cases of Allgeyer v.
Lousiana, 165 U.S., 578, 41 Law. ed., 832, and St. Louis
Cotton Compress Company v. Arkansas, 250 U.S., 346,
677 Law. ed., 279, the Supreme Court of the United
States held that "as the state is forbidden to deprive a
person of his liberty without due process of law, it may
not compel anyone within its jurisdiction to pay tribute to
it for contracts or money paid to secure the benefits of
contract made and to be performed outside of the state."
On the other hand, the Supreme Court of the United
States, in sustaining the imposition of the tax upon
premiums paid by the assured to the London Company,
says:
. . . . Does the fact that while the Tobacco
Company and the London Company were

82

within the jurisdiction of the Philippines they

made a contract outside of the Philippines,
prevent the imposition upon the assured of a
tax of 1 per cent upon the money paid by it as a
premium to the London Company? We may
properly assume that this tax placed upon the
assured must ultimately be paid by the insurer,
and treating its real incidence as such, the
question arises whether making and carrying
out the policy does not involve an exercise or
use of the right of the London Company to do
business in the Philippine Islands under its
license, because the policy covers fire risks no
property within the Philippine Islands which
may require adjustment and the activities of
agents in the Philippine Islands with respect to
settlement of losses arising thereunder. This we
think must be answered affirmatively
under Equitable
Life
Assur.
Soc.
v.
Pennsylvania, 238 U.S., 143 Law. ed., 1239, 35
Sup. Ct. Rep., 829. The case is a close one, but
in deference to the conclusion we reached in
the latter case, we affirm the judgment of the
court below in respect to the tax upon the
premium paid to the London Company.

The New York Insurance Company and the United States

Guaranty Company may be said to be doing policies
issued by them cover risks on properties within the
Philippines, which may require adjustment and the
activities of agents in the Philippines with respect to the
settlement of losses arising thereunder. For instance, it is
therein stipulated that "the insured, as often as may be
reasonably required, shall exhibit to any person
designated by the company all the remains of any
property therein described and submit to examination
under oath by any person named by the company, and as
often as may be reasonably required, shall exhibit to any
person designated by the company all the remains of any
property therein described and submit to an examination
all books of accounts . . . at such reasonable time and
place as may be designated by the company or its
representative." And, in case of disagreement as to the
amount of losses or damages as to require the
appointment of appraisers, the insurance contract
provides that "the appraisers shall first select a competent
umpire; and failure for fifteen days to agree to such
umpire, then, on request of the insured or of the
company, such umpire shall be selected by a judge of the
court of record in the state in which the property insured
is located.".

Pennsylvania in doing business there." (See Compaia

General de Tabacos v. Collector of Internal Revenue, 275
U.S., 87, 72 Law. ed., 177, 182.)

The ruling in the Paris Company case is obviously not

applicable in the instant one, for there, not only was the
contract executed in a foreign country, but the
merchandise insured was in transit from the Philippines
to Spain, and nothing was to be done in the Philippines in
pursuance of the contract. However, the rule laid down in
connection with the London Company may, by analogy,
be applied in the present case, the essential facts of both
cases being similar. Here, the insured is a corporation
organized under the laws of the Philippines, its principal
office and place of business being in the City of Manila.

True it is that the London Company had a license to do

business in the Philippines, but this fact was not a
decisive factor in the decision of that case, for reliance
was therein placed on the Equitable Life Assurance
Society v. Pennsylvania, 238 U.S., 143, 59 Law. ed.,
1239, 35 Sup. Ct. Rep., 829, wherein it was said that "the
Equitable Society was doing business in Pennsylvania
when it was annually paying the dividends in
Pennsylvania or sending an adjuster into the state in case
of dispute or making proof of death," and therefore "the
taxpayer had subjected itself to the jurisdiction of

In epitome, then, the whole question involved in this

appeal is whether or not the disputed tax is one imposed
by the Commonwealth of the Philippines upon a contract
beyond its jurisdiction. We are of the opinion and so hold
that where the insured against also within the Philippines,
the risk insured against also within the Philippines, and
certain incidents of the contract are to be attended to in
the Philippines, such as, payment of dividends when
received in cash, sending of an unjuster into the
Philippines in case of dispute, or making of proof of loss,
the Commonwealth of the Philippines has the power to

The controlling consideration, therefore, in the decision

of the London Company case was that said company, by
making and carrying out policies covering risks located
in this country which might require adjustment or the
making of proof of loss therein, did business in the
Philippines and subjected itself to its jurisdiction, a rule
that can perfectly be applied in the present case to the
new York Insurance Company and the United States
Guaranty Company.
It is argued, however, that the sending of an unjuster to
the Philippines to fix the amount of losses, is a mere
contingency and not an actual fact, as such, it cannot be a
ground for holding that the insurance companies
subjected themselves to the taxing jurisdiction of the
Philippines. This argument could have been made in the
London Company case where no adjuster appears to have
ever been sent to the Philippines nor any adjustment ever
made, and yet the stipulations to that effect were held to
be sufficient to bring the foreign corporation within the
taxing jurisdiction of the Philippines.

83

impose the tax upon the insured, regardless of whether

the contract is executed in a foreign country and with a
foreign corporation. Under such circumstances,
substantial elements of the contract may be said to be so
situated in the Philippines as to give its government the
power to tax. And, even if it be assumed that the tax
imposed upon the insured will ultimately be passed on
the insurer, thus constituting an indirect tax upon the
foreign corporation, it would still be valid, because the
foreign corporation, by the stipulations of its contract, has
subjected itself to the taxing jurisdiction of the
Philippines. After all, Commonwealth of the Philippines,
by protecting the properties insured, benefits the foreign
corporation, and it is but reasonable that the latter should
pay a just contribution therefor. It would certainly be a
discrimination against domestic corporations to hold the
tax valid when the policy is given by them and invalid
when issued by foreign corporations.
Judgment affirmed, with costs against appellant.
Avancea, C.J., Villa-Real, Imperial, Diaz, Laurel and
Concepcion, JJ., concur.

PAL vs EDU
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 plaintiffappellant.

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 reexamination 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.

84

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 defendantappellee 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

85

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 feesare 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

86

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)

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).

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.

Presently, Sec. 61 of the Land Transportation and Traffic

Code provides:

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. ....

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, thePhilippine 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.

87

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. 1213, 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:

88

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.)

89

(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:

the registration and licensing of the petitioner's motor

vehicles from April 9, 1979 as provided in Presidential
Decree No. 1590.

xxx xxx xxx

Lutz vs Araneta

(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).

G.R. No. L-7859

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.

SO ORDERED.
Fernan, C.J., Narvasa, Melencio-Herrera, Cruz, Paras,
Feliciano, Gancayco, Padilla, Bidin, Sarmiento, Cortes,
Grio Aquino and Medialdea, JJ., concur.

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.:

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

This case was initiated in the Court of First Instance of

Negros Occidental to test the legality of the taxes

90

imposed by Commonwealth Act No. 567, otherwise

known as the Sugar Adjustment Act.

to attain any or all of the following objectives,

as may be provided by law.

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."

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;

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

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 19481949 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).

91

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.

92

Manila Memorial Park vs

Secretary*
G.R. No. 175356

December 3, 2013

MANILA MEMORIAL PARK, INC. AND LA

FUNERARIA
PAZ-SUCAT,
INC., Petitioners,
vs.
SECRETARY OF THE DEPARTMENT OF SOCIAL
WELFARE AND DEVELOPMENT and THE
SECRETARY OF THE DEPARTMENT OF
FINANCE, Respondents.
DECISION
DEL CASTILLO, J.:
When a party challeges the constitutionality of a law, the
burden of proof rests upon him.

Factual Antecedents
On April 23, 1992, RA 7432 was passed into law,
granting senior citizens the following privileges:
SECTION 4. Privileges for the Senior Citizens. The
senior citizens shall be entitled to the following:
a) the grant of twenty percent (20%) discount from all
establishments relative to utilization of transportation
services, hotels and similar lodging establishment[s],
restaurants and recreation centers and purchase of
medicine anywhere in the country: Provided, That private
establishments may claim the cost as tax credit;
b) a minimum of twenty percent (20%) discount on
admission fees charged by theaters, cinema houses and
concert halls, circuses, carnivals and other similar places
of culture, leisure, and amusement;

Before us is a Petition for Prohibition 2 under Rule 65 of

the Rules of Court filed by petitioners Manila Memorial
Park, Inc. and La Funeraria Paz-Sucat, Inc., domestic
corporations engaged in the business of providing funeral
and burial services, against public respondents
Secretaries of the Department of Social Welfare and
Development (DSWD) and the Department of Finance
(DOF).

c) exemption from the payment of individual income

taxes: Provided, That their annual taxable income does
not exceed the property level as determined by the
National Economic and Development Authority (NEDA)
for that year;

Petitioners assail the constitutionality of Section 4 of

Republic Act (RA) No. 7432,3 as amended by RA
9257,4 and the implementing rules and regulations issued
by the DSWD and DOF insofar as these allow business
establishments to claim the 20% discount given to senior
citizens as a tax deduction.

e) free medical and dental services in government

establishment[s] anywhere in the country, subject to
guidelines to be issued by the Department of Health, the
Government Service Insurance System and the Social
Security System;

d) exemption from training fees for socioeconomic

programs undertaken by the OSCA as part of its work;

f) to the extent practicable and feasible, the continuance

of the same benefits and privileges given by the
Government Service Insurance System (GSIS), Social
Security System (SSS) and PAG-IBIG, as the case may
be, as are enjoyed by those in actual service.
On August 23, 1993, Revenue Regulations (RR) No. 0294 was issued to implement RA 7432. Sections 2(i) and 4
of RR No. 02-94 provide:
Sec. 2. DEFINITIONS. For purposes of these
regulations: i. Tax Credit refers to the amount
representing the 20% discount granted to a qualified
senior citizen by all establishments relative to their
utilization of transportation services, hotels and similar
lodging establishments, restaurants, drugstores, recreation
centers, theaters, cinema houses, concert halls, circuses,
carnivals and other similar places of culture, leisure and
amusement, which discount shall be deducted by the said
establishments from their gross income for income tax
purposes and from their gross sales for value-added tax or
other percentage tax purposes. x x x x Sec. 4.
RECORDING/BOOKKEEPING
REQUIREMENTS
FOR PRIVATE ESTABLISHMENTS. Private
establishments, i.e., transport services, hotels and similar
lodging establishments, restaurants, recreation centers,
drugstores, theaters, cinema houses, concert halls,
circuses, carnivals and other similar places of culture[,]
leisure and amusement, giving 20% discounts to qualified
senior citizens are required to keep separate and accurate
record[s] of sales made to senior citizens, which shall
include the name, identification number, gross
sales/receipts, discounts, dates of transactions and invoice
number for every transaction. The amount of 20%
discount shall be deducted from the gross income for
income tax purposes and from gross sales of the business

93

enterprise concerned for purposes of the VAT and other

percentage taxes.
In Commissioner of Internal Revenue v. Central Luzon
Drug Corporation,5 the Court declared Sections 2(i) and 4
of RR No. 02-94 as erroneous because these contravene
RA 7432,6 thus:
RA 7432 specifically allows private establishments to
claim as tax credit the amount of discounts they grant. In
turn, the Implementing Rules and Regulations, issued
pursuant thereto, provide the procedures for its
availment. To deny such credit, despite the plain mandate
of the law and the regulations carrying out that mandate,
is indefensible. First, the definition given by petitioner is
erroneous. It refers to tax credit as the amount
representing the 20 percent discount that "shall be
deducted by the said establishments from their gross
income for income tax purposes and from their gross
sales for value-added tax or other percentage tax
purposes." In ordinary business language, the tax credit
represents the amount of such discount. However, the
manner by which the discount shall be credited against
taxes has not been clarified by the revenue regulations.
By ordinary acceptation, a discount is an "abatement or
reduction made from the gross amount or value of
anything." To be more precise, it is in business parlance
"a deduction or lowering of an amount of money;" or "a
reduction from the full amount or value of something,
especially a price." In business there are many kinds of
discount, the most common of which is that affecting the
income statement or financial report upon which the
income tax is based.
xxxx

Sections 2.i and 4 of Revenue Regulations No. (RR) 2-94

define tax credit as the 20 percent discount deductible
from gross income for income tax purposes, or from
gross sales for VAT or other percentage tax purposes. In
effect, the tax credit benefit under RA 7432 is related to a
sales discount. This contrived definition is improper,
considering that the latter has to be deducted from gross
sales in order to compute the gross income in the income
statement and cannot be deducted again, even for
purposes of computing the income tax. When the law
says that the cost of the discount may be claimed as a tax
credit, it means that the amount when claimed shall
be treated as a reduction from any tax liability, plain and
simple. The option to avail of the tax credit benefit
depends upon the existence of a tax liability, but to limit
the benefit to a sales discount which is not even
identical to the discount privilege that is granted by law
does not define it at all and serves no useful purpose.
The definition must, therefore, be stricken down.
Laws Not Amended by Regulations
Second, the law cannot be amended by a mere regulation.
In fact, a regulation that "operates to create a rule out of
harmony with the statute is a mere nullity;" it cannot
prevail. It is a cardinal rule that courts "will and should
respect the contemporaneous construction placed upon a
statute by the executive officers whose duty it is to
enforce it x x x." In the scheme of judicial tax
administration, the need for certainty and predictability in
the implementation of tax laws is crucial. Our tax
authorities fill in the details that "Congress may not have
the opportunity or competence to provide." The
regulations these authorities issue are relied upon by
taxpayers, who are certain that these will be followed by
the courts. Courts, however, will not uphold these
authorities interpretations when clearly absurd,

erroneous or improper. In the present case, the tax

authorities have given the term tax credit in Sections 2.i
and 4 of RR 2-94 a meaning utterly in contrast to what
RA 7432 provides. Their interpretation has muddled x x x
the intent of Congress in granting a mere discount
privilege, not a sales discount. The administrative agency
issuing these regulations may not enlarge, alter or restrict
the provisions of the law it administers; it cannot engraft
additional requirements not contemplated by the
legislature.
In case of conflict, the law must prevail. A "regulation
adopted pursuant to law is law." Conversely, a regulation
or any portion thereof not adopted pursuant to law is no
law and has neither the force nor the effect of law.7
On February 26, 2004, RA 9257 8 amended certain
provisions of RA 7432, to wit:
SECTION 4. Privileges for the Senior Citizens. The
senior citizens shall be entitled to the following:
(a) the grant of twenty percent (20%) discount from all
establishments relative to the utilization of services in
hotels and similar lodging establishments, restaurants and
recreation centers, and purchase of medicines in all
establishments for the exclusive use or enjoyment of
senior citizens, including funeral and burial services for
the death of senior citizens;
xxxx
The establishment may claim the discounts granted under
(a), (f), (g) and (h) as tax deduction based on the net cost
of the goods sold or services rendered: Provided, That the
cost of the discount shall be allowed as deduction from

94

gross income for the same taxable year that the discount
is granted. Provided, further, That the total amount of the
claimed tax deduction net of value added tax if
applicable, shall be included in their gross sales receipts
for tax purposes and shall be subject to proper
documentation and to the provisions of the National
Internal Revenue Code, as amended.
To implement the tax provisions of RA 9257, the
Secretary of Finance issued RR No. 4-2006, the pertinent
provision of which provides:
SEC. 8. AVAILMENT BY ESTABLISHMENTS OF
SALES DISCOUNTS AS DEDUCTION FROM GROSS
INCOME. Establishments enumerated in subparagraph
(6) hereunder granting sales discounts to senior citizens
on the sale of goods and/or services specified thereunder
are entitled to deduct the said discount from gross income
subject to the following conditions:
(1) Only that portion of the gross sales EXCLUSIVELY
USED, CONSUMED OR ENJOYED BY THE SENIOR
CITIZEN shall be eligible for the deductible sales
discount.
(2) The gross selling price and the sales discount MUST
BE SEPARATELY INDICATED IN THE OFFICIAL
RECEIPT OR SALES INVOICE issued by the
establishment for the sale of goods or services to the
senior citizen.
(3) Only the actual amount of the discount granted or a
sales discount not exceeding 20% of the gross selling
price can be deducted from the gross income, net of value
added tax, if applicable, for income tax purposes, and
from gross sales or gross receipts of the business

enterprise concerned, for VAT or other percentage tax

purposes.
(4) The discount can only be allowed as deduction from
gross income for the same taxable year that the discount
is granted.
(5) The business establishment giving sales discounts to
qualified senior citizens is required to keep separate and
accurate record[s] of sales, which shall include the name
of the senior citizen, TIN, OSCA ID, gross sales/receipts,
sales discount granted, [date] of [transaction] and invoice
number for every sale transaction to senior citizen.
(6) Only the following business establishments which
granted sales discount to senior citizens on their sale of
goods and/or services may claim the said discount
granted as deduction from gross income, namely:
xxxx
(i) Funeral parlors and similar establishments The
beneficiary or any person who shall shoulder the funeral
and burial expenses of the deceased senior citizen shall
claim the discount, such as casket, embalmment,
cremation cost and other related services for the senior
citizen upon payment and presentation of [his] death
certificate.
The DSWD likewise issued its own Rules and
Regulations Implementing RA 9257, to wit:
RULE VI DISCOUNTS AS TAX DEDUCTION OF
ESTABLISHMENTS

Article 8. Tax Deduction of Establishments. The

establishment may claim the discounts granted under
Rule V, Section 4 Discounts for Establishments, Section
9, Medical and Dental Services in Private Facilities and
Sections 10 and 11 Air, Sea and Land Transportation as
tax deduction based on the net cost of the goods sold or
services rendered.
Provided, That the cost of the discount shall be allowed
as deduction from gross income for the same taxable year
that the discount is granted; Provided, further, That the
total amount of the claimed tax deduction net of value
added tax if applicable, shall be included in their gross
sales receipts for tax purposes and shall be subject to
proper documentation and to the provisions of the
National Internal Revenue Code, as amended; Provided,
finally, that the implementation of the tax deduction shall
be subject to the Revenue Regulations to be issued by the
Bureau of Internal Revenue (BIR) and approved by the
Department of Finance (DOF).
Feeling aggrieved by the tax deduction scheme,
petitioners filed the present recourse, praying that Section
4 of RA 7432, as amended by RA 9257, and the
implementing rules and regulations issued by the DSWD
and the DOF be declared unconstitutional insofar as these
allow business establishments to claim the 20% discount
given to senior citizens as a tax deduction; that the
DSWD and the DOF be prohibited from enforcing the
same; and that the tax credit treatment of the 20%
discount under the former Section 4 (a) of RA 7432 be
reinstated.
Issues
Petitioners raise the following issues:

95

A.
WHETHER THE PETITION PRESENTS AN ACTUAL
CASE OR CONTROVERSY.
B.
WHETHER SECTION 4 OF REPUBLIC ACT NO. 9257
AND X X X ITS IMPLEMENTING RULES AND
REGULATIONS, INSOFAR AS THEY PROVIDE
THAT THE TWENTY PERCENT (20%) DISCOUNT
TO SENIOR CITIZENS MAY BE CLAIMED AS A
TAX
DEDUCTION
BY
THE
PRIVATE
ESTABLISHMENTS,
ARE
INVALID
AND
UNCONSTITUTIONAL.9

it was acknowledged that the tax deduction scheme does

not meet the definition of just compensation. 15
Petitioners likewise seek a reversal of the ruling in Carlos
Superdrug Corporation16 that the tax deduction scheme
adopted by the government is justified by police power.17
They assert that "[a]lthough both police power and the
power of eminent domain have the general welfare for
their object, there are still traditional distinctions between
the two"18 and that "eminent domain cannot be made less
supreme than police power."19

Petitioners Arguments

Petitioners further claim that the legislature, in amending

RA 7432, relied on an erroneous contemporaneous
construction that prior payment of taxes is required for
tax credit.20

Petitioners emphasize that they are not questioning the

20% discount granted to senior citizens but are only
assailing the constitutionality of the tax deduction
scheme prescribed under RA 9257 and the implementing
rules and regulations issued by the DSWD and the DOF.10

Petitioners also contend that the tax deduction

violates Article XV, Section 4 21 and Article XIII,
1122of the Constitution because it shifts the
constitutional mandate or duty of improving the
of the elderly to the private sector.23

Petitioners posit that the tax deduction scheme

contravenes Article III, Section 9 of the Constitution,
which provides that: "[p]rivate property shall not be
taken for public use without just compensation."11

Under the tax deduction scheme, the private sector

shoulders 65% of the discount because only 35% 24 of it is
actually returned by the government.25

In support of their position, petitioners cite Central Luzon

Drug Corporation,12 where it was ruled that the 20%
discount privilege constitutes taking of private property
for public use which requires the payment of just
compensation,13 and Carlos Superdrug Corporation v.
Department of Social Welfare and Development, 14 where

scheme
Section
States
welfare

Consequently, the implementation of the tax deduction

scheme prescribed under Section 4 of RA 9257 affects
the businesses of petitioners.26
Thus, there exists an actual case or controversy of
transcendental importance which deserves judicious
disposition on the merits by the highest court of the
land.27

Respondents Arguments
Respondents, on the other hand, question the filing of the
instant Petition directly with the Supreme Court as this
disregards the hierarchy of courts.28
They likewise assert that there is no justiciable
controversy as petitioners failed to prove that the tax
deduction treatment is not a "fair and full equivalent of
the loss sustained" by them.29
As to the constitutionality of RA 9257 and its
implementing rules and regulations, respondents contend
that petitioners failed to overturn its presumption of
constitutionality.30
More important, respondents maintain that the tax
deduction scheme is a legitimate exercise of the States
police power.31
Our Ruling
The Petition lacks merit.
There exists an actual case or controversy.
We shall first resolve the procedural issue. When the
constitutionality of a law is put in issue, judicial review
may be availed of only if the following requisites concur:
"(1) the existence of an actual and appropriate case; (2)
the existence of personal and substantial interest on the
part of the party raising the [question of
constitutionality]; (3) recourse to judicial review is made
at the earliest opportunity; and (4) the [question of
constitutionality] is the lis mota of the case."32

96

In this case, petitioners are challenging the

constitutionality of the tax deduction scheme provided in
RA 9257 and the implementing rules and regulations
issued by the DSWD and the DOF. Respondents,
however, oppose the Petition on the ground that there is
no actual case or controversy. We do not agree with
respondents. An actual case or controversy exists when
there is "a conflict of legal rights" or "an assertion of
opposite legal claims susceptible of judicial resolution."33
The Petition must therefore show that "the governmental
act being challenged has a direct adverse effect on the
individual challenging it."34
In this case, the tax deduction scheme challenged by
petitioners has a direct adverse effect on them. Thus, it
cannot be denied that there exists an actual case or
controversy.
The validity of the 20% senior citizen discount and tax
deduction scheme under RA 9257, as an exercise of
police power of the State, has already been settled in
Carlos Superdrug Corporation.
Petitioners posit that the resolution of this case lies in the
determination of whether the legally mandated 20%
senior citizen discount is an exercise of police power or
eminent domain. If it is police power, no just
compensation is warranted. But if it is eminent domain,
the tax deduction scheme is unconstitutional because it is
not a peso for peso reimbursement of the 20% discount
given to senior citizens. Thus, it constitutes taking of
private property without payment of just compensation.
At the outset, we note that this question has been settled
in Carlos Superdrug Corporation.35

Petitioners assert that Section 4(a) of the law is

unconstitutional because it constitutes deprivation of
private property. Compelling drugstore owners and
establishments to grant the discount will result in a loss
of profit and capital because 1) drugstores impose a
mark-up of only 5% to 10% on branded medicines; and
2) the law failed to provide a scheme whereby drugstores
will be justly compensated for the discount. Examining
petitioners arguments, it is apparent that what petitioners
are ultimately questioning is the validity of the tax
deduction scheme as a reimbursement mechanism for the
twenty percent (20%) discount that they extend to senior
citizens. Based on the afore-stated DOF Opinion, the tax
deduction scheme does not fully reimburse petitioners for
the discount privilege accorded to senior citizens. This is
because the discount is treated as a deduction, a taxdeductible expense that is subtracted from the gross
income and results in a lower taxable income. Stated
otherwise, it is an amount that is allowed by law to
reduce the income prior to the application of the tax rate
to compute the amount of tax which is due. Being a tax
deduction, the discount does not reduce taxes owed on a
peso for peso basis but merely offers a fractional
reduction in taxes owed. Theoretically, the treatment of
the discount as a deduction reduces the net income of the
private establishments concerned. The discounts given
would have entered the coffers and formed part of the
gross sales of the private establishments, were it not for
R.A. No. 9257. The permanent reduction in their total
revenues is a forced subsidy corresponding to the taking
of private property for public use or benefit. This
constitutes compensable taking for which petitioners
would ordinarily become entitled to a just compensation.
Just compensation is defined as the full and fair
equivalent of the property taken from its owner by the
expropriator. The measure is not the takers gain but the
owners loss. The word just is used to intensify the

meaning of the word compensation, and to convey the

idea that the equivalent to be rendered for the property to
be taken shall be real, substantial, full and ample. A tax
deduction does not offer full reimbursement of the senior
citizen discount. As such, it would not meet the definition
of just compensation. Having said that, this raises the
question of whether the State, in promoting the health
and welfare of a special group of citizens, can impose
upon private establishments the burden of partly
subsidizing a government program. The Court believes
so. The Senior Citizens Act was enacted primarily to
maximize the contribution of senior citizens to nationbuilding, and to grant benefits and privileges to them for
their improvement and well-being as the State considers
them an integral part of our society. The priority given to
senior citizens finds its basis in the Constitution as set
forth in the law itself. Thus, the Act provides: SEC. 2.
Republic Act No. 7432 is hereby amended to read as
follows:
SECTION 1. Declaration of Policies and Objectives.
Pursuant to Article XV, Section 4 of the Constitution, it is
the duty of the family to take care of its elderly members
while the State may design programs of social security
for them. In addition to this, Section 10 in the Declaration
of Principles and State Policies provides: "The State shall
provide social justice in all phases of national
development." Further, Article XIII, Section 11, provides:
"The State shall adopt an integrated and comprehensive
approach to health development which shall endeavor to
make essential goods, health and other social services
available to all the people at affordable cost. There shall
be priority for the needs of the underprivileged sick,
elderly, disabled, women and children." Consonant with
these constitutional principles the following are the
declared policies of this Act:

In that case, we ruled:

97


(f) To recognize the important role of the private sector in
the improvement of the welfare of senior citizens and to
actively seek their partnership.
To implement the above policy, the law grants a twenty
percent discount to senior citizens for medical and dental
services, and diagnostic and laboratory fees; admission
fees charged by theaters, concert halls, circuses,
carnivals, and other similar places of culture, leisure and
amusement; fares for domestic land, air and sea travel;
utilization of services in hotels and similar lodging
establishments, restaurants and recreation centers; and
purchases of medicines for the exclusive use or
enjoyment of senior citizens. As a form of
reimbursement, the law provides that business
establishments extending the twenty percent discount to
senior citizens may claim the discount as a tax deduction.
The law is a legitimate exercise of police power which,
similar to the power of eminent domain, has general
welfare for its object. Police power is not capable of an
exact definition, but has been purposely veiled in general
terms to underscore its comprehensiveness to meet all
exigencies and provide enough room for an efficient and
flexible response to conditions and circumstances, thus
assuring the greatest benefits. Accordingly, it has been
described as "the most essential, insistent and the least
limitable of powers, extending as it does to all the great
public needs." It is "[t]he power vested in the legislature
by the constitution to make, ordain, and establish all
manner of wholesome and reasonable laws, statutes, and
ordinances, either with penalties or without, not
repugnant to the constitution, as they shall judge to be for
the good and welfare of the commonwealth, and of the
subjects of the same." For this reason, when the
conditions so demand as determined by the legislature,

property rights must bow to the primacy of police power

because property rights, though sheltered by due process,
must yield to general welfare. Police power as an
attribute to promote the common good would be diluted
considerably if on the mere plea of petitioners that they
will suffer loss of earnings and capital, the questioned
provision is invalidated. Moreover, in the absence of
evidence demonstrating the alleged confiscatory effect of
the provision in question, there is no basis for its
nullification in view of the presumption of validity which
every law has in its favor. Given these, it is incorrect for
petitioners to insist that the grant of the senior citizen
discount is unduly oppressive to their business, because
petitioners have not taken time to calculate correctly and
come up with a financial report, so that they have not
been able to show properly whether or not the tax
deduction scheme really works greatly to their
disadvantage. In treating the discount as a tax deduction,
petitioners insist that they will incur losses because,
referring to the DOF Opinion, for every P1.00 senior
citizen discount that petitioners would give, P0.68 will be
shouldered by them as only P0.32 will be refunded by the
government by way of a tax deduction. To illustrate this
point, petitioner Carlos Super Drug cited the antihypertensive maintenance drug Norvasc as an example.
According to the latter, it acquires Norvasc from the
distributors at P37.57 per tablet, and retails it at P39.60
(or at a margin of 5%). If it grants a 20% discount to
senior citizens or an amount equivalent to P7.92, then it
would have to sell Norvasc at P31.68 which translates to
a loss from capital of P5.89 per tablet. Even if the
government will allow a tax deduction, only P2.53 per
tablet will be refunded and not the full amount of the
discount which is P7.92. In short, only 32% of the 20%
discount will be reimbursed to the drugstores. Petitioners
computation is flawed. For purposes of reimbursement,
the law states that the cost of the discount shall be

deducted from gross income, the amount of income

derived from all sources before deducting allowable
expenses, which will result in net income. Here,
petitioners tried to show a loss on a per transaction basis,
which should not be the case. An income statement,
showing an accounting of petitioners' sales, expenses,
and net profit (or loss) for a given period could have
accurately reflected the effect of the discount on their
income. Absent any financial statement, petitioners
cannot substantiate their claim that they will be operating
at a loss should they give the discount. In addition, the
computation was erroneously based on the assumption
that their customers consisted wholly of senior citizens.
Lastly, the 32% tax rate is to be imposed on income, not
on the amount of the discount.
Furthermore, it is unfair for petitioners to criticize the law
because they cannot raise the prices of their medicines
given the cutthroat nature of the players in the industry. It
is a business decision on the part of petitioners to peg the
mark-up at 5%. Selling the medicines below acquisition
cost, as alleged by petitioners, is merely a result of this
decision. Inasmuch as pricing is a property right,
petitioners cannot reproach the law for being oppressive,
simply because they cannot afford to raise their prices for
fear of losing their customers to competition. The Court
is not oblivious of the retail side of the pharmaceutical
industry and the competitive pricing component of the
business. While the Constitution protects property rights,
petitioners must accept the realities of business and the
State, in the exercise of police power, can intervene in the
operations of a business which may result in an
impairment of property rights in the process.
Moreover, the right to property has a social dimension.
While Article XIII of the Constitution provides the
precept for the protection of property, various laws and

98

jurisprudence, particularly on agrarian reform and the

regulation of contracts and public utilities, continuously
serve as x x x reminder[s] that the right to property can
be relinquished upon the command of the State for the
promotion of public good. Undeniably, the success of the
senior citizens program rests largely on the support
imparted by petitioners and the other private
establishments concerned. This being the case, the means
employed in invoking the active participation of the
private sector, in order to achieve the purpose or
objective of the law, is reasonably and directly related.
Without sufficient proof that Section 4 (a) of R.A. No.
9257 is arbitrary, and that the continued implementation
of the same would be unconscionably detrimental to
petitioners, the Court will refrain from quashing a
legislative act.36 (Bold in the original; underline supplied)
We, thus, found that the 20% discount as well as the tax
deduction scheme is a valid exercise of the police power
of the State.
No compelling reason has been proffered to overturn,
modify or abandon the ruling in Carlos Superdrug
Corporation.
Petitioners argue that we have previously ruled in Central
Luzon Drug Corporation37 that the 20% discount is an
exercise of the power of eminent domain, thus, requiring
the payment of just compensation. They urge us to reexamine
our
ruling
in
Carlos
Superdrug
Corporation38 which allegedly reversed the ruling in
Central Luzon Drug Corporation.39
They also point out that Carlos Superdrug
Corporation40 recognized that the tax deduction scheme
under the assailed law does not provide for sufficient just
compensation. We agree with petitioners observation

that there are statements in Central Luzon Drug

Corporation41 describing the 20% discount as an exercise
of the power of eminent domain, viz.:
[T]he privilege enjoyed by senior citizens does not come
directly from the State, but rather from the private
establishments concerned. Accordingly, the tax credit
benefit granted to these establishments can be deemed as
their just compensation for private property taken by the
State for public use. The concept of public use is no
longer confined to the traditional notion of use by the
public, but held synonymous with public interest, public
benefit, public welfare, and public convenience. The
discount privilege to which our senior citizens are
entitled is actually a benefit enjoyed by the general public
to which these citizens belong. The discounts given
would have entered the coffers and formed part of the
gross sales of the private establishments concerned, were
it not for RA 7432. The permanent reduction in their total
revenues is a forced subsidy corresponding to the taking
of private property for public use or benefit. As a result of
the 20 percent discount imposed by RA 7432, respondent
becomes entitled to a just compensation. This term refers
not only to the issuance of a tax credit certificate
indicating the correct amount of the discounts given, but
also to the promptness in its release. Equivalent to the
payment of property taken by the State, such issuance
when not done within a reasonable time from the grant of
the discounts cannot be considered as just
compensation. In effect, respondent is made to suffer the
consequences of being immediately deprived of its
revenues while awaiting actual receipt, through the
certificate, of the equivalent amount it needs to cope with
the reduction in its revenues. Besides, the taxation power
can also be used as an implement for the exercise of the
power of eminent domain. Tax measures are but
"enforced contributions exacted on pain of penal

sanctions" and "clearly imposed for a public purpose." In

recent years, the power to tax has indeed become a most
effective tool to realize social justice, public welfare, and
the equitable distribution of wealth. While it is a declared
commitment under Section 1 of RA 7432, social justice
"cannot be invoked to trample on the rights of property
owners who under our Constitution and laws are also
entitled to protection. The social justice consecrated in
our [C]onstitution [is] not intended to take away rights
from a person and give them to another who is not
entitled thereto." For this reason, a just compensation for
income that is taken away from respondent becomes
necessary. It is in the tax credit that our legislators find
support to realize social justice, and no administrative
body can alter that fact. To put it differently, a private
establishment that merely breaks even without the
discounts yet will surely start to incur losses because
of such discounts. The same effect is expected if its
mark-up is less than 20 percent, and if all its sales come
from retail purchases by senior citizens. Aside from the
observation we have already raised earlier, it will also be
grossly unfair to an establishment if the discounts will be
treated merely as deductions from either its gross income
or its gross sales. Operating at a loss through no fault of
its own, it will realize that the tax credit limitation under
RR 2-94 is inutile, if not improper. Worse, profitgenerating businesses will be put in a better position if
they avail themselves of tax credits denied those that are
losing, because no taxes are due from the latter.42 (Italics
in the original; emphasis supplied)
The above was partly incorporated in our ruling in Carlos
Superdrug Corporation43 when we stated preliminarily
that
Petitioners assert that Section 4(a) of the law is
unconstitutional because it constitutes deprivation of

99

private property. Compelling drugstore owners and

establishments to grant the discount will result in a loss
of profit and capital because 1) drugstores impose a
mark-up of only 5% to 10% on branded medicines; and
2) the law failed to provide a scheme whereby drugstores
will be justly compensated for the discount. Examining
petitioners arguments, it is apparent that what petitioners
are ultimately questioning is the validity of the tax
deduction scheme as a reimbursement mechanism for the
twenty percent (20%) discount that they extend to senior
citizens. Based on the afore-stated DOF Opinion, the tax
deduction scheme does not fully reimburse petitioners for
the discount privilege accorded to senior citizens. This is
because the discount is treated as a deduction, a taxdeductible expense that is subtracted from the gross
income and results in a lower taxable income. Stated
otherwise, it is an amount that is allowed by law to
reduce the income prior to the application of the tax rate
to compute the amount of tax which is due. Being a tax
deduction, the discount does not reduce taxes owed on a
peso for peso basis but merely offers a fractional
reduction in taxes owed. Theoretically, the treatment of
the discount as a deduction reduces the net income of the
private establishments concerned. The discounts given
would have entered the coffers and formed part of the
gross sales of the private establishments, were it not for
R.A. No. 9257. The permanent reduction in their total
revenues is a forced subsidy corresponding to the taking
of private property for public use or benefit. This
constitutes compensable taking for which petitioners
would ordinarily become entitled to a just compensation.
Just compensation is defined as the full and fair
equivalent of the property taken from its owner by the
expropriator. The measure is not the takers gain but the
owners loss. The word just is used to intensify the
meaning of the word compensation, and to convey the
idea that the equivalent to be rendered for the property to

be taken shall be real, substantial, full and ample. A tax

deduction does not offer full reimbursement of the senior
citizen discount. As such, it would not meet the definition
of just compensation. Having said that, this raises the
question of whether the State, in promoting the health
and welfare of a special group of citizens, can impose
upon private establishments the burden of partly
subsidizing a government program. The Court believes
so.44
This, notwithstanding, we went on to rule in Carlos
Superdrug Corporation45 that the 20% discount and tax
deduction scheme is a valid exercise of the police power
of the State. The present case, thus, affords an
opportunity for us to clarify the above-quoted statements
in Central Luzon Drug Corporation46 and Carlos
Superdrug Corporation.47
First, we note that the above-quoted disquisition on
eminent
domain
in
Central
Luzon
Drug
Corporation48 is obiter dicta and, thus, not binding
precedent. As stated earlier, in Central Luzon Drug
Corporation,49 we ruled that the BIR acted ultra
vires when it effectively treated the 20% discount as a tax
deduction, under Sections 2.i and 4 of RR No. 2-94,
despite the clear wording of the previous law that the
same should be treated as a tax credit. We were,
therefore, not confronted in that case with the issue as to
whether the 20% discount is an exercise of police power
or eminent domain. Second, although we adverted to
Central Luzon Drug Corporation50 in our ruling in Carlos
Superdrug Corporation,51 this referred only to preliminary
matters. A fair reading of Carlos Superdrug
Corporation52 would show that we categorically ruled
therein that the 20% discount is a valid exercise of police
power. Thus, even if the current law, through its tax
deduction scheme (which abandoned the tax credit

scheme under the previous law), does not provide for a

peso for peso reimbursement of the 20% discount given
by private establishments, no constitutional infirmity
obtains because, being a valid exercise of police power,
payment of just compensation is not warranted. We have
carefully reviewed the basis of our ruling in Carlos
Superdrug Corporation53 and we find no cogent reason to
overturn, modify or abandon it. We also note that
petitioners arguments are a mere reiteration of those
raised
and
resolved
in
Carlos
Superdrug
Corporation.54 Thus, we sustain Carlos Superdrug
Corporation.55
Nonetheless, we deem it proper, in what follows, to
amplify our explanation in Carlos Superdrug
Corporation56 as to why the 20% discount is a valid
exercise of police power and why it may not, under the
specific circumstances of this case, be considered as an
exercise of the power of eminent domain contrary to the
obiter in Central Luzon Drug Corporation.57
Police power versus eminent domain.
Police power is the inherent power of the State to
regulate or to restrain the use of liberty and property for
public welfare.58
The only limitation is that the restriction imposed should
be reasonable, not oppressive.59
In other words, to be a valid exercise of police power, it
must have a lawful subject or objective and a lawful
method of accomplishing the goal.60

100

Under the police power of the State, "property rights of

individuals may be subjected to restraints and burdens in
order to fulfill the objectives of the government."61
The State "may interfere with personal liberty, property,
lawful businesses and occupations to promote the general
welfare [as long as] the interference [is] reasonable and
not arbitrary."62
Eminent domain, on the other hand, is the inherent power
of the State to take or appropriate private property for
public use.63
The Constitution, however, requires that private property
shall not be taken without due process of law and the
payment of just compensation.64

bundle of rights which constitute ownership is

appropriated for use by or for the benefit of the public. 69
On the other hand, in the exercise of the power of
eminent domain, property interests are appropriated and
applied to some public purpose which necessitates the
payment of just compensation therefor. Normally, the
title to and possession of the property are transferred to
the expropriating authority. Examples include the
acquisition of lands for the construction of public
highways as well as agricultural lands acquired by the
government under the agrarian reform law for
redistribution to qualified farmer beneficiaries. However,
it is a settled rule that the acquisition of title or total
destruction of the property is not essential for "taking"
under the power of eminent domain to be present.70

Traditional distinctions exist between police power and

eminent domain. In the exercise of police power, a
property right is impaired by regulation, 65 or the use of
property is merely prohibited, regulated or restricted 66 to
promote public welfare. In such cases, there is no
compensable taking, hence, payment of just
compensation is not required. Examples of these
regulations are property condemned for being noxious or
intended for noxious purposes (e.g., a building on the
verge of collapse to be demolished for public safety, or
obscene materials to be destroyed in the interest of public
morals)67 as well as zoning ordinances prohibiting the use
of property for purposes injurious to the health, morals or
safety of the community (e.g., dividing a citys territory
into residential and industrial areas).68

Examples of these include establishment of easements

such as where the land owner is perpetually deprived of
his proprietary rights because of the hazards posed by
electric transmission lines constructed above his
property71 or the compelled interconnection of the
telephone system between the government and a private
company.72

It has, thus, been observed that, in the exercise of police

power (as distinguished from eminent domain), although
the regulation affects the right of ownership, none of the

It may not always be easy to determine whether a

challenged governmental act is an exercise of police
power or eminent domain. The very nature of police
power as elastic and responsive to various social

In these cases, although the private property owner is not

divested of ownership or possession, payment of just
compensation is warranted because of the burden placed
on the property for the use or benefit of the public.
The 20% senior citizen discount is an exercise of police
power.

conditions73 as well as the evolving meaning and scope of

public use74 and just compensation75 in eminent domain
evinces that these are not static concepts. Because of the
exigencies of rapidly changing times, Congress may be
compelled to adopt or experiment with different measures
to promote the general welfare which may not fall
squarely within the traditionally recognized categories of
police power and eminent domain. The judicious
approach, therefore, is to look at the nature and effects of
the challenged governmental act and decide, on the basis
thereof, whether the act is the exercise of police power or
eminent domain. Thus, we now look at the nature and
effects of the 20% discount to determine if it constitutes
an exercise of police power or eminent domain. The 20%
discount is intended to improve the welfare of senior
citizens who, at their age, are less likely to be gainfully
employed, more prone to illnesses and other disabilities,
and, thus, in need of subsidy in purchasing basic
commodities. It may not be amiss to mention also that the
discount serves to honor senior citizens who presumably
spent the productive years of their lives on contributing to
the development and progress of the nation. This distinct
cultural Filipino practice of honoring the elderly is an
integral part of this law. As to its nature and effects, the
20% discount is a regulation affecting the ability of
private establishments to price their products and services
relative to a special class of individuals, senior citizens,
for which the Constitution affords preferential concern. 76
In turn, this affects the amount of profits or income/gross
sales that a private establishment can derive from senior
citizens. In other words, the subject regulation affects the
pricing, and, hence, the profitability of a private
establishment. However, it does not purport to
appropriate or burden specific properties, used in the
operation or conduct of the business of private
establishments, for the use or benefit of the public, or

101

senior citizens for that matter, but merely regulates the

pricing of goods and services relative to, and the amount
of profits or income/gross sales that such private
establishments may derive from, senior citizens. The
subject regulation may be said to be similar to, but with
substantial distinctions from, price control or rate of
return on investment control laws which are traditionally
regarded as police power measures.77
These laws generally regulate public utilities or
industries/enterprises imbued with public interest in order
to protect consumers from exorbitant or unreasonable
pricing as well as temper corporate greed by controlling
the rate of return on investment of these corporations
considering that they have a monopoly over the goods or
services that they provide to the general public. The
subject regulation differs therefrom in that (1) the
discount does not prevent the establishments from
adjusting the level of prices of their goods and services,
and (2) the discount does not apply to all customers of a
given establishment but only to the class of senior
citizens. Nonetheless, to the degree material to the
resolution of this case, the 20% discount may be properly
viewed as belonging to the category of price regulatory
measures which affect the profitability of establishments
subjected thereto. On its face, therefore, the subject
regulation is a police power measure. The obiter in
Central Luzon Drug Corporation, 78 however, describes
the 20% discount as an exercise of the power of eminent
domain and the tax credit, under the previous law,
equivalent to the amount of discount given as the just
compensation therefor. The reason is that (1) the discount
would have formed part of the gross sales of the
establishment were it not for the law prescribing the 20%
discount, and (2) the permanent reduction in total
revenues is a forced subsidy corresponding to the taking
of private property for public use or benefit. The flaw in

this reasoning is in its premise. It presupposes that the

subject regulation, which impacts the pricing and, hence,
the profitability of a private establishment, automatically
amounts to a deprivation of property without due process
of law. If this were so, then all price and rate of return on
investment control laws would have to be invalidated
because they impact, at some level, the regulated
establishments profits or income/gross sales, yet there is
no provision for payment of just compensation. It would
also mean that overnment cannot set price or rate of
return on investment limits, which reduce the profits or
income/gross sales of private establishments, if no just
compensation is paid even if the measure is not
confiscatory. The obiter is, thus, at odds with the settled
octrine that the State can employ police power measures
to regulate the pricing of goods and services, and, hence,
the profitability of business establishments in order to
pursue legitimate State objectives for the common good,
provided that the regulation does not go too far as to
amount to "taking."79
In City of Manila v. Laguio, Jr.,80 we recognized that x
x x a taking also could be found if government regulation
of the use of property went "too far." When regulation
reaches a certain magnitude, in most if not in all cases
there must be an exercise of eminent domain and
compensation to support the act. While property may be
regulated to a certain extent, if regulation goes too far it
will be recognized as a taking. No formula or rule can be
devised to answer the questions of what is too far and
when regulation becomes a taking. In Mahon, Justice
Holmes recognized that it was "a question of degree and
therefore cannot be disposed of by general propositions."
On many other occasions as well, the U.S. Supreme
Court has said that the issue of when regulation
constitutes a taking is a matter of considering the facts in
each case. The Court asks whether justice and fairness

require that the economic loss caused by public action

must be compensated by the government and thus borne
by the public as a whole, or whether the loss should
remain concentrated on those few persons subject to the
public action.81
The impact or effect of a regulation, such as the one
under consideration, must, thus, be determined on a caseto-case basis. Whether that line between permissible
regulation under police power and "taking" under
eminent domain has been crossed must, under the
specific circumstances of this case, be subject to proof
and the one assailing the constitutionality of the
regulation carries the heavy burden of proving that the
measure is unreasonable, oppressive or confiscatory. The
time-honored rule is that the burden of proving the
unconstitutionality of a law rests upon the one assailing it
and "the burden becomes heavier when police power is at
issue."82
The 20% senior citizen discount has not been shown to
be unreasonable, oppressive or confiscatory.
In Alalayan v. National Power Corporation, 83 petitioners,
who were franchise holders of electric plants, challenged
the validity of a law limiting their allowable net profits to
no more than 12% per annum of their investments plus
two-month operating expenses. In rejecting their plea, we
ruled that, in an earlier case, it was found that 12% is a
reasonable rate of return and that petitioners failed to
prove that the aforesaid rate is confiscatory in view of the
presumption of constitutionality.84
We adopted a similar line of reasoning in Carlos
Superdrug Corporation85 when we ruled that petitioners
therein failed to prove that the 20% discount is arbitrary,
oppressive or confiscatory. We noted that no evidence,

102

such as a financial report, to establish the impact of the

20% discount on the overall profitability of petitioners
was presented in order to show that they would be
operating at a loss due to the subject regulation or that the
continued implementation of the law would be
unconscionably detrimental to the business operations of
petitioners. In the case at bar, petitioners proceeded with
a hypothetical computation of the alleged loss that they
will suffer similar to what the petitioners in Carlos
Superdrug Corporation86 did. Petitioners went directly to
this Court without first establishing the factual bases of
their claims. Hence, the present recourse must, likewise,
fail. Because all laws enjoy the presumption of
constitutionality, courts will uphold a laws validity if any
set of facts may be conceived to sustain it.87

our ruling in Carlos Superdrug Corporation 88 that the

20% senior citizen discount and tax deduction scheme are
valid exercises of police power of the State absent a clear
showing that it is arbitrary, oppressive or confiscatory.

On its face, we find that there are at least two conceivable

bases to sustain the subject regulations validity absent
clear and convincing proof that it is unreasonable,
oppressive or confiscatory. Congress may have
legitimately concluded that business establishments have
the capacity to absorb a decrease in profits or
income/gross sales due to the 20% discount without
substantially affecting the reasonable rate of return on
their investments considering (1) not all customers of a
business establishment are senior citizens and (2) the
level of its profit margins on goods and services offered
to the general public. Concurrently, Congress may have,
likewise, legitimately concluded that the establishments,
which will be required to extend the 20% discount, have
the capacity to revise their pricing strategy so that
whatever reduction in profits or income/gross sales that
they may sustain because of sales to senior citizens, can
be recouped through higher mark-ups or from other
products not subject of discounts. As a result, the
discounts resulting from sales to senior citizens will not
be confiscatory or unduly oppressive. In sum, we sustain

As already mentioned, Congress may be reasonably

assumed to have foreseen this eventuality. But, more
importantly, this goes into the wisdom, efficacy and
expediency of the subject law which is not proper for
judicial review. In a way, this law pursues its social
equity objective in a non-traditional manner unlike past
and existing direct subsidy programs of the government
for the poor and marginalized sectors of our society.
Verily, Congress must be given sufficient leeway in
formulating welfare legislations given the enormous
challenges that the government faces relative to, among
others, resource adequacy and administrative capability
in implementing social reform measures which aim to
protect and uphold the interests of those most vulnerable
in our society. In the process, the individual, who enjoys
the rights, benefits and privileges of living in a
democratic polity, must bear his share in supporting
measures intended for the common good. This is only
fair. In fine, without the requisite showing of a clear and
unequivocal breach of the Constitution, the validity of the
assailed law must be sustained.

Conclusion
In closing, we note that petitioners hypothesize,
consistent with our previous ratiocinations, that the
discount will force establishments to raise their prices in
order to compensate for its impact on overall profits or
income/gross sales. The general public, or those not
belonging to the senior citizen class, are, thus, made to
effectively shoulder the subsidy for senior citizens. This,
in petitioners view, is unfair.

Refutation of the Dissent

The main points of Justice Carpios Dissent may be
summarized as follows: (1) the discussion on eminent
domain in Central Luzon Drug Corporation 89 is not obiter
dicta ; (2) allowable taking, in police power, is limited to
property that is destroyed or placed outside the commerce
of man for public welfare; (3) the amount of mandatory
discount is private property within the ambit of Article
III, Section 990 of the Constitution; and (4) the permanent
reduction in a private establishments total revenue,
arising from the mandatory discount, is a taking of
private property for public use or benefit, hence, an
exercise of the power of eminent domain requiring the
payment of just compensation. I We maintain that the
discussion on eminent domain in Central Luzon Drug
Corporation91 is obiter dicta. As previously discussed, in
Central Luzon Drug Corporation,92 the BIR, pursuant to
Sections 2.i and 4 of RR No. 2-94, treated the senior
citizen discount in the previous law, RA 7432, as a tax
deduction instead of a tax credit despite the clear
provision in that law which stated
SECTION 4. Privileges for the Senior Citizens. The
senior citizens shall be entitled to the following:
a) The grant of twenty percent (20%) discount from all
establishments relative to utilization of transportation
services, hotels and similar lodging establishment,
restaurants and recreation centers and purchase of
medicines anywhere in the country: Provided, That
private establishments may claim the cost as tax credit;
(Emphasis supplied)
Thus, the Court ruled that the subject revenue regulation
violated the law, viz:

103

The 20 percent discount required by the law to be given

to senior citizens is a tax credit, not merely a tax
deduction from the gross income or gross sale of the
establishment concerned. A tax credit is used by a private
establishment only after the tax has been computed; a tax
deduction, before the tax is computed. RA 7432
unconditionally grants a tax credit to all covered entities.
Thus, the provisions of the revenue regulation that
withdraw or modify such grant are void. Basic is the rule
that administrative regulations cannot amend or revoke
the law.93
As can be readily seen, the discussion on eminent domain
was not necessary in order to arrive at this conclusion.
All that was needed was to point out that the revenue
regulation contravened the law which it sought to
implement. And, precisely, this was done in Central
Luzon Drug Corporation94 by comparing the wording of
the previous law vis--vis the revenue regulation;
employing the rules of statutory construction; and
applying the settled principle that a regulation cannot
amend the law it seeks to implement. A close reading of
Central Luzon Drug Corporation95 would show that the
Court went on to state that the tax credit "can be deemed"
as just compensation only to explain why the previous
law provides for a tax credit instead of a tax deduction.
The Court surmised that the tax credit was a form of just
compensation given to the establishments covered by the
20% discount. However, the reason why the previous law
provided for a tax credit and not a tax deduction was not
necessary to resolve the issue as to whether the revenue
regulation contravenes the law. Hence, the discussion on
eminent domain is obiter dicta.
A court, in resolving cases before it, may look into the
possible purposes or reasons that impelled the enactment
of a particular statute or legal provision. However,

statements made relative thereto are not always necessary

in resolving the actual controversies presented before it.
This was the case in Central Luzon Drug
Corporation96resulting in that unfortunate statement that
the tax credit "can be deemed" as just compensation.
This, in turn, led to the erroneous conclusion, by
deductive reasoning, that the 20% discount is an exercise
of the power of eminent domain. The Dissent essentially
adopts this theory and reasoning which, as will be shown
below, is contrary to settled principles in police power
and eminent domain analysis. II The Dissent discusses at
length the doctrine on "taking" in police power which
occurs when private property is destroyed or placed
outside the commerce of man. Indeed, there is a whole
class of police power measures which justify the
destruction of private property in order to preserve public
health, morals, safety or welfare. As earlier mentioned,
these would include a building on the verge of collapse or
confiscated obscene materials as well as those mentioned
by the Dissent with regard to property used in violating a
criminal statute or one which constitutes a nuisance. In
such cases, no compensation is required. However, it is
equally true that there is another class of police power
measures which do not involve the destruction of private
property but merely regulate its use. The minimum wage
law, zoning ordinances, price control laws, laws
regulating the operation of motels and hotels, laws
limiting the working hours to eight, and the like would
fall under this category. The examples cited by the
Dissent, likewise, fall under this category: Article 157 of
the Labor Code, Sections 19 and 18 of the Social
Security Law, and Section 7 of the Pag-IBIG Fund Law.
These laws merely regulate or, to use the term of the
Dissent, burden the conduct of the affairs of business
establishments. In such cases, payment of just
compensation is not required because they fall within the
sphere of permissible police power measures. The senior

citizen discount law falls under this latter category. III

The Dissent proceeds from the theory that the permanent
reduction of profits or income/gross sales, due to the 20%
discount, is a "taking" of private property for public
purpose without payment of just compensation. At the
outset, it must be emphasized that petitioners never
presented any evidence to establish that they were forced
to suffer enormous losses or operate at a loss due to the
effects of the assailed law. They came directly to this
Court and provided a hypothetical computation of the
loss they would allegedly suffer due to the operation of
the assailed law. The central premise of the Dissents
argument that the 20% discount results in a permanent
reduction in profits or income/gross sales, or forces a
business establishment to operate at a loss is, thus, wholly
unsupported by competent evidence. To be sure, the
Court can invalidate a law which, on its face, is arbitrary,
oppressive or confiscatory.97
But this is not the case here.
In the case at bar, evidence is indispensable before a
determination of a constitutional violation can be made
because of the following reasons. First, the assailed law,
by imposing the senior citizen discount, does not take any
of the properties used by a business establishment like,
say, the land on which a manufacturing plant is
constructed or the equipment being used to produce
goods or services. Second, rather than taking specific
properties of a business establishment, the senior citizen
discount law merely regulates the prices of the goods or
services being sold to senior citizens by mandating a 20%
discount. Thus, if a product is sold at P10.00 to the
general public, then it shall be sold at P8.00 ( i.e., P10.00
less 20%) to senior citizens. Note that the law does not
impose at what specific price the product shall be sold,
only that a 20% discount shall be given to senior citizens

104

based on the price set by the business establishment. A

business establishment is, thus, free to adjust the prices of
the goods or services it provides to the general public.
Accordingly, it can increase the price of the above
product to P20.00 but is required to sell it at P16.00
(i.e. , P20.00 less 20%) to senior citizens. Third, because
the law impacts the prices of the goods or services of a
particular establishment relative to its sales to senior
citizens, its profits or income/gross sales are affected. The
extent of the impact would, however, depend on the
profit margin of the business establishment on a
particular good or service. If a product costs P5.00 to
produce
and
is
sold
at P10.00,
then
the
profit98 is P5.0099 or a profit margin100 of 50%.101
Under the assailed law, the aforesaid product would have
to be sold at P8.00 to senior citizens yet the business
would still earn P3.00102 or a 30%103 profit margin. On the
other hand, if the product costs P9.00 to produce and is
required to be sold at P8.00 to senior citizens, then the
business would experience a loss of P1.00.104
But note that since not all
establishment are senior
establishment may continue
senior citizens which, in turn,
from sales to senior citizens.

customers of a business
citizens, the business
to earn P1.00 from noncan offset any loss arising

Fourth, when the law imposes the 20% discount in favor

of senior citizens, it does not prevent the business
establishment from revising its pricing strategy.
By revising its pricing strategy, a business establishment
can recoup any reduction of profits or income/gross sales
which would otherwise arise from the giving of the 20%
discount. To illustrate, suppose A has two customers: X, a
senior citizen, and Y, a non-senior citizen. Prior to the

law, A sells his products at P10.00 a piece to X and Y

resulting in income/gross sales of P20.00 (P10.00
+ P10.00). With the passage of the law, A must now sell
his product to X at P8.00 (i.e., P10.00 less 20%) so that
his income/gross sales would be P18.00 (P8.00 +P10.00)
or lower by P2.00. To prevent this from happening, A
decides to increase the price of his products toP11.11 per
piece. Thus, he sells his product to X at P8.89
(i.e. , P11.11 less 20%) and to Y at P11.11. As a result, his
income/gross sales would still be P20.00105 (P8.89
+ P11.11). The capacity, then, of business establishments
to revise their pricing strategy makes it possible for them
not to suffer any reduction in profits or income/gross
sales, or, in the alternative, mitigate the reduction of their
profits or income/gross sales even after the passage of the
law. In other words, business establishments have the
capacity to adjust their prices so that they may remain
profitable even under the operation of the assailed law.
The Dissent, however, states that The explanation by
the majority that private establishments can always
increase their prices to recover the mandatory discount
will only encourage private establishments to adjust their
prices upwards to the prejudice of customers who do not
enjoy the 20% discount. It was likewise suggested that if
a company increases its prices, despite the application of
the 20% discount, the establishment becomes more
profitable than it was before the implementation of R.A.
7432. Such an economic justification is self-defeating,
for more consumers will suffer from the price increase
than will benefit from the 20% discount. Even then, such
ability to increase prices cannot legally validate a
violation of the eminent domain clause.106
But, if it is possible that the business establishment, by
adjusting its prices, will suffer no reduction in its profits
or income/gross sales (or suffer some reduction but

continue to operate profitably) despite giving the

discount, what would be the basis to strike down the law?
If it is possible that the business establishment, by
adjusting its prices, will not be unduly burdened, how can
there be a finding that the assailed law is an
unconstitutional exercise of police power or eminent
domain? That there may be a burden placed on business
establishments or the consuming public as a result of the
operation of the assailed law is not, by itself, a ground to
declare it unconstitutional for this goes into the wisdom
and expediency of the law.
The cost of most, if not all, regulatory measures of the
government on business establishments is ultimately
passed on to the consumers but that, by itself, does not
justify the wholesale nullification of these measures. It is
a basic postulate of our democratic system of government
that the Constitution is a social contract whereby the
people have surrendered their sovereign powers to the
State for the common good.107
All persons may be burdened by regulatory measures
intended for the common good or to serve some
important governmental interest, such as protecting or
improving the welfare of a special class of people for
which the Constitution affords preferential concern.
Indubitably, the one assailing the law has the heavy
burden of proving that the regulation is unreasonable,
oppressive or confiscatory, or has gone "too far" as to
amount to a "taking." Yet, here, the Dissent would have
this Court nullify the law without any proof of such
nature.
Further, this Court is not the proper forum to debate the
economic theories or realities that impelled Congress to
shift from the tax credit to the tax deduction scheme. It is
not within our power or competence to judge which

105

scheme is more or less burdensome to business

establishments or the consuming public and, thereafter, to
choose which scheme the State should use or pursue. The
shift from the tax credit to tax deduction scheme is a
policy determination by Congress and the Court will
respect it for as long as there is no showing, as here, that
the subject regulation has transgressed constitutional
limitations. Unavoidably, the lack of evidence constrains
the Dissent to rely on speculative and hypothetical
argumentation when it states that the 20% discount is a
significant amount and not a minimal loss (which
erroneously assumes that the discount automatically
results in a loss when it is possible that the profit margin
is greater than 20% and/or the pricing strategy can be
revised to prevent or mitigate any reduction in profits or
income/gross sales as illustrated above), 108 and not all
private establishments make a 20% profit margin (which
conversely implies that there are those who make more
and, thus, would not be greatly affected by this
regulation).109
In fine, because of the possible scenarios discussed
above, we cannot assume that the 20% discount results in
a permanent reduction in profits or income/gross sales,
much less that business establishments are forced to
operate at a loss under the assailed law. And, even if we
gratuitously assume that the 20% discount results in some
degree of reduction in profits or income/gross sales, we
cannot assume that such reduction is arbitrary, oppressive
or confiscatory. To repeat, there is no actual proof to back
up this claim, and it could be that the loss suffered by a
business establishment was occasioned through its fault
or negligence in not adapting to the effects of the assailed
law. The law uniformly applies to all business
establishments covered thereunder. There is, therefore, no
unjust discrimination as the aforesaid business
establishments are faced with the same constraints. The

necessity of proof is all the more pertinent in this case

because, as similarly observed by Justice Velasco in his
Concurring Opinion, the law has been in operation for
over nine years now. However, the grim picture painted
by petitioners on the unconscionable losses to be
indiscriminately suffered by business establishments,
which should have led to the closure of numerous
business establishments, has not come to pass. Verily, we
cannot invalidate the assailed law based on assumptions
and conjectures. Without adequate proof, the presumption
of constitutionality must prevail. IV At this juncture, we
note that the Dissent modified its original arguments by
including a new paragraph, to wit:
Section 9, Article III of the 1987 Constitution speaks of
private property without any distinction. It does not state
that there should be profit before the taking of property is
subject to just compensation. The private property
referred to for purposes of taking could be inherited,
donated, purchased, mortgaged, or as in this case, part of
the gross sales of private establishments. They are all
private property and any taking should be attended by
corresponding payment of just compensation. The 20%
discount granted to senior citizens belong to private
establishments, whether these establishments make a
profit or suffer a loss. In fact, the 20% discount applies to
non-profit establishments like country, social, or golf
clubs which are open to the public and not only for
exclusive membership. The issue of profit or loss to the
establishments is immaterial.110
Two things may be said of this argument. First, it
contradicts the rest of the arguments of the Dissent. After
it states that the issue of profit or loss is immaterial, the
Dissent proceeds to argue that the 20% discount is not a
minimal loss111 and that the 20% discount forces business
establishments to operate at a loss.112

Even
the
obiter
in
Central
Luzon
Drug
Corporation,113 which the Dissent essentially adopts and
relies on, is premised on the permanent reduction of total
revenues and the loss that business establishments will be
forced to suffer in arguing that the 20% discount
constitutes a "taking" under the power of eminent
domain. Thus, when the Dissent now argues that the issue
of profit or loss is immaterial, it contradicts itself because
it later argues, in order to justify that there is a "taking"
under the power of eminent domain in this case, that the
20% discount forces business establishments to suffer a
significant loss or to operate at a loss. Second, this
argument suffers from the same flaw as the Dissent's
original arguments. It is an erroneous characterization of
the 20% discount. According to the Dissent, the 20%
discount is part of the gross sales and, hence, private
property belonging to business establishments. However,
as previously discussed, the 20% discount is not private
property actually owned and/or used by the business
establishment. It should be distinguished from properties
like lands or buildings actually used in the operation of a
business establishment which, if appropriated for public
use, would amount to a "taking" under the power of
eminent domain. Instead, the 20% discount is a
regulatory measure which impacts the pricing and, hence,
the profitability of business establishments. At the time
the discount is imposed, no particular property of the
business establishment can be said to be "taken." That is,
the State does not acquire or take anything from the
business establishment in the way that it takes a piece of
private land to build a public road. While the 20%
discount may form part of the potential profits or
income/gross sales114 of the business establishment, as
similarly characterized by Justice Bersamin in his
Concurring Opinion, potential profits or income/gross
sales are not private property, specifically cash or money,
already belonging to the business establishment. They are

106

a mere expectancy because they are potential fruits of the

successful conduct of the business. Prior to the sale of
goods or services, a business establishment may be
subject to State regulations, such as the 20% senior
citizen discount, which may impact the level or amount
of profits or income/gross sales that can be generated by
such establishment. For this reason, the validity of the
discount is to be determined based on its overall effects
on the operations of the business establishment.
Again, as previously discussed, the 20% discount does
not automatically result in a 20% reduction in profits, or,
to align it with the term used by the Dissent, the 20%
discount does not mean that a 20% reduction in gross
sales necessarily results. Because (1) the profit margin of
a product is not necessarily less than 20%, (2) not all
customers of a business establishment are senior citizens,
and (3) the establishment may revise its pricing strategy,
such reduction in profits or income/gross sales may be
prevented or, in the alternative, mitigated so that the
business establishment continues to operate profitably.
Thus, even if we gratuitously assume that some degree of
reduction in profits or income/gross sales occurs because
of the 20% discount, it does not follow that the regulation
is unreasonable, oppressive or confiscatory because the
business establishment may make the necessary
adjustments to continue to operate profitably. No
evidence was presented by petitioners to show otherwise.
In fact, no evidence was presented by petitioners at all.
Justice Leonen, in his Concurring and Dissenting
Opinion, characterizes "profits" (or income/gross sales)
as an inchoate right. Another way to view it, as stated by
Justice Velasco in his Concurring Opinion, is that the
business establishment merely has a right to profits. The
Constitution adverts to it as the right of an enterprise to a
reasonable return on investment.115

Undeniably, this right, like any other right, may be

regulated under the police power of the State to achieve
important governmental objectives like protecting the
interests and improving the welfare of senior citizens. It
should be noted though that potential profits or
income/gross sales are relevant in police power and
eminent domain analyses because they may, in
appropriate cases, serve as an indicia when a regulation
has gone "too far" as to amount to a "taking" under the
power of eminent domain. When the deprivation or
reduction of profits or income/gross sales is shown to be
unreasonable, oppressive or confiscatory, then the
challenged governmental regulation may be nullified for
being a "taking" under the power of eminent domain. In
such a case, it is not profits or income/gross sales which
are actually taken and appropriated for public use. Rather,
when the regulation causes an establishment to incur
losses in an unreasonable, oppressive or confiscatory
manner, what is actually taken is capital and the right of
the business establishment to a reasonable return on
investment. If the business losses are not halted because
of the continued operation of the regulation, this
eventually leads to the destruction of the business and the
total loss of the capital invested therein. But, again,
petitioners in this case failed to prove that the subject
regulation is unreasonable, oppressive or confiscatory.
V.
The Dissent further argues that we erroneously used price
and rate of return on investment control laws to justify
the senior citizen discount law. According to the Dissent,
only profits from industries imbued with public interest
may be regulated because this is a condition of their
franchises. Profits of establishments without franchises
cannot be regulated permanently because there is no law
regulating their profits. The Dissent concludes that the

permanent reduction of total revenues or gross sales of

business establishments without franchises is a taking of
private property under the power of eminent domain. In
making this argument, it is unfortunate that the Dissent
quotes only a portion of the ponencia The subject
regulation may be said to be similar to, but with
substantial distinctions from, price control or rate of
return on investment control laws which are traditionally
regarded as police power measures. These laws generally
regulate public utilities or industries/enterprises imbued
with public interest in order to protect consumers from
exorbitant or unreasonable pricing as well as temper
corporate greed by controlling the rate of return on
investment of these corporations considering that they
have a monopoly over the goods or services that they
provide to the general public. The subject regulation
differs therefrom in that (1) the discount does not prevent
the establishments from adjusting the level of prices of
their goods and services, and (2) the discount does not
apply to all customers of a given establishment but only
to the class of senior citizens. x x x116
The above paragraph, in full, states
The subject regulation may be said to be similar to, but
with substantial distinctions from, price control or rate of
return on investment control laws which are traditionally
regarded as police power measures. These laws generally
regulate public utilities or industries/enterprises imbued
with public interest in order to protect consumers from
exorbitant or unreasonable pricing as well as temper
corporate greed by controlling the rate of return on
investment of these corporations considering that they
have a monopoly over the goods or services that they
provide to the general public. The subject regulation
differs therefrom in that (1) the discount does not prevent
the establishments from adjusting the level of prices of

107

their goods and services, and (2) the discount does not
apply to all customers of a given establishment but only
to the class of senior citizens.
Nonetheless, to the degree material to the resolution of
this case, the 20% discount may be properly viewed as
belonging to the category of price regulatory measures
which affects the profitability of establishments subjected
thereto. (Emphasis supplied)
The point of this paragraph is to simply show that the
State has, in the past, regulated prices and profits of
business establishments. In other words, this type of
regulatory measures is traditionally recognized as police
power measures so that the senior citizen discount may
be considered as a police power measure as well. What is
more, the substantial distinctions between price and rate
of return on investment control laws vis--vis the senior
citizen discount law provide greater reason to uphold the
validity of the senior citizen discount law. As previously
discussed, the ability to adjust prices allows the
establishment subject to the senior citizen discount to
prevent or mitigate any reduction of profits or
income/gross sales arising from the giving of the
discount. In contrast, establishments subject to price and
rate of return on investment control laws cannot adjust
prices accordingly. Certainly, there is no intention to say
that price and rate of return on investment control laws
are the justification for the senior citizen discount law.
Not at all. The justification for the senior citizen discount
law is the plenary powers of Congress. The legislative
power to regulate business establishments is broad and
covers a wide array of areas and subjects. It is well within
Congress legislative powers to regulate the profits or
income/gross sales of industries and enterprises, even
those without franchises. For what are franchises but
mere legislative enactments? There is nothing in the

Constitution that prohibits Congress from regulating the

profits or income/gross sales of industries and enterprises
without franchises. On the contrary, the social justice
provisions of the Constitution enjoin the State to regulate
the "acquisition, ownership, use, and disposition" of
property and its increments.117
This may cover the regulation of profits or income/gross
sales of all businesses, without qualification, to attain the
objective of diffusing wealth in order to protect and
enhance the right of all the people to human dignity.118
Thus, under the social justice policy of the Constitution,
business establishments may be compelled to contribute
to uplifting the plight of vulnerable or marginalized
groups in our society provided that the regulation is not
arbitrary, oppressive or confiscatory, or is not in breach of
some specific constitutional limitation. When the Dissent,
therefore, states that the "profits of private establishments
which are non-franchisees cannot be regulated
permanently, and there is no such law regulating their
profits permanently,"119 it is assuming what it ought to
prove. First, there are laws which, in effect, permanently
regulate profits or income/gross sales of establishments
without franchises, and RA 9257 is one such law. And,
second, Congress can regulate such profits or
income/gross sales because, as previously noted, there is
nothing in the Constitution to prevent it from doing so.
Here, again, it must be emphasized that petitioners failed
to present any proof to show that the effects of the
assailed law on their operations has been unreasonable,
oppressive or confiscatory. The permanent regulation of
profits or income/gross sales of business establishments,
even those without franchises, is not as uncommon as the
Dissent depicts it to be. For instance, the minimum wage
law allows the State to set the minimum wage of
employees in a given region or geographical area.

Because of the added labor costs arising from the

minimum wage, a permanent reduction of profits or
income/gross sales would result, assuming that the
employer does not increase the prices of his goods or
services. To illustrate, suppose it costs a company P5.00
to produce a product and it sells the same at P10.00 with
a 50% profit margin. Later, the State increases the
minimum wage. As a result, the company incurs greater
labor costs so that it now costs P7.00 to produce the same
product. The profit per product of the company would be
reduced to P3.00 with a profit margin of 30%. The net
effect would be the same as in the earlier example of
granting a 20% senior citizen discount. As can be seen,
the minimum wage law could, likewise, lead to a
permanent reduction of profits. Does this mean that the
minimum wage law should, likewise, be declared
unconstitutional on the mere plea that it results in a
permanent reduction of profits? Taking it a step further,
suppose the company decides to increase the price of its
product in order to offset the effects of the increase in
labor cost; does this mean that the minimum wage law,
following the reasoning of the Dissent, is unconstitutional
because the consuming public is effectively made to
subsidize the wage of a group of laborers, i.e., minimum
wage earners? The same reasoning can be adopted
relative to the examples cited by the Dissent which,
according to it, are valid police power regulations. Article
157 of the Labor Code, Sections 19 and 18 of the Social
Security Law, and Section 7 of the Pag-IBIG Fund Law
would effectively increase the labor cost of a business
establishment. This would, in turn, be integrated as part
of the cost of its goods or services. Again, if the
establishment does not increase its prices, the net effect
would be a permanent reduction in its profits or
income/gross sales. Following the reasoning of the
Dissent that "any form of permanent taking of private
property (including profits or income/gross sales)120 is an

108

exercise of eminent domain that requires the State to pay

just compensation,"121 then these statutory provisions
would, likewise, have to be declared unconstitutional. It
does not matter that these benefits are deemed part of the
employees legislated wages because the net effect is the
same, that is, it leads to higher labor costs and a
permanent reduction in the profits or income/gross sales
of the business establishments.122
The point then is this most, if not all, regulatory
measures imposed by the State on business
establishments impact, at some level, the latters prices
and/or profits or income/gross sales.123
If the Court were to sustain the Dissents theory, then a
wholesale nullification of such measures would
inevitably result. The police power of the State and the
social justice provisions of the Constitution would, thus,
be rendered nugatory. There is nothing sacrosanct about
profits or income/gross sales. This, we made clear in
Carlos Superdrug Corporation:124
Police power as an attribute to promote the common
good would be diluted considerably if on the mere plea of
petitioners that they will suffer loss of earnings and
capital, the questioned provision is invalidated.
Moreover, in the absence of evidence demonstrating the
alleged confiscatory effect of the provision in question,
there is no basis for its nullification in view of the
presumption of validity which every law has in its favor.
xxxx
The Court is not oblivious of the retail side of the
pharmaceutical industry and the competitive pricing
component of the business. While the Constitution
protects property rights petitioners must the realities of

business and the State, in the exercise of police power,

can intervene in the operations of a business which may
result in an impairment of property rights in the process.
Moreover, the right to property has a social dimension.
While Article XIII of the Constitution provides the
percept for the protection of property, various laws and
jurisprudence, particularly on agrarian reform and the
regulation of contracts and public utilities, continously
serve as a reminder for the promotion of public good.
Undeniably, the success of the senior citizens program
rests largely on the support imparted by petitioners and
the other private establishments concerned. This being
the case, the means employed in invoking the active
participation of the private sector, in order to achieve the
purpose or objective of the law, is reasonably and directly
related. Without sufficient proof that Section 4(a) of R.A.
No. 9257 is arbitrary, and that the continued
implementation of the same would be unconscionably
detrimental to petitioners, the Court will refrain form
quashing a legislative act.125
In conclusion, we maintain that the correct rule in
determining whether the subject regulatory measure has
amounted to a "taking" under the power of eminent
domain is the one laid down in Alalayan v. National
Power Corporation126 and followed in Carlos Superdurg
Corporation127 consistent with long standing principles in
police power and eminent domain analysis. Thus, the
deprivation or reduction of profits or income. Gross sales
must be clearly shown to be unreasonable, oppressive or
confiscatory. Under the specific circumstances of this
case, such determination can only be made upon the
presentation of competent proof which petitioners failed
to do. A law, which has been in operation for many years
and promotes the welfare of a group accorded special

concern by the Constitution, cannot and should not be

summarily invalidated on a mere allegation that it
reduces the profits or income/gross sales of business
establishments.
WHEREFORE, the Petition is hereby DISMISSED for
lack of merit.
SO ORDERED.

//Carlos Superdrug vs
Secretary
CARLOS SUPERDRUG CORP., G.R. No. 166494
doing business under the name
and style Carlos Superdrug, Present:
ELSIE M. CANO, doing business
under the name and style Advance PUNO, C.J.,
Drug, Dr. SIMPLICIO L. YAP, JR., QUISUMBING,*
doing business under the name and YNARES-SANTIAGO,
style City Pharmacy, MELVIN S. SANDOVAL-GUTIERREZ,**
DELA SERNA, doing business under CARPIO,
the name and style Botica dela Serna, AUSTRIA-MARTINEZ,
and LEYTE SERV-WELL CORP., CORONA,
doing business under the name and CARPIO MORALES,
style Leyte Serv-Well Drugstore, AZCUNA,
Petitioners, TINGA,
CHICO-NAZARIO,
- versus - GARCIA,
VELASCO, JR., and
DEPARTMENT OF SOCIAL NACHURA, JJ.
WELFARE and DEVELOPMENT
(DSWD), DEPARTMENT OF Promulgated:
HEALTH (DOH), DEPARTMENT
OF FINANCE (DOF), DEPARTMENT June 29, 2007
OF JUSTICE (DOJ), and
DEPARTMENT OF INTERIOR and
LOCAL GOVERNMENT (DILG),
Respondents.

109

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

The antecedents are as follows:

DECISION
On February 26, 2004, R.A.
AZCUNA, J.:

for Preliminary Injunction assailing the constitutionality

of Section 4(a) of Republic Act (R.A.) No. 9257,
otherwise known as the Expanded Senior Citizens Act

of 2003.

Petitioners are domestic corporations and

proprietors operating drugstores in the Philippines.

Public respondents, on the other hand, include the

Department

of

Social

Welfare

and

Development

(DSWD), the Department of Health (DOH), the

Department of Finance (DOF), the Department of Justice
(DOJ), and the Department of Interior and Local
Government (DILG) which have been specifically tasked
to monitor the drugstores compliance with the law;
promulgate the implementing rules and regulations for
the effective implementation of the law; and prosecute
and

revoke

establishments.

9257,

amending R.A. No. 7432,[3] was signed into law by

This is a petition[1] for Prohibition with Prayer

[2]

No.

the

licenses

of

erring

drugstore

total amount of the claimed tax

deduction net of value added tax if
applicable, shall be included in their
gross sales receipts for tax purposes
and shall be subject to proper
documentation and to the provisions
of the National Internal Revenue
Code, as amended.[4]

President Gloria Macapagal-Arroyo and it became

effective on March 21, 2004. Section 4(a) of the Act

On May 28, 2004, the DSWD approved and

adopted the Implementing Rules and Regulations of R.A.

states:
SEC. 4. Privileges for the Senior
Citizens. The senior citizens shall be
entitled to the following:
(a) the grant of twenty
percent (20%) discount from all
establishments relative to the
utilization of services in hotels and
similar
lodging
establishments,
restaurants and recreation centers,
and purchase of medicines in all
establishments for the exclusive use
or enjoyment of senior citizens,
including funeral and burial services
for the death of senior citizens;
...
The establishment may
claim the discounts granted under (a),
(f),
(g)
and
(h)
as tax
deduction based on the net cost of
the goods sold or services
rendered: Provided, That the cost of
the discount shall be allowed as
deduction from gross income for the
same taxable year that the discount is
granted. Provided, further, That the

No. 9257, Rule VI, Article 8 of which states:

Article 8. Tax Deduction of
Establishments. The
establishment
may claim the discounts granted
under Rule V, Section 4 Discounts for
Establishments;[5] Section 9, Medical
and Dental Services in Private
Facilities[,][6] and Sections 10[7] and
11[8] Air,
Sea
and
Land
Transportation as tax deduction based
on the net cost of the goods sold or
services rendered. Provided, That the
cost of the discount shall be allowed
as deduction from gross income for
the same taxable year that the
discount
is
granted; Provided,
further, That the total amount of the
claimed tax deduction net of value
added tax if applicable, shall be
included in their gross sales receipts
for tax purposes and shall be
subject to proper documentation and
to the provisions of the National
Internal Revenue Code, as amended;
Provided,
finally,
that
the
implementation of the tax deduction
shall be subject to the Revenue
Regulations to be issued by the

110

Bureau of Internal Revenue (BIR)

and approved by the Department of
Finance (DOF).[9]
On July 10, 2004, in reference to the query of
the Drug Stores Association of the Philippines (DSAP)
concerning the meaning of a tax deduction under the
Expanded Senior Citizens Act, the DOF, through Director
IV Ma. Lourdes B. Recente, clarified as follows:
1) The difference between
the Tax Credit (under the Old Senior
Citizens Act) and Tax Deduction
(under the Expanded Senior Citizens
Act).
1.1. The
provision of Section 4 of
R.A. No. 7432 (the old
Senior Citizens Act) grants
twenty percent (20%)
discount
from
all
establishments relative to
the
utilization
of
transportation
services,
hotels and similar lodging
establishment, restaurants
and recreation centers and
purchase of medicines
anywhere in the country,
the costs of which may be
claimed by the private
establishments concerned
as tax credit.
Effectively, a tax
credit is a peso-for-peso
deduction from a taxpayers
tax liability due to the
government of the amount

of
discounts
such
establishment has granted
to a senior citizen. The
establishment recovers the
full amount of discount
given to a senior citizen
and hence, the government
shoulders 100% of the
discounts granted.
It must be noted,
however, that conceptually,
a tax credit scheme under
the Philippine tax system,
necessitates
that
prior
payments of taxes have
been made and the taxpayer
is attempting to recover this
tax payment from his/her
income tax due. The tax
credit scheme under R.A.
No. 7432 is, therefore,
inapplicable since no tax
payments have previously
occurred.
1.2.
The
provision under R.A. No.
9257, on the other hand,
provides
that
the
establishment
concerned
may claim the discounts
under Section 4(a), (f), (g)
and
(h)
as tax
deduction from
gross
income, based on the net
cost of goods sold or
services rendered.
Under
this
scheme, the establishment
concerned is allowed to
deduct from gross income,

in computing for its tax

liability, the amount of
discounts granted to senior
citizens. Effectively, the
government loses in terms
of foregone revenues an
amount equivalent to the
marginal tax rate the said
establishment is liable to
pay the government. This
will
be
an
amount
equivalent to 32% of the
twenty percent
(20%)
discounts so granted. The
establishment shoulders the
remaining portion of the
granted discounts.
It
may
be
necessary to note that while
the burden on [the]
government is slightly
diminished in terms of its
percentage share on the
discounts granted to senior
citizens, the number of
potential
establishments
that
may claim tax
deductions, have however,
been broadened. Aside
from the establishments
that
may
claim tax
credits under the old law,
more establishments were
added under the new law
such as: establishments
providing medical and
dental services, diagnostic
and laboratory services,
including professional fees
of attending doctors in all
private
hospitals
and
medical facilities, operators

111

of domestic air and sea

transport services, public
railways and skyways and
bus transport services.
A
simple
illustration might help
amplify
the
points
discussed
above,
as
follows:
T
a
x
D
e
d
u
c
t
i
o
n
T
a
x
C
r
e
d
i
t

Net Sales x x x x x x x x x

Implement the Relevant Provisions of Republic Act 9257,

xxx

otherwise known as the Expanded Senior Citizens Act of

Less: Operating Expenses:

2003[11] was issued by the DOH, providing the grant of

Tax

twenty percent (20%) discount in the purchase of

Deduction

on

Discounts x x x x --

unbranded generic medicines from all establishments

Other deductions: x x x x x

dispensing medicines for the exclusive use of the senior

xxx

citizens.

Net Taxable Income x x x x

On November 12, 2004, the DOH issued Administrative

xxxxxx

Order No 177[12] amending A.O. No. 171. Under A.O. No.

Tax Due x x x x x x

177, the twenty percent discount shall not be limited to

Less: Tax

the purchase of unbranded generic medicines only, but

Credit -- ______x x

shall extend to both prescription and non-prescription

Net Tax Due -- x x

As shown above, under
a tax deduction scheme, the tax
deduction
on
discounts was
subtracted from Net Sales together
with other deductions which are
considered as operating expenses
before the Tax Due was computed
based on the Net Taxable Income. On
the other hand, under a tax
credit scheme, the amount of
discounts
which
is
the tax
credit item, was deducted directly
from the tax due amount.[10]

Gross Sales x x x x x x x x
xxxx
Less : Cost of goods sold x
xxxxxxxxx

medicines whether branded or generic. Thus, it stated that

[t]he grant of twenty percent (20%) discount shall be
provided in the purchase of medicines from all
establishments dispensing medicines for the exclusive
use of the senior citizens.

Petitioners assail the constitutionality of Section 4(a) of

the Expanded Senior Citizens Act based on the following
grounds:[13]
1)

Meanwhile, on October 1, 2004, Administrative

Order (A.O.) No. 171 or the Policies and Guidelines to

The law is confiscatory

because it infringes Art. III,
Sec. 9 of the Constitution
which provides that private
property shall not be taken

112

for public use without just

compensation;
2)

3)

It violates the equal

protection clause (Art. III,
Sec. 1) enshrined in our
Constitution which states
that no person shall be
deprived of life, liberty or
property
without
due
process of law, nor shall
any person be denied of the
equal protection of the
laws; and
The 20% discount on
medicines violates the
constitutional guarantee in
Article XIII, Section 11
that makes essential goods,
health and other social
services available to all
people at affordable cost.[14]

Examining petitioners arguments, it is apparent

that what petitioners are ultimately questioning is the
validity of the tax deduction scheme as a reimbursement
mechanism for the twenty percent (20%) discount that
they extend to senior citizens.

unconstitutional because it constitutes deprivation of

private property. Compelling drugstore owners and
establishments to grant the discount will result in a loss

is a forced subsidy corresponding to the taking of private

property for public use or benefit.[17] This constitutes
compensable

taking

for

which

petitioners

would

ordinarily become entitled to a just compensation.

Based on the afore-stated DOF Opinion, the tax

deduction scheme does not fully reimburse petitioners for
the discount privilege accorded to senior citizens. This is
because the discount is treated as a deduction, a taxdeductible expense that is subtracted from the gross
income and results in a lower taxable income. Stated
otherwise, it is an amount that is allowed by law

[15]

to

reduce the income prior to the application of the tax rate

Petitioners assert that Section 4(a) of the law is

The permanent reduction in their total revenues

Just compensation is defined as the full and fair

equivalent of the property taken from its owner by the
expropriator. The measure is not the takers gain but the
owners loss. The word just is used to intensify the
meaning of the wordcompensation, and to convey the
idea that the equivalent to be rendered for the property to
be taken shall be real, substantial, full and ample. [18]

to compute the amount of tax which is due.[16] Being a tax

deduction, the discount does not reduce taxes owed on a
peso for peso basis but merely offers a fractional
reduction in taxes owed.

tax

deduction

does

not

offer

full

reimbursement of the senior citizen discount. As such, it

would not meet the definition of just compensation.[19]

of profit
Theoretically, the treatment of the discount as a
and capital because 1) drugstores impose a mark-up of
only 5% to 10% on branded medicines; and 2) the law
failed to provide a scheme whereby drugstores will be
justly compensated for the discount.

deduction reduces the net income of the private

establishments concerned. The discounts given would
have entered the coffers and formed part of the gross
sales of the private establishments, were it not for R.A.

Having said that, this raises the question of

whether the State, in promoting the health and welfare of
a special group of citizens, can impose upon private
establishments the burden of partly subsidizing a
government program.

No. 9257.

113

The Court believes so.

The Senior Citizens Act was enacted primarily

to maximize the contribution of senior citizens to nation-

health and other social services

available to all the people at
affordable cost. There shall be
priority for the needs of the
underprivileged
sick,
elderly,
disabled, women and children.
Consonant with these constitutional
principles the following are the
declared policies of this Act:

building, and to grant benefits and privileges to them for

their improvement and well-being as the State considers
them an integral part of our society.

[20]

The priority given to senior citizens finds its

The law is a legitimate exercise of police power which,

similar to the power of eminent domain, has general
welfare for its object. Police power is not capable of an
exact definition, but has been purposely veiled in general
terms to underscore its comprehensiveness to meet all
exigencies and provide enough room for an efficient and

...

flexible response to conditions and circumstances, thus

(f) To
recognize
the
important role of the private sector
in the improvement of the welfare
of senior citizens and to actively
seek their partnership.[21]

assuring the greatest benefits. [22] Accordingly, it has been

described as the most essential, insistent and the least
limitable of powers, extending as it does to all the great
public needs.[23] It is [t]he power vested in the legislature

basis in the Constitution as set forth in the law itself.

Thus, the Act provides:
SEC. 2. Republic Act No.
7432 is hereby amended to read as
follows:
SECTION 1. Declaration
of Policies and Objectives. Pursuant
to Article XV, Section 4 of the
Constitution, it is the duty of the
family to take care of its elderly
members while the State may design
programs of social security for them.
In addition to this, Section 10 in the
Declaration of Principles and State
Policies provides: The State shall
provide social justice in all phases of
national
development.
Further,
Article XIII, Section 11, provides:
The State shall adopt an integrated
and comprehensive approach to
health development which shall
endeavor to make essential goods,

To implement the above policy, the law grants a twenty

by the constitution to make, ordain, and establish all

percent discount to senior citizens for medical and dental

manner of wholesome and reasonable laws, statutes, and

services, and diagnostic and laboratory fees; admission

ordinances, either with penalties or without, not

fees charged by theaters, concert halls, circuses,

repugnant to the constitution, as they shall judge to be for

carnivals, and other similar places of culture, leisure and

the good and welfare of the commonwealth, and of the

amusement; fares for domestic land, air and sea travel;

subjects of the same.[24]

utilization of services in hotels and similar lodging

establishments, restaurants and recreation centers; and

For this reason, when the conditions so demand

purchases of medicines for the exclusive use or

as determined by the legislature, property rights must

enjoyment

of

bow to the primacy of police power because property

business

rights, though sheltered by due process, must yield to

of

reimbursement,

senior
the

citizens.
law

As

provides

a
that

form

establishments extending the twenty percent discount to

general welfare.[25]

senior citizens may claim the discount as a tax deduction.

114

Police power as an attribute to promote the

To illustrate this point, petitioner Carlos Super

cited

the

common good would be diluted considerably if on the

Drug

maintenance

be operating at a loss should they give the discount. In

mere plea of petitioners that they will suffer loss of

drug Norvasc as an example. According to the latter, it

addition, the computation was erroneously based on the

earnings and capital, the questioned provision is

acquires Norvasc from the distributors at P37.57 per

assumption that their customers consisted wholly of

invalidated. Moreover, in the absence of evidence

tablet, and retails it at P39.60 (or at a margin of 5%). If it

senior citizens. Lastly, the 32% tax rate is to be imposed

demonstrating the alleged confiscatory effect of the

grants a 20% discount to senior citizens or an amount

on income, not on the amount of the discount.

provision in question, there is no basis for its nullification

equivalent

in view of the presumption of validity which every law

sell Norvasc at P31.68 which translates to a loss from

Furthermore, it is unfair for petitioners to

has in its favor.[26]

capital of P5.89 per tablet. Even if the government will

criticize the law because they cannot raise the prices of

allow a tax deduction, only P2.53 per tablet will be

their medicines given the cutthroat nature of the players

Given these, it is incorrect for petitioners to

refunded and not the full amount of the discount which

in the industry. It is a business decision on the part of

insist that the grant of the senior citizen discount is

is P7.92. In short, only 32% of the 20% discount will be

petitioners to peg the mark-up at 5%. Selling the

unduly oppressive to their business, because petitioners

reimbursed to the drugstores.[28]

medicines below acquisition cost, as alleged by

to P7.92,

anti-hypertensive

petitioners cannot substantiate their claim that they will

then

it

would

have

to

have not taken time to calculate correctly and come up

petitioners, is merely a result of this decision. Inasmuch

with a financial report, so that they have not been able to

Petitioners computation is flawed. For purposes

as pricing is a property right, petitioners cannot reproach

show properly whether or not the tax deduction scheme

of reimbursement, the law states that the cost of the

the law for being oppressive, simply because they cannot

really works greatly to their disadvantage. [27]

discount shall be deducted from gross income, [29] the

afford to raise their prices for fear of losing their

amount of income derived from all sources before

customers to competition.

In treating the discount as a tax deduction,

deducting allowable expenses, which will result in net

petitioners insist that they will incur losses because,

income. Here, petitioners tried to show a loss on a per

The Court is not oblivious of the retail side of

referring to the DOF Opinion, for every P1.00 senior

transaction basis, which should not be the case. An

the pharmaceutical industry and the competitive pricing

citizen discount that petitioners would give, P0.68 will be

income statement, showing an accounting of petitioners

component of the business. While the Constitution

shouldered by them as only P0.32 will be refunded by the

sales, expenses, and net profit (or loss) for a given period

protects property rights, petitioners must accept the

government by way of a tax deduction.

could have accurately reflected the effect of the discount

realities of business and the State, in the exercise of

on their income. Absent any financial statement,

police power, can intervene in the operations of a

115

NACHURA, J.:

business which may result in an impairment of property

rights in the process.

No costs.
Petitioners Romeo P. Gerochi, Katulong Ng Bayan (KB),

Moreover, the right to property has a social

SO ORDERED.

(petitioners), come before this Court in this original

dimension. While Article XIII of the Constitution

provides the precept for the protection of property,
various laws and jurisprudence, particularly on agrarian

Gerochi vs Department of
Energy *

reform and the regulation of contracts and public utilities,

continuously serve as a reminder that the right to
property can be relinquished upon the command of the
State for the promotion of public good.[30]

program rests largely on the support imparted by

petitioners

and

the

other

private

establishments

concerned. This being the case, the means employed in

invoking the active participation of the private sector, in

ROMEO P. GEROCHI, KATULONG NG BAYAN

(KB) and ENVIRONMENTALIST CONSUMERS
NETWORK, INC. (ECN),
Petitioners,

DEPARTMENT OF ENERGY (DOE), ENERGY

REGULATORY COMMISSION (ERC), NATIONAL
POWER CORPORATION (NPC), POWER SECTOR
ASSETS AND LIABILITIES MANAGEMENT
GROUP (PSALM Corp.), STRATEGIC POWER
UTILITIES
GROUP
(SPUG),
and PANAYELECTRIC COMPANY INC. (PECO),
Respondents.

order to achieve the purpose or objective of the law, is

reasonably and directly related. Without sufficient proof
that Section 4(a) of R.A. No. 9257 is arbitrary, and that
the continued implementation of the same would be
unconscionably detrimental to petitioners, the Court will
refrain from quashing a legislative act.[31]
WHEREFORE, the
is DISMISSED for lack of merit.

petition

action praying that Section 34 of Republic Act (RA)

9136, otherwise known as the Electric Power Industry
Reform Act of 2001 (EPIRA), imposing the Universal
Charge,[1] and Rule 18 of the Rules and Regulations

-versusUndeniably, the success of the senior citizens

and Environmentalist Consumers Network, Inc. (ECN)

x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ------------x
DECISION

(IRR)[2] which seeks to implement the said imposition, be

declared unconstitutional. Petitioners also pray that the
Universal Charge imposed upon the consumers be
refunded and that a preliminary injunction and/or
temporary restraining order (TRO) be issued directing the
respondents to refrain from implementing, charging, and
collecting the said charge.[3] The assailed provision of law
reads:
SECTION
34. Universal
Charge. Within one (1) year from the
effectivity of this Act, a universal
charge to be determined, fixed and
approved by the ERC, shall be
imposed on all electricity end-users
for the following purposes:
(a) Payment
for
the
stranded
debts[4] in excess of the amount
assumed by the National
Government and stranded

116

contract costs of NPC[5] and as

well as qualified stranded
contract costs of distribution
utilities resulting from the
restructuring of the industry;

TRANSCO. The PSALM Corp., as

administrator of the fund, shall create
a Special Trust Fund which shall be
disbursed only for the purposes
specified herein in an open and
transparent manner. All amount
collected for the universal charge
shall be distributed to the respective
beneficiaries within a reasonable
period to be provided by the ERC.

(b) Missionary electrification;[6]

(c) The equalization of the taxes and
royalties applied to indigenous
or renewable sources of energy
vis--vis imported energy fuels;
(d) An
environmental
charge
equivalent to one-fourth of one
centavo per kilowatt-hour
(P0.0025/kWh), which shall
accrue to an environmental
fund to be used solely for
watershed rehabilitation and
management. Said fund shall
be managed by NPC under
existing arrangements; and
(e) A charge to account for all forms
of cross-subsidies for a period
not exceeding three (3) years.
The universal charge shall be a nonbypassable charge which shall be
passed on and collected from all endusers on a monthly basis by the
distribution utilities. Collections by
the distribution utilities and the
TRANSCO in any given month shall
be remitted to the PSALM Corp. on
or before the fifteenth (15th) of the
succeeding month, net of any amount
due to the distribution utility. Any
end-user or self-generating entity not
connected to a distribution utility
shall
remit
its
corresponding
universal charge directly to the

Trust Fund (STF) managed by respondent Power Sector

Assets and

Liabilities Management Group (PSALM) [10] for the

rehabilitation and management of watershed areas. [11]

On December 20, 2002, the ERC issued an Order [12] in

The Facts

ERC Case No. 2002-165 provisionally approving the

computed amount of P0.0168/kWh as the share of the

Congress enacted the EPIRA on June 8, 2001; on June

26, 2001, it took effect.[7]

NPC-SPUG from the Universal Charge for Missionary

Electrification and authorizing the National Transmission
Corporation (TRANSCO) and Distribution Utilities to

On April

5,

2002,

respondent

National

Power

collect the same from its end-users on a monthly basis.

Corporation-Strategic Power Utilities Group [8] (NPCSPUG) filed with respondent Energy Regulatory
Commission (ERC) a petition for the availment from the
Universal

Charge

of

its

share

for

Missionary

On June 26, 2003, the ERC rendered its Decision [13] (for
ERC Case No. 2002-165) modifying its Order of
December 20, 2002, thus:

Electrification, docketed as ERC Case No. 2002-165. [9]

On May 7, 2002, NPC filed another petition with ERC,

docketed as ERC Case No. 2002-194, praying that the
proposed share from the Universal Charge for the
Environmental charge of P0.0025 per kilowatt-hour
(/kWh), or a total of P119,488,847.59, be approved for
withdrawal

from

the

Special

WHEREFORE,
the
foregoing premises considered, the
provisional authority granted to
petitioner
National
Power
Corporation-Strategic Power Utilities
Group (NPC-SPUG) in the Order
dated December 20, 2002 is hereby
modified to the effect that an
additional amount of P0.0205 per
kilowatt-hour should be added to
the P0.0168
per
kilowatt-hour

117

provisionally authorized by the

Commission in the said Order.
Accordingly,
a
total
amount
of P0.0373 per kilowatt-hour is
hereby APPROVED for withdrawal
from the Special Trust Fund managed
by PSALM as its share from the
Universal Charge for Missionary
Electrification (UC-ME) effective on
the following billing cycles:
(a) June 26-July 25, 2003
for
National
Transmission
Corporation
(TRANSCO); and
(b) July
2003
for
Distribution Utilities (Dus).
Relative
thereto,
TRANSCO and Dus are directed to
collect the UC-ME in the amount
of P0.0373 per kilowatt-hour and
remit the same to PSALM on or
before the 15th day of the succeeding
month.
In the meantime, NPCSPUG is directed to submit, not later
than April 30, 2004, a detailed report
to
include
Audited
Financial
Statements and physical status
(percentage of completion) of the
projects using the prescribed format.
Let copies of this Order be
furnished petitioner NPC-SPUG and
all distribution utilities (Dus).
SO ORDERED.

On August 13, 2003, NPC-SPUG filed a Motion for

Reconsideration asking the ERC, among others,

[14]

to set

aside the above-mentioned Decision, which the ERC

Rehabilitation Budget subject to the availability of funds

for the Environmental Fund component of the Universal
Charge.[16]

granted in its Order dated October 7, 2003, disposing:

On the basis of the said ERC decisions, respondent Panay
WHEREFORE,
the
foregoing
premises considered, the Motion for
Reconsideration filed by petitioner
National Power Corporation-Small
Power Utilities Group (NPC-SPUG)
is hereby GRANTED. Accordingly,
the Decision dated June 26, 2003 is
hereby modified accordingly.
Relative thereto, NPC-SPUG is
directed to submit a quarterly report
on the following:
1.
Projects for
CY 2002 undertaken;
2.
Location
3.
Actual
amount utilized to
complete the project;
4.
Period
of
completion;
5.
Start
of
Operation; and
6.
Explanation
of the reallocation of
UC-ME funds, if any.
SO ORDERED.[15]

Meanwhile, on April 2, 2003, ERC decided ERC Case

No. 2002-194, authorizing the NPC to draw up
to P70,000,000.00 from PSALM for its 2003 Watershed

Electric

Company,

Inc.

(PECO)

charged petitioner Romeo P. Gerochi and all other

end-users with the Universal Charge as reflected in their

respective electric bills starting from the month of July
2003.[17]
Hence, this original action.

Petitioners submit that the assailed provision of law and

its IRR which sought to implement the same are
unconstitutional on the following grounds:
1)

The universal charge provided

for under Sec. 34 of the EPIRA
and sought to be implemented
under Sec. 2, Rule 18 of the IRR
of the said law is a tax which is
to be collected from all electric
end-users and self-generating
entities. The power to tax is
strictly a legislative function and
as such, the delegation of said
power to any executive or
administrative agency like the
ERC is unconstitutional, giving

118

the same unlimited authority.

The assailed provision clearly
provides that the Universal
Charge is to be determined,
fixed and approved by the ERC,
hence leaving to the latter
complete
discretionary
legislative authority.
2)

3)

The ERC is also empowered to

approve and determine where
the funds collected should be
used.
The imposition of the Universal
Charge on all end-users is
oppressive and confiscatory and
amounts to taxation without
representation as the consumers
were not given a chance to be
heard and represented.[18]

Petitioners contend that the Universal Charge

has the characteristics of a tax and is collected to fund the
operations

of

the

NPC. They

argue

that

the

cases[19] invoked by the respondents clearly show the

need to delegate powers to administrative bodies.

contend that said Universal Charge does not possess the

[21]

essential characteristics of a tax, that its imposition would

Petitioners posit that the Universal Charge is imposed

not for a similar purpose.

redound to the benefit of the electric power industry and

On the other hand, respondent PSALM through the

not to the public, and that its rate is uniformly levied on

Office of the Government Corporate Counsel (OGCC)

electricity end-users, unlike a tax which is imposed based

contends that unlike a tax which is imposed to provide

on the individual taxpayer's ability to pay. Moreover,

income for public purposes, such as support of the

respondents deny that there is undue delegation of

government, administration of the law, or payment of

legislative power to the ERC since the EPIRA sets forth

public expenses, the assailed Universal Charge is levied

sufficient determinable standards which would guide the

for a specific regulatory purpose, which is to ensure the

ERC in the exercise of the powers granted to it. Lastly,

viability of the country's electric power industry. Thus, it

respondents argue that the imposition of the Universal

is exacted by the State in the exercise of its inherent

Charge is not oppressive and confiscatory since it is an

police power. On this premise, PSALM submits that there

exercise of the police power of the State and it complies

is no undue delegation of legislative power to the ERC

with the requirements of due process.[23]

since the latter merely exercises a limited authority or

discretion as to the execution and implementation of the

On its part, respondent PECO argues that it is duty-bound

provisions of the EPIRA.[22]

to collect and remit the amount pertaining to the

Missionary Electrification and Environmental Fund

regulatory purpose of the charges imposed therein, which

is not so in the case at bench. In said cases, the respective
funds[20] were created in order to balance and stabilize the
prices of oil and sugar, and to act as buffer to counteract
the changes and adjustments in prices, peso devaluation,
and other variables which cannot be adequately and
timely monitored by the legislature. Thus, there was a

Respondents Department of Energy (DOE), ERC, and

components of the Universal Charge, pursuant to Sec. 34

NPC, through the Office of the Solicitor General (OSG),

of the EPIRA and the Decisions in ERC Case Nos. 2002-

share the same view that the Universal Charge is not a tax

194 and 2002-165. Otherwise, PECO could be held liable

because it is levied for a specific regulatory purpose,

under Sec. 46[24] of the EPIRA, which imposes fines and

which is to ensure the viability of the country's electric

penalties for any violation of its provisions or its IRR. [25]

power industry, and is, therefore, an exaction in the

exercise of the State's police power. Respondents further

119

judgments and orders of lower

courts in:
The Issues

However, petitioners violated the doctrine of

The ultimate issues in the case at bar are:

1)

2)

Whether or not, the Universal

Charge imposed under Sec. 34
of the EPIRA is a tax; and
Whether or not there is undue
delegation of legislative power
to tax on the part of the ERC.[26]

Before we discuss the issues, the Court shall

first deal with an obvious procedural lapse.

Petitioners filed before us an original action

hierarchy of courts when they filed this Complaint

directly with us. Furthermore, the Complaint is bereft of
any allegation of grave abuse of discretion on the part of
the ERC or any of the public respondents, in order for the
Court to consider it as a petition for certiorari or
prohibition.

Article VIII, Section 5(1) and (2) of the 1987

Constitution[27] categorically provides that:

SECTION 5. The Supreme

Court
shall
have
the
following powers:

particularly denominated as a Complaint assailing the

constitutionality of Sec. 34 of the EPIRA imposing the

1.

doubt, petitioners have locus standi.They impugn the

constitutionality of Sec. 34 of the EPIRA because they

the Universal Charge as reflected in their electric bills.

But this Court's jurisdiction to issue writs of certiorari,

prohibition, mandamus, quo

warranto,

and habeas

corpus, while concurrent with that of the regional trial

Universal Charge and Rule 18 of the EPIRA's IRR. No

sustained a direct injury as a result of the imposition of

(a) All cases in

which
the constitut
ionality or
validity of
any treaty,
international
or executive
agreement, l
aw,
presidential
decree,
proclamatio
n,
order,
instruction,
ordinance,
or regulation
is
in
question.

2.

Exercise original jurisdiction

over
cases affecting
ambassadors,
other
public
ministers and consuls, and
over petitions for certiorari,
prohibition, mandamus, quo
warranto, and habeas corpus.

courts and the Court of Appeals, does not give litigants

Review, revise, reverse, modify,

or
affirm on
appeal
or
certiorari, as the law or the rules
of court may provide, final

redress desired cannot be obtained in the appropriate

unrestrained freedom of choice of forum from which to

seek such relief.[28] It has long been established that this
Court will not entertain direct resort to it unless the

courts,

or

where

exceptional

and

compelling

circumstances justify availment of a remedy within and

120

call for the exercise of our primary jurisdiction. [29] This

no limits, so that security against its abuse is to be found

power to protect, foster, promote, preserve, and control,

circumstance alone warrants the outright dismissal of the

only in the responsibility of the legislature which imposes

with due regard for the interests, first and foremost, of the

present action.

the tax on the constituency that is to pay it. [30] It is based

public, then of the utility and of its patrons.[35]

on the principle that taxes are the lifeblood of the

government, and their prompt and certain availability is
This procedural infirmity notwithstanding, we

The

conservative

and

pivotal

distinction

Thus, the theory behind the

between these two powers rests in the purpose for which

opt to resolve the constitutional issue raised herein. We

exercise of the power to tax emanates from necessity;

the charge is made. If generation of revenue is the

are aware that if the constitutionality of Sec. 34 of the

without taxes, government cannot fulfill its mandate of

primary purpose and regulation is merely incidental, the

EPIRA is not resolved now, the issue will certainly

promoting the general welfare and well-being of the

imposition is a tax; but if regulation is the primary

resurface in the near future, resulting in a repeat of this

an imperious need.

[31]

people.

[32]

purpose, the fact that revenue is incidentally raised does

litigation, and probably involving the same parties. In the

not make the imposition a tax.[36]

public interest and to avoid unnecessary delay, this Court

On the other hand, police power is the power of the state

In exacting the assailed Universal Charge through Sec. 34

renders its ruling now.

to promote public welfare by restraining and regulating

of the EPIRA, the State's police power, particularly its

the use of liberty and property.

The instant complaint is bereft of merit.

The First Issue

[33]

It is the most pervasive,

regulatory dimension, is invoked. Such can be deduced

the least limitable, and the most demanding of the three

from Sec. 34 which enumerates the purposes for which

fundamental powers of the State. The justification is

the Universal Charge is imposed [37] and which can be

found in the Latin maxims salus populi est suprema

amply discerned as regulatory in character. The EPIRA

lex (the welfare of the people is the supreme law) and sic

resonates such regulatory purposes, thus:

utere tuo ut alienum non laedas (so use your property as

To resolve the first issue, it is necessary to
distinguish the States power of taxation from the police
power.

not to injure the property of others). As an inherent

attribute of sovereignty which virtually extends to all
public needs, police power grants a wide panoply of
instruments

The power to tax is an incident of sovereignty and is

unlimited in its range, acknowledging in its very nature

through

which

the

State,

as parens

patriae, gives effect to a host of its regulatory powers.

[34]

We have held that the power to "regulate" means the

SECTION 2. Declaration of Policy. It

is hereby declared the policy of the
State:
(a) To ensure and accelerate the total
electrification of the country;
(b) To ensure the quality, reliability,
security and affordability of the
supply of electric power;
(c) To ensure transparent and
reasonable prices of electricity

121

in a regime of free and fair

competition and full public
accountability
to
achieve
greater
operational
and
economic
efficiency
and
enhance the competitiveness of
Philippine products in the
global market;
(d) To enhance the inflow of private
capital and broaden the
ownership base of the power
generation, transmission and
distribution sectors;
(e) To ensure fair and nondiscriminatory treatment of
public and private sector
entities in the process of
restructuring the electric power
industry;
(f) To protect the public interest as it
is affected by the rates and
services of electric utilities and
other providers of electric
power;
(g) To
assure
socially
and
environmentally
compatible
energy
sources
and
infrastructure;
(h) To promote the utilization of
indigenous and new and
renewable energy resources in
power generation in order to
reduce
dependence
on
imported energy;
(i) To provide for an orderly and
transparent privatization of the
assets and liabilities of the
National Power Corporation
(NPC);
(j) To establish a strong and purely
independent regulatory body
and system to ensure consumer
protection and enhance the

competitive operation of the

electricity market; and
(k) To encourage the efficient use of
energy and other modalities of
demand side management.

1)

In the implementation of
stranded cost recovery, the ERC
shall conduct a review to
determine whether there is
under-recovery or over recovery
and adjust (true-up) the level of
the stranded cost recovery
charge. In case of an overrecovery, the ERC shall ensure
that any excess amount shall be
remitted to the STF. A separate
account shall be created for
these amounts which shall be
held in trust for any future
claims of distribution utilities
for stranded cost recovery. At
the end of the stranded cost
recovery period, any remaining
amount in this account shall be
used to reduce the electricity
rates to the end-users.[43]

2)

With respect to the assailed

Universal Charge, if the total
amount collected for the same is
greater
than
the
actual
availments against it, the
PSALM shall retain the balance
within the STF to pay for
periods where a shortfall occurs.

From the aforementioned purposes, it can be gleaned that

the assailed Universal Charge is not a tax, but an exaction
in the exercise of the State's police power. Public welfare
is surely promoted.

Moreover, it is a well-established doctrine that the taxing

power may be used as an implement of police power.
[38]

In Valmonte v. Energy Regulatory Board, et al. [39] and

in Gaston v. Republic Planters Bank,[40] this Court held

that the Oil Price Stabilization Fund (OPSF) and the
Sugar Stabilization Fund (SSF) were exactions made in
the exercise of the police power. The doctrine was
reiterated in Osmea v. Orbos[41] with respect to the

[44]

OPSF. Thus, we disagree with petitioners that the instant

case is different from the aforementioned cases. With the
Universal Charge, a Special Trust Fund (STF) is also
created under the administration of PSALM. [42] The STF
has some notable characteristics similar to the OPSF and

3)

Upon expiration of the term of

PSALM, the administration of
the STF shall be transferred to
the DOF or any of the DOF
attached agencies as designated
by the DOF Secretary.[45]

the SSF, viz.:

The OSG is in point when it asseverates:

122

Evidently, the establishment and

maintenance of the Special Trust
Fund, under the last paragraph of
Section 34, R.A. No. 9136, is well
within the pervasive and nonwaivable power and responsibility of
the government to secure the physical
and economic survival and wellbeing of the community, that
comprehensive sovereign authority
we designate as the police power of
the State.[46]

Latin maxim potestas delegata non delegari potest (what

has been delegated cannot be delegated). This is based on

Under the first test, the law must be complete in all its

the ethical principle that such delegated power constitutes

terms and conditions when it leaves the legislature such

not only a right but a duty to be performed by the

that when it reaches the delegate, the only thing he will

delegate through the instrumentality of his own judgment

have to do is to enforce it. The second test mandates

and not through the intervening mind of another.

[47]

adequate guidelines or limitations in the law to determine

the boundaries of the delegate's authority and prevent the

In the face of the increasing complexity of modern life,

delegation from running riot.[49]

delegation of legislative power to various specialized

This feature of the Universal Charge further boosts the
position that the same is an exaction imposed primarily in
pursuit of the State's police objectives. The STF
reasonably serves and assures the attainment and
perpetuity of the purposes for which the Universal
Charge is imposed, i.e., to ensure the viability of the
country's electric power industry.

The Second Issue

The principle of separation of powers ordains

that each of the three branches of government has
exclusive cognizance of and is supreme in matters falling
within its own constitutionally allocated sphere. A logical
corollary to the doctrine of separation of powers is the
principle of non-delegation of powers, as expressed in the

administrative agencies is allowed as an exception to this

The Court finds that the EPIRA, read and appreciated in

principle.[48] Given the volume and variety of interactions

its entirety, in relation to Sec. 34 thereof, is complete in

in today's society, it is doubtful if the legislature can

all its essential terms and conditions, and that it contains

promulgate laws that will deal adequately with and

sufficient standards.

respond

promptly

to

the

minutiae

of

everyday

life. Hence, the need to delegate to administrative bodies

Although Sec. 34 of the EPIRA merely provides that

- the principal agencies tasked to execute laws in their

within one (1) year from the effectivity thereof, a

specialized fields - the authority to promulgate rules and

Universal Charge to be determined, fixed and approved

regulations to implement a given statute and effectuate its

by the ERC, shall be imposed on all electricity end-users,

policies. All that is required for the valid exercise of this

and therefore, does not state the specific amount to be

power of subordinate legislation is that the regulation be

paid as Universal Charge, the amount nevertheless is

germane to the objects and purposes of the law and that

made certain by the legislative parameters provided in the

the regulation be not in contradiction to, but in

law itself. For one, Sec. 43(b)(ii) of the EPIRA provides:

conformity with, the standards prescribed by the law.

These requirements are denominated as the completeness
test and the sufficient standard test.

123

SECTION 43. Functions of the ERC.

The ERC shall promote competition,
encourage market development,
ensure customer choice and penalize
abuse of market power in the
restructured electricity industry. In
appropriate cases, the ERC is
authorized to issue cease and desist
order after due notice and hearing.
Towards this end, it shall be
responsible for the following key
functions in the restructured industry:
xxxx
(b) Within six (6) months from the
effectivity of this Act, promulgate
and enforce, in accordance with law,
a National Grid Code and a
Distribution Code which shall
include, but not limited to the
following:
xxxx
(ii) Financial capability standards f
or the generating companies, the
TRANSCO, distribution utilities and
suppliers: Provided, That in the
formulation
of
the
financial
capability standards, the nature and
function of the entity shall be
considered: Provided, further, That
such standards are set to ensure that
the
electric
power
industry
participants meet the minimum
financial standards to protect the
public interest. Determine, fix, and
approve, after due notice and public
hearings the universal charge, to be
imposed on all electricity end-users
pursuant to Section 34 hereof;

As to the second test, this Court had, in the past, accepted

Moreover, contrary to the petitioners contention, the ERC

as sufficient standards the following: "interest of law and

does not enjoy a wide latitude of discretion in the

order;"[51] "adequate and efficient instruction;"[52] "public

determination of the Universal Charge. Sec. 51(d) and (e)

interest;"[53] "justice and equity;"[54] "public convenience

of the EPIRA[50] clearly provides:

and

welfare;"[55] "simplicity,
[56]

efficiency;"
SECTION 51. Powers. The PSALM
Corp. shall, in the performance of its
functions and for the attainment of its
objective, have the following powers:
xxxx

practices."

and

"standardization and regulation of medical

education;"[57] and
[58]

economy

"fair

and

equitable

employment

Provisions of the EPIRA such as, among

others, to ensure the total electrification of the country

and the quality, reliability, security and affordability of

(d) To calculate the amount of the

stranded debts and stranded
contract
costs
of
NPC
which shall form the basis for
ERC in the determination of
the universal charge;

the

(e) To liquidate the NPC stranded

contract costs, utilizing the
proceeds from sales and other
property contributed to it,
including the proceeds from
the universal charge.

standards.

supply

of

electric

power [59] and

rehabilitation and management

[60]

watershed

meet the requirements

for valid delegation, as they provide the limitations on the

ERCs power to formulate the IRR. These are sufficient

It may be noted that this is not the first time that the
ERC's conferred powers were challenged. In Freedom
from Debt Coalition v. Energy Regulatory Commission,
[61]

Thus, the law is complete and passes the first

test for valid delegation of legislative power.

the Court had occasion to say:

In determining the extent of powers
possessed by the ERC, the provisions
of the EPIRA must not be read in
separate parts. Rather, the law must
be read in its entirety, because a
statute is passed as a whole, and is
animated by one general purpose and

124

intent. Its meaning cannot to be

extracted from any single part thereof
but from a general consideration of
the statute as a whole. Considering
the intent of Congress in enacting the
EPIRA and reading the statute in its
entirety, it is plain to see that the law
has expanded the jurisdiction of the
regulatory body, the ERC in this case,
to enable the latter to implement the
reforms sought to be accomplished
by the EPIRA. When the legislators
decided to broaden the jurisdiction of
the ERC, they did not intend to
abolish or reduce the powers already
conferred upon ERC's predecessors.
To sustain the view that the ERC
possesses only the powers and
functions listed under Section 43 of
the EPIRA is to frustrate the
objectives of the law.

In his Concurring and Dissenting Opinion [62] in the same

case, then Associate Justice, now Chief Justice, Reynato
S. Puno described the immensity of police power in
relation to the delegation of powers to the ERC and its
regulatory functions over electric power as a vital public
utility, to wit:
Over the years, however,
the range of police power was no
longer limited to the preservation of
public health, safety and morals,
which used to be the primary social
interests in earlier times. Police
power now requires the State to
"assume an affirmative duty to

eliminate the excesses and injustices

that are the concomitants of an
unrestrained industrial economy."
Police power is now exerted "to
further the public welfare a concept
as vast as the good of society itself."
Hence, "police power is but another
name for the governmental authority
to further the welfare of society that
is
the
basic
end
of
all
government." When police power is
delegated to administrative bodies
with regulatory functions, its exercise
should be given a wide latitude.
Police power takes on an even
broader dimension in developing
countries such as ours, where the
State must take a more active role in
balancing the many conflicting
interests in society. The Questioned
Order was issued by the ERC, acting
as an agent of the State in the
exercise of police power. We should
have exceptionally good grounds to
curtail its exercise. This approach is
more compelling in the field of rateregulation
of
electric
power
rates. Electric power generation and
distribution
is
a
traditional
instrument of economic growth that
affects not only a few but the entire
nation. It is an important factor in
encouraging
investment
and
promoting business. The engines of
progress may come to a screeching
halt if the delivery of electric power
is impaired. Billions of pesos would
be lost as a result of power outages
or
unreliable
electric
power
services. The State thru the ERC
should be able to exercise its police
power with great flexibility, when the
need arises.

This was reiterated in National Association of Electricity

Consumers
Commission

for
[63]

Reforms

v.

Energy

Regulatory

where the Court held that the ERC, as

regulator, should have sufficient power to respond in real

time to changes wrought by multifarious factors affecting
public utilities.

From the foregoing disquisitions, we therefore hold that

there is no undue delegation of legislative power to the
ERC.

Petitioners

failed

to

pursue

in

their

Memorandum the contention in the Complaint that the

imposition of the Universal Charge on all end-users is
oppressive and confiscatory, and amounts to taxation
without representation. Hence, such contention is deemed
waived or abandoned per Resolution[64] of August 3,
2004.[65] Moreover, the determination of whether or not a
tax is excessive, oppressive or confiscatory is an issue
which essentially involves questions of fact, and thus,
this Court is precluded from reviewing the same.[66]

125

As a penultimate statement, it may be well to recall what

this Court said of EPIRA:
One of the landmark pieces of
legislation enacted by Congress in
recent years is the EPIRA. It
established a new policy, legal
structure and regulatory framework
for the electric power industry. The
new thrust is to tap private capital for
the expansion and improvement of
the industry as the large government
debt and the highly capital-intensive
character of the industry itself have
long been acknowledged as the
critical constraints to the program. To
attract private investment, largely
foreign, the jaded structure of the
industry had to be addressed. While
the generation and transmission
sectors
were
centralized
and
monopolistic, the distribution side
was fragmented with over 130
utilities,
mostly
small
and
uneconomic. The pervasive flaws
have caused a low utilization of
existing
generation
capacity;
extremely high and uncompetitive
power rates; poor quality of service
to consumers; dismal to forgettable
performance of the government
power sector; high system losses; and
an inability to develop a clear
strategy for overcoming these
shortcomings.
Thus, the EPIRA provides a
framework for the restructuring of
the
industry,
including
the
privatization of the assets of the

National Power Corporation (NPC),

the transition to a competitive
structure, and the delineation of the
roles of various government agencies
and the private entities. The law
ordains the division of the industry
into
four
(4)
distinct
sectors, namely: generation, transmis
sion, distribution and supply.
Corollarily, the NPC generating
plants have to privatized and its
transmission business spun off and
privatized thereafter.[67]

BRITISH AMERICAN TOBACCO, G.R. No. 163583

Petitioner,
Present:

P
un
o,
C.
J.,
Quisumbing,

Finally, every law has in its favor the presumption of

constitutionality, and to justify its nullification, there

Ynares-Santiago,

must be a clear and unequivocal breach of the

Carpio,

Constitution and not one that is doubtful, speculative, or

Austria-Martinez,

argumentative.[68] Indubitably,

petitioners

failed

to

overcome this presumption in favor of the EPIRA. We

find no clear violation of the Constitution which would
warrant a pronouncement that Sec. 34 of the EPIRA and

the

instant

hereby DISMISSED for lack of merit.

SO ORDERED.

case

- versus - Carpio Morales,

Tinga,
ChicoNazario,

Rule 18 of its IRR are unconstitutional and void.

WHEREFORE,

Corona,

is

Velasco, Jr.,
Nachura,
LeonardoDe Castro,
Brion,
Peralta, and

126

Bersamin,
J.

2003, and Sections II(1)(b), II(4)(b),

II(6), II(7), III (Large Tax Payers
Assistance Division II) II(b) of
Revenue Memorandum Order No. 62003, insofar as pertinent to
cigarettes packed by machine,
are INVALID insofar as they grant
the BIR the power to reclassify or
update the classification of new
brands every two years or earlier.

JOSE ISIDRO N. CAMACHO,

YNARES-SANTIAGO, J.:
in his capacity as Secretary of
the Department of Finance and
GUILLERMO L. PARAYNO, JR.,
in his capacity as Commissioner of

On August 20, 2008, the Court rendered a

Decision partially granting the petition in this case, viz:

the Bureau of Internal Revenue,

Respondents.
PHILIP MORRIS PHILIPPINES
MANUFACTURING, INC.,
FORTUNE TOBACCO, CORP., Promulgated:
MIGHTY CORPOR.A.TION, and
JT INTERNATIONAL, S.A.,

SO ORDERED.
WHEREFORE,
the
petition
is PARTIALLY
GRANTED and the decision of the
Regional Trial Court of Makati,
Branch 61, in Civil Case No. 031032,
is AFFIRMED with MODIFICATI
ON. As modified, this Court declares
that:

RESOLUTION

insists that the assailed provisions (1) violate the equal

protection and uniformity of taxation clauses of the
Constitution, (2) contravene Section 19,[1] Article XII of
the Constitution on unfair competition, and (3) infringe
the

constitutional

inequitable

Respondents-in-Intervention. April 15, 2009

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

In its Motion for Reconsideration, petitioner

(1) Section 145 of the

NIRC, as amended by Republic Act
No. 9334, is CONSTITUTIONAL;
and that

(2) Section
4(B)(e)(c),
2nd paragraph
of
Revenue
Regulations No. 1-97, as amended by
Section 2 of Revenue Regulations 9-

provisions

taxation. Petitioner

on

regressive

further

argues

and
that

assuming the assailed provisions are constitutional,

petitioner is entitled to a downward reclassification of
Lucky Strike from the premium-priced to the high-priced
tax bracket.

The Court is not persuaded.

127

T
h
e
a
s
s
a
i
l
e
d
l
a
w
d
o
e
s
n
o
t

e
e
q
u
a
l
p
r
o
t
e
c
t
i
o
n
a
n
d

t
a
x
a
t
i
o
n
c
l
a
u
s
e
s
.

Petitioner

argues

that

the classification

freeze

provision violates the equal protection and uniformity of

v
i
o
l
a
t
e

u
n
i
f
o
r
m
i
t
y

t
h

o
f

taxation clauses because Annex D brands are taxed based

on their 1996 net retail prices while new brands are taxed
based on their present day net retail prices. Citing Ormoc
Sugar Co. v. Treasurer of Ormoc City,[2] petitioner asserts
that the assailed provisions accord a special or privileged
status to Annex D brands while at the same time
discriminate against other brands.

128

These contentions are without merit and a rehash of

petitioners previous arguments before this Court. As held
in the assailed Decision, the instant case neither involves
a suspect classification nor impinges on a fundamental
right. Consequently, the rational basis test was properly
applied to gauge the constitutionality of the assailed law
in the face of an equal protection challenge. It has been
held that in the areas of social and economic policy, a
statutory classification that neither proceeds along
suspect lines nor infringes constitutional rights must be
upheld against equal protection challenge if there is any
reasonably conceivable state of facts that could provide a
rational basis for the classification. [3] Under the rational
basis test, it is sufficient that the legislative classification
is rationally related to achieving some legitimate State
interest. As the Court ruled in the assailed Decision, viz:

A legislative classification
that is reasonable does not offend the
constitutional guaranty of the equal
protection
of
the
laws. The
classification is considered valid and
reasonable provided that: (1) it rests
on substantial distinctions; (2) it is
germane to the purpose of the law;
(3) it applies, all things being equal,
to both present and future conditions;
and (4) it applies equally to all those
belonging to the same class.

The first, third and fourth

requisites
are
satisfied. The classification
freeze
provision was inserted in the law for
reasons
of
practicality
and
expediency. That is, since a new
brand was not yet in existence at the
time of the passage of RA 8240, then
Congress
needed
a
uniform
mechanism to fix the tax bracket of a
new brand. The current net retail
price, similar to what was used to
classify the brands under Annex D as
of October 1, 1996, was thus the
logical and practical choice. Further,
with the amendments introduced by
RA 9334, the freezing of the tax
classifications now expressly applies
not just to Annex D brands but to
newer brands introduced after the
effectivity of RA 8240 on January 1,
1997 and any new brand that will be
introduced in the future. (However,
as will be discussed later, the intent to
apply the freezing mechanism to
newer brands was already in place
even prior to the amendments
introduced by RA 9334 to RA
8240.) This does not explain,
however, why the classification is
frozen after its determination based
on current net retail price and how
this is germane to the purpose of the
assailed law. An examination of the
legislative history of RA 8240
provides interesting answers to this
question.

xxxx

From the foregoing, it is

quite evident that the classification
freeze provision could hardly be
considered arbitrary, or motivated by
a hostile or oppressive attitude to
unduly favor older brands over newer
brands. Congress was unequivocal in
its unwillingness to delegate the
power to periodically adjust the
excise tax rate and tax brackets as
well as to periodically resurvey and
reclassify the cigarette brands based
on the increase in the consumer price
index to the DOF and the BIR.
Congress
doubted
the
constitutionality of such delegation of
power, and likewise, considered the
ethical
implications
thereof. Curiously, the classification
freeze provision was put in place of
the
periodic
adjustment
and
reclassification provision because of
the belief that the latter would foster
an anti-competitive atmosphere in the
market. Yet, as it is, this same
criticism is being foisted by
petitioner upon the classification
freeze provision.

129

To
our
mind,
the classification
freeze
provision was in the main the result
of Congresss earnest efforts to
improve the efficiency and effectivity
of the tax administration over sin
products while trying to balance the
same with other State interests. In
particular, the questioned provision
addressed Congresss administrative
concerns regarding delegating too
much authority to the DOF and BIR
as this will open the tax system to
potential areas for abuse and
corruption. Congress
may
have
reasonably conceived that a tax
system which would give the least
amount of discretion to the tax
implementers would address the
problems of tax avoidance and tax
evasion.

To elaborate a little,
Congress could have reasonably
foreseen that, under the DOF
proposal and the Senate Version, the
periodic reclassification of brands
would
tempt
the
cigarette
manufacturers to manipulate their
price levels or bribe the tax
implementers in order to allow their
brands to be classified at a lower tax
bracket even if their net retail prices
have already migrated to a higher tax
bracket after the adjustment of the tax
brackets to the increase in the

consumer price index. Presumably,

this could be done when a resurvey
and
reclassification
is
forthcoming. As briefly touched upon
in the Congressional deliberations,
the difference of the excise tax rate
between the medium-priced and the
high-priced tax brackets under RA
8240, prior to its amendment, was
P3.36. For a moderately popular
brand which sells around 100 million
packs per year, this easily translates
to P336,000,000. The incentive for
tax avoidance, if not outright tax
evasion,
would
clearly
be
present. Then
again,
the
tax
implementers may use the power to
periodically adjust the tax rate and
reclassify the brands as a tool to
unduly oppress the taxpayer in order
for the government to achieve its
revenue targets for a given year.

Thus, Congress sought to,

among others, simplify the whole tax
system for sin products to remove
these potential areas of abuse and
corruption from both the side of the
taxpayer
and
the
government. Without
doubt,
the classification
freeze
provision was an integral part of this
overall plan. This is in line with one
of the avowed objectives of the
assailed law to simplify the tax
administration and compliance with

the tax laws that are about to unfold

in order to minimize losses arising
from inefficiencies and tax avoidance
scheme, if not outright tax
evasion. RA 9334 did not alter
this classification freeze provision of
RA 8240. On the contrary, Congress
affirmed this freezing mechanism by
clarifying the wording of the law. We
can thus reasonably conclude, as the
deliberations on RA 9334 readily
show, that the administrative
concerns in tax administration, which
moved
Congress
to
enact
the classification freeze provision in
RA 8240, were merely continued by
RA 9334. Indeed, administrative
concerns may provide a legitimate,
rational
basis
for
legislative
classification. In the case at bar, these
administrative concerns in the
measurement and collection of excise
taxes on sin products are readily
apparent as afore-discussed.

Aside from the major

concern regarding the elimination of
potential areas for abuse and
corruption
from
the
tax
administration of sin products, the
legislative deliberations also show
that
the classification
freeze
provision was intended to generate
buoyant and stable revenues for
government. With the frozen tax
classifications, the revenue inflow

130

would remain stable and the

government would be able to predict
with a greater degree of certainty the
amount of taxes that a cigarette
manufacturer would pay given the
trend in its sales volume over
time. The reason for this is that the
previously classified cigarette brands
would be prevented from moving
either upward or downward their tax
brackets despite the changes in their
net retail prices in the future and, as a
result, the amount of taxes due from
them
would
remain
predictable. The classification freeze
provision would, thus, aid in the
revenue planning of the government.

All in all, the classification

freeze provision addressed Congresss
administrative concerns in the
simplification of tax administration
of sin products, elimination of
potential areas for abuse and
corruption in tax collection, buoyant
and stable revenue generation, and
ease
of
projection
of
revenues. Consequently, there can be
no denial of the equal protection of
the laws since the rational-basis test
is amply satisfied.

Moreover, petitioners contention that the

assailed provisions violate the uniformity of taxation
clause

is

similarly

unavailing. In Churchill

v.

Concepcion,[4] we explained that a tax is uniform when it

operates with the same force and effect in every place
where the subject of it is found.[5] It does not signify an
intrinsic but simply a geographical uniformity.[6] A levy
of tax is not unconstitutional because it is not intrinsically

In the instant case, there is no question that

the classification freeze provision meets the geographical
uniformity requirement because the assailed law applies
to all cigarette brands in the Philippines. And, for reasons
already adverted to in our August 20, 2008 Decision, the
above four-fold test has been met in the present case.

equal and uniform in its operation. [7] The uniformity rule

does not prohibit classification for purposes of taxation.
[8]

As ruled in Tan v. Del Rosario, Jr.:[9]

Petitioners reliance on Ormoc Sugar Co. is

misplaced. In said case, the controverted municipal
ordinance specifically named and taxed only the Ormoc

Uniformity of taxation, like

the kindred concept of equal
protection, merely requires that all
subjects or objects of taxation,
similarly situated, are to be treated
alike both in privileges and liabilities
(citations omitted). Uniformity does
not forfend classification as long as:
(1) the standards that are used
therefor are substantial and not
arbitrary, (2) the categorization is
germane to achieve the legislative
purpose, (3) the law applies, all
things being equal, to both present
and future conditions, and (4) the
classification applies equally well to
all those belonging to the same class
(citations omitted).[10]

Sugar

Company, and

excluded

any subsequently

established sugar central from its coverage.Thus, the

ordinance was found unconstitutional on equal protection
grounds because its terms do not apply to future
conditions

as

well. This

here. The classification

freeze

is

not

the

case

provision uniformly

applies to all cigarette brands whether existing or to be

introduced in the market at some future time. It does not
purport to exempt any brand from its operation nor single
out a brand for the purpose of imposition of excise taxes.

At any rate, petitioners real disagreement lies

with the legitimate State interests. Although it concedes
that the Court utilized the rationality test and that
the classification freeze provision was necessitated by

131

several legitimate State interests, however, it refuses to

accept

the

justifications

given

by

Congress

for

the classification freeze provision. As we elucidated in

our August 20, 2008 Decision, this line of argumentation
revolves around the wisdom and expediency of the
assailed law which we cannot inquire into, much less
overrule. Equal protection is not a license for courts to
judge the wisdom, fairness, or logic of legislative
choices.[11] We reiterate, therefore, that petitioners remedy
is with Congress and not this Court.
T
h
e
a
s
s
a
i
l
e
d
p
r
o
v
i
s
i
o
n
s

d
o
n
o
t
v
i
o
l
a
t
e
t
h
e
c
o
n
s
t
i
t
u
t
i
o
n
a
l

r
o
h
i
b
i
t
i
o
n
o
n
u
n
f
a
i
r
c
o
m
p
e
t
i
t
i
o
n
.

132

Petitioner asserts that the Court erroneously

there is a substantial barrier to the entry of new brands in

applied the rational basis test allegedly because this test

does not apply in a constitutional challenge based on a
violation of Section 19, Article XII of the Constitution on
unfair competition. Citing Tatad v. Secretary of the
Department of Energy,

[12]

it argues that the classification

freeze provision gives the brands under Annex D a

decisive edge because it constitutes a substantial barrier
to the entry of prospective players; that the Annex D
provision is no different from the 4% tariff differential
which we invalidated in Tatad; that some of the new
brands, like Astro, Memphis, Capri, L&M, Bowling
Green, Forbes, and Canon, which were introduced into
the market after the effectivity of the assailed law on
January 1, 1997, were killed by Annex D brands because
the former brands were reclassified by the BIR to higher
tax brackets; that the finding that price is not the only
factor in the market as there are other factors like
consumer preference, active ingredients, etc. is contrary
to the evidence presented and the deliberations in

the cigarette market due to the classification freeze

The argument lacks merit. While previously arguing that
the rational basis test was not satisfied, petitioner now
asserts that this test does not apply in this case and that
the proper matrix to evaluate the constitutionality of the
assailed law is the prohibition on unfair competition
under Section 19, Article XII of the Constitution. It
should be noted that during the trial below, petitioner did
not invoke said constitutional provision as it relied solely

adequately brought to the attention of the lower court will

not be ordinarily considered by a reviewing court as they

price is not the only factor affecting competition in the

market for there are other factors such as taste, brand
loyalty, etc.

We see no reason to depart from these findings for the

following reasons:

rate, even if we were to relax this rule, as previously

stated, the evidence presented before the trial court is

First, petitioner did not lay down the factual

insufficient to establish the alleged violation of the

foundations, as supported by verifiable documentary

constitutional proscription against unfair competition.

proof, which would establish, among others, the cigarette

brands in competition with each other; the current net
retail prices of Annex D brands, as determined through a

the

of

substantial barriers to the entry and exit of new players in

the classification freeze provision is to perpetuate the

our downstream oil industry may be struck down for

oligopoly of intervenors Philip Morris and Fortune

being violative of Section 19, Article XII of the

Tobacco in contravention of the constitutional edict for

Constitution.[14] However, we went on to say in that case

the State to regulate or prohibit monopolies, and to

that if they are insignificant impediments, they need not

disallow combinations in restraint of trade and unfair

be stricken down.[15] As we stated in our August 20, 2008

competition.

Decision, petitioner failed to convincingly prove that

operation

barrier to the entry of new brands. We also noted that

cannot be raised for the first time on appeal. [13] At any

Indeed, in Tatad we ruled that a law which imposes

the

the classification freeze provisionis an insurmountable

that points of law, theories, issues and arguments not

constitutional prohibition on unfair competition; and that

of

into effect thus negating petitioners sweeping claim that

uniformity of taxation clauses. Well-settled is the rule

encourage predatory pricing in contravention of the

effect

were introduced in the market after the assailed law went

on the alleged violation of the equal protection and

Congress; that the classification freeze provision will

cumulative

provision. We further observed that several new brands

market survey, to provide a sufficient point of

comparison with those covered by the BIRs market
survey of new brands; and the causal connection with as
well as the extent of the impact on the competition in the
cigarette

market

of

the classification

freeze

provision. Other than petitioners self-serving allegations

and testimonial evidence, no adequate documentary
evidence was presented to substantiate its claims. Absent

133

ample documentary proof, we cannot accept petitioners

not a trier of facts, cannot take judicial notice of the

based on the current net retail price of a cigarette

claim that the classification freeze provision is an

factual premises of these arguments as petitioner now

brand. As previously explained, the current net retail

insurmountable barrier to the entry of new players.

seems to suggest. The evidence should have been

price is determined by the pricing strategy of the

presented before the trial court to allow it to examine and

manufacturer. This Court cannot simply speculate that the

determine for itself whether such factual premises, as

reason why a new brand cannot enter a specific tax

supported by sufficient documentary evidence, provide

bracket and compete with the brands therein was because

reasonable basis for petitioners conclusion that there

of the classification freeze provision, rather than the

arose an unconstitutional unfair competition due to the

manufacturers own pricing decision or some other factor

operation of the classification freeze provision. Petitioner

solely attributable to the manufacturer. Again, the burden

should be reminded that it appealed this case from the

of proof in this regard is on petitioner which it failed to

adverse ruling of the trial court directly to this Court on

muster.

Second, we cannot lend credence to petitioners

claim that it cannot produce cigarettes that can compete
with Marlboro and Philip Morris in the high-priced tax
bracket. Except for its self-serving testimonial evidence,
no sufficient documentary evidence was presented to
substantiate this claim. The current net retail price, which
is the basis for determining the tax bracket of a cigarette
brand, more or less consists of the costs of raw materials,

pure questions of law instead of resorting to the Court of

Appeals.

labor, advertising and profit margin. To a large extent,

Fourth, the finding in our August 20, 2008

these factors are controllable by the manufacturer, as

Decision that price is not the only factor which affects

such, the decision to enter which tax bracket will depend

Third, Tatad is not applicable to the instant

on the pricing strategy adopted by the individual

case. In Tatad, we found that the 4% tariff differential

petitioners

manufacturer. The same holds true for its claims that

between imported crude oil and imported refined

petitioners witness admitted that notwithstanding the

other new brands, like Astro, Memphis, Capri, L&M,

petroleum products erects a high barrier to the entry of

change in price, a cigarette smoker may prefer the old

Bowling Green, Forbes, and Canon, were killed by

new players because (1) it imposes an undue burden on

brand because of its addictive formulation. [17] As a result,

Annex D brands due to the effects of the operation of

new players to spend billions of pesos to build refineries

even if we were to assume that the classification freeze

the classification

time. The

in order to compete with the old players, and (2) new

provision distorts the pricing scheme of the market

evidence that petitioner presented before the trial court

players, who opt not to build refineries, suffer from the

players, it is not clear whether a substantial barrier to the

failed to substantiate the basis for these claims.

huge disadvantage of increasing their product cost by

entry of new players would thereby be created because of

freeze

provision over

4%.

[16]

The tariff was imposed on the raw materials

consumer behavior in the cigarette market is based on

own

evidence. On

cross-examination,

these other factors affecting consumer behavior.

uniformly used by the players in the oil industry. Thus,

Essentially, petitioner would want us to accept
its conclusions of law without first laying down the
factual foundations of its arguments. This Court, which is

the adverse effect on competition arising from this

discriminatory

treatment

was

readily

apparent. In

contrast, the excise tax under the assailed law is imposed

Last, the claim that the assailed provisions

encourage predatory pricing was never raised nor

134

substantiated before the trial court. It is merely an

afterthought and cannot be given weight.

In sum, the totality of the evidence presented

by petitioner before the trial court failed to convincingly

d
o
e
s
n
o
t

establish the alleged violation of the constitutional

prohibition on unfair competition. It is a basic postulate
that the one who challenges the constitutionality of a law
carries the heavy burden of proof for laws enjoy a strong
presumption of constitutionality as it is an act of a coequal branch of government. Petitioner failed to carry
this burden.

T
h
e
a
s
s
a
i
l
e
d
l
a
w

t
r
a
n
s
g
r
e
s
s
t
h
e
c
o
n
s
t
i
t
u
t
i
o
n

a
l
p
r
o
v
i
s
i
o
n
s
o
n
r
e
g
r
e
s
s
i
v
e
a
n
d
i
n
e
q

135

u
i
t
a
b
l
e

We note that the points raised by petitioner

with respect to alleged inequitable taxation perpetuated
by

the classification

freeze

provision are

[R]egressivity is not a negative

standard for courts to enforce. What
Congress is required by the
Constitution to do is to "evolve a
progressive system of taxation." This
is a directive to Congress, just like
the directive to it to give priority to
the enactment of laws for the
enhancement of human dignity and
the reduction of social, economic and
political inequalities [Art. XIII,
Section 1] or for the promotion of the
right to "quality education" [Art.
XIV, Section 1]. These provisions are
put in the Constitution as moral
incentives to legislation, not as
judicially enforceable rights.[20]

mere

reformulation of its equal protection challenge. As stated

earlier, the assailed provisions do not infringe the equal
protection clause because the four-fold test is satisfied. In
particular, the classification freeze provision has been

t
a
x
a
t
i
o
n
.

found to rationally further legitimate State interests

consistent with rationality review. Petitioners repackaged
argument has, therefore, no merit.

Anent the issue of regressivity, it may be

conceded that the assailed law imposes an excise tax on
cigarettes which is a form of indirect tax, and thus,
regressive in character. While there was an attempt to
Petitioner argues that the classification freeze

make the imposition of the excise tax more equitable by

provision is a form of regressive and inequitable tax

creating a four-tiered taxation system where higher priced

system which is proscribed under Article VI, Section

cigarettes are taxed at a higher rate, still, every consumer,

28(1)[18] of the Constitution. It claims that people in equal

whether rich or poor, of a cigarette brand within a

positions should be treated alike.The use of different tax

specific tax bracket pays the same tax rate. To this extent,

bases for brands under Annex D vis--vis new brands is

the tax does not take into account the persons ability to

discriminatory, and thus, iniquitous. Petitioner further

pay. Nevertheless, this does not mean that the assailed

posits that the classification freeze provision is regressive

law may be declared unconstitutional for being regressive

in character. It asserts that the harmonization of revenue

in character because the Constitution does not prohibit

flow projections and ease of tax administration cannot

the imposition of indirect taxes but merely provides that

override this constitutional command.

Congress

shall

evolve

progressive

system

of

taxation. As we explained in Tolentino v. Secretary of

Finance:[19]

P
e
t
i
t
i
o
n
e
r
i
s

136

n
o
t
e
n
t
i
t
l
e
d
t
o
a
d
o
w
n
w
a
r
d
r
e
c
l
a
s
s
i

f
i
c
a
t
i
o
n

Section 4(B)[21] of Revenue Regulations No. 1-97, in

order to determine the actual current net retail price of
Lucky Strike, and thus, fix its tax classification. Further,
the upward reclassification of Lucky Strike amounts to
deprivation of property right without due process of
law. The conduct of the market survey after two years
from product launch constitutes gross neglect on the part
of the BIR. Consequently, for failure of the BIR to

o
f

conduct

timely market

survey, Lucky Strikes

classification based on its suggested gross retail price

L
u
c
k
y

should be deemed its official tax classification. Finally,

petitioner asserts that had the market survey been timely
conducted sometime in 2001, the current net retail price
of Lucky Strike would have been found to be under the
high-priced tax bracket.

S
t
r
i
k
e
.

These

contentions

are

untenable

and

misleading.

First, BIR Ruling No. 018-2001 was requested

Petitioner alleges that assuming the assailed

by petitioner for the purpose of fixing Lucky Strikes

law is constitutional, its Lucky Strike brand should be

initial tax classification based on its suggested gross retail

reclassified from the premium-priced to the high-priced

price relative to its planned introduction of Lucky Strike

tax bracket. Relying on BIR Ruling No. 018-2001 dated

in the market sometime in 2001 and not for the conduct

May 10, 2001, it claims that it timely sought redress from

of the market survey within three months from product

the BIR to have the market survey conducted within three

launch. In fact, the said Ruling contained an express

months from product launch, as provided for under

reservation that the tax classification of Lucky Strike set

137

therein is without prejudice, however, to the subsequent

brand shall be the current net retail price and not the

pursued one theory and lost thereon, petitioner may no

conduct of a survey x x x in order to determine if the

suggested gross retail price. It is a basic principle of law

longer pursue another inconsistent theory without thereby

actual gross retail price thereof is consistent with

that the State cannot be estopped by the mistakes of its

trifling with court processes and burdening the courts

agents.

with endless litigation.

[petitioners] suggested gross retail price.

[22]

In short,

petitioner acknowledged that the initial tax classification

of Lucky Strike may be modified depending on the
outcome of the survey which will determine the actual
current net retail price of Lucky Strike in the market.

Last, the issue of timeliness of the market

survey was never raised before the trial court because

WHEREFORE,

the

motion

for

reconsideration is DENIED.

petitioners theory of the case was wholly anchored on the

alleged unconstitutionality of the classification freeze
Second, there was no upward reclassification of

provision. As a consequence, no documentary evidence

Lucky Strike because it was taxed based on its suggested

as to the actual net retail price of Lucky Strike in 2001,

gross retail price from the time of its introduction in the

based on a market survey at least comparable to the one

market in 2001 until the BIR market survey in 2003. We

mandated by law, was presented before the trial court.

reiterate that Lucky Strikes actual current net retail price

Evidently, it cannot be assumed that had the BIR

was surveyed for the first time in 2003 and was found to

conducted the market survey within three months from its

be from P10.34 to P11.53 per pack, which is within the

product launch sometime in 2001, Lucky Strike would

premium-priced

no

have been found to fall under the high-priced tax bracket

prohibited upward reclassification of Lucky Strike by the

and not the premium-priced tax bracket. To so hold

BIR based on its current net retail price.

would run roughshod over the States right to due

tax bracket. There

was,

thus,

process. Verily, petitioner prosecuted its case before the

trial court solely on the theory that the assailed law is
Third, the failure of the BIR to conduct the
market survey within the three-month period under the
revenue regulations then in force can in no way make the
initial tax classification of Lucky Strike based on its
suggested gross retail price permanent. Otherwise, this
would contravene the clear mandate of the law which
provides that the basis for the tax classification of a new

unconstitutional instead of merely challenging the

SO ORDERED.

///Tan vs Del Rosario

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.

timeliness of the market survey. The rule is that a party is

bound by the theory he adopts and by the cause of action
he stands on. He cannot be permitted after having lost
thereon to repudiate his theory and cause of action, and
thereafter, adopt another and seek to re-litigate the matter
anew either in the same forum or on appeal. [23] Having

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.

138

RAMON R. DEL ROSARIO, in his capacity as

SECRETARY OF FINANCE and JOSE U. ONG, in
his capacity as COMMISSIONER OF INTERNAL
REVENUE, respondents.

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.

Rufino R. Tan for and in his own behalf.

Carag, Caballes, Jamora & Zomera Law Offices for
petitioners in G.R. 109446.

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.

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

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%

139

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.

the netincome, 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.

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.

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.

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

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.

140

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.

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:

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

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).

141

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

142

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 corpusand 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.

practice their respective professions individually and of

those who do it through a general professional
partnership.

"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. 4Here, 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.

Paseo Realty vs CA

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

WHEREFORE, the petitions are DISMISSED. No

special pronouncement on costs.
SO ORDERED.

[G.R. No. 119286. October 13, 2004]

PASEO

REALTY
&
DEVELOPMENT
CORPORATION, petitioner, vs. COURT OF
APPEALS, COURT OF TAX APPEALS and
COMMISSIONER
OF
INTERNAL
REVENUE, respondents.

DECISION
TINGA, J.:
The changes in the reportorial requirements and
payment schedules of corporate income taxes from
annual to quarterly have created problems, especially on
the matter of tax refunds.[1] In this case, the Court is
called to resolve the question of whether alleged excess
taxes paid by a corporation during a taxable year should
be refunded or credited against its tax liabilities for the
succeeding year.
Paseo Realty and Development Corporation, a
domestic corporation engaged in the lease of two (2)

143

parcels of land at Paseo de Roxas in Makati City, seeks a

review of the Decision[2] of the Court of Appeals
dismissing its petition for review of the resolution [3] of
the Court of Tax Appeals (CTA) which, in turn, denied its
claim for refund.
The factual antecedents[4] are as follows:
On April 16, 1990, petitioner filed its Income Tax Return
for the calendar year 1989 declaring a gross income
of P1,855,000.00, deductions of P1,775,991.00, net
income of P79,009.00, an income tax due thereon in the
amount of P27,653.00, prior years excess credit
of P146,026.00, and creditable taxes withheld in 1989
of P54,104.00 or a total tax credit of P200,130.00 and
credit balance of P172,477.00.
On November 14, 1991, petitioner filed with respondent
a claim for the refund of excess creditable withholding
and income taxes for the years 1989 and 1990 in the
aggregate amount of P147,036.15.
On December 27, 1991 alleging that the prescriptive
period for refunds for 1989 would expire on December
30, 1991 and that it was necessary to interrupt the
prescriptive period, petitioner filed with the respondent
Court of Tax Appeals a petition for review praying for the
refund of P54,104.00 representing creditable taxes
withheld from income payments of petitioner for the
calendar year ending December 31, 1989.
On February 25, 1992, respondent Commissioner filed an
Answer and by way of special and/or affirmative
defenses averred the following: a) the petition states no
cause of action for failure to allege the dates when the
taxes sought to be refunded were paid; b) petitioners
claim for refund is still under investigation by respondent

Commissioner; c) the taxes claimed are deemed to have

been paid and collected in accordance with law and
existing pertinent rules and regulations; d) petitioner
failed to allege that it is entitled to the refund or
deductions claimed; e) petitioners contention that it has
available tax credit for the current and prior year is
gratuitous and does not ipso facto warrant the refund; f)
petitioner failed to show that it has complied with the
provision of Section 230 in relation to Section 204 of the
Tax Code.
After trial, the respondent Court rendered a decision
ordering respondent Commissioner to refund in favor of
petitioner the amount of P54,104.00, representing excess
creditable withholding taxes paid for January to
July1989.
Respondent Commissioner moved for reconsideration of
the decision, alleging that the P54,104.00 ordered to be
refunded has already been included and is part and parcel
of the P172,477.00 which petitioner automatically
applied as tax credit for the succeeding taxable year
1990.
In a resolution dated October 21, 1993 Respondent Court
reconsidered its decision of July 29, 1993 and dismissed
the petition for review, stating that it has overlooked the
fact that the petitioners 1989 Corporate Income Tax
Return (Exh. A) indicated that the amount of P54,104.00
subject of petitioners claim for refund has already been
included as part and parcel of the P172,477.00 which the
petitioner automatically applied as tax credit for the
succeeding taxable year 1990.
Petitioner filed a Motion for Reconsideration which was
denied by respondent Court on March 10, 1994.[5]

Petitioner filed a Petition for Review[6] dated April

3, 1994 with the Court of Appeals. Resolving the twin
issues of whether petitioner is entitled to a refund
of P54,104.00 representing creditable taxes withheld in
1989 and whether petitioner applied such creditable taxes
withheld to its 1990 income tax liability, the appellate
court held that petitioner is not entitled to a refund
because it had already elected to apply the total amount
of P172,447.00, which includes the P54,104.00 refund
claimed, against its income tax liability for 1990. The
appellate court elucidated on the reason for its dismissal
of petitioners claim for refund, thus:
In the instant case, it appears that when petitioner filed its
income tax return for the year 1989, it filled up the box
stating that the total amount of P172,477.00 shall be
applied against its income tax liabilities for the
succeeding taxable year.
Petitioner did not specify in its return the amount to be
refunded and the amount to be applied as tax credit to the
succeeding taxable year, but merely marked an x to the
box indicating to be applied as tax credit to the
succeeding taxable year. Unlike what petitioner had done
when it filed its income tax return for the year 1988, it
specifically stated that out of the P146,026.00 the entire
refundable amount, only P64,623.00 will be made
available as tax credit, while the amount of P81,403.00
will be refunded.
In its 1989 income tax return, petitioner filled up the box
to be applied as tax credit to succeeding taxable year,
which signified that instead of refund, petitioner will
apply the total amount of P172,447.00, which includes
the amount of P54,104.00 sought to be refunded, as tax
credit for its tax liabilities in 1990. Thus, there is really
nothing left to be refunded to petitioner for the year 1989.

144

To grant petitioners claim for refund is tantamount to

granting twice the refund herein sought to be refunded, to
the prejudice of the Government.
The Court of Appeals denied petitioners Motion for
Reconsideration[7] dated
November
8,
1994 in
its Resolution[8] dated February 21, 1995 because the
motion merely restated the grounds which have already
been considered and passed upon in its Decision.[9]
Petitioner thus filed the instant Petition for
Review[10] dated April 14, 1995 arguing that the evidence
presented before the lower courts conclusively shows that
it did not apply the P54,104.00 to its 1990 income tax
liability; that the Decision subject of the instant petition
is inconsistent with a final decision [11] of the Sixteenth
Division of the appellate court in C.A.-G.R. Sp. No.
32890 involving the same parties and subject matter; and
that the affirmation of the questioned Decision would
lead to absurd results in the manner of claiming refunds
or in the application of prior years excess tax credits.
The Office of the Solicitor General (OSG) filed
a Comment[12] dated May 16, 1996 on behalf of
respondents asserting that the claimed refund
of P54,104.00 was, by petitioners election in its
Corporate Annual Income Tax Return for 1989, to be
applied against its tax liability for 1990. Not having
submitted its tax return for 1990 to show whether the said
amount was indeed applied against its tax liability for
1990, petitioners election in its tax return stands. The
OSG also contends that petitioners election to apply its
overpaid income tax as tax credit against its tax liabilities
for the succeeding taxable year is mandatory and
irrevocable.

On September 2, 1997, petitioner filed

a Reply[13] dated August 31, 1996 insisting that the issue
in this case is not whether the amount of P54,104.00 was
included as tax credit to be applied against its 1990
income tax liability but whether the same amount was
actually applied as tax credit for 1990. Petitioner claims
that there is no need to show that the amount
of P54,104.00 had not been automatically applied against
its 1990 income tax liability because the appellate courts
decision in C.A.-G.R. Sp. No. 32890 clearly held that
petitioner charged its 1990 income tax liability against its
tax credit for 1988 and not 1989. Petitioner also disputes
the OSGs assertion that the taxpayers election as to the
application of excess taxes is irrevocable averring that
there is nothing in the law that prohibits a taxpayer from
changing its mind especially if subsequent events leave
the latter no choice but to change its election.
The OSG filed a Rejoinder[14] dated March 5, 1997
stating that petitioners 1988 tax return shows a prior
years excess credit of P81,403.00, creditable tax withheld
of P92,750.00 and tax due of P27,127.00. Petitioner
indicated that the prior years excess credit ofP81,403.00
was to be refunded, while the remaining amount
of P64,623.00 (P92,750.00 - P27,127.00) shall be
considered as tax credit for 1989. However, in its 1989
tax return, petitioner included the P81,403.00 which had
already been segregated for refund in the computation of
its excess credit, and specified that the full amount
of P172,479.00* (P81,403.00
+ P64,623.00
+ P54,104.00** - P27,653.00***) be considered as its tax
credit for 1990. Considering that it had obtained a
favorable ruling for the refund of its excess credit for
1988 in CA-G.R. SP. No. 32890, its remaining tax credit
for 1989 should be the excess credit to be applied against
its 1990 tax liability. In fine, the OSG argues that by its
own election, petitioner can no longer ask for a refund of

its creditable taxes withheld in 1989 as the same had been

applied against its 1990 tax due.
In its Resolution[15] dated July 16, 1997, the Court
gave due course to the petition and required the parties to
simultaneously file their respective memoranda within 30
days from notice. In compliance with this directive,
petitioner submitted its Memorandum[16]dated September
18, 1997 in due time, while the OSG filed
its Memorandum[17] dated April 27, 1998 only on April
29, 1998 after several extensions.
The petition must be denied.
As a matter of principle, it is not advisable for this
Court to set aside the conclusion reached by an agency
such as the CTA which is, by the very nature of its
functions, dedicated exclusively to the study and
consideration of tax problems and has necessarily
developed an expertise on the subject, unless there has
been an abuse or improvident exercise of its authority.[18]
This interdiction finds particular application in this
case since the CTA, after careful consideration of the
merits of the Commissioner of Internal Revenues motion
for reconsideration, reconsidered its earlier decision
which ordered the latter to refund the amount
ofP54,104.00 to petitioner. Its resolution cannot be
successfully assailed based, as it is, on the pertinent laws
as applied to the facts.
Petitioners 1989 tax return indicates an aggregate
creditable tax of P172,477.00, representing its 1988
excess credit of P146,026.00 and 1989 creditable tax
of P54,104.00 less tax due for 1989, which it elected to
apply as tax credit for the succeeding taxable year.
[19]
According to petitioner, it successively utilized this

145

amount when it obtained refunds in CTA Case No. 4439

(C.A.-G.R. Sp. No. 32300) and CTA Case No. 4528
(C.A.-G.R. Sp. No. 32890), and applied its 1990 tax
liability, leaving a balance of P54,104.00, the amount
subject of the instant claim for refund. [20] Represented
mathematically, petitioner accounts for its claim in this
wise:

32890[22]involving the same parties to the effect that

petitioner charged its 1990 income tax liability to its tax
credit for 1988 and not its 1989 tax credit. Hence, its
excess creditable taxes withheld of P54,104.00 for 1989
was left untouched and may be refunded.

- 25,623.00 Claim for refund in CTA Case No. 4439

(C.A.-G.R. Sp. No. 32300)

Note should be taken, however, that nowhere in the

case referred to by petitioner did the Court of Appeals
make a categorical determination that petitioners tax
liability for 1990 was applied against its 1988 tax credit.
The statement adverted to by petitioner was actually
presented in the appellate courts decision in CA-G.R. Sp
No. 32890 as part of petitioners own narration of facts.
The pertinent portion of the decision reads:

P146,854.00 Balance as of April 16, 1990

It would appear from petitioners submission as follows:

P172,477.00 Amount indicated in petitioners 1989 tax

return to be applied as tax credit for the succeeding
taxable year

P54,104.00 Balance as of April 15, 1991

now subject of the instant
claim for refund[21]

xxx since it has already applied to its prior years excess

credit of P81,403.00 (which petitioner wanted refunded
when it filed its 1988 Income Tax Return on April 14,
1989) the income tax liability for 1988 of P28,127.00 and
the income tax liability for 1989 of P27,653.00, leaving a
balance refundable of P25,623.00 subject of C.T.A. Case
No. 4439, the P92,750.00 (P64,623.00 plus P28,127.00,
since this second amount was already applied to the
amount refundable of P81,403.00) should be the
refundable amount. But since the taxpayer again used
part of it to satisfy its income tax liability of P33,240.00
for 1990, the amount refundable was P59,510.00, which
is the amount prayed for in the claim for refund and also
in the petitioner (sic) for review.

Other than its own bare allegations, however,

petitioner offers no proof to the effect that its creditable
tax of P172,477.00 was applied as claimed above.
Instead, it anchors its assertion of entitlement to refund
on an alleged finding in C.A.-G.R. Sp. No.

That the present claim for refund already consolidates its

claims for refund for 1988, 1989, and 1990, when it filed
a claim for refund of P59,510.00 in this case (CTA Case
No. 4528). Hence, the present claim should be resolved
together with the previous claims.[23]

- 59,510.00 Claim for refund in CTA Case

No. 4528 (C.A.-G.R. Sp.
No. 32890)
P87,344.00 Balance as of January 2, 1991
- 33,240.00 Income tax liability for calendar
year 1990 applied as of
April 15, 1991

The confusion as to petitioners entitlement to a

refund could altogether have been avoided had it
presented its tax return for 1990. Such return would have
shown whether petitioner actually applied its 1989 tax
credit of P172,477.00, which includes the P54,104.00
creditable taxes withheld for 1989 subject of the instant
claim for refund, against its 1990 tax liability as it had
elected in its 1989 return, or at least, whether petitioners
tax credit of P172,477.00 was applied to its approved
refunds as it claims.
The return would also have shown whether there
remained an excess credit refundable to petitioner after
deducting its tax liability for 1990. As it is, we only have
petitioners allegation that its tax due for 1990
was P33,240.00 and that this was applied against its
remaining tax credits using its own first in, first out
method of computation.
It would have been different had petitioner not
included the P54,104.00 creditable taxes for 1989 in the
total amount it elected to apply against its 1990 tax
liabilities. Then, all that would have been required of
petitioner are: proof that it filed a claim for refund within
the two (2)-year prescriptive period provided under
Section 230 of the NIRC; evidence that the income upon
which the taxes were withheld was included in its return;
and to establish the fact of withholding by a copy of the
statement (BIR Form No. 1743.1) issued by the
payor[24] to the payee showing the amount paid and the
amount of tax withheld therefrom. However, since
petitioner opted to apply its aggregate excess credits as
tax credit for 1990, it was incumbent upon it to present its
tax return for 1990 to show that the claimed refund had
not been automatically credited and applied to its 1990
tax liabilities.

146

The grant of a refund is founded on the assumption

that the tax return is valid, i.e., that the facts stated
therein are true and correct.[25] Without the tax return, it is
error to grant a refund since it would be virtually
impossible to determine whether the proper taxes have
been assessed and paid.
Why petitioner failed to present such a vital piece
of evidence confounds the Court. Petitioner could very
well have attached a copy of its final adjustment return
for 1990 when it filed its claim for refund on November
13, 1991. Annex B of its Petition for Review[26]dated
December 26, 1991 filed with the CTA, in fact, states that
its annual tax return for 1990 was submitted in support of
its claim. Yet, petitioners tax return for 1990 is nowhere
to be found in the records of this case.
Had petitioner presented its 1990 tax return in
refutation of respondent Commissioners allegation that it
did not present evidence to prove that its claimed refund
had already been automatically credited against its 1990
tax liability, the CTA would not have reconsidered its
earlier Decision. As it is, the absence of petitioners 1990
tax return was the principal basis of the
CTAs Resolution reconsidering its earlier Decision to
grant petitioners claim for refund.
Petitioner could even still have attached a copy of
its 1990 tax return to its petition for review before the
Court of Appeals. The appellate court, being a trier of
facts, is authorized to receive it in evidence and would
likely have taken it into account in its disposition of the
petition.
In BPI-Family Savings Bank v. Court of Appeals,
although petitioner failed to present its 1990 tax
return, it presented other evidence to prove its claim that
[27]

it did not apply and could not have applied the amount in
dispute as tax credit. Importantly, petitioner therein
attached a copy of its final adjustment return for 1990 to
its motion for reconsideration before the CTA buttressing
its claim that it incurred a net loss and is thus entitled to
refund. Considering this fact, the Court held that there is
no reason for the BIR to withhold the tax refund.
In this case, petitioners failure to present sufficient
evidence to prove its claim for refund is fatal to its cause.
After all, it is axiomatic that a claimant has the burden of
proof to establish the factual basis of his or her claim for
tax credit or refund. Tax refunds, like tax exemptions, are
construed strictly against the taxpayer.[28]
Section 69, Chapter IX, Title II of the National
Internal Revenue Code of the Philippines (NIRC)
provides:
Sec. 69. Final Adjustment Return.Every corporation
liable to tax under Section 24 shall file a final adjustment
return covering the total net income for the preceding
calendar or fiscal year. If the sum of the quarterly tax
payments made during the said taxable year is not equal
to the total tax due on the entire taxable net income of
that year the corporation shall either:
(a) Pay the excess tax still due; or
(b) Be refunded the excess amount paid, as the case may
be.
In case the corporation is entitled to a refund of the
excess estimated quarterly income taxes paid, the
refundable amount shown on its final adjustment
return may be credited against the estimated

quarterly income tax liabilities for the taxable

quarters of the succeeding taxable year. [Emphasis
supplied]
Revenue Regulation No. 10-77 of the Bureau of
Internal Revenue clarifies:
SEC. 7. Filing of final or adjustment return and final
payment of income tax. A final or an adjustment return on
B.I.R. Form No. 1702 covering the total taxable income
of the corporation for the preceding calendar or fiscal
year shall be filed on or before the 15th day of the fourth
month following the close of the calendar or fiscal year.
The return shall include all the items of gross income and
deductions for the taxable year. The amount of income
tax to be paid shall be the balance of the total income tax
shown on the final or adjustment return after deducting
therefrom the total quarterly income taxes paid during the
preceding first three quarters of the same calendar or
fiscal year.
Any excess of the total quarterly payments over the
actual income tax computed and shown in the adjustment
or final corporate income tax return shall either (a) be
refunded to the corporation, or (b) may be credited
against the estimated quarterly income tax liabilities for
the quarters of the succeeding taxable year. The
corporation must signify in its annual corporate
adjustment return its intention whether to request for
refund of the overpaid income tax or claim for
automatic credit to be applied against its income tax
liabilities for the quarters of the succeeding taxable
year by filling up the appropriate box on the
corporate tax return (B.I.R. Form No. 1702).
[Emphasis supplied]

147

As clearly shown from the above-quoted

provisions, in case the corporation is entitled to a refund
of the excess estimated quarterly income taxes paid, the
refundable amount shown on its final adjustment return
may be credited against the estimated quarterly income
tax liabilities for the taxable quarters of the succeeding
year. The carrying forward of any excess or overpaid
income tax for a given taxable year is limited to the
succeeding taxable year only.
In the recent case of AB Leasing and Finance
Corporation v. Commissioner of Internal Revenue,
[29]
where the Court declared that [T]he carrying forward
of any excess or overpaid income tax for a given taxable
year then is limited to the succeeding taxable year
only, we ruled that since the case involved a claim for
refund of overpaid taxes for 1993, petitioner could only
have applied the 1993 excess tax credits to its 1994
income tax liabilities. To further carry-over to 1995 the
1993 excess tax credits is violative of Section 69 of the
NIRC.
In this case, petitioner included its 1988 excess
credit of P146,026.00 in the computation of its total
excess credit for 1989. It indicated this amount, plus the
1989 creditable taxes withheld of P54,104.00 or a total
of P172,477.00, as its total excess credit to be applied as
tax credit for 1990. By its own disclosure, petitioner
effectively combined its 1988 and 1989 tax credits and
applied its 1990 tax due of P33,240.00 against the total,
and not against its creditable taxes for 1989 only as
allowed by Section 69. This is a clear admission that
petitioners 1988 tax credit was incorrectly and illegally
applied against its 1990 tax liabilities.
Parenthetically, while a taxpayer is given the choice
whether to claim for refund or have its excess taxes

applied as tax credit for the succeeding taxable year, such

election is not final. Prior verification and approval by
the Commissioner of Internal Revenue is required. The
availment of the remedy of tax credit is not absolute and
mandatory. It does not confer an absolute right on the
taxpayer to avail of the tax credit scheme if it so chooses.
Neither does it impose a duty on the part of the
government to sit back and allow an important facet of
tax collection to be at the sole control and discretion of
the taxpayer.[30]
Contrary to petitioners assertion however, the
taxpayers election, signified by the ticking of boxes in
Item 10 of BIR Form No. 1702, is not a mere technical
exercise. It aids in the proper management of claims for
refund or tax credit by leading tax authorities to the
direction they should take in addressing the claim.
The amendment of Section 69 by what is now
Section 76 of Republic Act No. 8424 [31] emphasizes that
it is imperative to indicate in the tax return or the final
adjustment return whether a tax credit or refund is sought
by making the taxpayers choice irrevocable. Section 76
provides:
SEC. 76. Final Adjustment Return.Every corporation
liable to tax under Section 27 shall file a final adjustment
return covering the total taxable income for the preceding
calendar or fiscal year. If the sum of the quarterly tax
payments made during the said taxable year is not equal
to the total tax due on the entire taxable income of that
year, the corporation shall either:
(A) Pay the balance of the tax still due; or
(B) Carry-over the excess credit; or

(C) Be credited or refunded with the excess

amount paid, as the case may be.
In case the corporation is entitled to a tax credit or refund
of the excess estimated quarterly income taxes paid, the
excess amount shown on its final adjustment return may
be carried over and credited against the estimated
quarterly income tax liabilities for the taxable quarters of
the succeeding taxable years. Once the option to carryover and apply the excess quarterly income tax
against income tax due for the taxable quarters of the
succeeding taxable years has been made, such option
shall be considered irrevocable for that taxable period
and no application for cash refund or issuance of a tax
credit certificate shall be allowed therefore. [Emphasis
supplied]
As clearly seen from this provision, the taxpayer is
allowed three (3) options if the sum of its quarterly tax
payments made during the taxable year is not equal to the
total tax due for that year: (a) pay the balance of the tax
still due; (b) carry-over the excess credit; or (c) be
credited or refunded the amount paid. If the taxpayer has
paid excess quarterly income taxes, it may be entitled to a
tax credit or refund as shown in its final adjustment
return which may be carried over and applied against the
estimated quarterly income tax liabilities for the taxable
quarters of the succeeding taxable years. However, once
the taxpayer has exercised the option to carry-over and to
apply the excess quarterly income tax against income tax
due for the taxable quarters of the succeeding taxable
years, such option is irrevocable for that taxable period
and no application for cash refund or issuance of a tax
credit certificate shall be allowed.
Had this provision been in effect when the present
claim for refund was filed, petitioners excess credits for

148

1988 could have been properly applied to its 1990 tax

liabilities. Unfortunately for petitioner, this is not the
case.

Leido, Andrada, Perez and Associates for petitioners.

Office of the Solicitor General for respondents.
BENGZON, J.P., J.:

Taxation is a destructive power which interferes

with the personal and property rights of the people and
takes from them a portion of their property for the
support of the government. And since taxes are what we
pay for civilized society, or are the lifeblood of the
nation, the law frowns against exemptions from taxation
and statutes granting tax exemptions are thus
construed strictissimi juris against the taxpayer and
liberally in favor of the taxing authority. A claim of
refund or exemption from tax payments must be clearly
shown and be based on language in the law too plain to
be mistaken. Elsewise stated, taxation is the rule,
exemption therefrom is the exception.[32]
WHEREFORE, the instant petition is DENIED.
The challenged decision of the Court of Appeals is
hereby AFFIRMED. No pronouncement as to costs.

(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

SO ORDERED.

Roxas vs CTA
G.R. No. L-25043

Don Pedro Roxas and Dona Carmen Ayala, Spanish

subjects, transmitted to their grandchildren by hereditary
succession the following properties:

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.

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

149

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.

Contributions to

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.

Manila Police Trust Fund

Philippine Air Force Chapel

Antonio Roxas
Eduardo Roxas
Jose Roxas

1955
Contributions

1955

1955
P5,813.00
5,828.00
5,588.00

to

ANTONIO ROXAS:
1953
Contributions to
Pasay City Firemen Christmas Fund
Pasay City Police Dept. X'mas fund
1955
Contributions to

Pasay City Firemen Christmas fund

Pasay City Police Christmas fund
EDUARDO ROXAS:

ROXAS Y CIA.:

1953

1953

Contributions to
Banquet

Gifts of San Miguel beer

in

honor

of

Philippines
Manila's

120.0

JOSE ROXAS:

Contributions

to
Herald's fund
neediest families

for

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:

Baguio City Police Christmas fund

The following deductions were disallowed:

for

1955
Contributions
to
Contribution
Our Lady of Fatima Chapel, FEU

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.

Tickets
for
S. Osmea

to
Herald's fund
neediest families

Philippines Herald's fund for Manila's neediest

families

In the same assessment, the Commissioner assessed

deficiency income taxes against the Roxas Brothers for
the years 1953 and 1955, as follows:
1953
P7,010.00
7,281.00
6,323.00

families

Hijas de Jesus' Retiro de Manresa

Philippines Herald's fund for Manila's neediest

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.

150

Philippines
Manila's

120.0

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 tenyear 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

151

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

Add: 1/3 share, profits in Roxas y Cia

P 153,249.

Less profits declared

146,052.58

Amount understated

P 7,196.57

Less 1/3 share in contributions amounting to

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

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

Less amount declared

Net income per review

Less: Exemptions

Amount understated
Contributions disallowed

Less 1/3 share of contributions amounting to

P21,126.06 disallowed from partnership but allowed to
partners
Net income per review
Less: Exemptions
Net taxable income

Net taxable income

Tax Due

P147,250.0

Tax paid

147,159.00

Deficiency

P91.00
========

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

P153,429.1

Less amount reported

146,135.46

Amount understated

7,113.69

Tax due
Tax paid
Deficiency
EDUARDO ROXAS
Net income per return

Less 1/3 share of contributions disallowed from

partnership but allowed as deductions to partners
7,042.02
Net income per review
Less: Exemption

152

N
A
C
H
U
R
A,
an
d

Net income subject to tax

Tax due
Tax paid
Deficiency

DECISION

REYES, R.T., J.:

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.

E
Y
E
S,
JJ
.

THE Regional Trial Courts (RTC) have the authority and

jurisdiction to consider the constitutionality of statutes,
executive

orders,

presidential

decrees

and

other

issuances. The Constitution vests that power not only in

Planters Products vs
Fertiphil Corporation*

the Supreme Court but in all Regional Trial Courts.

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

Promulgated:
The principle is relevant in this petition for

Petitioner,

FERTIPHIL CORPORATION,

Present:

Respondent. March

review on certiorari of the Decision[1] of the Court of

14,

2008
YNARES-SANTIAGO, J.,

Appeals (CA) affirming with modification that of

the RTC in Makati City,[2] finding petitioner Planters
Products, Inc. (PPI) liable to private respondent Fertiphil
Corporation (Fertiphil) for the levies it paid under Letter

n,

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

of Instruction (LOI) No. 1465.

AUSTRIA-MARTINEZ,
- versus - CHICO-NAZARIO,

153

applied by FPA to all domestic

sales
of
fertilizers
in
the Philippines.[5] (Underscorin
g supplied)

The Facts

and an unlawful imposition that amounted to a denial of

due process of law.[9] Fertiphil alleged that the LOI solely
favored PPI, a privately owned corporation, which used
the proceeds to maintain its monopoly of the fertilizer

Petitioner PPI and private respondent Fertiphil

industry.

are private corporations incorporated under Philippine

Pursuant to the LOI, Fertiphil paid P10 for

laws.[3] They are both engaged in the importation and

distribution of fertilizers, pesticides and agricultural
chemicals.

every bag of fertilizer it sold in the domestic market to

the Fertilizer and Pesticide Authority (FPA). FPA then
remitted the amount collected to the Far East Bank and
Trust Company, the depositary bank of PPI. Fertiphil

On June 3, 1985, then President Ferdinand

Marcos, exercising his legislative powers, issued LOI No.

paid P6,689,144 to FPA from July 8, 1985 to January 24,

1986.[6]

General, countered that the issuance of LOI No. 1465

was a valid exercise of the police power of the State in
ensuring the stability of the fertilizer industry in the
country. It also averred that Fertiphil did not sustain any
damage from the LOI because the burden imposed by the

1465 which provided, among others, for the imposition of

levy fell on the ultimate consumer, not the seller.

a capital recovery component (CRC) on the domestic sale

of all grades of fertilizers in the Philippines.[4] The LOI

In its Answer,[10] FPA, through the Solicitor

After

the

1986

Edsa

Revolution,

FPA

voluntarily stopped the imposition of the P10 levy. With

provides:

the return of democracy, Fertiphil demanded from PPI a

RTC Disposition

refund of the amounts it paid under LOI No. 1465, but

3. The Administrator of the Fertilizer
Pesticide Authority to include
in its fertilizer pricing formula
a capital
contribution
component of not less than P10
per
bag. This
capital
contribution shall be collected
until adequate capital is raised
to make PPI viable. Such
capital contribution shall be

PPI refused to accede to the demand.[7]

On November 20, 1991, the RTC rendered judgment in
favor of Fertiphil, disposing as follows:
Fertiphil filed a complaint for collection and
damages[8] against

FPA and

PPI

with

the

RTC

in Makati. It questioned the constitutionality of LOI No.

1465 for being unjust, unreasonable, oppressive, invalid

WHEREFORE, in view of
the foregoing, the Court hereby

154

renders judgment in favor of the

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

Ruling that the imposition of the P10 CRC was an

exercise of the States inherent power of taxation,
the RTC invalidated the levy for violating the basic
principle that taxes can only be levied for public

1) the

sum
of P6,698,1
44.00 with
interest at
12% from
the time of
judicial
demand;

2) the

sum
of P100,00
0
as
attorneys
fees;

3) the

cost
suit.

of

purpose, viz.:

It is apparent that the

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

SO ORDERED.[11]
One of the inherent limitations is that
a tax may be levied only for public
purposes:

The power to tax

can be resorted to
only
for
a

constitutionally
valid
public
purpose. By the
same token, taxes
may not be levied
for purely private
purposes,
for
building up of
private fortunes,
or for the redress
of
private
wrongs. They
cannot be levied
for
the
improvement of
private property,
or for the benefit,
and promotion of
private
enterprises,
except where the
aid is incident to
the
public
benefit. It is wellsettled principle
of constitutional
law
that
no
general tax can
be levied except
for the purpose of
raising
money
which is to be
expended
for
public use. Funds
cannot be exacted
under the guise
of taxation to

155

promote
a
purpose that is
not of public
interest. Without
such limitation,
the power to tax
could
be
exercised
or
employed as an
authority
to
destroy
the
economy of the
people. A
tax,
however, is not
held void on the
ground of want
of public interest
unless the want
of such interest is
clear. (71
Am.
Jur. pp. 371-372)

the defendant, Planters Product, Inc.,

another private domestic corporation,
became richer by the amount
of P6,698,144.00.

On November 28, 2003, the CA handed down its decision

affirming with modification that of the RTC, with the

Tested by the standards of

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

following fallo:

IN VIEW OF ALL THE

FOREGOING, the decision appealed
from is hereby AFFIRMED, subject
to the MODIFICATION that the
award of attorneys fees is
hereby DELETED.[15]

In affirming the RTC decision, the CA ruled that the lis

mota of

In the case at bar, the plaintiff paid

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

the

complaint

for

collection

was

the

constitutionality of LOI No. 1465, thus:

PPI moved for reconsideration but its motion was denied.
[13]

PPI then filed a notice of appeal with the RTC but it

failed to pay the requisite appeal docket fee. In a separate

but related proceeding, this Court [14] allowed the appeal
of PPI and remanded the case to the CA for proper

The question then is whether it was

proper for the trial court to exercise
its power to judicially determine the
constitutionality of the subject statute
in the instant case.

disposition.

CA Decision

As a rule, where the controversy can

be settled on other grounds, the
courts will not resolve the

156

constitutionality of a law (Lim v.

Pacquing,
240
SCRA
649
[1995]). The policy of the courts is to
avoid ruling on constitutional
questions and to presume that the acts
of political departments are valid,
absent a clear and unmistakable
showing to the contrary.

an unlawful and unconstitutional

special assessment. Consequently, the
requisite that the constitutionality of
the law in question be the very lis
mota of the case is present, making it
proper for the trial court to rule on
the constitutionality of LOI 1465.[16]

valid exercise of police power. In

addition, it disputes the court a quos
findings arguing that the collections
under LOI 1465 was for the benefit
of Planters Foundation, Incorporated
(PFI), a foundation created by law to
hold in trust for millions of farmers,
the stock ownership of PPI.

However, the courts are not

precluded from exercising such
power when the following requisites
are obtaining in a controversy before
it: First, there must be before the
court an actual case calling for the
exercise of judicial review. Second,
the question must be ripe for
adjudication. Third,
the
person
challenging the validity of the act
must
have
standing
to
challenge. Fourth, the question of
constitutionality must have been
raised at the earliest opportunity; and
lastly, the issue of constitutionality
must be the very lis mota of the case
(Integrated Bar of the Philippines v.
Zamora, 338 SCRA 81 [2000]).

The CA held that even on the assumption that LOI No.

Of the three fundamental powers of

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

Indisputably, the present case was

primarily instituted for collection and
damages. However, a perusal of the
complaint
also
reveals
that the instant action is founded on
the claim that the levy imposed was

1465 was issued under the police power of the state, it is

still unconstitutional because it did not promote public
welfare. The CA explained:

In declaring LOI 1465

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

On the other hand, appellant submits

that the subject statutes passage was a

Vast as the power is, however, it must

be exercised within the limits set by
the Constitution, which requires the
concurrence of a lawful subject and a
lawful method. Thus, our courts have
laid down the test to determine the
validity of a police measure as
follows: (1) the interests of the public
generally, as distinguished from those
of a particular class, requires its
exercise; and (2) the means employed
are reasonably necessary for the

157

accomplishment of the purpose and

not
unduly
oppressive
upon
individuals (National Development
Company v. Philippine Veterans
Bank, 192 SCRA 257 [1990]).

It is upon applying this established

tests that We sustain the trial courts
holding
LOI
1465
unconstitutional. To be sure, ensuring
the continued supply and distribution
of fertilizer in the country is an
undertaking imbued with public
interest. However, the method by
which LOI 1465 sought to achieve
this is by no means a measure that
will promote the public welfare. The
governments commitment to support
the successful rehabilitation and
continued viability of PPI, a private
corporation, is an unmistakable
attempt to mask the subject statutes
impartiality. There is no way to treat
the self-interest of a favored entity,
like PPI, as identical with the general
interest of the countrys farmers or
even the Filipino people in
general. Well to stress, substantive
due process exacts fairness and equal
protection
disallows
distinction
where none is needed. When a
statutes public purpose is spoiled by
private interest, the use of police
power becomes a travesty which
must be struck down for being an
arbitrary exercise of government

power. To rule in favor of appellant

would contravene the general
principle that revenues derived from
taxes cannot be used for purely
private purposes or for the exclusive
benefit of private individuals.[17]

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

Appellant next claims that the

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

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

Republic
shall
cause FPA to
include in its
fertilizer pricing
formula a capital
recovery
component, the
proceeds
of
which will be
used initially for
the purpose of
funding
the
unpaid portion of
the outstanding
capital stock of
Planters presently
held in trust by
Planters
Foundation, Inc.
(Planters
Foundation),
which
unpaid
capital
is
estimated
at
approximately P2
06
million
(subject
to
validation
by
Planters
and
Planters
Foundation)
(such
unpaid
portion of the
outstanding
capital stock of
Planters
being
hereafter referred

158

to as the Unpaid
Capital),
and
subsequently for
such
capital
increases as may
be required for
the
continuing
viability
of
Planters.

The
capital
recovery
component shall
be
in
the
minimum amount
of P10 per bag,
which will be
added to the price
of all domestic
sales of fertilizer
in
the Philippines b
y any importer
and/or fertilizer
mother company.
In
this
connection, the
Republic hereby
acknowledges
that the advances
by Planters to
Planters
Foundation
which
were
applied to the
payment of the

Planters shares
now held in trust
by
Planters
Foundation, have
been assigned to,
among others, the
Creditors. Accord
ingly,
the
Republic,
through
FPA,
hereby agrees to
deposit
the
proceeds of the
capital recovery
component in the
special
trust
account
designated in the
notice
dated April
2,
1985, addressed
by counsel for
the Creditors to
Planters
Foundation. Such
proceeds shall be
deposited by FPA
on or before the
15th day of each
month.

The
capital
recovery
component shall
continue to be
charged
and
collected
until
payment in full
of (a) the Unpaid
Capital and/or (b)
any shortfall in
the payment of
the
Subsidy
Receivables, (c)
any carrying cost
accruing from the
date hereof on
the
amounts
which may be
outstanding from
time to time of
the
Unpaid
Capital and/or the
Subsidy
Receivables and
(d) the capital
increases
contemplated in
paragraph
2
hereof. For
the
purpose of the
foregoing clause
(c), the carrying
cost shall be at
such rate as will
represent the full
and reasonable
cost to Planters

159

of servicing its
debts, taking into
account both its
peso and foreign
currencydenominated
obligations.
(Records, pp. 4243)

Issues

Petitioner

PPI

raises

four

issues

for

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

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

PPI moved for reconsideration but its motion

was denied.[19] It then filed the present petition with this

II

Court.

LOI 1465, BEING A

IMPLEMENTED
FOR

Our

PURPOSE OF ASSURING THE

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

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

LAW
THE

160

IV

o
c
u
s

THE PRINCIPLE OF UNJUST

VEXATION
(SHOULD
BE
ENRICHMENT)
FINDS
NO
APPLICATION IN THE INSTANT
CASE.[20] (Underscoring supplied)

s
t
a
n
d
i

Our Ruling

We shall first tackle the procedural issues of locus

standi and

the

jurisdiction

constitutional issues.

F
e
r
t
i
p
h
i
l
h
a
s
l

of

the RTC to

resolve

c
t
i
n
j
u
r
y
;

b
e
c
a
u
s
e

d
o
c
t
r
i
n
e

i
t

o
f

s
u
f
f
e
r
e
d

s
t
a
n
d
i
n
g

d
i
r
e

i
s
a

161

m
e
r
e
p
r
o
c
e
d
u
r
a
l
t
e
c
h
n
i
c
a
l
i
t
y
w
h
i
c
h

m
a
y

cases. Succinctly put, the doctrine requires a litigant to

have a material interest in the outcome of a case. In
private suits, locus standi requires a litigant to be a real

b
e

party

in

interest,

which

is

defined

as the

party who stands to be benefited or injured by the

w
a
i
v
e
d
.

judgment in the suit or the party entitled to the avails of

the suit.[23]

In public suits, this Court recognizes the

difficulty

of

applying

the

doctrine

especially

when plaintiff asserts a public right on behalf of the

PPI argues that Fertiphil has no locus standi to
question the constitutionality of LOI No. 1465 because it
does not have a personal and substantial interest in the
case or will sustain direct injury as a result of its
enforcement.[21] It asserts that Fertiphil did not suffer any
damage from the CRC imposition because incidence of
the levy fell on the ultimate consumer or the farmers

general public because of conflicting public policy

issues. [24] On one end, there is the right of the ordinary
citizen to petition the courts to be freed from unlawful
government intrusion and illegal official action. At the
other end, there is the public policy precluding excessive
judicial interference in official acts, which may
unnecessarily hinder the delivery of basic public services.

themselves, not on the seller fertilizer company.[22]

In this jurisdiction, We have adopted the direct

We

cannot

agree. The

doctrine

of locus

standi or the right of appearance in a court of justice has

injury

test

to

determine locus
[25]

suits. In People v. Vera,

standi in

public

it was held that a person who

been adequately discussed by this Court in a catena of

162

impugns the validity of a statute must have a personal

and it did pay, the P10 levy imposed for every bag of

Even assuming arguendo that there is no direct

and substantial interest in the case such that he has

fertilizer sold on the domestic market. It may be true that

injury, We find that the liberal policy consistently

sustained, or will sustain direct injury as a result. The

Fertiphil has passed some or all of the levy to the

adopted by this Court on locus standi must apply. The

direct injury test in public suits is similar to the real party

ultimate consumer, but that does not disqualify it from

issues raised by Fertiphil are of paramount public

in interest rule for private suits under Section 2, Rule 3 of

attacking the constitutionality of the LOI or from seeking

importance. It involves not only the constitutionality of a

a refund. As seller, it bore the ultimate burden of paying

tax law but, more importantly, the use of taxes for public

the levy. It faced the possibility of severe sanctions for

purpose. Former President Marcos issued LOI No. 1465

failure to pay the levy. The fact of payment is sufficient

with the intention of rehabilitating an ailing private

injury to Fertiphil.

company. This is clear from the text of the LOI. PPI is

the 1997 Rules of Civil Procedure.

[26]

Recognizing that a strict application of the

direct injury test may hamper public interest, this Court

expressly named in the LOI as the direct beneficiary of

relaxed the requirement in cases of transcendental

the levy. Worse, the levy was made dependent and

importance or with far reaching implications. Being a

Moreover, Fertiphil suffered harm from the

conditional upon PPI becoming financially viable. The

mere procedural technicality, it has also been held

enforcement of the LOI because it was compelled to

LOI provided that the capital contribution shall be

that locus standi may be waived in the public interest.[27]

factor in its product the levy. The levy certainly rendered

collected until adequate capital is raised to make PPI

the fertilizer products of Fertiphil and other domestic

viable.

sellers much more expensive. The harm to their business

consists not only in fewer clients because of the increased

Whether or not the complaint for collection is

characterized as a private or public suit, Fertiphil

price, but also in adopting alternative corporate strategies

The constitutionality of the levy is already in doubt on a

to meet the demands of LOI No. 1465. Fertiphil and other

plain reading of the statute. It is Our constitutional duty

fertilizer sellers may have shouldered all or part of the

to squarely resolve the issue as the final arbiter of all

levy just to be competitive in the market. The harm

justiciable controversies. The doctrine of standing, being

occasioned on the business of Fertiphil is sufficient injury

a mere procedural technicality, should be waived, if at all,

for purposes of locus standi.

to adequately thresh out an important constitutional issue.

has locus standi to file it. Fertiphil suffered a direct injury

from the enforcement of LOI No. 1465. It was required,

163

R
T
C
m
a
y
r
e
s
o
l
v
e
c
o
n
s
t
i
t
u
t
i
o
n
a
l
i
s
s
u
e
s

;
t
h
e
c
o
n
s
t
i
t
u
t
i
o
n
a
l
i
s
s
u
e
w
a
s
a
d
e
q
u

a
t
e
l
y
r
a
i
s
e
d
i
n
t
h
e
c
o
m
p
l
a
i
n
t
;
i
t
i
s

164

the resolution of the constitutional issue is not necessary

t
h
e

for a determination of the complaint for collection. [29]

l
i
s

Fertiphil counters that the constitutionality of

the LOI was adequately pleaded in its complaint. It

m
o
t
a

claims that the constitutionality of LOI No. 1465 is the

xxxx

(2) Review, revise, reverse,

modify, or affirm on appeal
or certiorari, as the law or the Rules
of
Court
may
provide, final
judgments and orders of lower
courts in:

very lis mota of the case because the trial court cannot
determine its claim without resolving the issue. [30]

o
f
It is settled that the RTC has jurisdiction to

t
h
e

resolve the constitutionality of a statute, presidential

decree or an executive order. This is clear from Section 5,
Article VIII of the 1987 Constitution, which provides:

c
a
s
e
.

(a) All
cases in which
the constitutional
ity or validity of
any treaty,
international or
executive
agreement, law,
presidential
decree,
proclamation, ord
er,
instruction,
ordinance,
or
regulation is in
question.
(Underscoring
supplied)

PPI insists that the RTC and the CA erred in

ruling on the constitutionality of the LOI. It asserts that
the constitutionality of the LOI cannot be collaterally
attacked in a complaint for collection. [28] Alternatively,

SECTION 5. The Supreme

Court shall have the following
powers:

165

In Mirasol v. Court of Appeals,[31] this Court

recognized the power of the RTC to resolve constitutional
issues, thus:

On the first issue. It is

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

or to this Court alone for even the

regional trial courts can take
cognizance of actions assailing a
specific rule or set of rules
promulgated
by
administrative
bodies. Indeed, the Constitution vests
the power of judicial review or the
power to declare a law, treaty,
international or executive agreement,
presidential decree, order, instruction,
ordinance, or regulation in the courts,
including the regional trial courts.[34]

Judicial review of official acts on the ground of

unconstitutionality may be sought or availed of through
any of the actions cognizable by courts of justice, not

LOI No. 1465 was properly and adequately raised in the

complaint for collection filed with the RTC. The pertinent
portions of the complaint allege:

6. The CRC of P10 per bag

levied under LOI 1465 on domestic
sales of all grades of fertilizer in the
Philippines,
is unlawful,
unjust,
uncalled
for,
unreasonable,
inequitable and oppressive because:
xxxx

necessarily in a suit for declaratory relief. Such review

may be had in criminal actions, as in People v.
Ferrer[35] involving the constitutionality of the now

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

defunct Anti-Subversion law, or in ordinary actions, as

v. Department of Foreign Affairs,[33] this Court reiterated:

in Krivenko v. Register of Deeds [36] involving the

constitutionality of laws prohibiting aliens from acquiring

There is no denying that

regular courts have jurisdiction over
cases involving the validity or
constitutionality of a rule or
regulation issued by administrative
agencies. Such jurisdiction, however,
is not limited to the Court of Appeals

Contrary to PPIs claim, the constitutionality of

public lands. The constitutional issue, however, (a) must

be properly raised and presented in the case, and (b) its
resolution is necessary to a determination of the case, i.e.,
the issue of constitutionality must be the very lis
mota presented.[37]

(c) It
favors only one
private domestic
corporation, i.e.,
defendant PPPI,
and imposed at
the expense and
disadvantage of
the
other
fertilizer
importers/distribu
tors who were
themselves
in
tight
business
situation
and

166

were
then
exerting
all
efforts
and
maximizing
management and
marketing skills
to remain viable;

amounting to a denial of due process

unconstitutional. The RTC surely cannot order PPI to

since the persons of entities which

refund Fertiphil if it does not declare the LOI

had to bear the burden of paying

unconstitutional. It is the unconstitutionality of the LOI

the CRC derived

which triggers the refund. The issue of constitutionality is

no

benefit

the very lis mota of the complaint with the RTC.

therefrom; that on the contrary it was

used by PPI in trying to regain its
xxxx

former despicable monopoly of the

T
h
e

fertilizer industry to the detriment of

(e) It
was a
glaring
example of crony
capitalism,
a
forced program
through
which
the PPI, having
been
presumptuously
masqueraded as
the
fertilizer
industry
itself,
was the sole and
anointed
beneficiary;

other
[38]

distributors

and

importers.

P
1
0

(Underscoring supplied)

The constitutionality of LOI No. 1465 is also

the very lis mota of the complaint for collection. Fertiphil
filed the complaint to compel PPI to refund the levies
paid under the statute on the ground that the law
imposing the levy is unconstitutional.The thesis is that an
unconstitutional law is void. It has no legal effect. Being

l
e
v
y
u
n
d
e
r

void, Fertiphil had no legal obligation to pay the

an

levy. Necessarily, all levies duly paid pursuant to an

unconstitutional

unconstitutional law should be refunded under the civil

7. The CRC was

unlawful; and

special assessment and its imposition

is tantamount to illegal exaction

code principle against unjust enrichment. The refund is a

mere

consequence

of

the

law

being

declared

L
O
I
N
o
.

167

1
4
6
5
i
s
a
n
e
x
e
r
c
i
s
e

a private company. The levy was imposed to pay the

t
a
x
a
t
i
o
n
.

corporate debt of PPI. Fertiphil also argues that, even if

the LOI is enacted under the police power, it is still
unconstitutional because it did not promote the general
welfare of the people or public interest.

Police power and the power of taxation are

inherent powers of the State. These powers are distinct
At any rate, the Court holds that the RTC and the CA did

and have different tests for validity. Police power is the

not err in ruling against the constitutionality of the LOI.

power of the State to enact legislation that may interfere

with personal liberty or property in order to promote the
general welfare,[39] while the power of taxation is the

PPI insists that LOI No. 1465 is a valid

power to levy taxes to be used for public purpose. The

exercise either of the police power or the power of

main purpose of police power is the regulation of a

taxation. It claims that the LOI was implemented for the

behavior

purpose of assuring the fertilizer supply and distribution

generation. The lawful subjects and lawful means tests

in the country and for benefiting a foundation created by

are used to determine the validity of a law enacted under

law to hold in trust for millions of farmers their stock

the police power.[40] The power of taxation, on the other

p
o
w
e
r

ownership in PPI.

hand, is circumscribed by inherent and constitutional

o
f

unconstitutional because it was enacted to give benefit to

o
f
t
h
e

or

conduct,

while

taxation

is

revenue

limitations.

Fertiphil

counters

that

the

LOI

is

168

We agree with the RTC that the imposition of

the levy was an exercise by the State of its taxation

be properly regarded as taxes even

though they also serve as an
instrument of regulation.

chauffeurs license fee. Such fees are

to go into the expenditures of the
Land Transportation Commission as
provided for in the last proviso of
Sec. 61.[44] (Underscoring supplied)

power. While it is true that the power of taxation can be

used as an implement of police power,[41] the primary
purpose of the levy is revenue generation. If the purpose
is primarily revenue, or if revenue is, at least, one of the
real and substantial purposes, then the exaction is
properly called a tax.[42]

[43]

In Philippine Airlines, Inc. v. Edu,

it was

held that the imposition of a vehicle registration fee is not

an exercise by the State of its police power, but of its
taxation power, thus:

It is clear from the

provisions of Section 73 of
Commonwealth Act 123 and Section
61 of the Land Transportation and
Traffic Code that the legislative
intent and purpose behind the law
requiring owners of vehicles to pay
for their registration is mainly to raise
funds for the construction and
maintenance of highways and to a
much lesser degree, pay for the
operating
expenses
of
the
administering agency. x x x Fees may

Taxation may be made the

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

The P10 levy under LOI No. 1465 is too

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

T
a
x
e
s
a
r
e
e
x

169

a
c
t
e
d
o
n
l
y
f
o
r
a
p
u
b
l
i
c
p
u
r
p
o
s
e
.
T
h
e

e
P
1
0

i
t

l
e
v
y

w
a
s

i
s

n
o
t

u
n
c
o
n
s
t
i
t
u
t
i
o
n
a
l
b
e
c
a
u
s

f
o
r
a
p
u
b
l
i
c
p
u
r
p
o
s
e
.
T

170

h
e
l
e
v
y
w
a
s
i
m
p
o
s
e
d
t
o

n
e
f
i
t

because it is done under the forms of law and is called

taxation.[47]

t
o

The term public purpose is not defined. It is an

elastic concept that can be hammered to fit modern

P
P
I
.

standards. Jurisprudence states that public purpose should

be given a broad interpretation. It does not only pertain to
those purposes which are traditionally viewed as
essentially government functions, such as building roads
and delivery of basic services, but also includes those
An inherent limitation on the power of taxation

purposes designed to promote social justice. Thus, public

is public purpose. Taxes are exacted only for a public

money may now be used for the relocation of illegal

purpose. They cannot be used for purely private purposes

settlers, low-cost housing and urban or agrarian reform.

or for the exclusive benefit of private persons.

[46]

The

reason for this is simple. The power to tax exists for the
g
i
v
e

general welfare; hence, implicit in its power is the

While the categories of what may constitute a

limitation that it should be used only for a public

public purpose are continually expanding in light of the

purpose. It would be a robbery for the State to tax its

expansion

u
n
d
u
e

citizens and use the funds generated for a private

requirement that taxes can only be exacted for a public

purpose. As an old United States case bluntly put it: To

purpose still stands. Public purpose is the heart of a tax

lay with one hand, the power of the government on the

law. When a tax law is only a mask to exact funds from

property of the citizen, and with the other to bestow it

the public when its true intent is to give undue benefit

b
e

upon favored individuals to aid private enterprises and

of government

functions,

the

inherent

build up private fortunes, is nonetheless a robbery

171

and advantage to a private enterprise, that law will not

indefinite. They are required to continuously pay the levy

satisfy the requirement of public purpose.

until adequate capital is raised for PPI.

The purpose of a law is evident from its text or

inferable from other secondary sources. Here, We agree
with the RTC and that CA that the levy imposed under
LOI No. 1465 was not for a public purpose.

Third, the RTC and the CA held that the levies

It is a basic rule of statutory construction that
the text of a statute should be given a literal meaning. In
this case, the text of the LOI is plain that the levy was
imposed in order to raise capital for PPI. The framers of
the LOI did not even hide the insidious purpose of the

paid under the LOI were directly remitted and deposited

by FPA to Far East Bank and Trust Company, the
depositary bank of PPI.[49] This proves that PPI benefited
from the LOI. It is also proves that the main purpose of
the law was to give undue benefit and advantage to PPI.

law. They were cavalier enough to name PPI as the

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

ultimate beneficiary of the taxes levied under the

LOI. We find it utterly repulsive that a tax law would

beneficiary of the taxes to be levied from the public. This

3. The Administrator of the Fertilizer
Pesticide Authority to include
in its fertilizer pricing formula
a capital
contribution
component of not less than P10
per
bag. This
capital
contribution shall be collected
until adequate capital is raised
to make PPI viable. Such
capital contribution shall be
applied by FPA to all domestic
sales
of
fertilizers
in
the Philippines.[48] (Underscorin
g supplied)

Fourth, the levy was used to pay the corporate

expressly name a private company as the ultimate

is a clear case of crony capitalism.

debts

of

PPI. A

reading

of

the

Letter

of

Understanding[50] dated May 18, 1985 signed by then

Prime Minister Cesar Virata reveals that PPI was in deep
financial problem because of its huge corporate
debts. There were pending petitions for rehabilitation

Second, the LOI provides that the imposition of

the P10 levy was conditional and dependent upon PPI
becoming financially viable. This suggests that the levy
was actually imposed to benefit PPI. The LOI notably
does not fix a maximum amount when PPI is deemed

against PPI before the Securities and Exchange

Commission. The government guaranteed payment of
PPIs debts to its foreign creditors. To fund the payment,
President Marcos issued LOI No. 1465. The pertinent
portions of the letter of understanding read:

financially viable. Worse, the liability of Fertiphil and

other domestic sellers of fertilizer to pay the levy is made

172

Republic of the Philippines

Office of the Prime Minister
Manila

LETTER OF UNDERTAKING

ay 18, 1985

TO:
THE
BANKING AND FINANCIAL
INSTITUTIONS
LISTED IN ANNEX A HERETO
WHICH ARE
CREDITORS
(COLLECTIVELY,
THE CREDITORS)
OF PLANTERS PRODUCTS, INC.
(PLANTERS)

Gentlemen:

This has reference to Planters which

is the principal importer and
distributor of fertilizer, pesticides and
agricultural
chemicals
in
the

Philippines. As regards Planters, the

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

In connection with the foregoing, the

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

xxxx

2. Upon the effective date

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

xxxx

The
capital
recovery
component shall continue to be
charged and collected until payment
in full of (a) the Unpaid Capital
and/or (b) any shortfall in the
payment of the Subsidy Receivables,

173

(c) any carrying cost accruing from

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

I
P
P
I
N
E
S
B
y
:
(
signed)
C
R
E
P
U
B
L
I
C
O
F

ESAR
E. A.
VIRAT
A
Prime Minister and Minister of Finance[51]

It is clear from the Letter of Understanding that

the levy was imposed precisely to pay the corporate debts
of PPI. We cannot agree with PPI that the levy was

T
H
E
P
H
I
L

imposed to ensure the stability of the fertilizer industry in

the country. The letter of understanding and the plain text
of the LOI clearly indicate that the levy was exacted for
the benefit of a private corporation.

All told, the RTC and the CA did not err in

holding that the levy imposed under LOI No. 1465 was
not for a public purpose. LOI No. 1465 failed to comply
with the public purpose requirement for tax laws.

T
h
e
L
O
I
i
s
s
t
i
l
l
u
n
c
o
n
s
t
i
t
u

174

t
i
o
n
a
l
e
v
e
n
i
f
e
n
a
c
t
e
d
u
n
d
e
r
t
h
e
p
o
l

i
c
e
p
o
w
e
r
;

i
n
t
e
r
e
s
t
.

i
t
d
i
d
n
o
t

Even if We consider LOI No. 1695 enacted under the

police power of the State, it would still be invalid for
failing to comply with the test of lawful subjects and
lawful means. Jurisprudence states the test as follows: (1)
the interest of the public generally, as distinguished from
those of particular class, requires its exercise; and (2) the

p
r
o
m
o
t
e

means employed are reasonably necessary for the

p
u
b
l
i
c

law was enacted to give undue advantage to a private

accomplishment of the purpose and not unduly

oppressive upon individuals.[52]
For the same reasons as discussed, LOI No. 1695 is
invalid because it did not promote public interest. The

corporation. We quote with approval the CA ratiocination

on this point, thus:

175

It is upon applying this

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

T
h
e
g
e
n
e
r
a
l

t
i
t
u
t
i
o
n
a
l
l
a
w

r
u
l
e

i
s

i
s

v
o
i
d
;

t
h
a
t
a
n
u
n
c
o
n
s

t
h
e
d
o
c
t
r
i
n
e

176

[54]

o
f
o
p
e
r
a
t
i
v
e
f
a
c
t
i
s
i
n
a
p
p
l
i
c
a
b
l
e
.

Being void, Fertiphil is not required to pay the

levy. All levies paid should be refunded in accordance

PPI also argues that Fertiphil cannot seek a
refund

even

if

LOI

No.

1465

is

declared

unconstitutional. It banks on the doctrine of operative

with the general civil code principle against unjust

enrichment. The general rule is supported by Article 7 of
the Civil Code, which provides:

fact, which provides that an unconstitutional law has an

effect before being declared unconstitutional. PPI wants
to retain the levies paid under LOI No. 1465 even if it is
subsequently declared to be unconstitutional.

ART. 7. Laws are repealed

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

We cannot agree. It is settled that no question,

issue or argument will be entertained on appeal, unless it
has been raised in the court a quo.

[53]

PPI did not raise the

applicability of the doctrine of operative fact with

When the courts declare a

law to be inconsistent with the
Constitution, the former shall be
void and the latter shall govern.

the RTC and the CA. It cannot belatedly raise the issue
with Us in order to extricate itself from the dire effects of
an unconstitutional law.

The doctrine of operative fact, as an exception

to the general rule, only applies as a matter of equity and
fair play.[55] It nullifies the effects of an unconstitutional

At

any

rate,

We

find

the

doctrine

law by recognizing that the existence of a statute prior to

inapplicable. The general rule is that an unconstitutional

a determination of unconstitutionality is an operative fact

law is void. It produces no rights, imposes no duties and

and may have consequences which cannot always be

affords no protection. It has no legal effect. It is, in legal

ignored. The past cannot always be erased by a new

contemplation, inoperative as if it has not been passed.

judicial declaration.[56]

177

and equity dictate that PPI must refund the amounts paid
by Fertiphil.

FINANCE, THE COMMISSIONER OF INTERNAL

REVENUE,
and
SECRETARY
OF
BUDGET, respondents.

The doctrine is applicable when a declaration

G.R. No. 81921 June 30, 1988

of unconstitutionality will impose an undue burden on

those who have relied on the invalid law. Thus, it was
applied to a criminal case when a declaration of
unconstitutionality would put the accused in double
jeopardy[57] or would put in limbo the acts done by a

WHEREFORE, the petition is DENIED. The Court of

Appeals

Decision

dated November

28,

2003 is AFFIRMED.

municipality in reliance upon a law creating it. [58]

SO ORDERED.

Here, We do not find anything iniquitous in

ordering PPI to refund the amounts paid by Fertiphil

Kapatiran vs Tan
G.R. No. 81311 June 30, 1988

under LOI No. 1465. It unduly benefited from the levy. It

was proven during the trial that the levies paid were
remitted and deposited to its bank account. Quite the
reverse, it would be inequitable and unjust not to order a
refund. To do so would unjustly enrich PPI at the expense
of Fertiphil. Article 22 of the Civil Code explicitly

KAPATIRAN NG MGA NAGLILINGKOD SA

PAMAHALAAN
NG
PILIPINAS,
INC.,
HERMINIGILDO C. DUMLAO, GERONIMO Q.
QUADRA,
and
MARIO
C.
VILLANUEVA, petitioners,
vs.
HON. BIENVENIDO TAN, as Commissioner of
Internal Revenue, respondent.

provides that every person who, through an act of

performance by another comes into possession of
something at the expense of the latter without just or
legal ground shall return the same to him. We cannot
allow PPI to profit from an unconstitutional law. Justice

G.R. No. 81820 June 30, 1988

KILUSANG MAYO UNO LABOR CENTER (KMU),
its officers and affiliated labor federations and
alliances,petitioners,
vs.
THE EXECUTIVE SECRETARY, SECRETARY OF

INTEGRATED
CUSTOMS
BROKERS
ASSOCIATION OF THE PHILIPPINES and JESUS
B.
BANAL, petitioners,
vs.
The HON. COMMISSIONER, BUREAU OF
INTERNAL REVENUE, respondent.
G.R. No. 82152 June 30, 1988
RICARDO
C.
VALMONTE, petitioner,
vs.
THE EXECUTIVE SECRETARY, SECRETARY OF
FINANCE, COMMISSIONER OF INTERNAL
REVENUE
and
SECRETARY
OF
BUDGET, respondent.
Franklin S. Farolan for petitioner Kapatiran in G.R. No.
81311.
Jaime C. Opinion for individual petitioners in G.R. No.
81311.
Banzuela, Flores, Miralles, Raeses, Sy, Taquio and
Associates for petitioners in G.R. No 81820.
Union of Lawyers and Advocates for Peoples Right
collaborating counsel for petitioners in G.R. No 81820.
Jose C. Leabres and Joselito R. Enriquez for petitioners
in G.R. No. 81921.

178

PADILLA, J.:
These four (4) petitions, which have been consolidated
because of the similarity of the main issues involved
therein, seek to nullify Executive Order No. 273 (EO
273, for short), issued by the President of the Philippines
on 25 July 1987, to take effect on 1 January 1988, and
which amended certain sections of the National Internal
Revenue Code and adopted the value-added tax (VAT, for
short), for being unconstitutional in that its enactment is
not alledgedly within the powers of the President; that the
VAT is oppressive, discriminatory, regressive, and
violates the due process and equal protection clauses and
other provisions of the 1987 Constitution.
The Solicitor General prays for the dismissal of the
petitions on the ground that the petitioners have failed to
show justification for the exercise of its judicial powers,
viz. (1) the existence of an appropriate case; (2) an
interest, personal and substantial, of the party raising the
constitutional questions; (3) the constitutional question
should be raised at the earliest opportunity; and (4) the
question of constitutionality is directly and necessarily
involved in a justiciable controversy and its resolution is
essential to the protection of the rights of the parties.
According to the Solicitor General, only the third
requisite that the constitutional question should be
raised at the earliest opportunity has been complied
with. He also questions the legal standing of the
petitioners who, he contends, are merely asking for an
advisory opinion from the Court, there being no
justiciable controversy for resolution.
Objections to taxpayers' suit for lack of sufficient
personality standing, or interest are, however, in the main

procedural matters. Considering the importance to the

public of the cases at bar, and in keeping with the Court's
duty, under the 1987 Constitution, to determine wether or
not the other branches of government have kept
themselves within the limits of the Constitution and the
laws and that they have not abused the discretion given to
them, the Court has brushed aside technicalities of
procedure and has taken cognizance of these petitions.
But, before resolving the issues raised, a brief look into
the tax law in question is in order.
The VAT is a tax levied on a wide range of goods and
services. It is a tax on the value, added by every seller,
with aggregate gross annual sales of articles and/or
services, exceeding P200,00.00, to his purchase of goods
and services, unless exempt. VAT is computed at the rate
of 0% or 10% of the gross selling price of goods or gross
receipts realized from the sale of services.
The VAT is said to have eliminated privilege taxes,
multiple rated sales tax on manufacturers and producers,
advance sales tax, and compensating tax on importations.
The framers of EO 273 that it is principally aimed to
rationalize the system of taxing goods and services;
simplify tax administration; and make the tax system
more equitable, to enable the country to attain economic
recovery.
The VAT is not entirely new. It was already in force, in a
modified form, before EO 273 was issued. As pointed out
by the Solicitor General, the Philippine sales tax system,
prior to the issuance of EO 273, was essentially a single
stage value added tax system computed under the "cost
subtraction method" or "cost deduction method" and was
imposed only on original sale, barter or exchange of
articles by manufacturers, producers, or importers.

Subsequent sales of such articles were not subject to sales

tax. However, with the issuance of PD 1991 on 31
October 1985, a 3% tax was imposed on a second sale,
which was reduced to 1.5% upon the issuance of PD
2006 on 31 December 1985, to take effect 1 January
1986. Reduced sales taxes were imposed not only on the
second sale, but on every subsequent sale, as well. EO
273 merely increased the VAT on every sale to 10%,
unless zero-rated or exempt.
Petitioners first contend that EO 273 is unconstitutional
on the Ground that the President had no authority to issue
EO 273 on 25 July 1987.
The contention is without merit.
It should be recalled that under Proclamation No. 3,
which decreed a Provisional Constitution, sole legislative
authority was vested upon the President. Art. II, sec. 1 of
the Provisional Constitution states:
Sec. 1. Until a legislature is elected
and convened under a new
Constitution, the President shall
continue to exercise legislative
powers.
On 15 October 1986, the Constitutional Commission of
1986 adopted a new Constitution for the Republic of the
Philippines which was ratified in a plebiscite conducted
on 2 February 1987. Article XVIII, sec. 6 of said
Constitution, hereafter referred to as the 1987
Constitution, provides:
Sec. 6. The incumbent President shall
continue to exercise legislative

179

powers until the first Congress is

convened.
It should be noted that, under both the Provisional and
the 1987 Constitutions, the President is vested with
legislative powers until a legislature under a new
Constitution is convened. The first Congress, created and
elected under the 1987 Constitution, was convened on 27
July 1987. Hence, the enactment of EO 273 on 25 July
1987, two (2) days before Congress convened on 27 July
1987, was within the President's constitutional power and
authority to legislate.
Petitioner Valmonte claims, additionally, that Congress
was really convened on 30 June 1987 (not 27 July 1987).
He contends that the word "convene" is synonymous with
"the date when the elected members of Congress assumed
office."
The contention is without merit. The word "convene"
which has been interpreted to mean "to call together,
cause to assemble, or convoke," 1 is clearly different from
assumption of office by the individual members of
Congress or their taking the oath of office. As an
example, we call to mind the interim National Assembly
created under the 1973 Constitution, which had not been
"convened" but some members of the body, more
particularly the delegates to the 1971 Constitutional
Convention who had opted to serve therein by voting
affirmatively for the approval of said Constitution, had
taken their oath of office.
To uphold the submission of petitioner Valmonte would
stretch the definition of the word "convene" a bit too far.
It would also defeat the purpose of the framers of the
1987 Constitutional and render meaningless some other
provisions of said Constitution. For example, the

provisions of Art. VI, sec. 15, requiring Congress

to conveneonce every year on the fourth Monday of July
for its regular session would be a contrariety, since
Congress would already be deemed to be in session after
the individual members have taken their oath of office. A
portion of the provisions of Art. VII, sec. 10, requiring
Congress to convene for the purpose of enacting a law
calling for a special election to elect a President and
Vice-President in case a vacancy occurs in said offices,
would also be a surplusage. The portion of Art. VII, sec.
11, third paragraph, requiring Congress to convene, if not
in session, to decide a conflict between the President and
the Cabinet as to whether or not the President and the
Cabinet as to whether or not the President can re-assume
the powers and duties of his office, would also be
redundant. The same is true with the portion of Art. VII,
sec. 18, which requires Congress to convene within
twenty-four (24) hours following the declaration of
martial law or the suspension of the privilage of the writ
of habeas corpus.
The 1987 Constitution mentions a specific date when the
President loses her power to legislate. If the framers of
said Constitution had intended to terminate the exercise
of legislative powers by the President at the beginning of
the term of office of the members of Congress, they
should have so stated (but did not) in clear and
unequivocal terms. The Court has not power to re-write
the Constitution and give it a meaning different from that
intended.
The Court also finds no merit in the petitioners' claim that
EO 273 was issued by the President in grave abuse of
discretion amounting to lack or excess of jurisdiction.
"Grave abuse of discretion" has been defined, as follows:

Grave abuse of discretion" implies

such capricious and whimsical
exercise of judgment as is equivalent
to lack of jurisdiction (Abad Santos
vs. Province of Tarlac, 38 Off. Gaz.
834), or, in other words, where the
power is exercised in an arbitrary or
despotic manner by reason of passion
or personal hostility, and it must be
so patent and gross as to amount to
an evasion of positive duty or to a
virtual refusal to perform the duty
enjoined or to act at all in
contemplation of law. (Tavera-Luna,
Inc. vs. Nable, 38 Off. Gaz. 62). 2
Petitioners have failed to show that EO 273 was issued
capriciously and whimsically or in an arbitrary or
despotic manner by reason of passion or personal
hostility. It appears that a comprehensive study of the
VAT had been extensively discussed by this framers and
other
government
agencies
involved
in
its
implementation, even under the past administration. As
the Solicitor General correctly sated. "The signing of
E.O. 273 was merely the last stage in the exercise of her
legislative powers. The legislative process started long
before the signing when the data were gathered,
proposals were weighed and the final wordings of the
measure were drafted, revised and finalized. Certainly, it
cannot be said that the President made a jump, so to
speak, on the Congress, two days before it convened." 3
Next, the petitioners claim that EO 273 is oppressive,
discriminatory, unjust and regressive, in violation of the
provisions of Art. VI, sec. 28(1) of the 1987 Constitution,
which states:

180

Sec. 28 (1) The rule of taxation shall

be uniform and equitable. The
Congress shall evolve a progressive
system of taxation.
The petitioners" assertions in this regard are not
supported by facts and circumstances to warrant their
conclusions. They have failed to adequately show that the
VAT is oppressive, discriminatory or unjust. Petitioners
merely rely upon newspaper articles which are actually
hearsay and have evidentiary value. To justify the
nullification of a law. there must be a clear and
unequivocal breach of the Constitution, not a doubtful
and argumentative implication. 4
As the Court sees it, EO 273 satisfies all the requirements
of a valid tax. It is uniform. The court, in City of Baguio
vs. De Leon, 5 said:
... In Philippine Trust Company v.
Yatco (69 Phil. 420), Justice Laurel,
speaking for the Court, stated: "A tax
is considered uniform when it
operates with the same force and
effect in every place where the
subject may be found."
There was no occasion in that case to
consider the possible effect on such a
constitutional requirement where
there is a classification. The
opportunity
came
in
Eastern
Theatrical Co. v. Alfonso (83 Phil.
852, 862). Thus: "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; . . ." About two years later,
Justice Tuason, speaking for this
Court in Manila Race Horses
Trainers Assn. v. de la Fuente (88
Phil. 60, 65) incorporated the above
excerpt in his opinion and continued;
"Taking everything into account, the
differentiation against which the
plaintiffs complain conforms to the
practical dictates of justice and equity
and is not discriminatory within the
meaning of the Constitution."
To satisfy this requirement then, all
that is needed as held in another case
decided two years later, (Uy Matias v.
City of Cebu, 93 Phil. 300) is that the
statute or ordinance in question
"applies equally to all persons, firms
and corporations placed in similar
situation." This Court is on record as
accepting the view in a leading
American case (Carmichael v.
Southern Coal and Coke Co., 301 US
495) that "inequalities which result
from a singling out of one particular
class for taxation or exemption
infringe no constitutional limitation."
(Lutz v. Araneta, 98 Phil. 148, 153).
The sales tax adopted in EO 273 is applied similarly on
all goods and services sold to the public, which are not
exempt, at the constant rate of 0% or 10%.

The disputed sales tax is also equitable. It is imposed

only on sales of goods or services by persons engage in
business with an aggregate gross annual sales exceeding
P200,000.00.
Small
corner sari-sari stores
are
consequently exempt from its application. Likewise
exempt from the tax are sales of farm and marine
products, spared as they are from the incidence of the
VAT, are expected to be relatively lower and within the
reach of the general public. 6
The Court likewise finds no merit in the contention of the
petitioner Integrated Customs Brokers Association of the
Philippines that EO 273, more particularly the new Sec.
103 (r) of the National Internal Revenue Code, unduly
discriminates against customs brokers. The contested
provision states:
Sec. 103. Exempt transactions.
The following shall be exempt from
the value-added tax:
xxx xxx xxx
(r) Service performed in the exercise
of profession or calling (except
customs brokers) subject to the
occupation tax under the Local Tax
Code, and professional services
performed by registered general
professional partnerships;
The phrase "except customs brokers" is not meant to
discriminate against customs brokers. It was inserted in
Sec. 103(r) to complement the provisions of Sec. 102 of
the Code, which makes the services of customs brokers
subject to the payment of the VAT and to distinguish
customs brokers from other professionals who are subject

181

to the payment of an occupation tax under the Local Tax

Code. Pertinent provisions of Sec. 102 read:
Sec. 102. Value-added tax on sale of
services. There shall be levied,
assessed and collected, a value-added
tax equivalent to 10% percent of
gross receipts derived by any person
engaged in the sale of services. The
phrase sale of services" means the
performance of all kinds of services
for others for a fee, remuneration or
consideration,
including
those
performed
or
rendered
by
construction and service contractors;
stock, real estate, commercial,
customs and immigration brokers;
lessors of personal property; lessors
or distributors of cinematographic
films; persons engaged in milling,
processing,
manufacturing
or
repacking goods for others; and
similar services regardless of whether
or not the performance thereof call
for the exercise or use of the physical
or mental faculties: ...
With the insertion of the clarificatory phrase "except
customs brokers" in Sec. 103(r), a potential conflict
between the two sections, (Secs. 102 and 103), insofar as
customs brokers are concerned, is averted.
At any rate, the distinction of the customs brokers from
the other professionals who are subject to occupation tax
under the Local Tax Code is based upon material
differences, in that the activities of customs brokers (like
those of stock, real estate and immigration brokers)

partake more of a business, rather than a profession and

were thus subjected to the percentage tax under Sec. 174
of the National Internal Revenue Code prior to its
amendment by EO 273. EO 273 abolished the percentage
tax and replaced it with the VAT. If the petitioner
Association did not protest the classification of customs
brokers then, the Court sees no reason why it should
protest now.

WHEREFORE, the petitions are DISMISSED. Without

pronouncement as to costs.

The Court takes note that EO 273 has been in effect for
more than five (5) months now, so that the fears
expressed by the petitioners that the adoption of the VAT
will trigger skyrocketing of prices of basic commodities
and services, as well as mass actions and demonstrations
against the VAT should by now be evident. The fact that
nothing of the sort has happened shows that the fears and
apprehensions of the petitioners appear to be more
imagined than real. It would seem that the VAT is not as
bad as we are made to believe.

Gutierrez, Jr. and Medialdea, JJ., are on leave.

In any event, if petitioners seriously believe that the

adoption and continued application of the VAT are
prejudicial to the general welfare or the interests of the
majority of the people, they should seek recourse and
relief from the political branches of the government. The
Court, following the time-honored doctrine of separation
of powers, cannot substitute its judgment for that of the
President as to the wisdom, justice and advisability of the
adoption of the VAT. The Court can only look into and
determine whether or not EO 273 was enacted and made
effective as law, in the manner required by, and consistent
with, the Constitution, and to make sure that it was not
issued in grave abuse of discretion amounting to lack or
excess of jurisdiction; and, in this regard, the Court finds
no reason to impede its application or continued
implementation.

SO ORDERED.
Yap, C.J., Fernan, Narvasa, Melencio-Herrera, Cruz,
Paras, Feliciano, Gancayco, Bidin, Sarmiento, Cortes
and Grio-Aquino, JJ., concur.

Tolentino vs Secretary
G.R. No. 115455 October 30, 1995
ARTURO
M.
TOLENTINO, petitioner,
vs.
THE SECRETARY OF FINANCE and THE
COMMISSIONER
OF
INTERNAL
REVENUE, respondents.
G.R. No. 115525 October 30, 1995
JUAN
T.
DAVID, petitioner,
vs.
TEOFISTO T. GUINGONA, JR., as Executive
Secretary; ROBERTO DE OCAMPO, as Secretary of
Finance; LIWAYWAY VINZONS-CHATO, as
Commissioner of Internal Revenue; and their
AUTHORIZED
AGENTS
OR
REPRESENTATIVES, respondents.
G.R. No. 115543 October 30, 1995

182

RAUL S. ROCO and the INTEGRATED BAR OF

THE
PHILIPPINES, petitioners,
vs.
THE SECRETARY OF THE DEPARTMENT OF
FINANCE; THE COMMISSIONERS OF THE
BUREAU OF INTERNAL REVENUE AND
BUREAU OF CUSTOMS, respondents.
G.R. No. 115544 October 30, 1995
PHILIPPINE PRESS INSTITUTE, INC.; EGP
PUBLISHING
CO.,
INC.;
KAMAHALAN
PUBLISHING
CORPORATION;
PHILIPPINE
JOURNALISTS, INC.; JOSE L. PAVIA; and
OFELIA
L.
DIMALANTA, petitioners,
vs.
HON. LIWAYWAY V. CHATO, in her capacity as
Commissioner
of
Internal
Revenue;
HON.
TEOFISTO T. GUINGONA, JR., in his capacity as
Executive Secretary; and HON. ROBERTO B. DE
OCAMPO, in his capacity as Secretary of
Finance, respondents.

TENDERO, FERNANDO SANTIAGO, JOSE

ABCEDE, CHRISTINE TAN, FELIPE L. GOZON,
RAFAEL G. FERNANDO, RAOUL V. VICTORINO,
JOSE CUNANAN, QUINTIN S. DOROMAL,
MOVEMENT
OF
ATTORNEYS
FOR
BROTHERHOOD,
INTEGRITY
AND
NATIONALISM, INC. ("MABINI"), FREEDOM
FROM DEBT COALITION, INC., and PHILIPPINE
BIBLE
SOCIETY,
INC.
and
WIGBERTO
TAADA,petitioners,
vs.
THE
EXECUTIVE
SECRETARY,
THE
SECRETARY
OF
FINANCE,
THE
COMMISSIONER OF INTERNAL REVENUE and
THE COMMISSIONER OF CUSTOMS, respondents.
G.R. No. 115852 October 30, 1995
PHILIPPINE
AIRLINES,
vs.
THE
SECRETARY
OF
COMMISSIONER
OF
REVENUE, respondents.

INC., petitioner,
FINANCE
and
INTERNAL

G.R. No. 115754 October 30, 1995

G.R. No. 115873 October 30, 1995
CHAMBER OF REAL ESTATE AND BUILDERS
ASSOCIATIONS,
INC.,
(CREBA), petitioner,
vs.
THE
COMMISSIONER
OF
INTERNAL
REVENUE, respondent.
G.R. No. 115781 October 30, 1995
KILOSBAYAN, INC., JOVITO R. SALONGA,
CIRILO A. RIGOS, ERME CAMBA, EMILIO C.
CAPULONG, JR., JOSE T. APOLO, EPHRAIM

COOPERATIVE
UNION
OF
THE
PHILIPPINES, petitioner,
vs.
HON. LIWAYWAY V. CHATO, in her capacity as the
Commissioner
of
Internal
Revenue,
HON.
TEOFISTO T. GUINGONA, JR., in his capacity as
Executive Secretary, and HON. ROBERTO B. DE
OCAMPO, in his capacity as Secretary of
Finance, respondents.
G.R. No. 115931 October 30, 1995

PHILIPPINE
EDUCATIONAL
PUBLISHERS
ASSOCIATION, INC. and ASSOCIATION OF
PHILIPPINE
BOOK
SELLERS, petitioners,
vs.
HON. ROBERTO B. DE OCAMPO, as the Secretary
of Finance; HON. LIWAYWAY V. CHATO, as the
Commissioner of Internal Revenue; and HON.
GUILLERMO PARAYNO, JR., in his capacity as the
Commissioner of Customs, respondents.
RESOLUTION

MENDOZA, J.:
These are motions seeking reconsideration of our
decision dismissing the petitions filed in these cases for
the declaration of unconstitutionality of R.A. No. 7716,
otherwise known as the Expanded Value-Added Tax Law.
The motions, of which there are 10 in all, have been filed
by the several petitioners in these cases, with the
exception of the Philippine Educational Publishers
Association, Inc. and the Association of Philippine
Booksellers, petitioners in G.R. No. 115931.
The Solicitor General, representing the respondents, filed
a consolidated comment, to which the Philippine Airlines,
Inc., petitioner in G.R. No. 115852, and the Philippine
Press Institute, Inc., petitioner in G.R. No. 115544, and
Juan T. David, petitioner in G.R. No. 115525, each filed a
reply. In turn the Solicitor General filed on June 1, 1995 a
rejoinder to the PPI's reply.
On June 27, 1995 the matter was submitted for
resolution.

183

I. Power of the Senate to propose amendments to revenue

bills. Some of the petitioners (Tolentino, Kilosbayan,
Inc., Philippine Airlines (PAL), Roco, and Chamber of
Real Estate and Builders Association (CREBA)) reiterate
previous claims made by them that R.A. No. 7716 did not
"originate exclusively" in the House of Representatives
as required by Art. VI, 24 of the Constitution. Although
they admit that H. No. 11197 was filed in the House of
Representatives where it passed three readings and that
afterward it was sent to the Senate where after first
reading it was referred to the Senate Ways and Means
Committee, they complain that the Senate did not pass it
on second and third readings. Instead what the Senate did
was to pass its own version (S. No. 1630) which it
approved on May 24, 1994. Petitioner Tolentino adds that
what the Senate committee should have done was to
amend H. No. 11197 by striking out the text of the bill
and substituting it with the text of S. No. 1630. That way,
it is said, "the bill remains a House bill and the Senate
version just becomes the text (only the text) of the House
bill."
The contention has no merit.
The enactment of S. No. 1630 is not the only instance in
which the Senate proposed an amendment to a House
revenue bill by enacting its own version of a revenue bill.
On at least two occasions during the Eighth Congress, the
Senate passed its own version of revenue bills, which, in
consolidation with House bills earlier passed, became the
enrolled bills. These were:
R.A. No. 7369 (AN ACT TO AMEND THE OMNIBUS
INVESTMENTS CODE OF 1987 BY EXTENDING
FROM FIVE (5) YEARS TO TEN YEARS THE
PERIOD FOR TAX AND DUTY EXEMPTION AND
TAX CREDIT ON CAPITAL EQUIPMENT) which was

approved by the President on April 10, 1992. This Act is

actually a consolidation of H. No. 34254, which was
approved by the House on January 29, 1992, and S. No.
1920, which was approved by the Senate on February 3,
1992.
R.A. No. 7549 (AN ACT GRANTING TAX
EXEMPTIONS TO WHOEVER SHALL GIVE
REWARD TO ANY FILIPINO ATHLETE WINNING A
MEDAL IN OLYMPIC GAMES) which was approved
by the President on May 22, 1992. This Act is a
consolidation of H. No. 22232, which was approved by
the House of Representatives on August 2, 1989, and S.
No. 807, which was approved by the Senate on October
21, 1991.
On the other hand, the Ninth Congress passed revenue
laws which were also the result of the consolidation of
House and Senate bills. These are the following, with
indications of the dates on which the laws were approved
by the President and dates the separate bills of the two
chambers of Congress were respectively passed:
1. R.A. NO. 7642
AN ACT INCREASING THE
PENALTIES FOR TAX EVASION,
AMENDING FOR THIS PURPOSE
THE PERTINENT SECTIONS OF
THE
NATIONAL
INTERNAL
REVENUE CODE (December 28,
1992).
House Bill No. 2165, October 5,
1992

Senate Bill No. 32, December 7,

1992
2. R.A. NO. 7643
AN ACT TO EMPOWER THE
COMMISSIONER OF INTERNAL
REVENUE TO REQUIRE THE
PAYMENT OF THE VALUEADDED TAX EVERY MONTH
AND
TO
ALLOW
LOCAL
GOVERNMENT
UNITS
TO
SHARE IN VAT REVENUE,
AMENDING FOR THIS PURPOSE
CERTAIN SECTIONS OF THE
NATIONAL INTERNAL REVENUE
CODE (December 28, 1992)
House Bill No. 1503, September 3,
1992
Senate Bill No. 968, December 7,
1992
3. R.A. NO. 7646
AN ACT AUTHORIZING THE
COMMISSIONER OF INTERNAL
REVENUE TO PRESCRIBE THE
PLACE FOR PAYMENT OF
INTERNAL REVENUE TAXES BY
LARGE TAXPAYERS, AMENDING
FOR THIS PURPOSE CERTAIN
PROVISIONS OF THE NATIONAL
INTERNAL REVENUE CODE, AS
AMENDED (February 24, 1993)

184

House Bill No. 1470, October 20,

1992
Senate Bill No. 35, November 19,
1992
4. R.A. NO. 7649
AN ACT REQUIRING THE
GOVERNMENT OR ANY OF ITS
POLITICAL
SUBDIVISIONS,
INSTRUMENTALITIES
OR
AGENCIES
INCLUDING
GOVERNMENT-OWNED
OR
CONTROLLED CORPORATIONS
(GOCCS) TO DEDUCT AND
WITHHOLD THE VALUE-ADDED
TAX DUE AT THE RATE OF
THREE PERCENT (3%) ON
GROSS PAYMENT FOR THE
PURCHASE OF GOODS AND SIX
PERCENT (6%) ON GROSS
RECEIPTS
FOR
SERVICES
RENDERED BY CONTRACTORS
(April 6, 1993)
House Bill No. 5260, January 26,
1993
Senate Bill No. 1141, March 30,
1993
5. R.A. NO. 7656
AN
ACT
REQUIRING
GOVERNMENT-OWNED
OR

CONTROLLED CORPORATIONS
TO
DECLARE
DIVIDENDS
UNDER CERTAIN CONDITIONS
TO
THE
NATIONAL
GOVERNMENT,
AND
FOR
OTHER PURPOSES (November 9,
1993)
House Bill No. 11024, November 3,
1993
Senate Bill No. 1168, November 3,
1993
6. R.A. NO. 7660
AN
ACT
RATIONALIZING
FURTHER THE STRUCTURE AND
ADMINISTRATION
OF
THE
DOCUMENTARY STAMP TAX,
AMENDING FOR THE PURPOSE
CERTAIN PROVISIONS OF THE
NATIONAL INTERNAL REVENUE
CODE,
AS
AMENDED,
ALLOCATING
FUNDS
FOR
SPECIFIC PROGRAMS, AND FOR
OTHER PURPOSES (December 23,
1993)
House Bill No. 7789, May 31, 1993
Senate Bill No. 1330, November 18,
1993
7. R.A. NO. 7717

AN ACT IMPOSING A TAX ON

THE
SALE,
BARTER
OR
EXCHANGE OF SHARES OF
STOCK LISTED AND TRADED
THROUGH THE LOCAL STOCK
EXCHANGE
OR
THROUGH
INITIAL PUBLIC OFFERING,
AMENDING FOR THE PURPOSE
THE
NATIONAL
INTERNAL
REVENUE CODE, AS AMENDED,
BY INSERTING A NEW SECTION
AND
REPEALING
CERTAIN
SUBSECTIONS THEREOF (May 5,
1994)
House Bill No. 9187, November 3,
1993
Senate Bill No. 1127, March 23,
1994
Thus, the enactment of S. No. 1630 is not the only
instance in which the Senate, in the exercise of its power
to propose amendments to bills required to originate in
the House, passed its own version of a House revenue
measure. It is noteworthy that, in the particular case of S.
No. 1630, petitioners Tolentino and Roco, as members of
the Senate, voted to approve it on second and third
readings.
On the other hand, amendment by substitution, in the
manner urged by petitioner Tolentino, concerns a mere
matter of form. Petitioner has not shown what substantial
difference it would make if, as the Senate actually did in
this case, a separate bill like S. No. 1630 is instead
enacted as a substitute measure, "taking into
Consideration . . . H.B. 11197."

185

Indeed, so far as pertinent, the Rules of the Senate only

provide:
RULE XXIX
AMENDMENTS
xxx xxx xxx
68. Not more than one amendment
to the original amendment shall be
considered.
No amendment by substitution shall
be entertained unless the text thereof
is submitted in writing.
Any of said amendments may be
withdrawn before a vote is taken
thereon.
69. No amendment which seeks the
inclusion of a legislative provision
foreign to the subject matter of a bill
(rider) shall be entertained.
xxx xxx xxx
70-A. A bill or resolution shall not
be amended by substituting it with
another which covers a subject
distinct from that proposed in the
original bill or resolution. (emphasis
added).

Nor is there merit in petitioners' contention that, with

regard to revenue bills, the Philippine Senate possesses
less power than the U.S. Senate because of textual
differences between constitutional provisions giving them
the power to propose or concur with amendments.
Art. I, 7, cl. 1 of the U.S. Constitution reads:
All Bills for raising Revenue shall
originate
in
the
House
of
Representatives; but the Senate may
propose or concur with amendments
as on other Bills.
Art. VI, 24 of our Constitution reads:
All appropriation, revenue or tariff
bills, bills authorizing increase of the
public debt, bills of local application,
and private bills shall originate
exclusively in the House of
Representatives, but the Senate may
propose or concur with amendments.
The addition of the word "exclusively" in the Philippine
Constitution and the decision to drop the phrase "as on
other Bills" in the American version, according to
petitioners, shows the intention of the framers of our
Constitution to restrict the Senate's power to propose
amendments to revenue bills. Petitioner Tolentino
contends that the word "exclusively" was inserted to
modify "originate" and "the words 'as in any other bills'
(sic) were eliminated so as to show that these bills were
not to be like other bills but must be treated as a special
kind."

The history of this provision does not support this

contention. The supposed indicia of constitutional intent
are nothing but the relics of an unsuccessful attempt to
limit the power of the Senate. It will be recalled that the
1935 Constitution originally provided for a unicameral
National Assembly. When it was decided in 1939 to
change to a bicameral legislature, it became necessary to
provide for the procedure for lawmaking by the Senate
and the House of Representatives. The work of proposing
amendments to the Constitution was done by the National
Assembly, acting as a constituent assembly, some of
whose members, jealous of preserving the Assembly's
lawmaking powers, sought to curtail the powers of the
proposed Senate. Accordingly they proposed the
following provision:
All bills appropriating public funds,
revenue or tariff bills, bills of local
application, and private bills shall
originate
exclusively
in
the
Assembly, but the Senate may
propose or concur with amendments.
In case of disapproval by the Senate
of any such bills, the Assembly may
repass the same by a two-thirds vote
of all its members, and thereupon, the
bill so repassed shall be deemed
enacted and may be submitted to the
President for corresponding action. In
the event that the Senate should fail
to finally act on any such bills, the
Assembly may, after thirty days from
the opening of the next regular
session of the same legislative term,
reapprove the same with a vote of
two-thirds of all the members of the
Assembly.
And
upon
such

186

reapproval, the bill shall be deemed

enacted and may be submitted to the
President for corresponding action.
The special committee on the revision of laws of the
Second National Assembly vetoed the proposal. It deleted
everything after the first sentence. As rewritten, the
proposal was approved by the National Assembly and
embodied in Resolution No. 38, as amended by
Resolution No. 73. (J. ARUEGO, KNOW YOUR
CONSTITUTION 65-66 (1950)). The proposed
amendment was submitted to the people and ratified by
them in the elections held on June 18, 1940.
This is the history of Art. VI, 18 (2) of the 1935
Constitution, from which Art. VI, 24 of the present
Constitution was derived. It explains why the word
"exclusively" was added to the American text from which
the framers of the Philippine Constitution borrowed and
why the phrase "as on other Bills" was not copied.
Considering the defeat of the proposal, the power of the
Senate to propose amendments must be understood to be
full, plenary and complete "as on other Bills." Thus,
because revenue bills are required to originate
exclusively in the House of Representatives, the Senate
cannot enact revenue measures of its own without such
bills. After a revenue bill is passed and sent over to it by
the House, however, the Senate certainly can pass its own
version on the same subject matter. This follows from the
coequality of the two chambers of Congress.
That this is also the understanding of book authors of the
scope of the Senate's power to concur is clear from the
following commentaries:
The power of the Senate to propose
or concur with amendments is

apparently without restriction. It

would seem that by virtue of this
power, the Senate can practically rewrite a bill required to come from the
House and leave only a trace of the
original bill. For example, a general
revenue bill passed by the lower
house of the United States Congress
contained
provisions
for
the
imposition of an inheritance tax .
This was changed by the Senate into
a corporation tax. The amending
authority of the Senate was declared
by the United States Supreme Court
to be sufficiently broad to enable it to
make the alteration. [Flint v. Stone
Tracy Company, 220 U.S. 107, 55 L.
ed. 389].
(L. TAADA AND F. CARREON,
POLITICAL
LAW OF
THE
PHILIPPINES 247 (1961))
The above-mentioned bills are
supposed to be initiated by the House
of Representatives because it is more
numerous in membership and
therefore also more representative of
the people. Moreover, its members
are presumed to be more familiar
with the needs of the country in
regard to the enactment of the
legislation involved.
The Senate is, however, allowed
much leeway in the exercise of its
power to propose or concur with

amendments to the bills initiated by

the House of Representatives. Thus,
in one case, a bill introduced in the
U.S. House of Representatives was
changed by the Senate to make a
proposed
inheritance
tax
a
corporation tax. It is also accepted
practice for the Senate to introduce
what is known as an amendment by
substitution, which may entirely
replace the bill initiated in the House
of Representatives.
(I. CRUZ, PHILIPPINE POLITICAL
LAW 144-145 (1993)).
In sum, while Art. VI, 24 provides that all appropriation,
revenue or tariff bills, bills authorizing increase of the
public debt, bills of local application, and private bills
must "originate exclusively in the House of
Representatives," it also adds, "but the Senate may
propose or concur with amendments." In the exercise of
this power, the Senate may propose an entirely new bill
as a substitute measure. As petitioner Tolentino states in a
high school text, a committee to which a bill is referred
may do any of the following:
(1) to endorse the bill without
changes; (2) to make changes in the
bill omitting or adding sections or
altering its language; (3) to make and
endorse an entirely new bill as a
substitute, in which case it will be
known as a committee bill; or (4) to
make no report at all.

187

(A.
TOLENTINO,
GOVERNMENT
OF
PHILIPPINES 258 (1950))

THE
THE

To except from this procedure the amendment of bills

which are required to originate in the House by
prescribing that the number of the House bill and its other
parts up to the enacting clause must be preserved
although the text of the Senate amendment may be
incorporated in place of the original body of the bill is to
insist on a mere technicality. At any rate there is no rule
prescribing this form. S. No. 1630, as a substitute
measure, is therefore as much an amendment of H. No.
11197 as any which the Senate could have made.
II. S. No. 1630 a mere amendment of H. No. 11197.
Petitioners' basic error is that they assume that S. No.
1630 is an independent and distinct bill. Hence their
repeated references to its certification that it was passed
by the Senate "in substitution of S.B. No. 1129, taking
into
consideration P.S.
Res.
No.
734
and H.B. No. 11197," implying that there is something
substantially different between the reference to S. No.
1129 and the reference to H. No. 11197. From this
premise, they conclude that R.A. No. 7716 originated
both in the House and in the Senate and that it is the
product of two "half-baked bills because neither H. No.
11197 nor S. No. 1630 was passed by both houses of
Congress."
In point of fact, in several instances the provisions of S.
No. 1630, clearly appear to be mere amendments of the
corresponding provisions of H. No. 11197. The very
tabular comparison of the provisions of H. No. 11197 and
S. No. 1630 attached as Supplement A to the basic
petition of petitioner Tolentino, while showing
differences between the two bills, at the same time

indicates that the provisions of the Senate bill were

precisely intended to be amendments to the House bill.
Without H. No. 11197, the Senate could not have enacted
S. No. 1630. Because the Senate bill was a mere
amendment of the House bill, H. No. 11197 in its original
form did not have to pass the Senate on second and three
readings. It was enough that after it was passed on first
reading it was referred to the Senate Committee on Ways
and Means. Neither was it required that S. No. 1630 be
passed by the House of Representatives before the two
bills could be referred to the Conference Committee.
There is legislative precedent for what was done in the
case of H. No. 11197 and S. No. 1630. When the House
bill and Senate bill, which became R.A. No. 1405 (Act
prohibiting the disclosure of bank deposits), were
referred to a conference committee, the question was
raised whether the two bills could be the subject of such
conference, considering that the bill from one house had
not been passed by the other and vice versa. As
Congressman Duran put the question:
MR. DURAN. Therefore, I raise this
question of order as to procedure: If a
House bill is passed by the House but
not passed by the Senate, and a
Senate bill of a similar nature is
passed in the Senate but never
passed in the House, can the two
bills be the subject of a conference,
and can a law be enacted from these
two bills? I understand that the
Senate bill in this particular instance
does not refer to investments in
government securities, whereas the
bill in the House, which was

introduced by the Speaker, covers

two subject matters: not only
investigation of deposits in banks but
also investigation of investments in
government securities. Now, since
the two bills differ in their subject
matter, I believe that no law can be
enacted.
Ruling on the point of order raised, the chair (Speaker
Jose B. Laurel, Jr.) said:
THE SPEAKER. The report of the
conference committee is in order. It is
precisely in cases like this where a
conference should be had. If the
House bill had been approved by the
Senate, there would have been no
need of a conference; but precisely
because the Senate passed another
bill on the same subject matter, the
conference committee had to be
created, and we are now considering
the report of that committee.
(2 CONG. REC. NO. 13, July 27,
1955, pp. 3841-42 (emphasis added))
III. The President's certification. The fallacy in thinking
that H. No. 11197 and S. No. 1630 are distinct and
unrelated measures also accounts for the petitioners'
(Kilosbayan's and PAL's) contention that because the
President separately certified to the need for the
immediate enactment of these measures, his certification
was ineffectual and void. The certification had to be
made of the version of the same revenue bill which at the
momentwas being considered. Otherwise, to follow

188

petitioners' theory, it would be necessary for the President

to certify as many bills as are presented in a house of
Congress even though the bills are merely versions of the
bill he has already certified. It is enough that he certifies
the bill which, at the time he makes the certification, is
under consideration. Since on March 22, 1994 the Senate
was considering S. No. 1630, it was that bill which had to
be certified. For that matter on June 1, 1993 the President
had earlier certified H. No. 9210 for immediate
enactment because it was the one which at that time was
being considered by the House. This bill was later
substituted, together with other bills, by H. No. 11197.
As to what Presidential certification can accomplish, we
have already explained in the main decision that the
phrase "except when the President certifies to the
necessity of its immediate enactment, etc." in Art. VI,
26 (2) qualifies not only the requirement that "printed
copies [of a bill] in its final form [must be] distributed to
the members three days before its passage" but also the
requirement that before a bill can become a law it must
have passed "three readings on separate days." There is
not only textual support for such construction but
historical basis as well.
Art. VI, 21 (2) of the 1935 Constitution originally
provided:
(2) No bill shall be passed by either
House unless it shall have been
printed and copies thereof in its final
form furnished its Members at least
three calendar days prior to its
passage, except when the President
shall have certified to the necessity of
its immediate enactment. Upon the
last reading of a bill, no amendment

thereof shall be allowed and the

question upon its passage shall be
taken immediately thereafter, and
the yeas and nays entered on the
Journal.
When the 1973 Constitution was adopted, it was
provided in Art. VIII, 19 (2):
(2) No bill shall become a law unless
it has passed three readings on
separate days, and printed copies
thereof in its final form have been
distributed to the Members three days
before its passage, except when the
Prime Minister certifies to the
necessity of its immediate enactment
to meet a public calamity or
emergency. Upon the last reading of a
bill, no amendment thereto shall be
allowed, and the vote thereon shall be
taken immediately thereafter, and
the yeas and nays entered in the
Journal.
This provision of the 1973 document, with slight
modification, was adopted in Art. VI, 26 (2) of the
present Constitution, thus:
(2) No bill passed by either House
shall become a law unless it has
passed three readings on separate
days, and printed copies thereof in its
final form have been distributed to its
Members three days before its
passage, except when the President
certifies to the necessity of its

immediate enactment to meet a

public calamity or emergency. Upon
the last reading of a bill, no
amendment thereto shall be allowed,
and the vote thereon shall be taken
immediately
thereafter,
and
the yeasand nays entered
in
the
Journal.
The exception is based on the prudential consideration
that if in all cases three readings on separate days are
required and a bill has to be printed in final form before it
can be passed, the need for a law may be rendered
academic by the occurrence of the very emergency or
public calamity which it is meant to address.
Petitioners further contend that a "growing budget
deficit" is not an emergency, especially in a country like
the Philippines where budget deficit is a chronic
condition. Even if this were the case, an enormous budget
deficit does not make the need for R.A. No. 7716 any less
urgent or the situation calling for its enactment any less
an emergency.
Apparently, the members of the Senate (including some
of the petitioners in these cases) believed that there was
an urgent need for consideration of S. No. 1630, because
they responded to the call of the President by voting on
the bill on second and third readings on the same day.
While the judicial department is not bound by the
Senate's acceptance of the President's certification, the
respect due coequal departments of the government in
matters committed to them by the Constitution and the
absence of a clear showing of grave abuse of discretion
caution a stay of the judicial hand.

189

At any rate, we are satisfied that S. No. 1630 received

thorough consideration in the Senate where it was
discussed for six days. Only its distribution in advance in
its final printed form was actually dispensed with by
holding the voting on second and third readings on the
same day (March 24, 1994). Otherwise, sufficient time
between the submission of the bill on February 8, 1994
on second reading and its approval on March 24, 1994
elapsed before it was finally voted on by the Senate on
third reading.
The purpose for which three readings on separate days is
required is said to be two-fold: (1) to inform the members
of Congress of what they must vote on and (2) to give
them notice that a measure is progressing through the
enacting process, thus enabling them and others
interested in the measure to prepare their positions with
reference to it. (1 J. G. SUTHERLAND, STATUTES
AND STATUTORY CONSTRUCTION 10.04, p. 282
(1972)). These purposes were substantially achieved in
the case of R.A. No. 7716.
IV. Power of Conference Committee. It is contended
(principally by Kilosbayan, Inc. and the Movement of
Attorneys for Brotherhood, Integrity and Nationalism,
Inc. (MABINI)) that in violation of the constitutional
policy of full public disclosure and the people's right to
know (Art. II, 28 and Art. III, 7) the Conference
Committee met for two days in executive session with
only the conferees present.
As pointed out in our main decision, even in the United
States it was customary to hold such sessions with only
the conferees and their staffs in attendance and it was
only in 1975 when a new rule was adopted requiring
open sessions. Unlike its American counterpart, the

Philippine Congress has not adopted a rule prescribing

open hearings for conference committees.
It is nevertheless claimed that in the United States, before
the adoption of the rule in 1975, at least staff members
were present. These were staff members of the Senators
and Congressmen, however, who may be presumed to be
their confidential men, not stenographers as in this case
who on the last two days of the conference were
excluded. There is no showing that the conferees
themselves did not take notes of their proceedings so as
to give petitioner Kilosbayan basis for claiming that even
in secret diplomatic negotiations involving state interests,
conferees keep notes of their meetings. Above all, the
public's right to know was fully served because the
Conference Committee in this case submitted a report
showing the changes made on the differing versions of
the House and the Senate.
Petitioners cite the rules of both houses which provide
that conference committee reports must contain "a
detailed, sufficiently explicit statement of the changes in
or other amendments." These changes are shown in the
bill attached to the Conference Committee Report. The
members of both houses could thus ascertain what
changes had been made in the original bills without the
need of a statement detailing the changes.
The same question now presented was raised when the
bill which became R.A. No. 1400 (Land Reform Act of
1955) was reported by the Conference Committee.
Congressman Bengzon raised a point of order. He said:
MR. BENGZON. My point of order
is that it is out of order to consider
the report of the conference
committee regarding House Bill No.

2557 by reason of the provision of

Section 11, Article XII, of the Rules
of this House which provides
specifically that the conference report
must be accompanied by a detailed
statement of the effects of the
amendment on the bill of the House.
This conference committee report is
not accompanied by that detailed
statement, Mr. Speaker. Therefore it
is out of order to consider it.
Petitioner Tolentino, then the Majority Floor Leader,
answered:
MR. TOLENTINO. Mr. Speaker, I
should just like to say a few words in
connection with the point of order
raised by the gentleman from
Pangasinan.
There is no question about the
provision of the Rule cited by the
gentleman from Pangasinan, butthis
provision applies to those cases
where only portions of the bill have
been amended. In this case before us
an entire bill is presented; therefore,
it can be easily seen from the reading
of the bill what the provisions are.
Besides, this procedure has been an
established practice.
After some interruption, he continued:
MR. TOLENTINO. As I was saying,
Mr. Speaker, we have to look into the

190

reason for the provisions of the

Rules, and the reason for the
requirement in the provision cited by
the gentleman from Pangasinan is
when there are only certain words or
phrases inserted in or deleted from
the provisions of the bill included in
the conference report, and we cannot
understand what those words and
phrases mean and their relation to the
bill. In that case, it is necessary to
make a detailed statement on how
those words and phrases will affect
the bill as a whole; but when the
entire bill itself is copied verbatim in
the conference report, that is not
necessary. So when the reason for the
Rule does not exist, the Rule does not
exist.
(2 CONG. REC. NO. 2, p. 4056.
(emphasis added))
Congressman Tolentino was sustained by the chair. The
record shows that when the ruling was appealed, it was
upheld by viva voce and when a division of the House
was called, it was sustained by a vote of 48 to 5. (Id.,
p. 4058)
Nor is there any doubt about the power of a conference
committee to insert new provisions as long as these are
germane to the subject of the conference. As this Court
held in Philippine Judges Association v. Prado, 227
SCRA 703 (1993), in an opinion written by then Justice
Cruz, the jurisdiction of the conference committee is not
limited to resolving differences between the Senate and
the House. It may propose an entirely new provision.

What is important is that its report is subsequently

approved by the respective houses of Congress. This
Court ruled that it would not entertain allegations that,
because new provisions had been added by the
conference committee, there was thereby a violation of
the constitutional injunction that "upon the last reading of
a bill, no amendment thereto shall be allowed."
Applying these principles, we
shall decline to
look
into
the
petitioners'
charges that
an
amendment was made upon the last
reading of the bill that eventually
became R.A. No. 7354 and
that copiesthereof in its final
form were not distributed among the
members of each House. Both the
enrolled bill and the legislative
journals certify that the measure was
duly enacted i.e., in accordance with
Article VI, Sec. 26 (2) of the
Constitution. We are bound by such
official assurances from a coordinate
department of the government, to
which we owe, at the very least, a
becoming courtesy.

the conference committees are

without instructions, and this is why
they are often critically referred to as
"the little legislatures." Once bills
have been sent to them, the conferees
have almost unlimited authority to
change the clauses of the bills and in
fact sometimes introduce new
measures that were not in the original
legislation. No minutes are kept, and
members' activities on conference
committees are difficult to determine.
One congressman known for his
idealism put it this way: "I killed a
bill on export incentives for my
interest group [copra] in the
conference committee but I could not
have done so anywhere else." The
conference committee submits a
report to both houses, and usually it
is accepted. If the report is not
accepted, then the committee is
discharged and new members are
appointed.

It is interesting to note the following description of

conference committees in the Philippines in a 1979 study:

(R. Jackson, Committees in the

Philippine
Congress,
in
COMMITTEES
AND
LEGISLATURES:
A
COMPARATIVE ANALYSIS 163 (J.
D. LEES AND M. SHAW, eds.)).

Conference committees may be of

two types: free or instructed. These
committees may be given instructions
by their parent bodies or they may be
left without instructions. Normally

In citing this study, we pass no judgment on the methods

of conference committees. We cite it only to say that
conference committees here are no different from their
counterparts in the United States whose vast powers we
noted in Philippine Judges Association v. Prado, supra.

(Id. at 710. (emphasis added))

191

At all events, under Art. VI, 16(3) each house has the
power "to determine the rules of its proceedings,"
including those of its committees. Any meaningful
change in the method and procedures of Congress or its
committees must therefore be sought in that body itself.
V. The titles of S. No. 1630 and H. No. 11197. PAL
maintains that R.A. No. 7716 violates Art. VI, 26 (1) of
the Constitution which provides that "Every bill passed
by Congress shall embrace only one subject which shall
be expressed in the title thereof." PAL contends that the
amendment of its franchise by the withdrawal of its
exemption from the VAT is not expressed in the title of
the law.
Pursuant to 13 of P.D. No. 1590, PAL pays a franchise
tax of 2% on its gross revenue "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."
PAL was exempted from the payment of the VAT along
with other entities by 103 of the National Internal
Revenue Code, which provides as follows:
103. Exempt transactions. The
following shall be exempt from the
value-added tax:
xxx xxx xxx

(q) Transactions which are exempt

under special laws or international
agreements to which the Philippines
is a signatory.
R.A. No. 7716 seeks to withdraw certain exemptions,
including that granted to PAL, by amending 103, as
follows:
103. Exempt transactions. The
following shall be exempt from the
value-added tax:
xxx xxx xxx
(q) Transactions which are exempt
under special laws, except those
granted under Presidential Decree
Nos. 66, 529, 972, 1491, 1590. . . .
The amendment of 103 is expressed in the title of R.A.
No. 7716 which reads:
AN ACT RESTRUCTURING THE
VALUE-ADDED
TAX
(VAT)
SYSTEM, WIDENING ITS TAX
BASE AND ENHANCING ITS
ADMINISTRATION, AND FOR
THESE PURPOSES AMENDING
AND
REPEALING
THE
RELEVANT PROVISIONS OF THE
NATIONAL INTERNAL REVENUE
CODE, AS AMENDED, AND FOR
OTHER PURPOSES.

By stating that R.A. No. 7716 seeks to

"[RESTRUCTURE] THE VALUE-ADDED TAX (VAT)
SYSTEM [BY] WIDENING ITS TAX BASE AND
ENHANCING ITS ADMINISTRATION, AND FOR
THESE PURPOSES AMENDING AND REPEALING
THE RELEVANT PROVISIONS OF THE NATIONAL
INTERNAL REVENUE CODE, AS AMENDED AND
FOR OTHER PURPOSES," Congress thereby clearly
expresses its intention to amend any provision of the
NIRC which stands in the way of accomplishing the
purpose of the law.
PAL asserts that the amendment of its franchise must be
reflected in the title of the law by specific reference to
P.D. No. 1590. It is unnecessary to do this in order to
comply with the constitutional requirement, since it is
already stated in the title that the law seeks to amend the
pertinent provisions of the NIRC, among which is
103(q), in order to widen the base of the VAT. Actually,
it is the bill which becomes a law that is required to
express in its title the subject of legislation. The titles of
H. No. 11197 and S. No. 1630 in fact specifically referred
to 103 of the NIRC as among the provisions sought to
be amended. We are satisfied that sufficient notice had
been given of the pendency of these bills in Congress
before they were enacted into what is now R.A.
No. 7716.
In Philippine Judges Association v. Prado, supra, a
similar argument as that now made by PAL was rejected.
R.A. No. 7354 is entitled AN ACT CREATING THE
PHILIPPINE POSTAL CORPORATION, DEFINING
ITS
POWERS,
FUNCTIONS
AND
RESPONSIBILITIES,
PROVIDING
FOR
REGULATION OF THE INDUSTRY AND FOR
OTHER PURPOSES CONNECTED THEREWITH. It
contained a provision repealing all franking privileges. It

192

was contended that the withdrawal of franking privileges

was not expressed in the title of the law. In holding that
there was sufficient description of the subject of the law
in its title, including the repeal of franking privileges, this
Court held:
To require every end and means
necessary for the accomplishment of
the general objectives of the statute to
be expressed in its title would not
only be unreasonable but would
actually
render
legislation
impossible. [Cooley, Constitutional
Limitations, 8th Ed., p. 297] As has
been correctly explained:
The details of a
legislative
act
need
not
be
specifically
stated in its title,
but
matter
germane to the
subject
as
expressed in the
title, and adopted
to
the
accomplishment
of the object in
view,
may
properly
be
included in the
act. Thus, it is
proper to create
in the same act
the machinery by
which the act is

to be enforced, to
prescribe
the
penalties for its
infraction, and to
remove obstacles
in the way of its
execution. If such
matters
are
properly
connected with
the subject as
expressed in the
title,
it
is
unnecessary that
they should also
have
special
mention in the
title. (Southern
Pac.
Co.
v.
Bartine, 170 Fed.
725)
(227 SCRA at 707-708)
VI. Claims of press freedom and religious liberty. We
have held that, as a general proposition, the press is not
exempt from the taxing power of the State and that what
the constitutional guarantee of free press prohibits are
laws which single out the press or target a group
belonging to the press for special treatment or which in
any way discriminate against the press on the basis of the
content of the publication, and R.A. No. 7716 is none of
these.
Now it is contended by the PPI that by removing the
exemption of the press from the VAT while maintaining
those granted to others, the law discriminates against the

press. At any rate, it is averred, "even nondiscriminatory

taxation of constitutionally guaranteed freedom is
unconstitutional."
With respect to the first contention, it would suffice to
say that since the law granted the press a privilege, the
law could take back the privilege anytime without
offense to the Constitution. The reason is simple: by
granting exemptions, the State does not forever waive the
exercise of its sovereign prerogative.
Indeed, in withdrawing the exemption, the law merely
subjects the press to the same tax burden to which other
businesses have long ago been subject. It is thus different
from the tax involved in the cases invoked by the PPI.
The license tax in Grosjean v. American Press Co., 297
U.S. 233, 80 L. Ed. 660 (1936) was found to be
discriminatory because it was laid on the gross
advertising receipts only of newspapers whose weekly
circulation was over 20,000, with the result that the tax
applied only to 13 out of 124 publishers in Louisiana.
These large papers were critical of Senator Huey Long
who controlled the state legislature which enacted the
license tax. The censorial motivation for the law was thus
evident.
On the other hand, in Minneapolis Star & Tribune
Co. v. Minnesota Comm'r of Revenue, 460 U.S. 575, 75
L. Ed. 2d 295 (1983), the tax was found to be
discriminatory because although it could have been made
liable for the sales tax or, in lieu thereof, for the use tax
on the privilege of using, storing or consuming tangible
goods, the press was not. Instead, the press was exempted
from both taxes. It was, however, later made to pay
a specialuse tax on the cost of paper and ink which made
these items "the only items subject to the use tax that
were component of goods to be sold at retail." The U.S.

193

Supreme Court held that the differential treatment of the

press "suggests that the goal of regulation is not related to
suppression of expression, and such goal is
presumptively unconstitutional." It would therefore
appear that even a law that favors the press is
constitutionally suspect. (See the dissent of Rehnquist, J.
in that case)
Nor is it true that only two exemptions previously
granted by E.O. No. 273 are withdrawn "absolutely and
unqualifiedly" by R.A. No. 7716. Other exemptions from
the VAT, such as those previously granted to PAL,
petroleum concessionaires, enterprises registered with the
Export Processing Zone Authority, and many more are
likewise totally withdrawn, in addition to exemptions
which are partially withdrawn, in an effort to broaden the
base of the tax.
The PPI says that the discriminatory treatment of the
press is highlighted by the fact that transactions, which
are profit oriented, continue to enjoy exemption under
R.A. No. 7716. An enumeration of some of these
transactions will suffice to show that by and large this is
not so and that the exemptions are granted for a purpose.
As the Solicitor General says, such exemptions are
granted, in some cases, to encourage agricultural
production and, in other cases, for the personal benefit of
the end-user rather than for profit. The exempt
transactions are:
(a) Goods for consumption or use
which are in their original state
(agricultural, marine and forest
products, cotton seeds in their
original state, fertilizers, seeds,
seedlings, fingerlings, fish, prawn
livestock and poultry feeds) and

goods or services to enhance

agriculture (milling of palay, corn,
sugar cane and raw sugar, livestock,
poultry feeds, fertilizer, ingredients
used for the manufacture of feeds).
(b) Goods used for personal
consumption or use (household and
personal effects of citizens returning
to the Philippines) or for professional
use, like professional instruments and
implements, by persons coming to
the Philippines to settle here.
(c) Goods subject to excise tax such
as petroleum products or to be used
for manufacture of petroleum
products subject to excise tax and
services subject to percentage tax.
(d) Educational services, medical,
dental, hospital and veterinary
services, and services rendered under
employer-employee relationship.
(e) Works of art and similar creations
sold by the artist himself.
(f) Transactions exempted under
special laws, or international
agreements.
(g) Export-sales by persons not VATregistered.

(h) Goods or services with gross

annual
sale
or
receipt
not
exceeding P500,000.00.
(Respondents'
Consolidated
Comment on the Motions for
Reconsideration, pp. 58-60)
The PPI asserts that it does not really matter that the law
does not discriminate against the press because "even
nondiscriminatory taxation on constitutionally guaranteed
freedom is unconstitutional." PPI cites in support of this
assertion the
following statement
in Murdock
v. Pennsylvania, 319 U.S. 105, 87 L. Ed. 1292 (1943):
The fact that the ordinance is
"nondiscriminatory" is immaterial.
The protection afforded by the First
Amendment is not so restricted. A
license tax certainly does not acquire
constitutional validity because it
classifies the privileges protected by
the First Amendment along with the
wares and merchandise of hucksters
and peddlers and treats them all alike.
Such equality in treatment does not
save the ordinance. Freedom of press,
freedom of speech, freedom of
religion are in preferred position.
The Court was speaking in that case of a license tax,
which, unlike an ordinary tax, is mainly for regulation. Its
imposition on the press is unconstitutional because it lays
a prior restraint on the exercise of its right. Hence,
although its application to others, such those selling
goods, is valid, its application to the press or to religious
groups, such as the Jehovah's Witnesses, in connection

194

with the latter's sale of religious books and pamphlets, is

unconstitutional. As the U.S. Supreme Court put it, "it is
one thing to impose a tax on income or property of a
preacher. It is quite another thing to exact a tax on him
for delivering a sermon."
A similar ruling was made by this Court in American
Bible Society v. City of Manila, 101 Phil. 386 (1957)
which invalidated a city ordinance requiring a business
license fee on those engaged in the sale of general
merchandise. It was held that the tax could not be
imposed on the sale of bibles by the American Bible
Society without restraining the free exercise of its right to
propagate.
The VAT is, however, different. It is not a license tax. It is
not a tax on the exercise of a privilege, much less a
constitutional right. It is imposed on the sale, barter, lease
or exchange of goods or properties or the sale or
exchange of services and the lease of properties purely
for revenue purposes. To subject the press to its payment
is not to burden the exercise of its right any more than to
make the press pay income tax or subject it to general
regulation is not to violate its freedom under the
Constitution.
Additionally, the Philippine Bible Society, Inc. claims
that although it sells bibles, the proceeds derived from the
sales are used to subsidize the cost of printing copies
which are given free to those who cannot afford to pay so
that to tax the sales would be to increase the price, while
reducing the volume of sale. Granting that to be the case,
the resulting burden on the exercise of religious freedom
is so incidental as to make it difficult to differentiate it
from any other economic imposition that might make the
right to disseminate religious doctrines costly. Otherwise,
to follow the petitioner's argument, to increase the tax on

the sale of vestments would be to lay an impermissible

burden on the right of the preacher to make a sermon.
On the other hand the registration fee of P1,000.00
imposed by 107 of the NIRC, as amended by 7 of R.A.
No. 7716, although fixed in amount, is really just to pay
for the expenses of registration and enforcement of
provisions such as those relating to accounting in 108 of
the NIRC. That the PBS distributes free bibles and
therefore is not liable to pay the VAT does not excuse it
from the payment of this fee because it also sells some
copies. At any rate whether the PBS is liable for the VAT
must be decided in concrete cases, in the event it is
assessed this tax by the Commissioner of Internal
Revenue.
VII. Alleged violations of the due process, equal
protection and contract clauses and the rule on taxation.
CREBA asserts that R.A. No. 7716 (1) impairs the
obligations of contracts, (2) classifies transactions as
covered or exempt without reasonable basis and (3)
violates the rule that taxes should be uniform and
equitable and that Congress shall "evolve a progressive
system of taxation."
With respect to the first contention, it is claimed that the
application of the tax to existing contracts of the sale of
real property by installment or on deferred payment basis
would result in substantial increases in the monthly
amortizations to be paid because of the 10% VAT. The
additional amount, it is pointed out, is something that the
buyer did not anticipate at the time he entered into the
contract.
The short answer to this is the one given by this Court in
an early case: "Authorities from numerous sources are
cited by the plaintiffs, but none of them show that a

lawful tax on a new subject, or an increased tax on an old

one, interferes with a contract or impairs its obligation,
within the meaning of the Constitution. Even though such
taxation may affect particular contracts, as it may
increase the debt of one person and lessen the security of
another, or may impose additional burdens upon one
class and release the burdens of another, still the tax must
be paid unless prohibited by the Constitution, nor can it
be said that it impairs the obligation of any existing
contract in its true legal sense." (La Insular v. Machuca
Go-Tauco and Nubla Co-Siong, 39 Phil. 567, 574
(1919)). Indeed not only existing laws but also "the
reservation of the essential attributes of sovereignty,
is . . . read into contracts as a postulate of the legal order."
(Philippine-American Life Ins. Co. v. Auditor General, 22
SCRA 135, 147 (1968)) Contracts must be understood as
having been made in reference to the possible exercise of
the rightful authority of the government and no obligation
of contract can extend to the defeat of that authority.
(Norman v. Baltimore and Ohio R.R., 79 L. Ed. 885
(1935)).
It is next pointed out that while 4 of R.A. No. 7716
exempts such transactions as the sale of agricultural
products, food items, petroleum, and medical and
veterinary services, it grants no exemption on the sale of
real property which is equally essential. The sale of real
property for socialized and low-cost housing is exempted
from the tax, but CREBA claims that real estate
transactions of "the less poor," i.e., the middle class, who
are equally homeless, should likewise be exempted.
The sale of food items, petroleum, medical and veterinary
services, etc., which are essential goods and services was
already exempt under 103, pars. (b) (d) (1) of the NIRC
before the enactment of R.A. No. 7716. Petitioner is in
error in claiming that R.A. No. 7716 granted exemption

195

to these transactions, while subjecting those of petitioner

to the payment of the VAT. Moreover, there is a
difference between the "homeless poor" and the
"homeless less poor" in the example given by petitioner,
because the second group or middle class can afford to
rent houses in the meantime that they cannot yet buy their
own homes. The two social classes are thus differently
situated in life. "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 of one particular class for taxation, or
exemption infringe no constitutional limitation.'" (Lutz v.
Araneta, 98 Phil. 148, 153 (1955). Accord, City of
Baguio v. De Leon, 134 Phil. 912 (1968); Sison, Jr. v.
Ancheta, 130 SCRA 654, 663 (1984); Kapatiran ng mga
Naglilingkod sa Pamahalaan ng Pilipinas, Inc. v. Tan, 163
SCRA 371 (1988)).
Finally, it is contended, for the reasons already noted, that
R.A. No. 7716 also violates Art. VI, 28(1) which
provides that "The rule of taxation shall be uniform and
equitable. The Congress shall evolve a progressive
system of taxation."
Equality and uniformity of taxation means that all taxable
articles or kinds of property of the same class be taxed at
the same rate. The taxing power has the authority to make
reasonable and natural classifications for purposes of
taxation. To satisfy this requirement it is enough that the
statute or ordinance applies equally to all persons, forms
and corporations placed in similar situation. (City of
Baguio v. De Leon, supra; Sison, Jr. v. Ancheta, supra)
Indeed, the VAT was already provided in E.O. No. 273
long before R.A. No. 7716 was enacted. R.A. No. 7716
merely expands the base of the tax. The validity of the
original VAT Law was questioned in Kapatiran ng

Naglilingkod sa Pamahalaan ng Pilipinas, Inc. v. Tan,

163 SCRA 383 (1988) on grounds similar to those made
in these cases, namely, that the law was "oppressive,
discriminatory, unjust and regressive in violation of Art.
VI, 28(1) of the Constitution." (At 382) Rejecting the
challenge to the law, this Court held:
As the Court sees it, EO 273 satisfies
all the requirements of a valid tax. It
is uniform. . . .
The sales tax adopted in EO 273 is
applied similarly on all goods and
services sold to the public, which are
not exempt, at the constant rate of 0%
or 10%.
The disputed sales tax is also
equitable. It is imposed only on sales
of goods or services by persons
engaged in business with an
aggregate
gross
annual
sales
exceeding P200,000.00. Small corner
sari-sari stores are consequently
exempt
from
its
application.
Likewise exempt from the tax are
sales of farm and marine products, so
that the costs of basic food and other
necessities, spared as they are from
the incidence of the VAT, are
expected to be relatively lower and
within the reach of the general
public.
(At 382-383)

The CREBA claims that the VAT is regressive. A similar

claim is made by the Cooperative Union of the
Philippines, Inc. (CUP), while petitioner Juan T. David
argues that the law contravenes the mandate of Congress
to provide for a progressive system of taxation because
the law imposes a flat rate of 10% and thus places the tax
burden on all taxpayers without regard to their ability to
pay.
The Constitution does not really prohibit the imposition
of indirect taxes which, like the VAT, are regressive.
What it simply provides is that Congress shall "evolve a
progressive system of taxation." The constitutional
provision has been interpreted to mean simply that "direct
taxes are . . . to be preferred [and] as much as possible,
indirect taxes should be minimized." (E. FERNANDO,
THE CONSTITUTION OF THE PHILIPPINES 221
(Second ed. (1977)). Indeed, the mandate to Congress is
not to prescribe, but to evolve, a progressive tax system.
Otherwise, sales taxes, which perhaps are the oldest form
of indirect taxes, would have been prohibited with the
proclamation of Art. VIII, 17(1) of the 1973
Constitution from which the present Art. VI, 28(1) was
taken. Sales taxes are also regressive.
Resort to indirect taxes should be minimized but
not avoided entirely because it is difficult, if not
impossible, to avoid them by imposing such taxes
according to the taxpayers' ability to pay. In the case of
the VAT, the law minimizes the regressive effects of this
imposition by providing for zero rating of certain
transactions (R.A. No. 7716, 3, amending 102 (b) of
the NIRC), while granting exemptions to other
transactions. (R.A. No. 7716, 4, amending 103 of the
NIRC).

196

Thus, the following transactions involving basic and

essential goods and services are exempted from the VAT:

(e) Works of art and similar creations

sold by the artist himself.

(a) Goods for consumption or use

which are in their original state
(agricultural, marine and forest
products, cotton seeds in their
original state, fertilizers, seeds,
seedlings, fingerlings, fish, prawn
livestock and poultry feeds) and
goods or services to enhance
agriculture (milling of palay, corn
sugar cane and raw sugar, livestock,
poultry feeds, fertilizer, ingredients
used for the manufacture of feeds).

(f) Transactions exempted under

special laws, or international
agreements.

(b) Goods used for personal

consumption or use (household and
personal effects of citizens returning
to
the
Philippines)
and
or
professional use, like professional
instruments and implements, by
persons coming to the Philippines to
settle here.
(c) Goods subject to excise tax such
as petroleum products or to be used
for manufacture of petroleum
products subject to excise tax and
services subject to percentage tax.
(d) Educational services, medical,
dental, hospital and veterinary
services, and services rendered under
employer-employee relationship.

(g) Export-sales by persons not VATregistered.

(h) Goods or services with gross
annual
sale
or
receipt
not
exceeding P500,000.00.
(Respondents'
Consolidated
Comment on the Motions for
Reconsideration, pp. 58-60)
On the other hand, the transactions which are subject to
the VAT are those which involve goods and services
which are used or availed of mainly by higher income
groups. These include real properties held primarily for
sale to customers or for lease in the ordinary course of
trade or business, the right or privilege to use patent,
copyright, and other similar property or right, the right or
privilege to use industrial, commercial or scientific
equipment, motion picture films, tapes and discs, radio,
television, satellite transmission and cable television
time, hotels, restaurants and similar places, securities,
lending investments, taxicabs, utility cars for rent, tourist
buses, and other common carriers, services of franchise
grantees of telephone and telegraph.
The problem with CREBA's petition is that it presents
broad claims of constitutional violations by tendering
issues not at retail but at wholesale and in the abstract.

There is no fully developed record which can impart to

adjudication the impact of actuality. There is no factual
foundation to show in the concrete the application of the
law to actual contracts and exemplify its effect on
property rights. For the fact is that petitioner's members
have not even been assessed the VAT. Petitioner's case is
not made concrete by a series of hypothetical questions
asked which are no different from those dealt with in
advisory opinions.
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.
(Sison, Jr. v. Ancheta, 130 SCRA at
661)
Adjudication of these broad claims must await the
development of a concrete case. It may be that
postponement of adjudication would result in a
multiplicity of suits. This need not be the case, however.

197

Enforcement of the law may give rise to such a case. A

test case, provided it is an actual case and not an abstract
or hypothetical one, may thus be presented.

jurisdiction, this Court cannot inquire into any allegation

of grave abuse of discretion by the other departments of
the government.

Nor is hardship to taxpayers alone an adequate

justification for adjudicating abstract issues. Otherwise,
adjudication would be no different from the giving of
advisory opinion that does not really settle legal issues.

VIII. Alleged violation of policy towards cooperatives.

On the other hand, the Cooperative Union of the
Philippines (CUP), after briefly surveying the course of
legislation, argues that it was to adopt a definite policy of
granting tax exemption to cooperatives that the present
Constitution embodies provisions on cooperatives. To
subject cooperatives to the VAT would therefore be to
infringe a constitutional policy. Petitioner claims that in
1973, P.D. No. 175 was promulgated exempting
cooperatives from the payment of income taxes and sales
taxes but in 1984, because of the crisis which menaced
the national economy, this exemption was withdrawn by
P.D. No. 1955; that in 1986, P.D. No. 2008 again granted
cooperatives exemption from income and sales taxes
until December 31, 1991, but, in the same year, E.O. No.
93 revoked the exemption; and that finally in 1987 the
framers of the Constitution "repudiated the previous
actions of the government adverse to the interests of the
cooperatives, that is, the repeated revocation of the tax
exemption to cooperatives and instead upheld the policy
of strengthening the cooperatives by way of the grant of
tax exemptions," by providing the following in Art. XII:

We are told that it is our duty under Art. VIII, 1, 2 to

decide whenever a claim is made that "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." This duty can only arise if an actual
case or controversy is before us. Under Art . VIII, 5 our
jurisdiction is defined in terms of "cases" and all that Art.
VIII, 1, 2 can plausibly mean is that in the exercise of
that jurisdiction we have the judicial power to determine
questions of grave abuse of discretion by any branch or
instrumentality of the government.
Put in another way, what is granted in Art. VIII, 1, 2 is
"judicial power," which is "the power of a court to hear
and decide cases pending between parties who have the
right to sue and be sued in the courts of law and equity"
(Lamb v. Phipps, 22 Phil. 456, 559 (1912)), as
distinguished from legislative and executive power. This
power cannot be directly appropriated until it is
apportioned among several courts either by the
Constitution, as in the case of Art. VIII, 5, or by statute,
as in the case of the Judiciary Act of 1948 (R.A. No. 296)
and the Judiciary Reorganization Act of 1980 (B.P. Blg.
129). The power thus apportioned constitutes the court's
"jurisdiction," defined as "the power conferred by law
upon a court or judge to take cognizance of a case, to the
exclusion of all others." (United States v. Arceo, 6 Phil.
29 (1906)) Without an actual case coming within its

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.
Private
enterprises,
including
corporations,
cooperatives,
and
similar collective organizations, shall
be encouraged to broaden the base of
their ownership.
15. The Congress shall create an
agency to promote the viability and
growth
of
cooperatives
as
instruments for social justice and
economic development.
Petitioner's contention has no merit. In the first place, it is
not true that P.D. No. 1955 singled out cooperatives by
withdrawing their exemption from income and sales taxes
under P.D. No. 175, 5. What P.D. No. 1955, 1 did was
to withdraw the exemptions and preferential treatments
theretofore granted to private business enterprises in
general, in view of the economic crisis which then beset
the nation. It is true that after P.D. No. 2008, 2 had

198

restored the tax exemptions of cooperatives in 1986, the

exemption was again repealed by E.O. No. 93, 1, but
then again cooperatives were not the only ones whose
exemptions were withdrawn. The withdrawal of tax
incentives applied to all, including government and
private entities. In the second place, the Constitution does
not really require that cooperatives be granted tax
exemptions in order to promote their growth and
viability. Hence, there is no basis for petitioner's assertion
that the government's policy toward cooperatives had
been one of vacillation, as far as the grant of tax
privileges was concerned, and that it was to put an end to
this indecision that the constitutional provisions cited
were adopted. Perhaps as a matter of policy cooperatives
should be granted tax exemptions, but that is left to the
discretion of Congress. If Congress does not grant
exemption and there is no discrimination to cooperatives,
no violation of any constitutional policy can be charged.
Indeed, petitioner's theory amounts to saying that under
the Constitution cooperatives are exempt from taxation.
Such theory is contrary to the Constitution under which
only the following are exempt from taxation: charitable
institutions, churches and parsonages, by reason of Art.
VI, 28 (3), and non-stock, non-profit educational
institutions by reason of Art. XIV, 4 (3).
CUP's further ground for seeking the invalidation of R.A.
No. 7716 is that it denies cooperatives the equal
protection of the law because electric cooperatives are
exempted from the VAT. The classification between
electric and other cooperatives (farmers cooperatives,
producers cooperatives, marketing cooperatives, etc.)
apparently rests on a congressional determination that
there is greater need to provide cheaper electric power to
as many people as possible, especially those living in the
rural areas, than there is to provide them with other

necessities in life. We cannot say that such classification

is unreasonable.
We have carefully read the various arguments raised
against the constitutional validity of R.A. No. 7716. We
have in fact taken the extraordinary step of enjoining its
enforcement pending resolution of these cases. We have
now come to the conclusion that the law suffers from
none of the infirmities attributed to it by petitioners and
that its enactment by the other branches of the
government does not constitute a grave abuse of
discretion. Any question as to its necessity, desirability or
expediency must be addressed to Congress as the body
which is electorally responsible, remembering that, as
Justice Holmes has said, "legislators are the ultimate
guardians of the liberties and welfare of the people in
quite as great a degree as are the courts." (Missouri,
Kansas & Texas Ry. Co. v. May, 194 U.S. 267, 270, 48 L.
Ed. 971, 973 (1904)). It is not right, as petitioner in G.R.
No. 115543 does in arguing that we should enforce the
public accountability of legislators, that those who took
part in passing the law in question by voting for it in
Congress should later thrust to the courts the burden of
reviewing measures in the flush of enactment. This Court
does not sit as a third branch of the legislature, much less
exercise a veto power over legislation.
WHEREFORE, the motions for reconsideration are
denied with finality and the temporary restraining order
previously issued is hereby lifted.
SO ORDERED.

Republic vs IAC
G.R. No. L-69344

April 26, 1991

REPUBLIC OF THE PHILIPPINES, petitioner,

vs.
INTERMEDIATE APPELLATE COURT and
SPOUSES
ANTONIO
and
CLARA
PASTOR, respondents.
Roberto L. Bautista for private respondents.

GRIO-AQUINO, J.:
The legal issue presented in this petition for review is
whether or not the tax amnesty payments made by the
private respondents on October 23, 1973 bar an action for
recovery of deficiency income taxes under P.D.'s Nos. 23,
213 and 370.
On April 15, 1980, the Republic of the Philippines,
through the Bureau of Internal Revenue, commenced an
action in the Court of First Instance (now Regional Trial
Court) of Manila, Branch XVI, to collect from the
spouses Antonio Pastor and Clara Reyes-Pastor
deficiency income taxes for the years 1955 to 1959 in the
amount of P17,117.08 with a 5% surcharge and 1%
monthly interest, and costs.
The Pastors filed a motion to dismiss the complaint, but
the motion was denied.1wphi1 On August 2, 1975, they
filed an answer admitting there was an assessment
against them of P17,117.08 for income tax deficiency but
denying liability therefor. They contended that they had
availed of the tax amnesty under P.D.'s Nos. 23, 213 and
370 and had paid the corresponding amnesty taxes

199

amounting to P10,400 or 10% of their reported untaxed

income under P.D. 23, P2,951.20 or 20% of the reported
untaxed income under P.D. 213, and a final payment on
October 26, 1973 under P.D. 370 evidenced by the
Government's
Official
Receipt
No.
1052388.
Consequently, the Government is in estoppel to demand
and compel further payment of income taxes by them.
The parties agreed that there were no issues of fact to be
litigated, hence, the case was submitted for decision upon
the pleadings and memoranda on the lone legal question
of: whether or not the payment of deficiency income tax
under the tax amnesty, P.D. 23, and its acceptance by the
Government operated to divest the Government of the
right to further recover from the taxpayer, even if there
was an existing assessment against the latter at the time
he paid the amnesty tax.
It is not disputed that as a result of an investigation made
by the Bureau of Internal Revenue in 1963, it was found
that the private respondents owed the Government
P1,283,621.63 as income taxes for the years 1955 to
1959, inclusive of the 50% surcharge and 1% monthly
interest. The defendants protested against the assessment.
A reinvestigation was conducted resulting in the drastic
reduction of the assessment to only P17,117.08.
It appears that on April 27, 1978, the private respondents
offered to pay the Bureau of Internal Revenue the sum of
P5,000 by way of compromise settlement of their income
tax deficiency for the questioned years, but Assistant
Commissioner Bernardo Carpio, in a letter addressed to
the Pastor spouses, rejected the offer stating that there
was no legal or factual justification for accepting it. The
Government filed the action against the spouses in 1980,
ten (10) years after the assessment of the income tax
deficiency was made.
On a motion for judgment on the pleadings filed by the
Government, which the spouses did not oppose, the trial
court rendered a decision on February 28, 1980, holding
that the defendants spouses had settled their income tax

deficiency for the years 1955 to 1959, not under P.D. 23

or P.D. 370, but under P.D. 213, as shown in the Amnesty
Income Tax Returns' Summary Statement and the tax
Payment Acceptance Order for P2,951.20 with its
corresponding official receipt, which returns also contain
the very assessment for the questioned years. By
accepting the payment of the amnesty income taxes, the
Government, therefore, waived its right to further recover
deficiency incomes taxes "from the defendants under the
existing assessment against them because:

Nos. 8-72 and 7-73. Since the Pastors did in fact have a
pending assessment against them, they were precluded
from availing of the amnesty granted in P.D.'s Nos. 23
and 213. The Government further argued that "tax
exemptions should be interpreted strictissimi jurisagainst
the taxpayer."
The respondent spouses, on the other hand, alleged that
P.D. 213 contains no exemptions from its coverage and
that, under Letter of Instruction LOI 129 dated September
18, 1973, the immunities granted by P.D. 213 include:

1. the defendants' amnesty income tax returns'

Summary Statement included therein the
deficiency assessment for the years 1955 to
1959;

II-Immunities Granted.

2. tax amnesty payment was made by the

defendants under Presidential Decree No. 213,
hence, it had the effect of remission of the
income tax deficiency for the years 1955 to
1959;

1. . . . .

3. P.D. No. 23 as well as P.D. No. 213 do not

make any exceptions nor impose any
conditions for their application, hence,
Revenue Regulation No. 7-73 which excludes
certain taxpayers from the coverage of P.D. No.
213 is null and void, and
4. the acceptance of tax amnesty payment by
the plaintiff-appellant bars the recovery of
deficiency taxes. (pp. 3-4, IAC Decision, pp.
031-032, Rollo.)
The Government appealed to the Intermediate Appellant
Court (AC G.R. CV No. 68371 entitled, "Republic of the
Philippines vs. Antonio Pastor, et al."), alleging that the
private respondents were not qualified to avail of the tax
amnesty under P.D. 213 for the benefits of that decree are
available only to persons who had no pending assessment
for unpaid taxes, as provided in Revenue Regulations

Upon payment of the amounts specified in the

Decree, the following shall be observed:

2. The taxpayer shall not be subject to any

investigation, whether civil, criminal or
administrative, insofar as his declarations in
the income tax returns are concerned nor shall
the same be used as evidence against, or to the
prejudice of the declarant in any proceeding
before any court of law or body, whether
judicial, quasi-judicial or administrative, in
which he is a defendant or respondent, and he
shall be exempt from any liability arising from
or incident to his failure to file his income tax
return and to pay the tax due thereon, as well
as to any liability for any other tax that may be
due as a result of business transactions from
which such income, now voluntarily declared
may have been derived. (Emphasis supplied; p.
040, Rollo.)
There is nothing in the LOI which can be construed as
authority for the Bureau of Internal Revenue to introduce
exceptions and/or conditions to the coverage of the law.

200

On November 23, 1984, the Intermediate Appellate Court

(now Court of Appeals) rendered a decision dismissing
the Government's appeal and holding that the payment of
deficiency income taxes by the Pastors under PD. No.
213, and the acceptance thereof by the Government,
operated to divest the latter of its right to further recover
deficiency income taxes from the private respondents
pursuant to the existing deficiency tax assessment against
them. The appellate court held that if Revenue Regulation
No. 7-73 did provide an exception to the coverage of P.D.
213, such provision was null and void for being contrary
to, or restrictive of, the clear mandate of P.D. No. 213
which the regulation should implement. Said revenue
regulation may not prevail over the provisions of the
decree, for it would then be an act of administrative
legislation, not mere implementation, by the Bureau of
Internal Revenue.
On February 4, 1986, the Republic of the Philippines,
through the Solicitor General, filed this petition for
review of the decision dated November 23, 1984 of the
Intermediate Appellate Court affirming the dismissal, by
the Court of First Instance of Manila, of the
Government's complaint against the respondent spouses.
The petition is devoid of merit.
Even assuming that the deficiency tax assessment of
P17,117.08 against the Pastor spouses were correct, since
the latter have already paid almost the equivalent amount
to the Government by way of amnesty taxes under P.D.
No. 213, and were granted not merely an exemption, but
an amnesty, for their past tax failings, the Government is
estopped from collecting the difference between the
deficiency tax assessment and the amount already paid by
them as amnesty tax.
A tax amnesty, being a general pardon or
intentional overlooking by the State of its
authority to impose penalties on persons
otherwise guilty of evasion or violation of a
revenue or tax law, partakes of an absolute

forgiveness or waiver by the Government of its

right to collect what otherwise would be due it,
and in this sense, prejudicial thereto,
particularly to give tax evaders, who wish to
relent and are willing to reform a chance to do
so and thereby become a part of the new
society with a clean slate (Commission of
Internal Revenue vs. Botelho Corp. and
Shipping Co., Inc., 20 SCRA 487).
The finding of the appellate court that the deficiency
income taxes were paid by the Pastors, and accepted by
the Government, under P.D. 213, granting amnesty to
persons who are required by law to file income tax
returns but who failed to do so, is entitled to the highest
respect and may not be disturbed except under
exceptional circumstances which have already become
familiar (Rule 45, Sec. 4, Rules of Court; e.g., where: (1)
the conclusion is a finding grounded entirely on
speculation, surmise and conjecture; (2) the inference
made is manifestly mistaken; (3) there is grave abuse of
discretion; (4) the judgment is based on misapprehension
of facts; (5) the Court of Appeals went beyond the issues
of the case and its findings are contrary to the admissions
of both the appellant and the appellee; (6) the findings of
fact of the Court of Appeals are contrary to those of the
trial court; (7) said findings of fact are conclusions
without citation of specific evidence in which they are
based; (8) the facts set forth in the petition as well as in
the petitioner's main and reply briefs are not disputed by
the respondents; and (9) when the finding of fact of the
Court of Appeals is premised on the absense of evidence
and is contradicted by the evidence on record (Thelma
Fernan vs. CA, et al., 181 SCRA 546, citing Tolentino vs.
de Jesus, 56 SCRA 67; People vs. Traya, 147 SCRA 381),
none of which is present in this case.
The rule is that in case of doubt, tax statutes are to be
construed strictly against the Government and liberally in
favor of the taxpayer, for taxes, being burdens, are not to
be presumed beyond what the applicable statute (in this
case P.D. 213) expressly and clearly declares

(Commission of Internal Revenue vs. La Tondena, Inc.

and CTA, 5 SCRA 665, citing Manila Railroad Company
vs. Collector of Customs, 52 Phil, 950).
WHEREFORE, the petition for review is denied. No
costs.
SO ORDERED.

Juan Luna Subdivision vs

Sarmiento
G.R. No. L-3538

May 28, 1952

JUAN LUNA SUBDIVISION, INC., plaintiff-appellee,

vs.
M. SARMIENTO, ET AL., defendants-appellants.
Gibbs, Gibbs, Chuidian and Quasha for appellee.
City Fiscal Eugenio Angeles and Assistant Fiscal
Cornelio
S.
Ruperto
for
appellant.
La O and Feria for defendant Philippine Trust Co.
TUASON, J.:
This is an appeal by the City Treasure of the City of
Manila from the following judgment handed down in the
above-entitled cause:
POR TODAS CONSIDERACIONES, el
Jugado dicta sentencia ordenado: que el
demandado Tesorero de la Ciudad de Manila
pague a la demandante la cantidad de
P2,210.52 sin intereses; que la demandada
Philippine Trust Companypague a la
demandante la suma de P105 sin intereses.

201

The Philippine Trust Company did not appeal.

The facts of the case, in so far as they are not in
controversy, are these: The plaintiff was a corporation
duly organized and existing under the laws of the
Philippines with principal office in Manila. On December
29, 1941 it issued to the City Treasurer of Manila, and the
City Treasurer accepted checks No. 628334 for P2,210.52
drawn upon the Philippine Trust Company with which it
had a credit balance of P4,940.17 on its account. This
check was to be applied to plaintiff's land tax for the
second semester of 1941 the exact amount of which was
yet undetermine and so it was entered in the ledger,
Exhibit "F", as deposit by the taxpayer. On February 20,
1942, presumably after the exact amount had been
verified, which was P341.60, the balance of P1,868.92,
covered by voucher No. 1487 of the City Treasure's
office, was noted in the ledger as a credit to the Juan
Luna Subdivision, Inc.
Further than this, the records of the City Treasurer's
office do not show what was done with the check. But the
books of the Philippine Trust Company do reveal that it
was deposited with the Philippine National Bank, the
City Treasurer's sole depository, on December 29, 1941,
and that it was presented by that Bank to the Philippine
Trust Company on May 1, 1944 and was cashed by the
drawee. Manuel F. Garcia, Assistant Treasurer of the
Philippine Trust Company, testified that soon after his
bank was authorized in March, 1942, to reopen for
business (it had been closed by order of the Japanese
military authorities,) it received from the Philippine
National Bank a bundle of checks, including appellees
check No. 628334, drawn upon the Philippine Trust
Company before the Japanese occupation and held in
abeyance by the Philippine National Bank pending
resumption of operation by the Philippine Trust

Company; that these checks, including the appellee's

check, were accepted and the amounts thereof debited
against the respective drawer's accounts; that with respect
to check No. 628334, the operation was effected on May
1, 1944.
The City refused after liberation to refund the plaintiff's
deposit or apply it to such future taxes as might be found
due, while the Philippine Trust Company was unwilling
to reverse its debit entry against the Juan Luna
Subdivision, Inc. It was upon this predicament that the
Juan Luna Subdivision, Inc. brought this suit against the
City Treasurer and the Philippine Trust Company as
defendants in the alternative. The purpose of the action is
determine which of the two defendants is liable for
plaintiff's check. There is a separate cause of action
which concerns the plaintiff and the City Treasurer alone.
On the main cause of action the burden of the City
Treasurer's defense is that his office was not benefited
why the check. He denies that the said check was cashed
"or rather there was no proof that it was." It is pointed out
that Mr. Gibbs, testifying in open court, admitted that he
had never received nor could he have received the
cancelled checks;" that "the courts finding that sum
P2,210.52 was in fact and in truth added to the actual
cash of the Treasurer of the City of Manila is based on
conjectures and surprises without any support of
pertinent and competent proof;" that "special ledger sheet
of the City Treasurer . . . simply showed that some
accounting transaction in the book value was done or
accomplished but these accounting processes did not
show that actual payment had been made (by the
Philippine National Bank) to the City Treasurer, and that
the City Treasurer had in effect received said amount
represented by said checks;" that "the burden of proving
that the check in question was in fact paid rest on the

defendant Philippine Trust Company." It is further argued

that "there is a lot of difference between the book value
and the cash value of this check," that the acceptance by
the City Treasurer and the issuance of the Official
Receipt No. 755402 on December 29, 1941 in favor of
Juan Luna Subdivision, Inc. did not simultaneously and
automatically place in the hands of the City Treasurer the
cash value represented by the said checks in the amount
of P2,210.52".
That the plaintiff's check was deposited by the City
Treasurer with the Philippine National Bank, and the
latter was paid the cash equivalent thereof by the
Philippine Trust Company, admits of no doubt. The
entries in the books of the latter bank are not in the least
impugned. Whether the City Treasurer was paid that
amount by the Philippine National Bank or given credit
for it, the City Treasurer would neither admit nor deny.
He said:
A. Not that I am not willing (to admit); I am
willing, but I am not the right party to admit
that the check was actually collected by the
City of Manila from the Philippine Trust
Company, The Philippine Trust Company never
submitted any financial statement. To my
knowledge, the City Treasurer of Manila has
never been informed by the Philippine Trust
Company or by the Philippine National Bank,
which is the depository of the City of Manila,
that same check was collected by the City
Manila from the Philippine National Bank; by
that I am not trying to say that the check was
not actually collected by the City.
xxx

xxx

xxx

202

Q. This particular check in question pertains to

the revenue account of the City of Manila, is
that right?
A. Yes, sir.
Q. Ordinarily it would be deposited with the
Philippine National Bank, is that right?
A. That is right.
Q. And the Philippine National Bank has not
rendered you any account of its collections?
A. I would not say that; they probably gave us
statement, but as we have lost our records
pertaining to the occupation and the pre-war
years, I could not make a categorial statement.
From the fact that the Philippine National Bank was open
throughout the Japanese occupation and the other facts
heretofore admitted or not denied, it is to be presumed
that the Philippine National Bank credited the City
Treasurer with the amount of the check in question, and
that the City Treasurer, taking ordinary care of his
concerns, withdrew that amount. This is in accordance
with the presumption that things happened according to
the ordinary course of business and habits. The burden is
on the City Treasurer, not on the plaintiff, to rebut these
presumptions.
But the point is not material at all as far as the plaintiff is
concerned. What became of the check or where the
money went is a matter between the City Treasurer and
the Philippine National Bank. The drawer of the check
had funds on deposit to meet it; the City Treasurer

accepted it and deposited it with the Philippine National

Bank, and the Philippine National Bank, collected the
equivalent amount from the drawee Bank. In the light of
these circumstances, the City Treasurer became the
Philippine National Bank's creditor and the Juan Luna
Subdivision, Inc. was released from liability on its
checks. If the City Treasurer did not collect his credit
from the Philippine National Bank or otherwise make use
of it, he alone was to blame and should suffer the
consequences of his neglect. That the City Treasurer held
the check merely in trust for plaintiff does not alter the
situation as far as his branch of the case goes.
The amount to be refunded to the plaintiff is the subject
of another disagreement between the Juan Luna
Subdivision, Inc. and the City Treasurer. This is the
ground of other cause of action heretofore referred to.
The plaintiff claims the whole amount of the check
contending that taxes for the last semester of 1941 have
been remitted by Commonwealth Act No. 703.
Section 1 of this Act, which was approved on November
1, 1945, provides:
All land taxes and penalties due and payable
for the years nineteen hundred and forty-two
nineteen hundred and forty-three nineteen
hundred and forty-four and fifty per cent of the
tax due for nineteen hundred and forty-five, are
hereby remitted. The land taxes and penalties
due and payable for the second semester of the
year nineteen hundred and forty-one shall also
be remitted the if the remaining fifty per cent
corresponding to the year nineteen hundred and
forty-five shall been paid on or before

December thirty-first, nineteen hundred and

forty-five.
Does this provision cover taxes paid before its enactment
as the plaintiff maintains and the court below held, or
does it refer, as the City Treasurer believes, only to taxes
which were still unpaid?
There is no ambiguity in the language of the law. It says
"taxes and penalties due and payable," the literal meaning
of which taxes owned or owing. (See Webster's New
International Dictionary) Note that the provision speaks
of penalties, and note that penalties accrue only when
taxes are not paid on time. The word "remit" underlined
by the appellant does not help its theory, for to remit to
desist or refrain from exacting, inflicting, or enforcing
something as well as to restore what has already been
taken. (Webster's New International Dictionary.)
We do not see that literal interpretation of
Commonwealth Act No. 703 runs counter and does
violence to its spirit and intention , nor do we think that
such interpretation would be "constitutionally bad" in that
"it would unduly discriminate against taxpayers who had
paid in favor of delinquent taxpayers."
The remission of taxes due and payable to the exclusion
of taxes already collected does not constitute unfair
discrimination. Each set of taxes is a class by itself, and
the law would be open to attack as class legislation only
if all taxpayers belonging to one class were not treated
alike. They are not.
As to the justice of the measure, the confinement of the
condonation to deliquent taxes was not without good
reason. The property owners who had paid their taxes
before liberation and those who had not were not on the

203

same footing on the need of material relief. It is true that

the ravages and devastations wrought by was operations
had rendered the bulk of the people destitute or
impoverished and that it was this situation which
prompted the passage of Commonwealth Act No. 703.
But it is also true that the taxpayers who had been in
arrears in their obligation would have to satisfy their
liability with genuine currency, while the taxes paid
during the occupation had been satisfied in Japanese
military notes, many of them at a time when those notes
were well-nigh worthless. To refund those taxes with the
restored currency, even if the Government could afford to
do so, would be unduly to enrich many of the payers at a
greater expense to the people at large. What is more, the
process of refunding would entail a tremendous amount
of work and difficulties, what with the destruction of tax
records and the great number of claimants who would
take advantage of such grace.
It is said that the plaintiff's check was in the nature of
deposit, held trust by the City Treasurer, and that for this
reason, plaintiff's taxes are to be regarded as still due and
payable. This argument is well taken but only to the
extent of P1,868.92. The amount of P341.60 as early as
February 20, 1942, had been applied to the second half of
plaintiff's 1941 tax and become part of the general funds
of the city treasury. From that date that tax was legally
and actually paid and settled.
The appealed judgment should, therefore, be modified so
that the defendant City Treasurer shall refund to the
plaintiff the sum of P1,868.92 instead P2,210.52, without
costs. It is so ordered.
Paras, C.J., Feria, Pablo, Bengzon, Montemayor,
Bautista Angelo and Labrador, JJ., concur.

Surigao Consolidated
Mining vs CIR
G.R. No. L-14878

December 26, 1963

SURIGAO
CONSOLIDATED
MINING
CO.,
INC., petitioner,
vs.
COLLECTOR OF INTERNAL REVENUE and
COURT OF APPEALS, respondents.
Leido, Angeles and Valladolid for petitioner.
Office of the Solicitor General for respondents.
REGALA, J.:
This is a petition to review the decision of the Court of
Tax Appeals in Manila Civil Case No. 4770 dismissing
for lack of merit the action of the Surigao Consolidated
Mining Company for the refund of the total amount of
P17,051.14 allegedly representing overpayment of ad
valorem tax for the fourth quarter of 1941.
The record shows that before the outbreak of World War
II, the Surigao Consolidated Mining Company (called
SURIGAO CONSOLIDATED, for short), a domestic
corporation which then had its principal office in the City
of Iloilo, was operating its mining concessions in Mainit,
Surigao. Pursuant to section 246 of the Internal Revenue
Code, which prescribes the time and manner of payment
of royalties or ad valorem taxes, it filed a bond and had
been regularly filing its returns for minerals removed
from its mines during each calendar quarter and
paying ad valorem tax thereon within 20 days after the
close of every quarter. In each case, computation of
the ad valoremtax was based on the market value of the
minerals set forth in the returns, subject to adjustment
upon the receipt of the smelter showing the actual market
value of the minerals to the United States.

Due to the interruption, of the communications outbreak

of the war, the principal office of Surigao Consolidated
lost contact with its mines and never received the
production reports for the fourth quarter of 1941. In order
to avoid incurring any tax penalty, said company, on
January 19, 1942, deposited a check amount of
P27,000.00 payable to and "indorsed in favor of the City
Treasurer (of Iloilo) in payment of the ad valorem taxes
(approximate adjustment to be made when circumstances
allow it) for the fourth quarter of 1941."
After the termination of the war, Commonwealth Act No.
722 was enacted, which provided for the filing of returns
for minerals removed during the last quarter of 1941 up
to December 31, 1945 and the payment of ad valoremtax
on said minerals to February 28, 1946.
Availing of the provisions of the aforementioned Act, the
Surigao Consolidated, on December 28, 1945, ad
valorem tax returns for the fourth quarter declaring as its
tax liability the amount of P43,486.54. Applying the
amount of P27,000.00 previously deposited with the City
Treasurer of Iloilo, the returns indicated an unpaid
balance of P16,486.54 as the " tax subject to revision."
However, on February 26, 1946, the Surigao
Consolidated filed an amended ad valorem tax returns
under which amendment it declared a reduced ad
valorem tax in the amount of P37,189.00. And crediting
itself with the amount of P27,000.00 previously
deposited with the City Treasurer of Iloilo, it paid the
remaining balance of P10,189.00.
On September 24, 1946, the Surigao Consolidated again
filed a statement of adjustment allegedly containing
figures and data of the complete smelter returns for
minerals shipped to the United States. In the
accompanying letter, a request was made, this time not
only for the reduction of tax, but for the refund of the
amount of P18,107.87. On October 19, 1946, another
statement of adjustment was filed reducing the claim for
refund to P17,158.01. Finally, on March 15, 1947, a third

204

statement of adjustment was submitted further reducing

the claim for refund to the amount of P 17,051.14.
As the Collector of Internal Revenue denied the request
for the refund of the said P17,051.14 on the ground that
the money already paid as ad valorem tax was legally due
to the Government, the Surigao Consolidated instituted
with the Court of First Instance of Manila civil action for
its recovery. However, upon the enactment of Republic
Act No. 1125 creating the Court of Tax Appeals, the case
was remanded to the latter court for proper disposition.
After hearing, the Court of Tax Appeals, on July 16,
1958, finding that the amount sought to be refunded been
lawfully collected, rendered its decision denying the
claim for refund. The Surigao Consolidated in due time
filed a motion for new trial on the ground that the
decision was "not justified by the overwhelming weight
of evidence" and that it was contrary to law. The tax
court, however, denied the motion. Hence, this petition
for review.lawphil.net
The question to be resolved is whether or not Surigao
Consolidated, petitioner herein, is entitled to the refund
ofad valorem tax in the total amount of P17,051.14,
itemized as follows:
1.
2.
3.

valorem tax paid on minerals removed from the mines

but alleged to have been lost in transit on account of the
war. The refund is sought under section 1 (d) of Republic
Act No. 81, which provides as follows:
SECTION 1. Any provision of existing law to
the contrary notwithstanding:
xxx

xxx

xxx

(d) All unpaid royalties, ad valorem or specific

taxes on all minerals mined from mining claims
or concessions existing and in force on January
first, nineteen hundred and forty-two, and
which minerals were lost by reason of the war
or circumstances arising therefrom, are hereby
condoned: Provided, That if said minerals had
been or shall be recovered by the miner or
producer, such royalties, ad valorem or specific
taxes on the same shall be immediately due and
demandable.

Petitioner argues that since the law condones the taxes

due from taxpayers who failed to pay their taxes, it would
be unfair to deny this benefit to those taxpayers who had
been prompt in paying theirs. The argument merits
careful consideration. At first it would seem to be sound
and logical.
Ad valorem tax on minerals removed from the mines
but But the aforequoted section clearly refers to
the
condonation
of unpaid taxes only. The condonation of
allegedly lost in transit on account of war
a tax liability is equivalent and is in the nature of a tax
exemption.
Ad valorem tax on minerals extracted from the mines
but Being so, it should be sustained only when
expressed in explicit terms, and it can not be extended
allegedly looted during the Japanese occupation
beyond the plain meaning of those terms. It is the
Alleged overpayment of ad valorem tax on mineralsuniversal
shipped rule that he who claims an exemption from his
to the United States
share of the common burden of taxation must justify his
claim by showing that the Legislature intended to exempt
him by words too plain to be mistaken. (Statutory
Construction by Francisco, citing Government of P. I. v.
Monte de Piedad, 25 Phil. 42.)

The first, item in petitioner's claim for refund in the

amount of P1,191.46 represents the amount of ad

The application of a statute creating an

exemption for taxation to taxes already
assessed depends upon whether it is
retrospective in its operation. Such a statute has
no retrospective operation, unless by the terms
thereof it clearly appears to be the intention of
the legislature that the exemption shall relate
back to taxes which have already become fixed,
as a statute which releases a person or
corporation from a burden common to the
whole community should be strictly (Louisville
Water Co. v. Hamilton, 81 Ky. 517, ... cited 6
American and English Ann. Cases, p. 438).
Petitioner having failed to point to Us any portion of the
law that explicitly provides for a refund of those
taxpayers who had paid their taxes on the items and
under circumstances mentioned in the abovequoted
provision, We are constrained to hold that the benefits of
said provision does not extend to it.
Even assuming arguendo that the provisions of Republic
Act No. 81 authorizes the refund of taxes already paid by
petitioner, the latter would not still be entitled to the
refund sought for under the first item. It is to be noted
that petitioner's evidence of the alleged loss in transit as
observed by the Court of Tax Appeals, merely of
testimony of witnesses who did not have personal
knowledge of the circumstances which gave rise to the
loss. Such evidence cannot, of course be considered
sufficient to establish that the minerals were in fact lost.
Judge Luciano of the Court of Tax Appeals during the
trial, would be to create a dangerous precendent.
Under the second item, petitioner seeks to recover the
amount of P15,609.73 representing the ad valorem tax
paid on minerals extracted from its mines but alleged to
have been looted during the enemy occupation. In
connection with the alleged looting of the minerals, the
Tax Court has this to say:

205

We are again confronted with the case where

plaintiff has, to our mind, failed to present
adequate evidence to prove such loss. The
evidence, if at all, is merely limited to the
general and uncorroborated statements of
plaintiff's officers that the same were lost in the
mines. These testimonies cannot be taken on
their full face value, especially because they
had no direct supervision over the handling of
such minerals at the time of the alleged loss.
Much less had these officers have personal
knowledge of the loss. Under the
circumstances, we can not make the finding
that the minerals were in fact lost.
Going over the record, We find no reason to disturb the
above findings of the Court of Tax Appeals, there being
no showing that they are not substantiated by the
evidence. With this observation, it would be useless
ceremony to delve into the issue of whether ad
valorem tax should be or should not be paid on minerals
extracted from the mines but not removed therefrom.
One more item in petitioner's claim is the alleged
overpayment of ad valorem tax in the amount of P249.95
on the minerals shipped to the United States. It is that
an ad valorem tax in the amount of P20,387.81 was
originally paid on the minerals shipped to the United
States with a gross value of P410,299.49; that the smelter
returns from the United States show that the actual
market value of the minerals shipped to the States was
P416,895.28; and that after deducting all allowable
deductions amounting in all to P1,828,34, the true and
correct amount of ad valoremtax on said minerals was
P20,137.86. Petitioner, therefore, claims difference
between the amount of P20,387.81 and P20,137.86 is an
overpayment.
It is not disputed that, as indicated above, the amount
of ad valorem tax on the minerals shipped to the United
States is subject to adjustment upon the receipt of the
smelter returns showing their actual market value

Petitioner contends that the statements of adjustment

alleged to contain the figures and data set forth in the
smelter returns are adequate evidence of the actual
market value of the minerals shipped to the United States.
The best evidence of the actual market value minerals
shipped to the United States are the smelter returns
themselves. These returns are admittedly petitioner's
possession, but for unknown reasons, petitioner failed to
produce them during the trial. As there is no credible and
satisfactory explanation for the non-production of said
returns, there arises the presumption that if produced they
would be adverse to petitioner. Under the circumstances,
the Court of Tax Appeals cannot be said to have
committed error, much less abused its discretion, in
refusing to give any probative value statements of
adjustment.
It is a settled doctrine that in a suit for the recovery of the
payment of taxes or any portion thereof as having been
illegally or erroneously collected, the burden is upon the
taxpayer to establish the facts which show the illegality
of the tax or that the determination thereof is erroneous.
In this case, petitioner failed to show that the amount of
taxes sought to be refunded have been erroneously
collected.
Conformably to the above, We are of the opinion that the
Court of Tax Appeals did not commit any error in
denying petitioner's claim.
WHEREFORE, the decision appealed from is hereby
affirmed. Costs against petitioner.
Bengzon, C.J., Padilla, Bautista Angelo, Labrador,
Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon and
Makalintal, JJ., concur.

Mactan Cebu Intl Airport

vs Marcos
G.R. No. 120082 September 11, 1996
MACTAN CEBU INTERNATIONAL AIRPORT
AUTHORITY, petitioner,
vs.
HON. FERDINAND J. MARCOS, in his capacity as
the Presiding Judge of the Regional Trial Court,
Branch 20, Cebu City, THE CITY OF CEBU,
represented by its Mayor HON. TOMAS R.
OSMEA, and EUSTAQUIO B. CESA, respondents.

DAVIDE, JR., J.:

For review under Rule 45 of the Rules of Court
on a pure question of law are the decision of 22
March 1995 1 of the Regional Trial Court (RTC)
of Cebu City, Branch 20, dismissing the
petition for declaratory relief in Civil Case No.
CEB-16900
entitled
"Mactan
Cebu
International Airport Authority vs. City of
Cebu", and its order of 4, May 1995 2 denying
the motion to reconsider the decision.
We resolved to give due course to this petition
for its raises issues dwelling on the scope of the
taxing power of local government-owned and
controlled corporations.
The uncontradicted factual antecedents are
summarized in the instant petition as follows:

206

Petitioner Mactan Cebu International

Airport Authority (MCIAA) was
created by virtue of Republic Act No.
6958, mandated to "principally
undertake the economical, efficient
and effective control, management
and supervision of the Mactan
International Airport in the Province
of Cebu and the Lahug Airport in
Cebu City, . . . and such other
Airports as may be established in the
Province of Cebu . . . (Sec. 3, RA
6958). It is also mandated to:
a)
en
co
ur
ag
e,
pr
o
m
ot
e
an
d
de
ve
lo
p
int
er
na
tio
na
l

an
d
do
m
es
tic
air
tra
ffi
c
in
th
e
C
en
tra
l
Vi
sa
ya
s
an
d
M
in
da
na
o
re
gi
on
s
as
a
m
ea
ns

of
m
ak
in
g
th
e
re
gi
on
s
ce
nt
er
s
of
int
er
na
tio
na
l
tra
de
an
d
to
ur
is
m,
an
d
ac
ce
ler
ati
ng

207

th
e
de
ve
lo
p
m
en
t
of
th
e
m
ea
ns
of
tra
ns
po
rta
tio
n
an
d
co
m
m
un
ic
ati
on
in
th
e
co
un
tr

y;
an
d
b)
up
gr
ad
e
th
e
se
rv
ic
es
an
d
fa
cil
iti
es
of
th
e
air
po
rts
an
d
to
fo
r
m
ul
at
e
int

er
na
tio
na
lly
ac
ce
pt
ab
le
st
an
da
rd
s
of
air
po
rt
ac
co
m
m
od
ati
on
an
d
se
rv
ic
e.
Since the time of its creation,
petitioner MCIAA enjoyed the
privilege of exemption from payment

208

of realty taxes in accordance with

Section 14 of its Charter.
Sec. 14. Tax
Exemptions.
The
authority
shall be exempt
from realty taxes
imposed by the
National
Government or
any
of
its
political
subdivisions,
agencies
and
instrumentalities .
..

it is an instrumentality of the
government
performing
governmental
functions,
citing
section 133 of the Local Government
Code of 1991 which puts limitations
on the taxing powers of local
government units:
Sec.
133.
Common
Limitations
on
the
Taxing
Powers of Local
Government
Units. Unless
otherwise
provided herein,
the exercise of
the taxing powers
of
provinces,
cities,
municipalities,
and
barangay
shall not extend
to the levy of the
following:

On October 11, 1994, however, Mr.

Eustaquio B. Cesa, Officer-inCharge, Office of the Treasurer of the
City of Cebu, demanded payment for
realty taxes on several parcels of land
belonging to the petitioner (Lot Nos.
913-G, 743, 88 SWO, 948-A, 989-A,
474, 109(931), I-M, 918, 919, 913-F,
941, 942, 947, 77 Psd., 746 and 991A), located at Barrio Apas and Barrio
Kasambagan, Lahug, Cebu City, in
the total amount of P2,229,078.79.
Petitioner objected to such demand
for payment as baseless and
unjustified, claiming in its favor the
aforecited Section 14 of RA 6958
which exempt it from payment of
realty taxes. It was also asserted that

a)
..
.
xxx xxx xxx
o)
Ta
xe
s,

fe
es
or
ch
ar
ge
s
of
an
y
ki
nd
on
th
e
N
ati
on
al
G
ov
er
n
m
en
t,
its
a
ge
nc
ie
s
a
n
d
in
st

209

ru
m
en
ta
lit
ie
s,
a
n
d
lo
ca
l
g
ov
er
n
m
en
t
u
ni
ts.
(E
m
ph
as
is
su
pp
lie
d)
Respondent City refused to cancel
and set aside petitioner's realty tax
account, insisting that the MCIAA is
a government-controlled corporation

whose tax exemption privilege has

been withdrawn by virtue of Sections
193 and 234 of the Local
Governmental Code that took effect
on January 1, 1992:
Sec. 193. Withdrawal of Tax
Exemption Privilege. Unless
otherwise provided in this Code, tax
exemptions or incentives granted to,
or presently enjoyed by all persons
whether natural or juridical,including
government-owned or controlled
corporations, except local water
districts, cooperatives duly registered
under RA No. 6938, non-stock, and
non-profit hospitals and educational
institutions,are hereby withdrawn
upon the effectivity of this Code.
(Emphasis supplied)
xxx xxx xxx
Sec. 234. Exemptions from Real
Property taxes. . . .
(a) . . .
xxx xxx xxx
(c) . . .
Except
as
provided herein,
any exemption
from payment of

real property tax

previously
granted to, or
presently enjoyed
by all persons,
whether natural
or
juridical,
including
governmentowned
or
controlled
corporations are
hereby
withdrawn upon
the effectivity of
this Code.
As the City of Cebu was about to
issue a warrant of levy against the
properties of petitioner, the latter was
compelled to pay its tax account
"under protest" and thereafter filed a
Petition for Declaratory Relief with
the Regional Trial Court of Cebu,
Branch 20, on December 29, 1994.
MCIAA basically contended that the
taxing powers of local government
units do not extend to the levy of
taxes or fees of any kind on
an instrumentality of the national
government. Petitioner insisted that
while it is indeed a governmentowned corporation, it nonetheless
stands on the same footing as an
agency or instrumentality of the
national
government.
Petitioner
insisted that while it is indeed a

210

government-owned corporation, it
nonetheless stands on the same
footing
as
an
agency
or
instrumentality of the national
government by the very nature of its
powers and functions.
Respondent City, however, asserted
that
MACIAA
is
not
an
instrumentality of the government but
merely
a
government-owned
corporation performing proprietary
functions As such, all exemptions
previously granted to it were deemed
withdrawn by operation of law, as
provided under Sections 193 and 234
of the Local Government Code when
it took effect on January 1, 1992. 3
The petition for declaratory relief was docketed
as Civil Case No. CEB-16900.
In its decision of 22 March 1995, 4 the trial
court dismissed the petition in light of its
findings, to wit:
A close reading of the New Local
Government Code of 1991 or RA
7160
provides
the
express
cancellation and withdrawal of
exemption of taxes by government
owned and controlled corporation per
Sections after the effectivity of said
Code on January 1, 1992, to wit:
[proceeds to quote Sections 193 and
234]

Petitioners claimed that its real

properties assessed by respondent
City Government of Cebu are
exempted from paying realty taxes in
view of the exemption granted under
RA 6958 to pay the same (citing
Section 14 of RA 6958).
However, RA 7160 expressly
provides that "All general and special
laws, acts, city charters, decress [sic],
executive orders, proclamations and
administrative regulations, or part or
parts thereof which are inconsistent
with any of the provisions of this
Code are hereby repealed or modified
accordingly." ([f], Section 534, RA
7160).
With that repealing clause in RA
7160, it is safe to infer and state that
the tax exemption provided for in RA
6958 creating petitioner had been
expressly repealed by the provisions
of the New Local Government Code
of 1991.
So that petitioner in this case has to
pay the assessed realty tax of its
properties effective after January 1,
1992 until the present.
This Court's ruling finds expression
to give impetus and meaning to the
overall objectives of the New Local
Government Code of 1991, RA 7160.
"It is hereby declared the policy of

the State that the territorial and

political subdivisions of the State
shall enjoy genuine and meaningful
local autonomy to enable them to
attain their fullest development as
self-reliant communities and make
them more effective partners in the
attainment of national goals. Towards
this end, the State shall provide for a
more responsive and accountable
local government structure instituted
through a system of decentralization
whereby local government units shall
be given more powers, authority,
responsibilities, and resources. The
process of decentralization shall
proceed
from
the
national
government to the local government
units. . . . 5
Its motion for reconsideration having been
denied by the trial court in its 4 May 1995
order, the petitioner filed the instant petition
based on the following assignment of errors:
I RESPONDENT
JUDGE ERRED
IN FAILING TO
RULE
THAT
THE
PETITIONER IS
VESTED WITH
GOVERNMENT
POWERS AND
FUNCTIONS
WHICH PLACE
IT
IN
THE

211

SAME
CATEGORY AS
AN
INSTRUMENTA
LITY
OR
AGENCY
OF
THE
GOVERNMENT.
II
RESPONDENT
JUDGE ERRED
IN
RULING
THAT
PETITIONER IS
LIABLE TO PAY
REAL
PROPERTY
TAXES TO THE
CITY OF CEBU.
Anent the first assigned error, the petitioner
asserts that although it is a government-owned
or controlled corporation it is mandated to
perform functions in the same category as an
instrumentality
of
Government.
An
instrumentality of Government is one created to
perform governmental functions primarily to
promote certain aspects of the economic life of
the people. 6 Considering its task "not merely to
efficiently operate and manage the MactanCebu International Airport, but more
importantly, to carry out the Government
policies of promoting and developing the
Central Visayas and Mindanao regions as
centers of international trade and tourism, and
accelerating the development of the means of

transportation and communication in the

country," 7 and that it is an attached agency of
the Department of Transportation and
Communication (DOTC), 8 the petitioner "may
stand in [sic] the same footing as an agency or
instrumentality of the national government."
Hence, its tax exemption privilege under
Section 14 of its Charter "cannot be considered
withdrawn with the passage of the Local
Government Code of 1991 (hereinafter LGC)
because Section 133 thereof specifically states
that the taxing powers of local government
units shall not extend to the levy of taxes of
fees or charges of any kind on the national
government its agencies and instrumentalities."
As to the second assigned error, the petitioner
contends that being an instrumentality of the
National Government, respondent City of Cebu
has no power nor authority to impose realty
taxes upon it in accordance with the aforesaid
Section 133 of the LGC, as explained in Basco
vs. Philippine Amusement and Gaming
Corporation; 9
Local governments have no power to
tax instrumentalities of the National
Government.
PAGCOR
is
a
government owned or controlled
corporation
with
an
original
character, PD 1869. All its shares of
stock are owned by the National
Government. . . .
PAGCOR has a dual role, to operate
and regulate gambling casinos. The
latter joke is governmental, which

places it in the category of an agency

or
instrumentality
of
the
Government. Being
an
instrumentality of the Government,
PAGCOR should be and actually is
exempt from local taxes. Otherwise,
its operation might be burdened,
impeded or subjected to control by a
mere Local government.
The states have no power by taxation
or otherwise, to retard, impede,
burden or in any manner control the
operation of constitutional laws
enacted by Congress to carry into
execution the powers vested in the
federal government. (McCulloch v.
Maryland, 4 Wheat 316, 4 L Ed.
579).
This doctrine emanates from the
"supremacy" of the National
Government over local government.
Justice Holmes, speaking for the
Supreme Court, make references to
the entire absence of power on the
part of the States to touch, in that
way (taxation) at least, the
instrumentalities of the United States
(Johnson v. Maryland, 254 US 51)
and it can be agreed that no state or
political subdivision can regulate a
federal instrumentality in such a way
as to prevent it from consummating
its federal responsibilities, or even to
seriously
burden
it
in
the

212

accomplishment of them. (Antieau

Modern Constitutional Law, Vol. 2, p.
140)
Otherwise mere creature of the State
can defeat National policies thru
extermination
of
what
local
authorities may perceive to be
undesirable activities or enterprise
using the power to tax as "a toll for
regulation" (U.S. v. Sanchez, 340 US
42). The power to tax which was
called by Justice Marshall as the
"power to destroy" (McCulloch v.
Maryland, supra) cannot be allowed
to defeat an instrumentality or
creation of the very entity which has
the inherent power to wield it.
(Emphasis supplied)
It then concludes that the respondent Judge
"cannot therefore correctly say that the
questioned provisions of the Code do not
contain any distinction between a governmental
function as against one performing merely
proprietary ones such that the exemption
privilege withdrawn under the said Code would
apply to allgovernment corporations." For it is
clear from Section 133, in relation to Section
234, of the LGC that the legislature meant to
exclude instrumentalities of the national
government from the taxing power of the local
government units.
In its comment respondent City of Cebu alleges
that as local a government unit and a political
subdivision, it has the power to impose, levy,

assess, and collect taxes within its jurisdiction.

Such power is guaranteed by the
Constitution 10 and enhanced further by the
LGC. While it may be true that under its
Charter the petitioner was exempt from the
payment of realty taxes, 11 this exemption was
withdrawn by Section 234 of the LGC. In
response to the petitioner's claim that such
exemption was not repealed because being an
instrumentality of the National Government,
Section 133 of the LGC prohibits local
government units from imposing taxes, fees, or
charges of any kind on it, respondent City of
Cebu points out that the petitioner is likewise a
government-owned corporation, and Section
234 thereof does not distinguish between
government-owned corporation, and Section
234 thereof does not distinguish between
government-owned corporation, and Section
234 thereof does not distinguish between
government-owned or controlled corporations
performing
governmental
and
purely
proprietary functions. Respondent city of Cebu
urges this the Manila International Airport
Authority
is
a
governmental-owned
corporation, 12 and to reject the application of
Basco because it was "promulgated . . . before
the enactment and the singing into law of R.A.
No. 7160," and was not, therefore, decided "in
the light of the spirit and intention of the
framers of the said law.
As a general rule, the power to tax is an
incident of sovereignty and is unlimited in its
range, acknowledging in its very nature no
limits, so that security against its abuse is to be
found only in the responsibility of the

legislature which imposes the tax on the

constituency who are to pay it. Nevertheless,
effective limitations thereon may be imposed
by
the
people
through
their
Constitutions. 13 Our Constitution, for instance,
provides that the rule of taxation shall be
uniform and equitable and Congress shall
evolve a progressive system of taxation. 14 So
potent indeed is the power that it was once
opined that "the power to tax involves the
power to destroy." 15Verily, taxation is a
destructive power which interferes with the
personal and property for the support of the
government. Accordingly, tax statutes must be
construed strictly against the government and
liberally in favor of the taxpayer. 16 But since
taxes are what we pay for civilized society, 17 or
are the lifeblood of the nation, the law frowns
against exemptions from taxation and statutes
granting
tax
exemptions
are
thus
construed strictissimi
juris against
the
taxpayers and liberally in favor of the taxing
authority. 18 A claim of exemption from tax
payment must be clearly shown and based on
language in the law too plain to be
mistaken. 19 Elsewise stated, taxation is the rule,
exemption
therefrom
is
the
exception. 20 However, if the grantee of the
exemption is a political subdivision or
instrumentality, the rigid rule of construction
does not apply because the practical effect of
the exemption is merely to reduce the amount
of money that has to be handled by the
government in the course of its operations. 21
The power to tax is primarily vested in the
Congress; however, in our jurisdiction, it may

213

be exercised by local legislative bodies, no

longer merely by virtue of a valid delegation as
before, but pursuant to direct authority
conferred by Section 5, Article X of the
Constitution. 22 Under the latter, the exercise of
the power may be subject to such guidelines
and limitations as the Congress may provide
which, however, must be consistent with the
basic policy of local autonomy.
There can be no question that under Section 14
of R.A. No. 6958 the petitioner is exempt from
the payment of realty taxes imposed by the
National Government or any of its political
subdivisions, agencies, and instrumentalities.
Nevertheless, since taxation is the rule and
exemption therefrom the exception, the
exemption may thus be withdrawn at the
pleasure of the taxing authority. The only
exception to this rule is where the exemption
was granted to private parties based on material
consideration of a mutual nature, which then
becomes contractual and is thus covered by the
non-impairment clause of the Constitution. 23
The LGC, enacted pursuant to Section 3,
Article X of the constitution provides for the
exercise by local government units of their
power to tax, the scope thereof or its
limitations, and the exemption from taxation.
Section 133 of the LGC prescribes the common
limitations on the taxing powers of local
government units as follows:
Sec. 133. Common Limitations on the
Taxing Power of Local Government

Units. Unless otherwise provided

herein, the exercise of the taxing
powers
of
provinces,
cities,
municipalities, and barangays shall
not extend to the levy of the
following:

except wharfage
on
wharves
constructed and
maintained by the
local government
unit concerned:

(a) Income tax,

except
when
levied on banks
and
other
financial
institutions;

(e) Taxes, fees

and charges and
other imposition
upon
goods
carried into or
out of, or passing
through,
the
territorial
jurisdictions of
local government
units in the guise
or charges for
wharfages, tolls
for bridges or
otherwise,
or
other taxes, fees
or charges in any
form whatsoever
upon such goods
or merchandise;

(b) Documentary
stamp tax;
(c) Taxes on
estates,
"inheritance,
gifts,
legacies
and
other
acquisitions mort
is causa, except
as
otherwise
provided herein
(d)
Customs
duties,
registration fees
of vessels and
wharfage
on
wharves, tonnage
dues, and all
other kinds of
customs
fees
charges and dues

(f) Taxes fees or

charges
on
agricultural and
aquatic products
when sold by
marginal farmers
or fishermen;

214

(g) Taxes on
business
enterprise
certified to be the
Board
of
Investment
as
pioneer or nonpioneer for a
period of six (6)
and four (4)
years,
respectively from
the
date
of
registration;
(h) Excise taxes
on
articles
enumerated
under
the
National Internal
Revenue Code,
as amended, and
taxes, fees or
charges
on
petroleum
products;
(i) Percentage or
value added tax
(VAT) on sales,
barters
or
exchanges
or
similar
transactions on
goods or services
except
as

otherwise
provided herein;
(j) Taxes on the
gross receipts of
transportation
contractor
and
person engage in
the transportation
of passengers of
freight by hire
and
common
carriers by air,
land, or water,
except
as
provided in this
code;
(k) Taxes on
premiums paid
by
ways
reinsurance
or
retrocession;
(l) Taxes, fees, or
charges for the
registration
of
motor
vehicles
and
for
the
issuance of all
kinds of licenses
or permits for the
driving
of
thereof, except,
tricycles;

(m) Taxes, fees,

or other charges
on
Philippine
product actually
exported, except
as
otherwise
provided herein;
(n) Taxes, fees, or
charges,
on
Countryside and
Barangay
Business
Enterprise
and
Cooperatives
duly registered
under R.A. No.
6810
and
Republic
Act
Numbered Sixty
nine
hundred
thirty-eight (R.A.
No.
6938)
otherwise known
as
the
"Cooperative
Code
of the
Philippines; and
(o)
TAXES,
FEES,
OR
CHARGES OF
ANY KIND ON
THE NATIONAL
GOVERNMENT,
ITS AGENCIES
AND

215

INSTRUMENTA
LITIES,
AND
LOCAL
GOVERNMENT
UNITS.
(emphasis
supplied)
Needless to say the last item (item o) is
pertinent in this case. The "taxes, fees or
charges" referred to are "of any kind", hence
they include all of these, unless otherwise
provided by the LGC. The term "taxes" is well
understood so as to need no further elaboration,
especially in the light of the above
enumeration. The term "fees" means charges
fixed by law or Ordinance for the regulation or
inspection
of
business
activity, 24while
"charges" are pecuniary liabilities such as rents
or fees against person or property. 25
Among the "taxes" enumerated in the LGC is
real property tax, which is governed by Section
232. It reads as follows:
Sec. 232. Power to Levy Real
Property Tax. A province or city
or a municipality within the
Metropolitan Manila Area may levy
on an annual ad valorem tax on real
property such as land, building,
machinery and other improvements
not hereafter specifically exempted.
Section 234 of LGC provides for the
exemptions from payment of real property
taxes and withdraws previous exemptions

therefrom granted to natural and juridical

persons, including government owned and
controlled corporations, except as provided
therein. It provides:
Sec. 234. Exemptions from Real
Property Tax. The following are
exempted from payment of the real
property tax:
(a) Real property
owned by the
Republic of the
Philippines
or
any
of
its
political
subdivisions
except when the
beneficial
use
thereof had been
granted,
for
reconsideration
or otherwise, to a
taxable person;
(b)
Charitable
institutions,
churches,
parsonages
or
convents
appurtenants
thereto, mosques
nonprofits
or
religious
cemeteries and
all
lands,
building
and

improvements
actually, directly,
and exclusively
used for religious
charitable
or
educational
purposes;
(c)
All
machineries and
equipment that
are
actually,
directly
and
exclusively used
by local water
districts
and
governmentowned
or
controlled
corporations
engaged in the
supply
and
distribution
of
water
and/or
generation
and
transmission of
electric power;
(d)
All
real
property owned
by
duly
registered
cooperatives as
provided
for
under R.A. No.
6938; and;

216

(e)
Machinery
and
equipment
used for pollution
control
and
environmental
protection.
Except
as
provided herein,
any exemptions
from payment of
real property tax
previously
granted to or
presently enjoyed
by, all persons
whether natural
or
juridical,
including
all
government
owned
or
controlled
corporations are
hereby
withdrawn upon
the effectivity of
his Code.
These exemptions are based on the ownership,
character, and use of the property. Thus;
(a)
Ownership
Exemptions.
Exemptions from
real
property
taxes on the basis
of ownership are

real
properties
owned by: (i) the
Republic, (ii) a
province, (iii) a
city,
(iv)
a
municipality, (v)
a barangay, and
(vi)
registered
cooperatives.
(b)
Character
Exemptions.
Exempted from
real
property
taxes on the basis
of their character
are: (i) charitable
institutions, (ii)
houses
and
temples of prayer
like
churches,
parsonages
or
convents
appurtenant
thereto, mosques,
and (iii) non
profit or religious
cemeteries.
(c)
Usage
exemptions.
Exempted from
real
property
taxes on the basis
of the actual,
direct
and
exclusive use to

which they are

devoted are: (i)
all
lands
buildings
and
improvements
which
are
actually, directed
and exclusively
used
for
religious,
charitable
or
educational
purpose; (ii) all
machineries and
equipment
actually, directly
and exclusively
used or by local
water districts or
by governmentowned
or
controlled
corporations
engaged in the
supply
and
distribution
of
water
and/or
generation
and
transmission of
electric power;
and
(iii)
all
machinery
and
equipment used
for
pollution
control
and
environmental
protection.

217

To help provide
a
healthy
environment in the midst of the
modernization of the country, all
machinery and equipment for
pollution control and environmental
protection may not be taxed by local
governments.
2.
Other
Exemptions
Withdrawn. All
other exemptions
previously
granted to natural
or
juridical
persons including
governmentowned
or
controlled
corporations are
withdrawn upon
the effectivity of
the Code. 26
Section 193 of the LGC is the general provision
on withdrawal of tax exemption privileges. It
provides:
Sec. 193. Withdrawal of Tax
Exemption Privileges. Unless
otherwise provided in this code, tax
exemptions or incentives granted to
or presently enjoyed by all persons,
whether
natural
or
juridical,
including government-owned, or
controlled corporations, except local
water districts, cooperatives duly

registered under R.A. 6938, non

stock and non profit hospitals and
educational constitutions, are hereby
withdrawn upon the effectivity of this
Code.
On the other hand, the LGC authorizes local
government units to grant tax exemption
privileges. Thus, Section 192 thereof provides:
Sec. 192. Authority to Grant Tax
Exemption Privileges. Local
government units may, through
ordinances duly approved, grant tax
exemptions, incentives or reliefs
under such terms and conditions as
they may deem necessary.
The foregoing sections of the LGC speaks of:
(a) the limitations on the taxing powers of local
government units and the exceptions to such
limitations; and (b) the rule on tax exemptions
and the exceptions thereto. The use
of exceptions of provisos in these section, as
shown by the following clauses:
(1)
"unless
otherwise
provided herein"
in the opening
paragraph
of
Section 133;
(2)
"Unless
otherwise
provided in this

Code" in section
193;
(3) "not hereafter
specifically
exempted"
in
Section 232; and
(4) "Except as
provided herein"
in
the
last
paragraph
of
Section 234
initially hampers a ready understanding of the
sections. Note, too, that the aforementioned
clause in section 133 seems to be inaccurately
worded. Instead of the clause "unless otherwise
provided herein," with the "herein" to mean, of
course, the section, it should have used the
clause "unless otherwise provided in this
Code." The former results in absurdity since the
section itself enumerates what are beyond the
taxing powers of local government units and,
where exceptions were intended, the exceptions
were explicitly indicated in the text. For
instance, in item (a) which excepts the income
taxes "when livied on banks and other financial
institutions", item (d) which excepts "wharfage
on wharves constructed and maintained by the
local government until concerned"; and item
(1) which excepts taxes, fees, and charges for
the registration and issuance of license or
permits for the driving of "tricycles". It may
also be observed that within the body itself of
the section, there are exceptions which can be
found only in other parts of the LGC, but the

218

section interchangeably uses therein the clause

"except as otherwise provided herein" as in
items (c) and (i), or the clause "except as
otherwise provided herein" as in items (c) and
(i), or the clause "excepts as provided in this
Code" in item (j). These clauses would be
obviously unnecessary or mere surplus-ages if
the opening clause of the section were" "Unless
otherwise provided in this Code" instead of
"Unless otherwise provided herein". In any
event, even if the latter is used, since under
Section 232 local government units have the
power to levy real property tax, except those
exempted therefrom under Section 234, then
Section 232 must be deemed to qualify Section
133.
Thus, reading together Section 133, 232 and
234 of the LGC, we conclude that as a general
rule, as laid down in Section 133 the taxing
powers of local government units cannot
extend to the levy of inter alia, "taxes, fees,
and charges of any kind of the National
Government, its agencies and instrumentalties,
and local government units"; however, pursuant
to Section 232, provinces, cities, municipalities
in the Metropolitan Manila Area may impose
the real property tax except on, inter alia, "real
property owned by the Republic of the
Philippines or any of its political subdivisions
except when the beneficial used thereof has
been granted, for consideration or otherwise, to
a taxable person", as provided in item (a) of the
first paragraph of Section 234.
As to tax exemptions or incentives granted to
or presently enjoyed by natural or juridical

persons, including government-owned and

controlled corporations, Section 193 of the
LGC prescribes the general rule, viz., they
are withdrawn upon the effectivity of the LGC,
except upon the effectivity of the
LGC, except those granted to local water
districts, cooperatives duly registered under
R.A. No. 6938, non stock and non-profit
hospitals and educational institutions, and
unless otherwise provided in the LGC. The
latter proviso could refer to Section 234, which
enumerates the properties exempt from real
property tax. But the last paragraph of Section
234 further qualifies the retention of the
exemption in so far as the real property taxes
are concerned by limiting the retention only to
those enumerated there-in; all others not
included in the enumeration lost the privilege
upon the effectivity of the LGC. Moreover,
even as the real property is owned by the
Republic of the Philippines, or any of its
political subdivisions covered by item (a) of the
first paragraph of Section 234, the exemption is
withdrawn if the beneficial use of such
property has been granted to taxable person for
consideration or otherwise.
Since the last paragraph of Section 234
unequivocally withdrew, upon the effectivity of
the LGC, exemptions from real property taxes
granted to natural or juridical persons,
including government-owned or controlled
corporations, except as provided in the said
section, and the petitioner is, undoubtedly, a
government-owned corporation, it necessarily
follows that its exemption from such tax
granted it in Section 14 of its charter, R.A. No.

6958, has been withdrawn. Any claim to the

contrary can only be justified if the petitioner
can seek refuge under any of the exceptions
provided in Section 234, but not under Section
133, as it now asserts, since, as shown above,
the said section is qualified by Section 232 and
234.
In short, the petitioner can no longer invoke the
general rule in Section 133 that the taxing
powers of the local government units cannot
extend to the levy of:
(o) taxes, fees, or
charges of any
kind
on
the
National
Government, its
agencies,
or
instrumentalities,
and
local
government
units.
I must show that the parcels of land in question,
which are real property, are any one of those
enumerated in Section 234, either by virtue of
ownership, character, or use of the property.
Most likely, it could only be the first, but not
under any explicit provision of the said section,
for one exists. In light of the petitioner's theory
that it is an "instrumentality of the
Government", it could only be within be first
item of the first paragraph of the section by
expanding the scope of the terms Republic of
the
Philippines"
to

219

embrace . . . . . . "instrumentalities" and

"agencies" or expediency we quote:
(a) real property
owned by the
Republic of the
Philippines,
or
any
of
the
Philippines,
or
any
of
its
political
subdivisions
except when the
beneficial
use
thereof has been
granted,
for
consideration or
otherwise, to a
taxable person.
This view does not persuade us. In the first
place, the petitioner's claim that it is an
instrumentality of the Government is based on
Section 133(o), which expressly mentions the
word "instrumentalities"; and in the second
place it fails to consider the fact that the
legislature used the phrase "National
Government, its agencies and instrumentalities"
"in Section 133(o),but only the phrase
"Republic of the Philippines or any of its
political subdivision "in Section 234(a).
The terms "Republic of the Philippines" and
"National
Government"
are
not
interchangeable. The former is boarder and
synonymous with "Government of the Republic
of the Philippines" which the Administrative

Code of the 1987 defines as the "corporate

governmental entity though which the
functions of the government are exercised
through at the Philippines, including, saves as
the contrary appears from the context, the
various arms through which political authority
is made effective in the Philippines, whether
pertaining to the autonomous reason, the
provincial, city, municipal or barangay
subdivision or other forms of local
government." 27 These autonomous regions,
provincial, city, municipal or barangay
subdivisions" are the political subdivision. 28
On the other hand, "National Government"
refers "to the entire machinery of the central
government, as distinguished from the different
forms of local Governments." 29 The National
Government then is composed of the three
great departments the executive, the legislative
and the judicial. 30
An "agency" of the Government refers to "any
of the various units of the Government,
including a department, bureau, office
instrumentality, or government-owned or
controlled corporation, or a local government
or a distinct unit therein;" 31 while an
"instrumentality" refers to "any agency of the
National Government, not integrated within the
department framework, vested with special
functions or jurisdiction by law, endowed with
some if not all corporate powers, administering
special funds, and enjoying operational
autonomy; usually through a charter. This term
includes regulatory agencies, chartered

institutions and government-owned

controlled corporations". 32

and

If Section 234(a) intended to extend the

exception therein to the withdrawal of the
exemption from payment of real property taxes
under the last sentence of the said section to the
agencies and instrumentalities of the National
Government mentioned in Section 133(o), then
it should have restated the wording of the latter.
Yet, it did not Moreover, that Congress did not
wish to expand the scope of the exemption in
Section 234(a) to include real property owned
by other instrumentalities or agencies of the
government including government-owned and
controlled corporations is further borne out by
the fact that the source of this exemption is
Section 40(a) of P.D. No. 646, otherwise
known as the Real Property Tax Code, which
reads:
Sec 40. Exemption from Real
Property Tax. The exemption shall
be as follows:
(a
)
R
ea
l
pr
op
ert
y
o
w
ne

220

d
by
th
e
R
ep
ub
lic
of
th
e
Ph
ili
pp
in
es
or
an
y
of
its
po
lit
ic
al
su
bd
ivi
si
on
s
an
d
an
y
go
ve

rn
m
en
to
w
ne
d
or
co
nt
ro
lle
d
co
rp
or
ati
on
s
so
ex
e
m
pt
by
is
ch
art
er:
Pr
ov
id
ed
,
h
o

w
ev
er
,
th
at
thi
s
ex
e
m
pti
on
sh
all
no
t
ap
pl
y
to
re
al
pr
op
ert
y
of
th
e
ab
ov
e
m
en
tio
ne

221

d
en
tit
ie
s
th
e
be
ne
fic
ial
us
e
of
w
hi
ch
ha
s
be
en
gr
an
te
d,
fo
r
co
ns
id
er
ati
on
or
ot
he
rw

is
e,
to
a
ta
xa
bl
e
pe
rs
on
.
Note that as a reproduced in Section 234(a), the
phrase "and any government-owned or
controlled corporation so exempt by its charter"
was excluded. The justification for this
restricted exemption in Section 234(a) seems
obvious: to limit further tax exemption
privileges, specially in light of the general
provision on withdrawal of exemption from
payment of real property taxes in the last
paragraph of property taxes in the last
paragraph of Section 234. These policy
considerations are consistent with the State
policy to ensure autonomy to local
governments 33 and the objective of the LGC
that they enjoy genuine and meaningful local
autonomy to enable them to attain their fullest
development as self-reliant communities and
make them effective partners in the attainment
of national goals. 34 The power to tax is the
most effective instrument to raise needed
revenues to finance and support myriad
activities of local government units for the
delivery of basic services essential to the
promotion of the general welfare and the

enhancement of peace, progress, and prosperity

of the people. It may also be relevant to recall
that the original reasons for the withdrawal of
tax exemption
privileges
granted
to
government-owned and controlled corporations
and all other units of government were that
such privilege resulted in serious tax base
erosion and distortions in the tax treatment of
similarly situated enterprises, and there was a
need for this entities to share in the
requirements of the development, fiscal or
otherwise, by paying the taxes and other
charges due from them. 35
The crucial issues then to be addressed are: (a)
whether the parcels of land in question belong
to the Republic of the Philippines whose
beneficial use has been granted to the
petitioner, and (b) whether the petitioner is a
"taxable person".
Section 15 of the petitioner's Charter provides:
Sec. 15. Transfer of Existing
Facilities and Intangible Assets.
All existing public airport facilities,
runways, lands, buildings and other
properties, movable or immovable,
belonging
to
or
presently
administered by the airports, and all
assets, powers, rights, interests and
privileges relating on airport works,
or air operations, including all
equipment which are necessary for
the operations of air navigation,
acrodrome control towers, crash, fire,
and rescue facilities are hereby

222

transferred to the Authority: Provided

however, that the operations control
of all equipment necessary for the
operation of radio aids to air
navigation, airways communication,
the approach control office, and the
area control center shall be retained
by the Air Transportation Office. No
equipment, however, shall be
removed by the Air Transportation
Office from Mactan without the
concurrence of the authority. The
authority may assist in the
maintenance
of
the
Air
Transportation Office equipment.
The "airports" referred to are the "Lahug Air
Port" in Cebu City and the "Mactan
International AirPort in the Province of
Cebu", 36 which belonged to the Republic of the
Philippines, then under the Air Transportation
Office (ATO). 37
It may be reasonable to assume that the term
"lands" refer to "lands" in Cebu City then
administered by the Lahug Air Port and
includes the parcels of land the respondent City
of Cebu seeks to levy on for real property
taxes. This section involves a "transfer" of the
"lands" among other things, to the petitioner
and not just the transfer of the beneficial use
thereof, with the ownership being retained by
the Republic of the Philippines.
This "transfer" is actually an absolute
conveyance of the ownership thereof because
the petitioner's authorized capital stock consists

of, inter alia "the value of such real estate

owned
and/or
administered
by
the
airports." 38 Hence, the petitioner is now the
owner of the land in question and the exception
in Section 234(c) of the LGC is inapplicable.

WHEREFORE, the instant petition is

DENIED. The challenged decision and order of
the Regional Trial Court of Cebu, Branch 20, in
Civil Case No. CEB-16900 are AFFIRMED.
No pronouncement as to costs.

Moreover, the petitioner cannot claim that it

was never a "taxable person" under its Charter.
It was only exempted from the payment of real
property taxes. The grant of the privilege only
in respect of this tax is conclusive proof of the
legislative intent to make it a taxable person
subject to all taxes, except real property tax.

SO ORDERED.

Manila Railroad vs
Collector
G.R. No. L-30264

Finally, even if the petitioner was originally not

a taxable person for purposes of real property
tax, in light of the forgoing disquisitions, it had
already become even if it be conceded to be an
"agency" or "instrumentality" of the
Government, a taxable person for such purpose
in view of the withdrawal in the last paragraph
of Section 234 of exemptions from the payment
of real property taxes, which, as earlier
adverted to, applies to the petitioner.
Accordingly, the position taken by the
petitioner is untenable. Reliance on Basco
vs. Philippine Amusement and Gaming
Corporation 39 is unavailing since it was
decided before the effectivity of the LGC.
Besides, nothing can prevent Congress from
decreeing that even instrumentalities or
agencies of the government performing
governmental functions may be subject to tax.
Where it is done precisely to fulfill a
constitutional mandate and national policy, no
one can doubt its wisdom.

March 12, 1929

MANILA RAILROAD COMPANY, plaintiff-appellee,

vs.
INSULAR COLLECTOR OF CUSTOMS, defendantappellant.
Attorney-General
Jaranilla
Jose C. Abrew for appellee.

for

appellant.

MALCOLM, J.:
The question involved in this appeal is the following:
How should dust shields be classified for the purposes of
the tariff, under paragraph 141 or under paragraph 197 of
section 8 of the Tariff Law of 1909? These paragraphs
placed in parallel columns for purposes of comparison
read:
141. Manufactures of wool not otherwise
provided for, forty per centum ad valorem

223

197. Vehicles for use on railways and

tramways, and detached parts thereof, ten per
centum ad valorem.
Dust shields are manufactured of wool and hair mixed.
The component material of chief value is the wool. They
are used by the Manila Railroad Company on all of its
railway wagons. The purpose of the dust shield is to
cover the axle box in order to protect from dust the oil
deposited therein which serves to lubricate the bearings
of the wheel. "Dust guard," which is the same as "dust
shield," is defined in the work Car Builders' Cyclopedia
of American Practice, 10th ed., 1922, p. 41, as follows:
"A this piece of wood, leather, felt, asbestos or other
material inserted in the dust guard chamber at the back of
a journal box, and fitting closely around the dust guard
bearing of the axle. Its purpose is to exclude dust and to
prevent the escape of oil and waste. Sometimes called
axle packing or box packing."
Based on these facts, it was the decision of the Insular
Collector of Customs that dust shields should be
classified as "manufactures of wool, not otherwise
provided for." That decision is entitled to our respect. The
burden is upon the importer to overcome the presumption
of a legal collection of duties by proof that their exaction
was unlawful. The question to be decided is not whether
the Collector was wrong but whether the importer was
right. (Erhardt vs. Schroeder [1894], 155 U. S., 124;
Behn, Meyer & Co. vs. Collector of Customs [1913], 26
Phil., 647.) On the other hand, His Honor, Judge
Simplicio del Rosario, took an opposite view, overruled
the decision of the Collector of Customs, and held that
dust shields should be classified as "detached parts" of
vehicles for the use on railways. This impartial finding is
also entitled to our respect. It is the general rule in the
interpretation of statutes levying taxes or duties not to

extend their provisions beyond the clear import of the

language used. In every case of doubt, such statutes are
construed most strongly against the Government and in
favor of the citizen, because burdens are not to be
imposed, nor presumed to be imposed, beyond what the
statutes expressly and clearly import. (U. S. vs.
Wigglesworth [1842], 2 Story, 369; Froehlich & Kuttner
vs. Collector of Customs [1911], 18 Phil., 461.)
There are present two fundamental considerations which
guide the way out of the legal dilemma. The first is by
taking into account the purpose of the article and then
acknowledging that it is in reality used as a detached part
or railways vehicles. The second point is that paragraph
141 is a general provision while paragraph 197 is a
special provision. Where there is in the same statute a
particular enactment and also a general one which is
embraced in the former, the particular enactment must be
operative, and the general enactment must be taken to
effect only such cases within its general language as are
not within the provisions of the particular enactment (25
R. C. L., p. 1010, citing numerous cases).
We conclude that the trial judge was correct in classifying
dust shields under paragraph 197 of section 8 of the Tariff
Law of 1909, and in refusing to classify them under
paragraph 141 of the same section of the law.
Accordingly, the judgment appealed from will be
affirmed in its entirety, without special taxation of costs
in either instance.
Johnson, Street, Ostrand, Johns, Romualdez and VillaReal, JJ., concur.

Commissioner vs
Firemans fund
G.R. No. L-30644 March 9, 1987
COMMISSIONER
OF
INTERNAL
REVENUE, petitioner,
vs.
FIREMAN'S FUND INSURANCE COMPANY and
the COURT OF TAX APPEALS, respondents.
B.V. Abela, M.C. Gutierrez & F.J. Malate, Jr., for
respondents.

PARAS, J.:
This is an appeal from the decision of the respondent
Court of Tax Appeals dated May 24, 1969, in C.T.A.
Case
No.
1629,
entitled "FIREMAN'S
FUND
INSURANCE COMPANY v. COMMISSIONER OF
INTERNAL REVENUE,"which reversed the decision of
petitioner Commissioner of Internal Revenue holding
private respondent Fireman's Fund Insurance Company
liable for the payment of the amount of P81,406.87 as
documentary stamp taxes and compromise penalties for
the years 1952 to 1958.
Private respondent is a resident foreign insurance
corporation organized under the laws of the United
States, authorized and duly licensed to do business in the
Philippines. It is a member of the American Foreign
Insurance Association, through which its business is
cleared (Brief for Respondents, pp. 1-2)
The antecedent facts of this case are as follows:

224

From January, 1952 to December, 1958, herein private

respondent Fireman's Fund Insurance Company entered
into various insurance contracts involving casualty, fire
and marine risks, for which the corresponding insurance
policies were issued. From January, 1952 to 1956,
documentary stamps were bought and affixed to the
monthly statements of policies issues; and from 1957 to
1958 documentary stamps were bought and affixed to the
corresponding pages of the policy register, instead of on
the insurance policies issued. On July 3, 1959,
respondent company discovered that its monthly
statements of business and policy register were lost. The
loss was reported to the Building Administration of Ayala
Building and the National Bureau of Investigation on
July 6, 1959. Herein petitioner was also informed of such
loss by respondent company, through the latter's auditors,
Sycip, Gorres and Velayo, in a letter dated July 14, 1959.
After conducting an investigation of said loss, petitioner's
examiner ascertained that respondent company failed to
affix the required documentary stamps to the insurance
policies issued by it and failed to preserve its accounting
records within the time prescribed by Section 337 of the
Revenue Code by using loose leaf forms as registers of
documentary stamps without written authority from the
Commissioner of Internal Revenue as required by
Section 4 of Revenue Regulations No. V-1. As a
consequence of these findings, petitioner, in a letter dated
December 7, 1962, assessed and demanded from
petitioner the payment of documentary stamp taxes for
the years 1952 to 1958 in the total amount of P 79,806.87
and plus compromise penalties, a total of P 81,406.87.
A breakdown of the amount of taxes due and collectible
are as follows:

YEAR

AMOUNT

1952

P 6,500.00

1953

9,977.72

1954

10,908.89

1955

14,204.52

1956

1957

1958

............................
..............1,218.35
1958....................
............................
............................
..............3,264.39
Total....................
............................
............................
.......P 82,320.41
Less: Stamp taxes paid per voucher
shown:

12,108.26

1957....................
............................
...............
p
416.82

7,880.68

1958....................
............................
................2,096.7
2 2,513.54

16,257.60

AMOUNT
DUE
&
COLLECTIBLE.................................
............P 79,906.87
(CTA Decision, Rollo, pp. 16-17).

Total stamp taxes due on policies

issued from 1952 to 1958 77,837.67
Add: Stamp taxes
statements during:

on

monthly

The compromise penalties consisted of the sum of

P1,000.00 as penalty for the alleged failure to affix
documentary stamps and the further sum of P 600.00 as
penalty for an alleged violation of Revenue Regulations
No. V-1 otherwise known as the Bookkeeping
Regulations (Brief for Respondents, p. 4)

1957....................
............................

225

In a letter dated January 14, 1963, respondent company

contested the assessment. After petitioner denied the
protest in a decision dated March 17, 1965, respondent
company appealed to the respondent Court of Tax
Appeals on May 8, 1965. After hearing respondent court
rendered its decision dated May 24, 1969 (Rollo, pp. 1621) reversing the decision of the Commissioner of
Internal Revenue. The assailed decision reads in part:
The affixture of documentary stamps
to papers other than those authorized
by law is not tantamount to failure to
pay the same. It is true that the mode
of affixing the stamps as prescribed
by law was not followed, but the fact
remains that the documentary stamps
corresponding to the
various
insurance policies were purchased
and paid by petitioner. There is no
legal justification for respondent to
require petitioner to pay again the
documentary stamp tax which it had
already paid. To sustain respondent's
stand would require petitioner to pay
the same tax twice. If at all, the
petitioner should be proceeded
against for failure to comply with the
requirement
of
affixing
the
documentary stamps to the taxable
insurance policies and not for failure
to pay the tax. (See Sec. 239 and 332,
Rev. Code).
It should be observed that the law
allows the affixture of documentary
stamps' to such other paper as may be
indicated by law or regulations as the
proper recipient of the stamp.' It
appears from this provision that
respondent has authority to allow
documentary stamps to be affixed to
papers other than the documents or

instruments taxed. Although the

practice adopted by petitioner in
affixing the documentary stamps to
the business statements and policy
register was without specific
permission from respondent but only
on the strength of his ruling given to
Wise & Company (see Petitioner's
Memorandum, p. 176, CTA rec.; p.
24, t.s.n.), one of the general agents
of petitioner, however, considering
that petitioner actually purchased the
documentary stamps, affixed them to
the business statements and policy
register and cancelled the stamps by
perforating them, we hold that
petitioner cannot be held liable to pay
again the same tax.
With respect to the 'compromise
penalties' in the total sum of P
1,600.00, suffice it to say that
penalties cannot be imposed in the
absence of a showing that petitioner
consented thereto. A compromise
implies agreement. If the offer is
rejected by the taxpayer, as in this
case, respondent cannot enforce it
except through a criminal action.
(See Comm. of Int. Rev. vs. Abad, L19627, June 27, 1968.) (CTA
Decision, Rollo, pp. 20-21).
Hence, this petition filed on June 26, 1969 (Rollo, pp. 18).
The petition is devoid of merit.
The principal issue in this case is whether or not
respondent company may be required to pay again the
documentary stamps it has actually purchased, affixed
and cancelled.

The relevant provisions of the National Internal Revenue

Code provide:
SEC. 210. Stamp taxes upon
documents, instruments, and papers.
Upon documents, instruments, 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 sections of this Title,
by the person making, signing,
issuing, accepting, or transferring the
same, and at the same time such act is
done or transaction had. (Now. Sec.
222).
SEC. 232. 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-five
centavos on each two hundred pesos
or fractional part thereof, of the
amount issued by any such policy.
(220) (As amended by PD 1457)
Insurance policies issued by a
Philippine company to persons in
other countries are not subject to
documentary stamp tax. (Rev. Regs.
No. 26)
Medical certificate attached to an
insurance policy is not a part of the

226

said policy. Insurance policy is

subject to Section 232 of the Tax
Code while medical certificate is
taxable under Section 237 of the
same Code.
Insurance policies are issued in the
place where delivered to the person
insured. (As amended.)
SEC. 221. Stamp tax on policies of
insurance upon property. On all
policies of insurance or other
instruments by whatever name the
same may be called, by which
insurance shall be made or renewed
upon property of any description,
including rents or profits, against
peril by sea or on inland waters, or by
fire or lightning, there shall be
collected a documentary stamp tax of
six centavos on each four persons, or
fractional part thereof, of the amount
of premium charged," (Now Sec.
233.)
SEC. 237. Payment of documentary
stamp tax. Documentary stamp
taxes shall be paid by the purchase
and affixture of documentary stamps
to the document or instrument taxed
or to such other paper as may be
indicated by law or regulations as
the proper recipient of the stamp, and
by the subsequent cancellation of
same, such cancellation to be
accomplished by writing, stamping,
or perforating the date of the
cancellation across the face of each
stamp in such manner that part of the
writing, impression, or perforation
shall be on the stamp itself and part

on the paper to which it is

attached; Provided, That
if
the
cancellation is accomplished by
writing or stamping the date of
cancellation, a hole sufficiently large
to be visible to the naked eye shall be
punched, cut or perforated on both
the stamp and the document either by
the use of a hand punch, knife,
perforating machine, scissors, or any
other cutting instrument; but if the
cancellation is accomplished by
perforating the date of cancellation,
no other hole need be made on the
stamp. (Now Sec. 249.)
SEC. 239. Failure to affix or cancel
documentary stamps. Any person
who fails to affix the correct amount
of documentary stamps to any
taxable document, instrument, or
paper, or to cancel in the manner
prescribed by section 237 any
documentary stamp affixed to any
document, instrument, or paper, shall
be subject to a fine of not less than
twenty pesos or more than three
hundred pesos. (Emphasis supplied.)
(Now Sec. 250.)
As correctly pointed out by respondent Court of Tax
Appeals, under the above-quoted provisions of law,
documentary tax is deemed paid by: (a) the purchase of
documentary stamps; (b) affixture of documentary
stamps to the document or instrument taxed or to such
other paper as may be indicated by law or regulations;
and (c) cancellation of the stamps as required by law
(Rollo, p. 18).
It will be observed however, that the over-riding purpose
of these provisions of law is the collection of taxes. The
three steps above-mentioned are but the means to that

end. Thus, the purchase of the stamps is the form of

payment made; the affixture thereof on the document or
instrument taxed is to insure that the corresponding tax
has been paid for such document while the cancellation
of the stamps is to obviate the possibility that said stamps
will be reused for similar documents for similar purposes.
In the case at bar, there appears to be no dispute on the
fact that the documentary stamps corresponding to the
various policies were purchased and paid for by the
respondent Company. Neither is there any argument that
the same were cancelled as required by law. In fact such
were the findings of petitioner's examiner Amando B.
Melgar who stated as follows:
Investigation disclosed that the
subject insurance company is a duly
organized corporation doing business
in the Philippines. It keeps the
necessary books of accounts and
other accounting records needed by
the business. Further verification
revealed that it has, since July, 1959,
been using a "HASLER" franking
machine, Model F88, which stamps
the documentary stamps on the
duplicates of the policies issued.
Prior to the acquisition of the said
machine, the company buys its
stamps by allowing the Manager to
issue a Manager's check drawn
against the National City Bank of
New York and payable to the City
Treasurer of Manila. It was also
found out that during this period
(1952 to 1958), the total purchases of
documentary stamps amounted to
P77,837.67, while the value of the
used stamps lost amounted to
P65,901.11. Verification with the
files revealed that most of the
monthly statements of business and

227

registers of documentary stamps

corresponding to insurance policies
issued were missing while some
where the punched documentary
stamps affixed were small in amount
are still intact.
The taxpayer was found to be
negligent in the preservation and
keeping of its records. Although the
loss was found by the company's
private investigator (see attached true
copies of his reports) was not an
"Inside Job," still the company
should be held liable for its
negligence, it appearing that the said
records were placed in a bodega,
where almost all patrons of the coffee
shop nearby could see them. The
company also violated the provision
of Section 221 of the National
Internal Revenue Code which
provides that the documentary stamps
should be affixed and cancelled on
the duplicates of bonds and policies
issued. In this case, the said stamps
were affixed on the register of
documentary stamps. (pp. 35-36, BIR
rec.; Emphasis supplied.) (CTA
Decision, Rollo, pp, 18-19.)
Such findings were confirmed by the Memorandum of
Acting Commissioner of Internal Revenue Jose B.
Lingad, dated November 7, 1962 to the Chief, Business
Tax Division, which states:
The records show that the
FIREMAN'S FUND INSURANCE
COMPANY allegedly paid P
77,837.67 in documentary stamp
taxes for the policies of insurance
issued by it for the years 1952 to

1958 but could only present as proof

of payment Pll,936.56 of said taxes
as the rest of the amount of P
65,901.11 were lost due to robbery.
Upon verification of this payment
however it was found that the
FIREMAN'S FUND INSURANCE
COMPANY affixed the documentary
stamps not on the individual
insurance policies issued by it but on
a monthly statement of business and
a register of documentary stamps, the
use of which was not authorized by
this Office. It was claimed that the
same procedure was used in the case
of the lost documentary stamps
aforementioned. As this practice is
irregular and the remaining records
are not conclusive proofs of the
payment of the corresponding
documentary stamp tax on the
policies, the FIREMAN'S FUND
AND INSURANCE COMPANY is
still liable for the payment of the
documentary stamp taxes on the
policies found not affixed with
stamps. (Original B I R Record, p.
87).
Later, respondent Court of Tax Appeals correctly
observed that the purchase of documentary stamps and
their being affixed to the monthly statements of business
and policy registers were also admitted by counsel for the
Government as could clearly be gleaned from his
Memorandum submitted to the respondent Court.
(Decision, CTA Rollo, pp. 4-5).
Thus, all investigations made by the petitioner show the
same factual findings that respondent company purchased
documentary stamps for the various policies it has issued
for the period in question although it has attached the
same on documents not authorized by law.

There is no argument to petitioner's contention that the

insurance policies with the corresponding documentary
stamps affixed are the best evidence to prove payment of
said documentary stamp tax. This rule however does not
preclude the admissibility of other proofs which are
uncontradicted and of considerable weight, such as:
copies of the applications for manager's checks, copies of
the manager's check vouchers of the bank showing the
purchases of documentary stamps corresponding to the
various insurance policies issued during the years 19521958 duly and properly Identified by the witnesses for
respondent company during the hearing and admitted by
the respondent Court of Tax Appeals (Brief for
Respondent, p. 15).
It is a general rule in the interpretation of statutes levying
taxes or duties, that in case of doubt, such statutes are to
be construed most strongly against the government and in
favor of the subjects or citizens, because burdens are not
to be imposed, nor presumed to be imposed beyond what
statutes expressly and clearly import (Manila Railroad
Co. v. Collector of Customs, 52 Phil. 950 [1929]).
There appears to be no question that the purpose of
imposing documentary stamp taxes is to raise revenue
and the corresponding amount has already been paid by
respondent and has actually become part of the revenue
of the government. In the same manner, it is evident that
the affixture of the stamps on documents not authorized
by law is not attended by bad faith as the practice was
adopted from the authority granted to Wise & Company,
one of respondent's general agents (CTA Decision, Rollo,
p. 20). Indeed, petitioner argued that such authority was
not given to respondent company specifically, but under
the general principle of agency, where the acts of the
agents bind the principal, the conclusion is inescapable
that the justification for the acts of the agents may also be
claimed for the acts of the principal itself (Brief for the
Respondents, pp. 12-13).
Be that as it may, there is no justification for the
government which has already realized the revenue

228

which is the object of the imposition of subject stamp tax,

to require the payment of the same tax for the same
documents. Enshrined in our basic legal principles is the
time honored doctrine that no person shall unjustly enrich
himself at the expense of another. It goes without saying
that the government is not exempted from the application
of this doctrine (Ramie Textiles, Inc. v. Mathay Sr., 89
SCRA 587 [1979]).
Under the circumstances, this court RESOLVED to
DISMISS this petition and to AFFIRM the assailed
decision of the Court of Tax Appeals.
Fernan (Chairman), Gutierrez, Jr., Padilla, Bidin and
Cortes, JJ., concur.

Sea-Land vs CA
G.R. No. 122605

April 30, 2001

SEA-LAND
SERVICE,
INC., petitioner,
vs.
COURT OF APPEALS and COMMISSIONER OF
INTERNAL REVENUE, respondents.
PARDO, J.:
The Case
Appeal via certiorari from the decision of the Court of
Appeals affirming in toto that of the Court of Tax
Appeals which denied petitioners claim for tax credit or
refund of income tax paid on its gross Philippine billings
for taxable year 1984, in the amount of P870,093.12.1
The Facts

The facts, as found by the Court of Appeals, are as

follows:

Internal Revenue, petitioner-appellant

filed a petition for review with the
CTA docketed as CTA Case No.
4149, to judicially pursue its claim
for refund and to stop the running of
the two-year prescriptive period
under the then Section 243 of the
NIRC.

"Sea-Land Service Incorporated

(SEA-LAND),
an
American
international
shipping company
licensed by the Securities and
Exchange Commission to do business
in the Philippines entered into a
contract with the United States
Government to transport military
household goods and effects of U.S.
military personnel assigned to the
Subic Naval Base.
"From the aforesaid contract, SEALAND derived an income for the
taxable year 1984 amounting to
P58,006,207.54. During the taxable
year in question, SEA-LAND filed
with the Bureau of Internal Revenue
(BIR) the corresponding corporate
Income Tax Return (ITR) and paid
the income tax due thereon of 1.5%
as required in Section 25 (a)(2) of the
National Internal Revenue Code
(NIRC) in relation to Article 9 of the
RP-US Tax Treaty, amounting to
P870,093.12.
"Claiming
that
it
paid
the
aforementioned income tax by
mistake, a written claim for refund
was filed with the BIR on 15 April
1987. However, before the said claim
for refund could be acted upon by
public respondent Commissioner of

"On 21 February 1995, CTA rendered

its decision denying SEA-LANDs
claim for refund of the income tax it
paid in 1984."2
On March 30, 1995, petitioner appealed the decision of
the Court of Tax Appeals to the Court of Appeals.3
After due proceedings, on October 26, 1995, the Court of
Appeals promulgated its decision dismissing the appeal
and affirming in toto the decision of the Court of Tax
Appeals.4
Hence, this petition.5
The Issue
The issue raised is whether or not the income that
petitioner derived from services in transporting the
household goods and effects of U.S. military personnel
falls within the tax exemption provided in Article XII,
paragraph 4 of the RP-US Military Bases Agreement.
The Courts Ruling
We deny the petition.

229

The RP-US Military Bases Agreement provides:

"No national of the United States, or
corporation organized under the laws
of 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
with the government of 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."6
Petitioner Sea-Land Service, Inc. a US shipping company
licensed to do business in the Philippines earned income
during taxable year 1984 amounting to P58,006,207.54,
and paid income tax thereon of 1.5% amounting to
P870,093.12.
The question is whether petitioner is exempted from the
payment of income tax on its revenue earned from the
transport or shipment of household goods and effects of
US personnel assigned at Subic Naval Base.
"Laws
granting
exemption
from
tax
are
construed strictissimi juris against the taxpayer and
liberally in favor of the taxing power. Taxation is the rule
and exemption is the exception."7 The law "does not look
with favor on tax exemptions and that he who would seek
to be thus privileged must justify it by words too plain to
be mistaken andtoo categorical to be misinterpreted."8

Under Article XII (4) of the RP-US Military Bases

Agreement, the Philippine Government agreed to exempt
from payment of Philippine income tax nationals of the
United States, or corporations organized under the laws
of the United States, residents in the United States in
respect of any profit derived under a contract made in the
United States with the Government of the United States
in connection with the construction, maintenance,
operation and defense of the bases.

necessarily developed an expertise on the subject, unless

there has been an abuse or improvident exercise of
authority."11

It is obvious that the transport or shipment of household

goods and effects of U.S. military personnel is not
included in the term "construction, maintenance,
operation and defense of the bases." Neither could the
performance of this service to the U.S. government be
interpreted as directly related to the defense and security
of the Philippine territories. "When the law speaks in
clear and categorical language, there is no reason for
interpretation
or construction,
but only for
application."9 Any interpretation that would give it an
expansive construction to encompass petitioners
exemption from taxation would be unwarranted.

WHEREFORE, the Court DENIES the petition for lack

of merit.

The avowed purpose of tax exemption "is some public

benefit or interest, which the lawmaking body considers
sufficient to offset the monetary loss entailed in the grant
of the exemption."10 The hauling or transport of
household goods and personal effects of U. S. military
personnel would not directly contribute to the defense
and security of the Philippines.

ERNESTO
M.
MACEDA, petitioner,
vs.
HON. CATALINO MACARAIG, JR., in his capacity
as Executive Secretary, Office of the President; HON.
VICENTE R. JAYME, in his capacity as Secretary of
the Department of Finance; HON. SALVADOR
MISON, in his capacity as Commissioner, Bureau of
Customs; HON. JOSE U. ONG, in his capacity as
Commissioner of Internal Revenue; NATIONAL
POWER
CORPORATION;
the
FISCAL
INCENTIVES REVIEW BOARD; Caltex (Phils.)
Inc.; Pilipinas Shell Petroleum Corporation;
Philippine National Oil Corporation; and Petrophil
Corporation, respondents.

We see no reason to reverse the ruling of the Court of

Appeals, which affirmed the decision of the Court of Tax
Appeals. The Supreme "Court will not set aside lightly
the conclusion reached by the Court of Tax Appeals
which, by the very nature of its function, is dedicated
exclusively to the consideration of tax problems and has

Hence, the Court of Appeals did not err or gravely abuse

its discretion in dismissing the petition for review. We
can not grant the petition.1wphi1.nt
The Judgment

No costs.
SO ORDERED.

Maceda vs Macaraig *
G.R. No. 88291

May 31, 1991

230

Villamor & Villamor Law Offices for petitioner.

Angara, Abello, Concepcion, Regala & Cruz for
Pilipinas
Shell
Petroleum
Corporation.
Siguion Reyna, Montecillo & Ongsiako for Caltex
(Phils.), Inc.

GANCAYCO, J.:
This petition seeks to nullify certain decisions, orders,
rulings, and resolutions of respondents Executive
Secretary, Secretary of Finance, Commissioner of
Internal Revenue, Commissioner of Customs and the
Fiscal Incentives Review Board FIRB for exempting the
National Power Corporation (NPC) from indirect tax and
duties.
The relevant facts are not in dispute.
On November 3, 1986, Commonwealth Act No. 120
created the NPC as a public corporation to undertake the
development of hydraulic power and the production of
power from other sources. 1
On June 4, 1949, Republic Act No. 358 granted NPC tax
and duty exemption privileges under
Sec. 2. To facilitate payment of its
indebtedness, the National Power Corporation
shall be exempt from all taxes, duties, fees,
imposts, charges and restrictions of the
Republic of the Philippines, its provinces, cities
and municipalities.
On September 10, 1971, Republic Act No. 6395 revised
the charter of the NPC wherein Congress declared as a
national policy the total electrification of the Philippines
through the development of power from all sources to

meet the needs of industrial development and rural

electrification which should be pursued coordinately and
supported by all instrumentalities and agencies of the
government, including its financial institutions. 2 The
corporate existence of NPC was extended to carry out
this policy, specifically to undertake the development of
hydro electric 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. 3 Being a non-profit corporation,
Section 13 of the law provided in detail the exemption of
the NPC from all taxes, duties, fees, imposts and other
charges by the government and its instrumentalities.
On January 22, 1974, Presidential Decree No. 380
amended section 13, paragraphs (a) and (d) of Republic
Act No. 6395 by specifying, among others, the
exemption of NPC from such taxes, duties, fees, imposts
and other charges imposed "directly or indirectly," on all
petroleum products used by NPC in its operation.
Presidential Decree No. 938 dated May 27, 1976 further
amended the aforesaid provision by integrating the tax
exemption in general terms under one paragraph.
On June 11, 1984, Presidential Decree No. 1931
withdrew all tax exemption privileges granted in favor of
government-owned or controlled corporations including
their subsidiaries. 4 However, said law empowered the
President and/or the then Minister of Finance, upon
recommendation of the FIRB to restore, partially or
totally, the exemption withdrawn, or otherwise revise the
scope and coverage of any applicable tax and duty.
Pursuant to said law, on February 7, 1985, the FIRB
issued Resolution No. 10-85 restoring the tax and duty
exemption privileges of NPC from June 11, 1984 to June
30, 1985. On January 7, 1986, the FIRB issued resolution
No. 1-86 indefinitely restoring the NPC tax and duty
exemption privileges effective July 1, 1985.
However, effective March 10, 1987, Executive Order No.
93 once again withdrew all tax and duty incentives

granted to government and private entities which had

been restored under Presidential Decree Nos. 1931 and
1955 but it gave the authority to FIRB to restore, revise
the scope and prescribe the date of effectivity of such tax
and/or duty exemptions.
On June 24, 1987 the FIRB issued Resolution No. 17-87
restoring NPC's tax and duty exemption privileges
effective March 10, 1987. On October 5, 1987, the
President, through respondent Executive Secretary
Macaraig, Jr., confirmed and approved FIRB Resolution
No. 17-87.
As alleged in the petition, the following are the
background facts:
The following are the facts relevant to NPC's
questioned claim for refunds of taxes and
duties originally paid by respondents Caltex,
Petrophil and Shell for specific and ad
valorem taxes to the BIR; and for Customs
duties and ad valorem taxes paid by PNOC,
Shell and Caltex to the Bureau of Customs on
its crude oil importation.
Many of the factual statements are reproduced
from the Senate Committee on Accountability
of Public Officers and Investigations (Blue
Ribbon) Report No. 474 dated January 12,
1989 and approved by the Senate on April 21,
1989 (copy attached hereto as Annex "A") and
are identified in quotation marks:
1. Since May 27, 1976 when P.D. No. 938 was
issued until June 11, 1984 when P.D. No. 1931
was promulgated abolishing the tax exemptions
of all government-owned or-controlled
corporations, the oil firms never paid excise or
specific and ad valorem taxes for petroleum
products sold and delivered to the NPC. This
non-payment of taxes therefore spanned a

231

period of eight (8) years. (par. 23, p. 7, Annex

"A")
During this period, the Bureau of Internal
Revenue was not collecting specific taxes on
the purchases of NPC of petroleum products
from the oil companies on the erroneous belief
that the National Power Corporation (NPC)
was exempt from indirect taxes as reflected in
the letter of Deputy Commissioner of Internal
Revenue (DCIR) Romulo Villa to the NPC
dated October 29, 1980 granting blanket
authority to the NPC to purchase petroleum
products from the oil companies without
payment of specific tax (copy of this letter is
attached hereto as petitioner's Annex "B").

4. For the sales of petroleum products delivered

to NPC during the period from October, 1984
to April, 1985, NPC was billed a total of
P522,016,77.34 (sic) including both duties and
taxes, the specific tax component being valued
at P58,020,110.79. (par. 25, p. 8, Annex "A").
5. Fiscal Incentives Review Board (FIRB)
Resolution 10-85, dated February 7, 1985,
certified true copy of which is hereto attached
as Annex "C", restored the tax exemption
privileges of NPC effective retroactively to
June 11, 1984 up to June 30, 1985. The first
paragraph of said resolution reads as follows:
1. Effective June 11, 1984, the tax
and duty exemption privileges
enjoyed by the National Power
Corporation under C.A. No. 120, as
amended, are restored up to June 30,
1985.

2. The oil companies started to pay specific

and ad valorem taxes on their sales of oil
products to NPC only after the promulgation of
P.D. No. 1931 on June 11, 1984, withdrawing
all exemptions granted in favor of governmentowned
or-controlled
corporations
and
empowering the FIRB to recommend to the
President or to the Minister of Finance the
restoration of the exemptions which were
withdrawn. "Specifically, Caltex paid the total
amount of P58,020,110.79 in specific and ad
valorem taxes for deliveries of petroleum
products to NPC covering the period from
October 31, 1984 to April 27, 1985." (par. 23,
p. 7, Annex "A")

Because of this restoration (Annex "G") the

NPC applied on September 11, 1985 with the
BIR for a "refund of Specific Taxes paid on
petroleum products . . . in the total amount of
P58,020,110.79. (par. 26, pp. 8-9, Annex "A")

3. Caltex billings to NPC until June 10, 1984

always included customs duty without the tax
portion. Beginning June 11, 1984, when P.D.
1931 was promulgated abolishing NPC's tax
exemptions, Caltex's billings to NPC always
included both duties and taxes. (Caturla, tsn,
Oct. 10, 1988, pp. 1-5) (par. 24, p, 7, Annex
"A")

FIRB Resolution No. 10-85 serves as

sufficient basis to allow NPC to
purchase petroleum products from
the oil companies free of specific
and ad valorem taxes, during the
period in question.

6. In a letter to the president of the NPC dated

May 8, 1985 (copy attached as petitioner's
Annex "D"), Acting BIR Commissioner Ruben
Ancheta declared:

The "period in question" is June 1 1, 1 984 to

June 30, 1 985.
7. On June 6, 1985The president of the NPC,
Mr. Gabriel Itchon, wrote Mr. Cesar Virata,
Chairman of the FIRB (Annex "E"), requesting
"the FIRB to resolve conflicting rulings on the
tax exemption privileges of the National Power
Corporation (NPC)." These rulings involve
FIRB Resolutions No. 1-84 and 10-85. (par. 40,
p. 12, Annex "A")
8. In a letter to the President of NPC (Annex
"F"), dated June 26, 1985, Minister Cesar
Virata confirmed the ruling of May 8, 1985 of
Acting BIR Commissioner Ruben Ancheta,
(par. 41, p. 12, Annex "A")
9. On October 22, 1985, however, under BIR
Ruling No. 186-85, addressed to Hanil
Development Co., Ltd., a Korean contractor of
NPC for its infrastructure projects, certified
true copy of which is attached hereto as
petitioner's
Annex
"E",
BIR
Acting
Commissioner Ruben Ancheta ruled:
In Reply please be informed that after
a re-study of Section 13, R.A. 6395,
as amended by P.D. 938, this Office
is of the opinion, and so holds, that
the scope of the tax exemption
privilege enjoyed by NPC under said
section covers only taxes for which it
is directly liable and not on taxes
which are only shifted to it. (Phil.
Acetylene vs. C.I.R. et al., G.R. L19707, Aug. 17, 1967) Since
contractor's tax is directly payable by
the contractor, not by NPC, your
request for exemption, based on the
stipulation in the aforesaid contract
that NPC shall assume payment of

232

your contractor's tax liability, cannot

be granted for lack of legal basis."
(Annex "H") (emphasis added)
Said BIR ruling clearly states that NPC's
exemption privileges covers (sic) only taxes for
which it is directly liable and does not cover
taxes which are only shifted to it or for indirect
taxes. The BIR, through Ancheta, reversed its
previous position of May 8, 1985 adopted by
Ancheta himself favoring NPC's indirect tax
exemption privilege.
10. Furthermore, "in a BIR Ruling,
unnumbered, "dated June 30, 1986, "addressed
to Caltex (Annex "F"), the BIR Commissioner
declared that PAL's tax exemption is limited to
taxes for which PAL is directly liable, and that
the payment of specific and ad valorem taxes
on petroleum products is a direct liability of the
manufacturer or producer thereof". (par. 51, p.
15, Annex "A")
11. On January 7, 1986, FIRB Resolution No.
1-86 was issued restoring NPC's tax
exemptions retroactively from July 1, 1985 to a
indefinite period, certified true copy of which is
hereto attached as petitioner's Annex "H".
12. NPC's total refund claim was P468.58
million but only a portion thereof i.e. the
P58,020,110.79 (corresponding to Caltex) was
approved and released by way of a Tax Credit
Memo (Annex "Q") dated July 7, 1986,
certified true copy of which [is) attached hereto
as petitioner's Annex "F," which was assigned
by NPC to Caltex. BIR Commissioner Tan
approved the Deed of Assignment on July 30,
1987, certified true copy of which is hereto
attached as petitioner's Annex "G"). (pars. 26,
52, 53, pp. 9 and 15, Annex "A")

The Deed of Assignment stipulated among

others that NPC is assigning the tax credit to
Caltex in partial settlement of its outstanding
obligations to the latter while Caltex, in turn,
would apply the assigned tax credit against its
specific tax payments for two (2) months. (per
memorandum dated July 28, 1986 of DCIR
Villa, copy attached as petitioner Annex "G")

15. On December 22, 1986, in a 2nd

Indorsement to the Hon. Fulgencio S. Factoran,
Jr., BIR Commissioner Tan, Jr. (certified true
copy of which is hereto attached and made a
part hereof as petitioner's Annex "J"), reversed
his previous position and states this time that
all deliveries of petroleum products to NPC are
tax exempt, regardless of the period of delivery.

13. As a result of the favorable action taken by

the BIR in the refund of the P58.0 million tax
credit assigned to Caltex, the NPC reiterated its
request for the release of the balance of its
pending refunds of taxes paid by respondents
Petrophil, Shell and Caltex covering the period
from June 11, 1984 to early part of 1986
amounting to P410.58 million. (The claim of
the first two (2) oil companies covers the
period from June 11, 1984 to early part of
1986; while that of Caltex starts from July 1,
1985 to early 1986). This request was denied
on August 18, 1986, under BIR Ruling 152-86
(certified true copy of which is attached hereto
as petitioner's Annex "I"). The BIR ruled that
NPC's tax free privilege to buy petroleum
products covered only the period from June 11,
1984 up to June 30, 1985. It further declared
that, despite FIRB No. 1-86, NPC had already
lost its tax and duty exemptions because it only
enjoys special privilege for taxes for which it
isdirectly liable. This ruling, in effect, denied
the P410 Million tax refund application of NPC
(par. 28, p. 9, Annex "A")

16. On December 17, 1986, President Corazon

C. Aquino enacted Executive Order No. 93,
entitled "Withdrawing All Tax and Duty
Incentives, Subject to Certain Exceptions,
Expanding the Powers of the Fiscal Incentives
Review Board and Other Purposes."

14. NPC filed a motion for reconsideration on

September 18, 1986. Until now the BIR has not
resolved the motion. (Benigna, II 3, Oct. 17,
1988, p. 2; Memorandum for the Complainant,
Oct. 26, 1988, p. 15)." (par. 29, p. 9, Annex
"A")

17. On June 24, 1987, the FIRB issued

Resolution No. 17-87, which restored NPC's
tax exemption privilege and included in the
exemption "those pertaining to its domestic
purchases of petroleum and petroleum
products, and the restorations were made to
retroact effective March 10, 1987, a certified
true copy of which is hereto attached and made
a part hereof as Annex "K".
18. On August 6, 1987, the Hon. Sedfrey A.
Ordoez, Secretary of Justice, issued Opinion
No. 77, series of 1987, opining that "the power
conferred upon Fiscal Incentives Review Board
by Section 2a (b), (c) and (d) of Executive
order No. 93 constitute undue delegation of
legislative power and, therefore, [are]
unconstitutional," a copy of which is hereto
attached and made a part hereof as Petitioner's
Annex "L."
19. On October 5, 1987, respondent Executive
Secretary Macaraig, Jr. in a Memorandum to
the Chairman of the FIRB a certified true copy
of which is hereto attached and made a part
hereof as petitioner's Annex "M," confirmed

233

and approved FIRB Res. No. 17-87 dated June

24, 1987, allegedly pursuant to Sections 1 (f)
and 2 (e) of Executive Order No. 93.
20. Secretary Vicente Jayme in a reply dated
May 20, 1988 to Secretary Catalino Macaraig,
who by letter dated May 2, 1988 asked him to
rule "on whether or not, as the law now stands,
the National Power Corporation is still exempt
from taxes, duties . . . on its local purchases of .
. . petroleum products . . ." declared that "NPC
under the provisions of its Revised Charter
retains its exemption from duties and taxes
imposed on the petroleum products purchased
locally and used for the generation of
electricity," a certified true copy of which is
attached hereto as petitioner's Annex "N." (par.
30, pp. 9-10, Annex "A")
21. Respondent Executive Secretary came up
likewise with a confirmatory letter dated June 1
5, 1988 but without the usual official form of
"By the Authority of the President," a certified
true copy of which is hereto attached and made
a part hereof as Petitioner's Annex "O".
22. The actions of respondents Finance
Secretary and the Executive Secretary are
based on the RESOLUTION No. 17-87 of
FIRB restoring the tax and duty exemption of
the respondent NPC pertaining to its domestic
purchases of petroleum products (petitioner's
Annex K supra).
23. Subsequently, the newspapers particularly,
the Daily Globe, in its issue of July 11, 1988
reported that the Office of the President and the
Department of Finance had ordered the BIR to
refund the tax payments of the NPC amounting
to Pl.58 Billion which includes the P410
Million Tax refund already rejected by BIR
Commissioner Tan, Jr., in his BIR Ruling No.

152-86. And in a letter dated July 28, 1988 of

Undersecretary Marcelo B. Fernando to BIR
Commissioner Tan, Jr. the Pl.58 Billion tax
refund was ordered released to NPC (par. 31, p.
1 0, Annex "A")
24. On August 8, 1988, petitioner "wrote both
Undersecretary Fernando and Commissioner
Tan requesting them to hold in abeyance the
release of the Pl.58 billion and await the
outcome of the investigation in regard to
Senate Resolution No. 227," copies attached as
Petitioner's Annexes "P" and "P-1 " (par. 32, p.
10, Annex "A").
Reacting to this letter of the petitioner,
Undersecretary Fernando wrote Commissioner
Tan of the BIR dated August, 1988 requesting
him to hold in abeyance the release of the tax
refunds to NPC until after the termination of
the Blue Ribbon investigation.
25. In the Bureau of Customs, oil companies
import crude oil and before removal thereof
from customs custody, the corresponding
customs duties and ad valorem taxes are paid.
Bunker fuel oil is one of the petroleum
products processed from the crude oil; and
same is sold to NPC. After the sale, NPC
applies for tax credit covering the duties and ad
valorem exemption under its Charter. Such
applications are processed by the Bureau of
Customs and the corresponding tax credit
certificates are issued in favor of NPC which,
in turn assigns it to the oil firm that imported
the crude oil. These certificates are eventually
used by the assignee-oil firms in payment of
their other duty and tax liabilities with the
Bureau of Customs. (par. 70, p. 19, Annex "A")
A lesser amount totalling P740 million,
covering the period from 1985 to the present, is

being sought by respondent NPC for refund

from the Bureau of Customs for duties paid by
the oil companies on the importation of crude
oil from which the processed products sold
locally by them to NPC was derived. However,
based on figures submitted to the Blue Ribbon
Committee of the Philippine Senate which
conducted an investigation on this matter as
mandated by Senate Resolution No. 227 of
which the herein petitioner was the sponsor, a
much bigger figure was actually refunded to
NPC representing duties and ad valorem taxes
paid to the Bureau of Customs by the oil
companies on the importation of crude oil from
1979 to 1985.
26. Meantime, petitioner, as member of the
Philippine Senate introduced P.S. Res. No. 227,
entitled:
Resolution Directing the Senate Blue
Ribbon Committee, In Aid of
Legislation, To conduct a Formal and
Extensive Inquiry into the Reported
Massive Tax Manipulations and
Evasions
by Oil
Companies,
particularly Caltex (Phils.) Inc.,
Pilipinas Shell and Petrophil, Which
Were Made Possible By Their
Availing of the Non-Existing
Exemption of National Power
Corporation (NPC) from Indirect
Taxes, Resulting Recently in Their
Obtaining A Tax Refund Totalling
P1.55 Billion From the Department
of Finance, Their Refusal to Pay
Since
1976
Customs
Duties
Amounting to Billions of Pesos on
Imported Crude Oil Purportedly for
the Use of the National Power
Corporation, the Non-Payment of
Surtax on Windfall Profits from

234

Increases in the Price of Oil Products

in August 1987 amounting Maybe to
as Much as Pl.2 Billion Surtax Paid
by Them in 1984 and For Other
Purposes.
27. Acting on the above Resolution, the Blue
Ribbon Committee of the Senate did conduct a
lengthy formal inquiry on the matter, calling all
parties interested to the witness stand including
representatives from the different oil
companies, and in due time submitted its
Committee Report No. 474 . . . The Blue
Ribbon Committee recommended the following
courses of action.
1. Cancel its approval of the tax
refund of P58,020,110.70 to the
National Power Corporation (NPC)
and its approval of Tax Credit memo
covering said amount (Annex "P"
hereto), dated July 7, 1986, and
cancel its approval of the Deed of
Assignment (Annex "Q" hereto) by
NPC to Caltex, dated July 28, 1986,
and collect from Caltex its tax
liabilities which were erroneously
treated as paid or settled with the use
of the tax credit certificate that NPC
assigned to said firm.:
1.1. NPC did not have any
indirect tax exemption
since May 27, 1976 when
PD 938 was issued.
Therefore, the grant of a
tax refund to NPC in the
amount of P58 million was
illegal, and therefore, null
and void. Such refund was
a nullity right from the
beginning. Hence, it never

transferred any right in

favor of NPC.
2. Stop the processing and/or release
of Pl.58 billion tax refund to NPC
and/or oil companies on the same
ground that the NPC, since May 27,
1976 up to June 17, 1987 was never
granted any indirect tax exemption.
So, the P1.58 billion represent taxes
legally and properly paid by the oil
firms.
3. Start collection actions of specific
or excise and ad valorem taxes due
on petroleum products sold to NPC
from May 27, 1976 (promulgation of
PD 938) to June 17, 1987 (issuance
of EO 195).
B. For the Bureau of Customs (BOC) to do the
following:
1. Start recovery actions on the illegal duty
refunds or duty credit certificates for purchases
of petroleum products by NPC and allegedly
granted under the NPC charter covering the
years 1978-1988 . . .
28. On March 30, 1989, acting on the request
of respondent Finance Secretary for clearance
to direct the Bureau of Internal Revenue and of
Customs to proceed with the processing of
claims for tax credits/refunds of the NPC,
respondent Executive Secretary rendered his
ruling, the dispositive portion of which reads:
IN VIEW OF THE FOREGOING, the clearance is
hereby GRANTED and, accordingly, unless restrained by
proper authorities, that department and/or its line-tax
bureaus may now proceed with the processing of the

claims of the National Power Corporation for duty and

tax free exemption and/or tax credits/ refunds, if there be
any, in accordance with the ruling of that Department
dated May 20,1988, as confirmed by this Office on June
15, 1988 . . . 5
Hence, this petition for certiorari, prohibition
and mandamus with prayer for a writ of preliminary
injunction and/or restraining order, praying among others
that:
1. Upon filing of this petition, a temporary
restraining order forthwith be issued against
respondent
FIRB
Executive
Secretary
Macaraig, and Secretary of Finance Jayme
restraining them and other persons acting for,
under, and in their behalf from enforcing their
resolution, orders and ruling, to wit:
A. FIRB Resolution No. 17-87 dated
June 24, 1987 (petitioner's Annex
"K");
B. Memorandum-Order of the Office
of the President dated October 5,
1987 (petitioner's Annex "M");
C. Order of the Executive Secretary
dated June 15, 1988 (petitioner's
Annex "O");
D. Order of the Executive Secretary
dated March 30, l989 (petitioner's
Annex "Q"); and
E. Ruling of the Finance Secretary
dated May 20, 1988 (petitioner's
Annex "N").

235

2. Said temporary restraining order should also

include respondent Commissioners of Customs
Mison and Internal Revenue Ong restraining
them from processing and releasing any
pending claim or application by respondent
NPC for tax and duty refunds.
3. Thereafter, and during the pendency of this
petition, to issue a writ or preliminary
injunction against above-named respondents
and all persons acting for and in their behalf.
4. A decision be rendered in favor of the
petitioner and against the respondents:
A. Declaring that respondent NPC did not
enjoy indirect tax exemption privilege since
May 27, 1976 up to the present;
B. Nullifying the setting aside the following:
1. FIRB Resolution No. 17-87 dated
June 24, 1987 (petitioner's Annex
"K");
2. Memorandum-Order of the Office
of the President dated October 5,
1987 (petitioner's Annex "M");
3. Order of the Executive Secretary
dated June 15, 1988 (petitioner's
Annex "O");
4. Order of the Executive Secretary
dated March 30, 1989 (petitioner's
Annex "Q");
5. Ruling of the Finance Secretary
dated May 20, 1988 (petitioner's
Annex "N"

6. Tax Credit memo dated July 7,

1986 issued to respondent NPC
representing
tax
refund
for
P58,020,110.79 (petitioner's Annex
"F");
7. Deed of Assignment of said tax
credit memo to respondent Caltex
dated July 30, 1987 (petitioner's
Annex "G");
8. Application of the assigned tax
credit of Caltex in payment of its tax
liabilities with the Bureau of Internal
Revenue and
9. Illegal duty and tax refunds issued
by the Bureau of Customs to
respondent NPC by way of tax credit
certificates from 1979 up to the
present.
C. Declaring as illegal and null and void the
pending claims for tax and duty refunds by
respondent NPC with the Bureau of Customs
and the Bureau of Internal Revenue;

respondents Caltex, Shell and PNOC by using

the tax credit certificates assigned to them by
NPC and to recover from respondents Caltex,
Shell and PNOC all the amounts appearing in
said tax credit certificates which were used to
settle their duty and tax liabilities with the
Bureau of Customs.
F. Ordering respondent Commissioner of
Internal Revenue to deny as being null and void
the pending claims for refund of respondent
NPC with the Bureau of Internal Revenue
covering the period from June 11, 1984 to June
17, 1987.
PETITIONER prays for such other relief and
remedy as may be just and equitable in the
premises. 6
The issues raised in the petition are the following:
To determine whether respondent NPC is
legally entitled to the questioned tax and duty
refunds, this Honorable Court must resolve the
following issues:
Main issue

D. Prohibiting respondents Commissioner of

Customs and Commissioner of Internal
Revenue from enforcing the abovequestioned
resolution, orders and ruling of respondents
Executive Secretary, Secretary of Finance, and
FIRB by processing and releasing respondent
NPC's tax and duty refunds;
E. Ordering the respondent Commissioner of
Customs to deny as being null and void the
pending claims for refund of respondent NPC
with the Bureau of Customs covering the
period from 1985 to the present; to cancel and
invalidate the illegal payment made by

Whether or not the respondent NPC has ceased

to enjoy indirect tax and duty exemption with
the enactment of P.D. No. 938 on May 27, 1976
which amended P.D. No. 380, issued on
January 11, 1974.
Corollary issues
1. Whether or not FIRB Resolution No. 10-85
dated February 7, 1985 which restored NPC's
tax exemption privilege effective June 11, 1984
to June 30, 1985 and FIRB Resolution No. 1-86

236

dated January 7, 1986 restoring NPC's tax

exemption privilege effective July 1, 1985
included
the
restoration
of indirect tax
exemption to NPC and
2. Whether or not FIRB could validly and
legally issue Resolution No. 17-87 dated June
24, 1987 which restored NPC's tax exemption
privilege effective March 10, 1987; and if said
Resolution was validly issued, the nature and
extent of the tax exemption privilege restored
to NPC. 7
In a resolution dated June 6, 1989, the Court, without
giving due course to the petition, required respondents to
comment thereon, within ten (10) days from notice. The
respondents having submitted their comment, on October
10, 1989 the Court required petitioner to file a
consolidated reply to the same. After said reply was filed
by petitioner on November 15, 1989 the Court gave due
course to the petition, considering the comments of
respondents as their answer to the petition, and requiring
the parties to file simultaneously their respective
memoranda within twenty (20) days from notice. The
parties having submitted their respective memoranda, the
petition was deemed submitted for resolution.
First the preliminary issues.
Public respondents allege that petitioner does not have
the standing to challenge the questioned orders and
resolution.
In the petition it is alleged that petitioner is "instituting
this suit in his capacity as a taxpayer and a duly-elected
Senator of the Philippines." Public respondent argues that
petitioner must show he has sustained direct injury as a
result of the action and that it is not sufficient for him to
have a mere general interest common to all members of
the public.8

The Court however agrees with the petitioner that as a

taxpayer he may file the instant petition following the
ruling in Lozada when it involves illegal expenditure of
public money. The petition questions the legality of the
tax refund to NPC by way of tax credit certificates and
the use of said assigned tax credits by respondent oil
companies to pay for their tax and duty liabilities to the
BIR and Bureau of Customs.
Assuming petitioner has the personality to file the
petition, public respondents also allege that the proper
remedy for petitioner is an appeal to the Court of Tax
Appeals under Section 7 of R.A. No. 125 instead of this
petition. However Section 11 of said law provides
Sec. 11. Who may appeal; effect of appeal
Any person, association or corporation
adversely affected by a decision or ruling of the
Commissioner of Internal Revenue, the
Collector of Customs (Commissioner 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
receipt of such decision or ruling.
From the foregoing, it is only the taxpayer adversely
affected by a decision or ruling of the Commissioner of
Internal Revenue, the Commissioner of Customs or any
provincial or city Board of Assessment Appeal who may
appeal to the Court of Tax Appeals. Petitioner does not
fall under this category.
Public respondents also contend that mandamus does not
lie to compel the Commissioner of Internal Revenue to
impose a tax assessment not found by him to be proper. It
would be tantamount to a usurpation of executive
functions. 9
Even in Meralco, this Court recognizes the situation
when mandamus can control the discretion of the
Commissioners of Internal Revenue and Customs when

the exercise of discretion is tainted with arbitrariness and

grave abuse as to go beyond statutory authority. 10
Public respondents then assert that a writ of prohibition is
not proper as its function is to prevent an unlawful
exercise of jurisdiction 11 or to prevent the oppressive
exercise of legal authority. 12 Precisely, petitioner
questions the lawfulness of the acts of public respondents
in this case.
Now to the main issue.
It may be useful to make a distinction, for the purpose of
this disposition, between a direct tax and an indirect tax.
A direct tax is a tax for which a taxpayer is directly liable
on the transaction or business it engages in. Examples are
the custom duties and ad valorem taxes paid by the oil
companies to the Bureau of Customs for their importation
of crude oil, and the specific and ad valorem taxes they
pay to the Bureau of Internal Revenue after converting
the crude oil into petroleum products.
On the other hand, "indirect taxes are taxes primarily paid
by persons who can shift the burden upon someone
else ." 13 For example, the excise and ad valorem taxes
that oil companies pay to the Bureau of Internal Revenue
upon removal of petroleum products from its refinery can
be shifted to its buyer, like the NPC, by adding them to
the "cash" and/or "selling price."
The main thrust of the petition is that under the latest
amendment to the NPC charter by Presidential Decree
No. 938, the exemption of NPC from indirect taxation
was revoked and repealed. While petitioner concedes that
NPC enjoyed broad exemption privileges from both
direct and indirect taxes on the petroleum products it
used, under Section 13 of Republic Act No, 6395 and
more so under Presidential Decree No. 380, however, by
the deletion of the phrases "directly or indirectly" and "on
all petroleum products used by the Corporation in the
generation, transmission, utilization and sale of electric

237

power" he contends that the exemption from indirect

taxes was withdrawn by P.D. No. 938.

The relevant provisions of FIRB resolution Nos. 10-85

and 1-86 are the following:

Petitioner further states that the exemption of NPC

provided in Section 13 of Presidential Decree No. 938
regarding the payments of "all forms of taxes, etc."
cannot be interpreted to include indirect tax exemption.
He cites Philippine Aceytelene Co. Inc. vs. Commissioner
of Internal Revenue. 14 Petitioner emphasizes the
principle in taxation that the exception contained in the
tax statutes must be strictly construed against the one
claiming the exemption, and that the rule that a tax
statute granting exemption must be strictly construed
against the one claiming the exemption is similar to the
rule that a statute granting taxing power is to be
construed strictly, with doubts resolved against its
existence. 15 Petitioner cites rulings of the BIR that the
phrase exemption from "all taxes, etc." from "all forms of
taxes" and "in lieu of all taxes" covers only taxes for
which the taxpayer is directly liable. 16

Resolution. No. 10-85

BE IT RESOLVED AS IT IS HEREBY RESOLVED,
That:
1. Effective June 11, 1984, the tax and duty exemption
privileges enjoyed by the National Power Corporation
under C.A. No. 120 as amended are restored up to June
30, 1985.
2. Provided, That to restoration does not apply to the
following:
a. importations of fuel oil (crude
equivalent) and coal as per FIRB
Resolution No. 1-84;

On the corollary issues. First, FIRB Resolution Nos. 1085 and 10-86 issued under Presidential Decree No. 1931,
the relevant provision of which are to wit:

b.
commercially-funded
importations; and

P.D. No. 1931 provides as follows:

c. interest income derived from any

investment source.

Sec. 1. The provisions of special or general law

to the contrary notwithstanding, all exemptions
from the payment of duties, taxes . . . heretofore
granted in favor of government-owned or
controlled corporations are hereby withdrawn.
(Emphasis supplied.)

3. Provided further, That in case of importations funded

by international financing agreements, the NPC is hereby
required to furnish the FIRB on a periodic basis the
particulars of items received or to be received through
such arrangements, for purposes of tax and duty
exemptions privileges. 17

Sec. 2. The President of the Philippines and/or

the Minister
of
Finance,
upon
the recommendation of the Fiscal Incentives
Review Board . . . is hereby empowered to
restore, partially or totally, the exemptions
withdrawn by Section 1 above . . . (Emphasis
supplied.)

Resolution No. 1-86

BE IT RESOLVED AS IT IS HEREBY RESOLVED:
That:

1. Effective July 1, 1985, the tax and duty exemption

privileges enjoyed by the National Power Corporation
(NPC) under Commonwealth Act No. 120, as amended,
are restored: Provided, That importations of fuel oil
(crude oil equivalent), and coal of the herein grantee shall
be subject to the basic and additional import
duties; Provided, further, that the following shall remain
fully taxable:
a.
Commercially-funded
importations; and
b. Interest income derived by said
grantee from bank deposits and yield
or any other monetary benefits from
deposit substitutes, trust funds and
other similar arrangements.
2. The NPC as a government corporation is exempt from
the real property tax on land and improvements owned by
it provided that the beneficial use of the property is not
transferred to another pursuant to the provisions of Sec.
10(a) of the Real Property Tax Code, as amended. 18
Petitioner does not question the validity and
enforceability of FIRB Resolution Nos. 10-85 and 1-86.
Indeed, they were issued in compliance with the
requirement of Section 2, P.D. No. 1931, whereby the
FIRB should make the recommendation subject to the
approval of "the President of the Philippines and/or the
Minister of Finance." While said Resolutions do not
appear to have been approved by the President, they were
nevertheless approved by the Minister of Finance who is
also duly authorized to approve the same. In fact it was
the Minister of Finance who signed and promulgated said
resolutions. 19
The observation of Mr. Justice Sarmiento in the
dissenting opinion that FIRB Resolution Nos. 10-85 and
1-86 which were promulgated by then Acting Minister of
Finance Alfredo de Roda, Jr. and Minister of Finance

238

Cesar E.A Virata, as Chairman of FIRB respectively,

should be separately approved by said Minister of
Finance as required by P.D. 1931 is, a superfluity. An
examination of the said resolutions which are reproduced
in full in the dissenting opinion show that the said
officials signed said resolutions in the dual capacity of
Chairman of FIRB and Minister of Finance.

through a deed of assignment approved by the BIR 22 is

patently illegal. He also contends that the pending claim
of respondent NPC in the amount of P410.58 million
with respondent BIR for the sale and delivery to it of
bunker fuel by respondents Petrophil, Shell and Caltex
from July 1, 1985 up to 1986, being illegal, should not be
released.

Mr. Justice Sarmiento also makes reference to the

case National Power Corporation vs. Province of
Albay, 20wherein the Court observed that under P.D. No.
776 the power of the FIRB was only recommendatory
and requires the approval of the President to be valid.
Thus, in said case the Court held that FIRB Resolutions
Nos. 10-85 and 1-86 not having been approved by the
President were not valid and effective while the validity
of FIRB 17-87 was upheld as it was duly approved by the
Office of the President on October 5, 1987.

Now to the second corollary issue involving the validity

of FIRB Resolution No. 17-87 issued on June 24, 1987. It
was issued under authority of Executive Order No. 93
dated December 17, 1986 which grants to the FIRB
among others, the power to recommend the restoration of
the tax and duty exemptions/incentives withdrawn
thereunder.

However, under Section 2 of P.D. No. 1931 of June 11,

1984, hereinabove reproduced, which amended P.D. No.
776, it is clearly provided for that such FIRB resolution,
may be approved by the "President of the Philippines
and/or the Minister of Finance." To repeat, as FIRB
Resolutions Nos. 10-85 and 1-86 were duly approved by
the Minister of Finance, hence they are valid and
effective. To this extent, this decision modifies or
supersedes the Court's earlier decision in Albay aforereferred to.
Petitioner, however, argues that under both FIRB
resolutions, only the tax and duty exemption privileges
enjoyed by the NPC under its charter, C.A. No. 120, as
amended, are restored, that is, only its direct tax
exemption privilege; and that it cannot be interpreted to
cover indirect taxes under the principle that tax
exemptions are construed stricissimi juris against the
taxpayer and liberally in favor of the taxing authority.
Petitioner argues that the release by the BIR of the P58.0
million refund to respondent NPC by way of a tax credit
certificate 21 which was assigned to respondent Caltex

Petitioner stresses that on August 6, 1987 the Secretary of

Justice rendered Opinion No. 77 to the effect that the
powers conferred upon the FIRB by Section 2(a), (b), and
(c) and (4) of Executive Order No. 93 "constitute undue
delegation of legislative power and is, therefore,
unconstitutional." Petitioner observes that the FIRB did
not merely recommend but categorically restored the tax
and duty exemption of the NPC so that the memorandum
of the respondent Executive Secretary dated October 5,
1987 approving the same is a surplusage.
Further assuming that FIRB Resolution No. 17-87 to
have been legally issued, following the doctrine
in Philippine Aceytelene, petitioner avers that the
restoration cannot cover indirect taxes and it cannot
create new indirect tax exemption not otherwise granted
in the NPC charter as amended by Presidential Decree
No. 938.
The petition is devoid of merit.
The NPC is a non-profit public corporation created for
the general good and welfare 23 wholly owned by the
government of the Republic of the Philippines. 24 From
the very beginning of its corporate existence, the NPC

enjoyed preferential tax treatment 25 to enable the

Corporation to pay the indebtedness and obligation and in
furtherance and effective implementation of the policy
enunciated in Section one of "Republic Act No.
6395" 26which provides:
Sec. 1. Declaration of PolicyCongress
hereby declares that (1) the comprehensive
development, utilization and conservation of
Philippine water resources for all beneficial
uses, including power generation, and (2) the
total electrification of the Philippines through
the development of power from all sources to
meet the need of rural electrification are
primary objectives of the nation which shall be
pursued coordinately and supported by all
instrumentalities and agencies of the
government including its financial institutions.
From the changes made in the NPC charter, the intention
to strengthen its preferential tax treatment is obvious.
Under Republic Act No. 358, its exemption is provided as
follows:
Sec. 2. To facilitate payment of its
indebtedness, the National Power Corporation
shall be exempt from all taxes, duties, fees,
imposts, charges, and restrictions of the
Republic of the Philippines, its provinces, cities
and municipalities."
Under Republic Act No. 6395:
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 returns from
its capital investment, as well as excess

239

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 declared 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. (Emphasis supplied.)
Under Presidential Decree No. 380:
Sec. 13. Non-profit Character of the
Corporation: Exemption from all Taxes, Duties,
Fees, Imposts and other Charges by the
Government and Government Instrumentalities.

The Corporation shall be non-profit and

shall devote all its returns 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,
including its subsidiaries, is hereby declared,
exempt:
(a) From the payment of all taxes, duties, fees,
imposts, charges, costs and services 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 governmental 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
operation and projects; and
(d) From all taxes, duties, fees, imposts, and all
other charges imposed directly or indirectly by
the Republic of the Philippines, its provinces,
cities, municipalities and other government
agencies and instrumentalities, on all
petroleum produced used by the Corporation in
the generation, transmission, utilization, and
sale of electric power. (Emphasis supplied.)
Under Presidential Decree No. 938:

Sec. 13. Non-profit Character of the

Corporation: Exemption from All Taxes,
Duties, Fees, Imposts and Other Charges by
the
Government
and
Government
Instrumentalities.The Corporation shall be
non-profit and shall devote all its returns from
its capital investment as well as excess
revenues from its operation, for expansion. To
enable the Corporation to pay the indebtedness
and obligations and in furtherance and effective
implementation of the policy enunciated in
Section One of this Act, the Corporation,
including its subsidiaries hereby declared
exempt from the payment of all forms of taxes,
duties, fees, imposts as well as costs and
service fees including filing fees, appeal bonds,
supersedeas bonds, in any court or
administrative
proceedings. (Emphasis
supplied.)
It is noted that in the earlier law, R.A. No. 358 the
exemption was worded in general terms, as to cover
"all taxes, duties, fees, imposts, charges, etc. . . ."
However, the amendment under Republic Act No. 6395
enumerated the details covered by the exemption.
Subsequently, P.D. No. 380, made even more specific the
details of the exemption of NPC to cover, among
others, both direct and indirect taxes on all petroleum
products used in its operation. Presidential Decree No.
938 amended the tax exemption by simplifying the same
law in general terms. It succinctly exempts NPC from
"all forms of taxes, duties, fees, imposts, as well as costs
and service fees including filing fees, appeal bonds,
supersedeas bonds, in any court or administrative
proceedings."
The use of the phrase "all forms" of taxes demonstrate
the intention of the law to give NPC all the tax
exemptions it has been enjoying before. The rationale for
this exemption is that being non-profit the NPC "shall
devote all its returns from its capital investment as well
as excess revenues from its operation, for expansion. To

240

enable the Corporation to pay the indebtedness and

obligations and in furtherance and effective
implementation of the policy enunciated in Section one
of this Act, . . ." 27
The preamble of P.D. No. 938 states
WHEREAS, in the application of the tax
exemption provision of the Revised Charter,
the non-profit character of the NPC has not
been fully utilized because of restrictive
interpretations of the taxing agencies of the
government on said provisions. . . . (Emphasis
supplied.)
It is evident from the foregoing that the lawmaker did not
intend that the said provisions of P.D. No. 938 shall be
construed strictly against NPC. On the contrary, the law
mandates that it should be interpreted liberally so as to
enhance the tax exempt status of NPC.
Hence, petitioner cannot invoke the rule on strictissimi
juris with respect to the interpretation of statutes granting
tax exemptions to NPC.
Moreover, it is a recognized principle that the rule on
strict interpretation does not apply in the case of
exemptions in favor of a government political
subdivision or instrumentality. 28
The basis for applying the rule of strict
construction to statutory provisions granting
tax exemptions or deductions, even more
obvious than with reference to the affirmative
or levying provisions of tax statutes, is to
minimize differential treatment and foster
impartiality, fairness, and equality of treatment
among tax payers.

The reason for the rule does not apply in the

case of exemptions running to the benefit of the
government itself or its agencies. In such case
the practical effect of an exemption is merely to
reduce the amount of money that has to be
handled by government in the course of its
operations. For these reasons, provisions
granting exemptions to government agencies
may be construed liberally, in favor of non tax
liability of such agencies. 29
In the case of property owned by the state or a city or
other public corporations, the express exemption should
not be construed with the same degree of strictness that
applies to exemptions contrary to the policy of the state,
since as to such property "exemption is the rule and
taxation the exception." 30
The contention of petitioner that the exemption of NPC
from indirect taxes under Section 13 of R.A. No. 6395
and P.D. No. 380, is deemed repealed by P.D. No. 938
when the reference to it was deleted is not well-taken.
Repeal by implication is not favored unless it is manifest
that the legislature so intended. As laws are presumed to
be passed with deliberation and with knowledge of all
existing ones on the subject, it is logical to conclude that
in passing a statute it is not intended to interfere with or
abrogate a former law relating to the same subject matter,
unless the repugnancy between the two is not only
irreconcilable but also clear and convincing as a result of
the language used, or unless the latter Act fully embraces
the subject matter of the earlier. 31 The first effort of a
court must always be to reconcile or adjust the provisions
of one statute with those of another so as to give sensible
effect to both provisions. 32
The legislative intent must be ascertained from a
consideration of the statute as a whole, and not of an
isolated part or a particular provision alone. 33 When
construing a statute, the reason for its enactment should
be kept in mind and the statute should be construed with

reference to its intended scope and purpose 34 and the evil

sought to be remedied. 35
The NPC is a government instrumentality with the
enormous task of undertaking development of
hydroelectric generation of power and production of
electricity from other sources, as well as the transmission
of electric power on a nationwide basis, to improve the
quality of life of the people pursuant to the State policy
embodied in Section E, Article II of the 1987
Constitution.
It is evident from the provision of P.D. No. 938 that its
purpose is to maintain the tax exemption of NPC from all
forms of taxes including indirect taxes as provided for
under R.A. No. 6895 and P.D. No. 380 if it is to attain its
goals.
Further, the construction of P.D. No. 938 by the Office
charged with its implementation should be given
controlling weight. 36
Since the May 8, 1985 ruling of Commissioner Ancheta,
to the letter of the Secretary of Finance of June 26, 1985
confirming said ruling, the letters of the BIR of August
18, 1986, and December 22, 1986, the letter of the
Secretary of Finance of February 19, 1987, the
Memorandum of the Executive Secretary of October 9,
1987, by authority of the President, confirming and
approving FIRB Resolution No. 17-87, the letter of the
Secretary of Finance of May 20, 1988 to the Executive
Secretary rendering his opinion as requested by the latter,
and the latter's reply of June 15, 1988, it was uniformly
held that the grant of tax exemption to NPC under C.A.
No. 120, as amended, included exemption from payment
of all taxes relative to NPC's petroleum purchases
including indirect taxes. 37 Thus, then Secretary of
Finance Vicente Jayme in his letter of May 20, 1988 to
the Executive Secretary Macaraig aptly stated the
justification for this tax exemption of NPC

241

The issue turns on the effect to the exemption of

NPC from taxes of the deletion of the phrase
'taxes imposed indirectly on oil products and
its exemption from 'all forms of taxes.' It is
suggested that the change in language
evidenced an intention to exempt NPC only
from taxes directly imposed on or payable by
it; since taxes on fuel-oil purchased by it; since
taxes on fuel-oil purchased by NPC locally are
levied on and paid by its oil suppliers, NPC
thereby lost its exemption from those taxes.
The principal authority relied on is the 1967
case of Philippine Acetylene Co., Inc. vs.
Commissioner of Internal Revenue, 20 SCRA
1056.
First of all, tracing the changes made through
the years in the Revised Charter, the
strengthening of NPC's preferential tax
treatment was clearly the intention. To the
extent that the explanatory "whereas clauses"
may disclose the intent of the law-maker, the
changes effected by P.D. 938 can only be read
as being expansive rather than restrictive,
including its version of Section 13.
Our Tax Code does not recognize that there are
taxes directly imposed and those imposed
indirectly. The textbook distinction between a
direct and an indirect tax may be based on the
possibility of shifting the incidence of the tax.
A direct tax is one which is demanded from the
very person intended to be the payor, although
it may ultimately be shifted to another. An
example of a direct tax is the personal income
tax. On the other hand, indirect taxes are those
which are demanded from one person in the
expectation and intention that he shall
indemnify himself at the expense of another.
An example of this type of tax is the sales tax
levied on sales of a commodity.

The distinction between a direct tax and one

indirectly imposed (or an indirect tax) is really
of no moment. What is more relevant is that
when an "indirect tax" is paid by those upon
whom the tax ultimately falls, it is paid not as a
tax but as an additional part of the cost or of the
market price of the commodity.
This distinction was made clear by Chief
Justice Castro in the Philippine Acetylene case,
when he analyzed the nature of the percentage
(sales) tax to determine whether it is a tax on
the producer or on the purchaser of the
commodity. Under out Tax Code, the sales tax
falls upon the manufacturer or producer. The
phrase "pass on" the tax was criticized as being
inaccurate. Justice Castro says that the tax
remains on the manufacturer alone. The
purchaser does not pay the tax; he pays an
amount added to the price because of the tax.
Therefore, the tax is not "passed on" and does
not for that reason become an "indirect tax" on
the purchaser. It is eminently possible that the
law maker in enacting P.D. 938 in 1976 may
have used lessons from the analysis of Chief
Justice Castro in 1967 Philippine Acetylene
case.
When P.D. 938 which exempted NPC from "all
forms of taxes" was issued in May 1976, the socalled oil crunch had already drastically
pushed up crude oil Prices from about $1.00
per bbl in 1971 to about $10 and a peak (as it
turned out) of about $34 per bbl in 1981. In
1974-78, NPC was operating the Meralco
thermal plants under a lease agreement. The
power generated by the leased plants was sold
to Meralco for distribution to its customers.
This lease and sale arrangement was entered
into for the benefit of the consuming public, by
reducing the burden on the swiftly rising world
crude oil prices. This objective was achieved

by the use of NPC's "tax umbrella under its

Revised Charterthe exemption from specific
taxes on locally purchased fuel oil. In this
context, I can not interpret P.D. 938 to have
withdrawn the exemption from tax on fuel oil to
which NPC was already entitled and which
exemption Government in fact was utilizing to
soften the burden of high crude prices.
There is one other consideration which I
consider pivotal. The taxes paid by oil
companies on oil products sold to NPC,
whether paid to them by NPC or no never
entered into the rates charged by NPC to its
customers not even during those periods of
uncertainty engendered by the issuance of P.D.
1931 and E. 0. 93 on NP/Cs tax status. No tax
component on the fuel have been charged or
recovered by NPC through its rates.
There is an import duty on the crude oil
imported by the local refineries. After the
refining process, specific and ad valorem taxes
are levied on the finished products including
fuel oil or residue upon their withdrawal from
the refinery. These taxes are paid by the oil
companies as the manufacturer thereof.
In selling the fuel oil to NPC, the oil companies
include in their billings the duty and tax
component. NPC pays the oil companies'
invoices including the duty component but net
of the tax component. NPC then applies for
drawback of customs duties paid and for a
credit in amount equivalent to the tax paid (by
the oil companies) on the products purchased.
The tax credit is assigned to the oil companies
as payment, in effect, of the tax component
shown in the sales invoices. (NOTE: These
procedures varied over timeThere were
instances when NPC paid the tax component
that was shifted to it and then applied for tax

242

credit. There were also side issues raised

because of P.D. 1931 and E.O. 93 which
withdrew all exemptions of government
corporations. In these latter instances, the
resolutions of the Fiscal Incentives Review
Board (FIRB) come into play. These incidents
will not be touched upon for purposes of this
discussion).
NPC rates of electricity are structured such that
changes in its cost of fuel are automatically
(without need of fresh approvals) reflected in
the subsequent months billing rates.
This Fuel Cost Adjustment clause protects
NPC's rate of return. If NPC should ever accept
liability to the tax and duty component on the
oil products, such amount will go into its fuel
cost and be passed on to its customers through
corresponding increases in rates. Since 1974,
when NPC operated the oil-fired generating
stations leased from Meralco (which plants it
bought in 1979), until the present time, no tax
on fuel oil ever went into NPC's electric rates.
That the exemption of NPC from the tax on fuel
was not withdrawn by P.D. 938 is impressed
upon me by yet another circumstance. It is
conceded that NPC at the very least, is exempt
from taxes to which it is directly liable. NPC
therefore could very well have imported its fuel
oil or crude residue for burning at its thermal
plants. There would have been no question in
such a case as to its exemption from all duties
and taxes, even under the strictest
interpretation that can be put forward.
However, at the time P.D. 938 was issued in
1976, there were already operating in the
Philippines three oil refineries. The
establishment of these refineries in the
Philippines involved heavy investments, were
economically desirable and enabled the

country to import crude oil and process / refine

the same into the various petroleum products at
a savings to the industry and the public. The
refining process produced as its largest output,
in volume, fuel oil or residue, whose
conventional economic use was for burning in
electric or steam generating plants. Had there
been no use locally for the residue, the oil
refineries would have become largely unviable.
Again, in this circumstances, I cannot accept
that P.D. 938 would have in effect forced NPC
to by-pass the local oil refineries and import its
fossil fuel requirements directly in order to
avail itself of its exemption from "direct
taxes." The oil refineries had to keep operating
both for economic development and national
security reasons. In fact, the restoration by the
FIRB of NPC's exemption after P.D. 1931 and
E.O. 93 expressly excluded direct fuel oil
importations, so as not to prejudice the
continued operations of the local oil refineries.
To answer your query therefore, it is the
opinion of this Department that NPC under the
provisions of its Revised Charter retains its
exemption from duties and taxes imposed on
the petroleum products purchased locally and
used for the generation of electricity.
The Department in issuing this ruling does so
pursuant to its power and function to supervise
and control the collection of government
revenues
by
the
application
and
implementation of revenue laws. It is prepared
to take the measures supplemental to this ruling
necessary to carry the same into full effect.
As presented rather extensively above, the NPC
electric power rates did not carry the taxes and
duties paid on the fuel oil it used. The point is
that while these levies were in fact paid to the

government, no part thereof was recovered

from the sale of electricity produced. As a
consequence, as of our most recent
information, some P1.55 B in claims represent
amounts for which the oil suppliers and NPC
are "out-of-pocket. There would have to be
specific order to the Bureaus concerned for the
resumption of the processing of these claims." 38
In the latter of June 15, 1988 of then Executive Secretary
Macaraig to the then Secretary of Finance, the said
opinion ruling of the latter was confirmed and its
implementation was directed. 39
The Court finds and so holds that the foregoing reasons
adduced in the aforestated letter of the Secretary of
Finance as confirmed by the then Executive Secretary are
well-taken. When the NPC was exempted from all forms
of taxes, duties, fees, imposts and other charges, under
P.D. No. 938, it means exactly what it says, i.e., all forms
of taxes including those that were imposed directly or
indirectly on petroleum products used in its operation.
Reference is made in the dissenting opinion to contrary
rulings of the BIR that the exemption of the NPC extends
only to taxes for which it is directly liable and not to
taxes merely shifted to it. However, these rulings are
predicated on Philippine Acytelene.
The doctrine in Philippine Acytelene decided in 1967 by
this Court cannot apply to the present case. It involved
the sales tax of products the plaintiff sold to NPC from
June 2, 1953 to June 30,1958 when NPC was enjoying
tax exemption from all taxes under Commonwealth Act
No. 120, as amended by Republic Act No. 358 issued on
June 4, 1949 hereinabove reproduced.
In said case, this Court held, that the sales tax is due from
the manufacturer and not the buyer, so plaintiff cannot
claim exemptions simply because the NPC, the buyer,
was exempt.

243

However, on September 10, 1971, Republic Act No. 6395

was passed as the revised charter of NPC whereby
Section 13 thereof was amended by emphasizing its nonprofit character and expanding the extent of its tax
exemption.
As petitioner concedes, Section 13(d) aforestated of this
amendment under Republic Act No. 6345 spells out
clearly the exemption of the NPC from indirect taxes.
And as hereinabove stated, in P.D. No. 380, the
exemption of NPC from indirect taxes was emphasized
when it was specified to include those imposed "directly
and indirectly."

In the light of the foregoing discussion the first corollary

issue must consequently be resolved in the affirmative,
that is, FIRB Resolution No. 10-85 dated February 7,
1985 and FIRB Resolution No. 1-86 dated January 7,
1986 which restored NPC's tax exemption privileges
included the restoration of the indirect tax exemption of
the NPC on petroleum products it used.
On the second corollary issue as to the validity of FIRB
resolution No. 17-87 dated June 24, 1987 which restored
NPC's tax exemption privilege effective March 10, 1987,
the Court finds that the same is valid and effective.
It provides as follows:

Thereafter, under P.D. No. 938 the tax exemption of NPC

was integrated under Section 13 defining the same in
general terms to cover "all forms of taxes, duties, fees,
imposts, etc." which, as hereinabove discussed, logically
includes exemption from indirect taxes on petroleum
products used in its operation.
This is the status of the tax exemptions the NPC was
enjoying when P.D. No. 1931 was passed, on the
authority of which FIRB Resolution Nos. 10-85 and 1-86
were issued, and when Executive Order No. 93 was
promulgated, by which FIRB Resolution 17-87 was
issued.
Thus, the ruling in Philippine Acetylene cannot apply to
this case due to the different environmental
circumstances. As a matter of fact, the amendments of
Section 13, under R.A. No. 6395, P.D. No, 380 and P.D.
No. 838 appear to have been brought about by the earlier
inconsistent rulings of the tax agencies due to the
doctrine in Philippine Acetylene, so as to leave no doubt
as to the exemption of the NPC from indirect taxes on
petroleum products it uses in its operation. Effectively,
said amendments superseded if not abrogated the ruling
inPhilippine Acetylene that the tax exemption of NPC
should be limited to direct taxes only.

BE IT RESOLVED, AS IT IS HEREBY
RESOLVED, That the tax and duty exemption
privileges of the National Power Corporation,
including those pertaining to its domestic
purchases of petroleum and petroleum
products, granted under the terms and
conditions of Commonwealth Act No. 120
(Creating the National Power Corporation,
defining its powers, objectives and functions,
and for other purposes), as amended, are
restored effective March 10, 1987, subject to
the following conditions:
1. The restoration of the tax and duty
exemption privileges does not apply to the
following:
1.1. Importation of fuel oil (crude
equivalent) and coal;
1.2.
Commercially-funded
importations (i.e., importations which
include but are not limited to those
financed by the NPC's own internal
funds, domestic borrowings from any
source whatsoever, borrowing from

foreign-based
private
institutions, etc.); and

financial

1.3. Interest income derived from any

source.
2. The NPC shall submit to the FIRB a report
of its expansion program, including details of
disposition of relieved tax and duty payments
for such expansion on an annual basis or as
often as the FIRB may require it to do so. This
report shall be in addition to the usual FIRB
reporting
requirements
on
incentive
availment.40
Executive Order No. 93 provides as follows
Sec. 1. The provisions of any general or special
law to the contrary notwithstanding, all tax and
duty incentives granted " to government and
private entities are hereby withdrawn, except:
a) those covered by the
impairment
clause
of
Constitution;

nonthe

b) those conferred by effective

international agreements to which the
Government of the Republic of the
Philippines is a signatory;
c) those enjoyed-by
registered with:

enterprises

(i)
the
Board
of
Investments pursuant to
Presidential Decree No.
1789, as amended;

244

(ii) the Export Processing

Zone Authority, pursuant to
Presidential Decree No. 66,
as amended;
(iii) the Philippine Veterans
Investment Development
Corporation
Industrial
Authority
pursuant
to
Presidential Decree No.
538, as amended;
d) those enjoyed by the copper
mining industry pursuant to the
provisions of Letter of Instruction
No. 1416;
e) those conferred under the four
basic codes namely:
(i) the Tariff and Customs
Code, as amended;
(ii) the National Internal
Revenue
Code,
as
amended;
(iii) the Local Tax Code, as
amended;
(iv) the Real Property Tax
Code, as amended;
f) those approved by the President
upon the recommendation of the
Fiscal Incentives Review Board.
Sec. 2. The Fiscal Incentives Review Board
created under Presidential Decree No. 776, as
amended, is hereby authorized to:

a) restore tax and/or duty exemptions

withdrawn hereunder in whole or in
part;

b) relative contribution of the

beneficiary to the revenue generation
effort;

b) revise the scope and coverage of

tax and/of duty exemption that may
be restored.

c) nature of the activity

beneficiary is engaged;

c) impose conditions for the

restoration of tax and/or duty
exemption;
d) prescribe the date or period of
effectivity of the restoration of tax
and/or duty exemption;
e) formulate and submit to the
President for approval, a complete
system for the grant of subsidies to
deserving beneficiaries, in lieu of or
in combination with the restoration of
tax and duty exemptions or
preferential treatment in taxation,
indicating the source of funding
therefor, eligible beneficiaries and the
terms and conditions for the grant
thereof taking into consideration the
international commitments of the
Philippines and the necessary
precautions such that the grant of
subsidies does not become the basis
for countervailing action.
Sec. 3. In the discharge of its authority
hereunder, the Fiscal Incentives Review Board
shall take into account any or all of the
following considerations:
a) the effect on relative price levels;

the

d) in general, the greater national

interest to be served.
True it is that the then Secretary of Justice in Opinion No.
77 dated August 6, 1977 was of the view that the powers
conferred upon the FIRB by Sections 2(a), (b), (c), and
(d) of Executive Order No. 93 constitute undue
delegation of legislative power and is therefore
unconstitutional. However, he was overruled by the
respondent Executive Secretary in a letter to the
Secretary of Finance dated March 30, 1989. The
Executive Secretary, by authority of the President, has the
power to modify, alter or reverse the construction of a
statute given by a department secretary.41
A reading of Section 3 of said law shows that it set the
policy to be the greater national interest. The standards of
the delegated power are also clearly provided for.
The required "standard" need not be expressed. In Edu
vs. Ericta 42 and in De la Llana vs. Alba 43 this Court held:
"The standard may be either express or implied. If the
former, the non-delegated 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."
In People vs. Rosenthal 44 the broad standard of "public
interest" was deemed sufficient. In Calalang vs.
Williams,45, it was "public welfare" and in Cervantes vs.
Auditor General, 46 it was the purpose of promotion of
"simplicity, economy and efficiency." And, implied from
the purpose of the law as a whole, "national security" was

245

considered sufficient standard 47 and so was "protection

of fish fry or fish eggs. 48
The observation of petitioner that the approval of the
President was not even required in said Executive Order
of the tax exemption privilege approved by the FIRB
unlike in previous similar issuances, is not well-taken. On
the contrary, under Section l(f) of Executive Order No.
93, aforestated, such tax and duty exemptions extended
by the FIRB must be approved by the President. In this
case, FIRB Resolution No. 17-87 was approved by the
respondent Executive Secretary, by authority of the
President, on October 15, 1987. 49
Mr. Justice Isagani A. Cruz commenting on the
delegation of legislative power stated

One thing however, is apparent in the

development of the principle of separation of
powers and that is that the maxim of delegatus
non potest delegare or delegati potestas non
potest delegare, adopted this practice
(Delegibus et Consuetudiniis Anglia edited by
G.E. Woodline, Yale University Press, 1922,
Vol. 2, p. 167) but which is also recognized in
principle in the Roman Law d. 17.18.3) has
been made to adapt itself to the complexities of
modern government, giving rise to the
adoption, within certain limits, of the principle
of subordinate legislation, not only in the
United States and England but in practically
all modern governments. (People vs. Rosenthal
and Osmea, 68 Phil. 318, 1939). Accordingly,
with the growing complexities of modern life,
the multiplication of the subjects of
governmental regulation, and the increased
difficulty of administering the laws, there is a
constantly growing tendency toward the
delegation of greater power by the legislative,
and toward the approval of the practice by the
Courts. (Emphasis supplied.)

The latest in our jurisprudence indicates that

delegation of legislative power has become the
rule and its non-delegation the exception. The
reason is the increasing complexity of modern
life and many technical fields of governmental
functions as in matters pertaining to tax
exemptions. This is coupled by the growing
inability of the legislature to cope directly with
the many problems demanding its attention.
The growth of society has ramified its activities
and created peculiar and sophisticated
problems that the legislature cannot be
expected
reasonably
to
comprehend.
Specialization even in legislation has become
necessary. To many of the problems attendant
upon present day undertakings, the legislature
may not have the competence, let alone the
interest and the time, to provide the required
direct and efficacious, not to say specific
solutions. 50

The legislative authority could not or is not expected to

state all the detailed situations wherein the tax exemption
privileges of persons or entities would be restored. The
task may be assigned to an administrative body like the
FIRB.

Thus, in the case of Tablarin vs. Gutierrez, 51 this Court

enunciated the rationale in favor of delegation of
legislative functions

E.O. No. 93 is complete in itself and constitutes a valid

delegation of legislative power to the FIRB And as above
discussed, the tax exemption privilege that was restored
to NPC by FIRB Resolution No. 17-87 of June 1987

Moreover, all presumptions are indulged in favor of the

constitutionality and validity of the statute. Such
presumption can be overturned if its invalidity is proved
beyond reasonable doubt. Otherwise, a liberal
interpretation in favor of constitutionality of legislation
should be adopted. 52

includes exemption from indirect taxes and duties on

petroleum products used in its operation.
Indeed, the validity of Executive Order No. 93 as well as
of FIRB Resolution No. 17-87 has been upheld
in Albay.53
In the dissenting opinion of Mr. Justice Cruz, it is stated
that P.D. Nos. 1931 and 1955 issued by President Marcos
in 1984 are invalid as they were presumably promulgated
under the infamous Amendment No. 6 and that as they
cover tax exemption, under Section 17(4), Article VIII of
the 1973 Constitution, the same cannot be passed
"without the concurrence of the majority of all the
members of the Batasan Pambansa." And, even
conceding that the reservation of legislative power in the
President was valid, it is opined that it was not validly
exercised as there is no showing that such presidential
encroachment was justified under the conditions then
existing. Consequently, it is concluded that Executive
Order No. 93, which was intended to implement said
decrees, is also illegal. The authority of the President to
sub-delegate to the FIRB powers delegated to him is also
questioned.
In Albay, 54 as above stated, this Court upheld the validity
of P.D. Nos. 776 and 1931. The latter decree withdrew
tax exemptions of government-owned or controlled
corporations including their subsidiaries but authorized
the FIRB to restore the same. Nevertheless, in Albay, as
above-discussed, this Court ruled that the tax exemptions
under FIRB Resolution Nos. 10-85 and 1-86 cannot be
enforced as said resolutions were only recommendatory
and were not duly approved by the President of the
Philippines as required by P.D. No. 776. 55 The Court also
sustained in Albay the validity of Executive Order No.
93, and of the tax exemptions restored under FIRB
Resolution No. 17-87 which was issued pursuant thereto,
as it was duly approved by the President as required by
said executive order.

246

Moreover, under Section 3, Article XVIII of the

Transitory Provisions of the 1987 Constitution, it is
provided that:
All existing laws, decrees, executive orders,
proclamation, letters of instructions, and other
executive issuances not inconsistent with this
constitution shall remain operative until
amended, repealed or revoked.
Thus, P.D. Nos. 776 and 1931 are valid and operative
unless it is shown that they are inconsistent with the
Constitution.1wphi1

been filed in this Court to stop this proposed increase

without a hearing.
As above-discussed, at the time FIRB Resolutions Nos.
10-85 and 1-86 were issued, P.D. No. 776 dated August
24, 1975 was already amended by P.D. No. 1931 ,
57
wherein it is provided that such FIRB resolutions may
be approved not only by the President of the Philippines
but also by the Minister of Finance. Such resolutions
were promulgated by the Minister of Finance in his own
right and also in his capacity as FIRB Chairman. Thus, a
separate approval thereof by the Minister of Finance or
by the President is unnecessary.

Even assuming arguendo that P.D. Nos. 776, 1931 and

Executive Order No. 93 are not valid and are
unconstitutional, the result would be the same, as then the
latest applicable law would be P.D. No. 938 which
amended the NPC charter by granting exemption to NPC
from all forms of taxes. As above discussed, this
exemption of NPC covers direct and indirect taxes on
petroleum products used in its operation. This is as it
should be, if We are to hold as invalid and inoperative the
withdrawal of such tax exemptions under P.D. No. 1931
as well as under Executive Order No. 93 and the
delegation of the power to restore these exemptions to the
FIRB.

As earlier stated a reexamination of the ruling

in Albay on this aspect is therefore called for and
consequently,Albay must be considered superseded to this
extent by this decision. This is because P.D. No. 938
which is the latest amendment to the NPC charter
granting the NPC exemption from all forms of
taxes certainly covers real estate taxes which are direct
taxes.

The Court realizes the magnitude of the consequences of

this decision. To reiterate, in Albay this Court ruled that
the NPC is liable for real estate taxes as of June 11, 1984
(the date of promulgation of P.D. No. 1931) when NPC
had ceased to enjoy tax exemption privileges since FIRB
Resolution Nos. 1085 and 1-86 were not validly issued.
The real estate tax liability of NPC from June 11, 1984 to
December 1, 1990 is estimated to amount to P7.49 billion
plus another P4.76 billion in fuel import duties the firm
had earlier paid to the government which the NPC now
proposed to pass on to the consumers by another 33centavo increase per kilowatt hour in power rates on top
of the 17-centavo increase per kilowatt hour that took
effect just over a week ago., 56 Hence, another case has

The allegation that this is in effect allowing tax evasion

by oil companies is not quite correct.1a\^/phi1 There are
various arrangements in the payment of crude oil
purchased by NPC from oil companies. Generally, the
custom duties paid by the oil companies are added to the
selling price paid by NPC. As to the specific and ad
valorem taxes, they are added a part of the seller's price,
but NPC pays the price net of tax, on condition that NPC
would seek a tax refund to the oil companies. No tax
component on fuel had been charged or recovered by
NPC from the consumers through its power rates. 58 Thus,
this is not a case of tax evasion of the oil companies but
of tax relief for the NPC. The billions of pesos involved
in these exemptions will certainly inure to the ultimate

This tax exemption is intended not only to insure that the

NPC shall continue to generate electricity for the country
but more importantly, to assure cheaper rates to be paid
by the consumers.

good and benefit of the consumers who are thereby

spared the additional burden of increased power rates to
cover these taxes paid or to be paid by the NPC if it is
held liable for the same.
The fear of the serious implication of this decision in that
NPC's suppliers, importers and contractors may claim the
same privilege should be dispelled by the fact that (a) this
decision particularly treats of only the exemption of the
NPC from all taxes, duties, fees, imposts and all other
charges imposed by the government on the petroleum
products it used or uses for its operation; and (b) Section
13(d) of R.A. No. 6395 and Section 13(d) of P.D. No.
380, both specifically exempt the NPC from all taxes,
duties, fees, imposts and all other charges imposed by the
government on all petroleum products used in its
operation only, which is the very exemption which this
Court deems to be carried over by the passage of P.D. No.
938. As a matter of fact in Section 13(d) of P.D. No. 380
it is specified that the aforesaid exemption from taxes,
etc. covers those "directly or indirectly" imposed by the
"Republic of the Philippines, its provincies, cities,
municipalities and other government agencies and
instrumentalities" on said petroleum products. The
exemption therefore from direct and indirect tax on
petroleum products used by NPC cannot benefit the
suppliers, importers and contractors of NPC of other
products or services.
The Court realizes the laudable objective of petitioner to
improve the revenue of the government. The amount of
revenue received or expected to be received by this tax
exemption is, however, not going to any of the oil
companies. There would be no loss to the government.
The said amount shall accrue to the benefit of the NPC, a
government corporation, so as to enable it to sustain its
tremendous task of providing electricity for the country
and at the least cost to the consumers. Denying this tax
exemption would mean hampering if not paralyzing the
operations of the NPC. The resulting increased revenue in
the government will also mean increased power rates to
be shouldered by the consumers if the NPC is to survive

247

and continue to provide our power requirements. 59The

greater interest of the people must be paramount.
WHEREFORE, the petition is DISMISSED for lack of
merit. No pronouncement as to costs.
SO ORDERED.

Commissioner vs Pilipinas
Shell
G.R. No. 192398

September 29, 2014

COMMISSIONER
OF
REVENUE, Petitioner,
vs.
PILIPINAS
SHELL
CORPORATION, Respondent.

INTERNAL

PETROLEUM

DECISION
VILLARAMA, JR., J.:
Before us is a petition for review on certiorari filed by
petitioner Commissioner of Internal Revenue, who seeks
to nullify and set aside the September 10, 2009
Decision1 of the Court of Appeals (CA) in CA-G.R. SP
No. 77117. The CA had affirmed the Decision 2 of the
Court of Tax Appeals ordering petitioner to refund, or in
the alternative, issue a tax credit certificate in favor of
Pilipinas Shell Petroleum Corporation (respondent) in the
amount of 1!22,101,407.64 representing the latter's
erroneously paid documentary stamp tax for the taxable
year 2000. Petitioner likewise assails the CA
Resolution3 denying
petitioner's
motion
for
reconsideration. The antecedent facts:

Petitioner is the duly appointed Commissioner of Internal

Revenue who holds office at the Bureau of Internal
Revenue (BIR) National Office located at Agham Road,
Diliman, Quezon City.
Respondent Pilipinas Shell Petroleum Corporation
(PSPC) is a corporation organized and existing under the
laws of the Philippines and was incorporated to construct,
operate and maintain petroleum refineries, works, plant
machinery, equipment dock and harbor facilities and
auxiliary works and other facilities of all kinds and used
in or in connection with the manufacture of products of
all kinds which are wholly or partly derived from crude
oil.
On April 27, 1999, respondent entered into a Plan of
Merger with its affiliate, Shell Philippine Petroleum
Corporation (SPPC), a corporation organized and existing
under the laws ofthe Philippines. In the Plan of Merger, it
was provided that the entire assets and liabilities of SPPC
will be transferred to, and absorbed by, respondent as the
surviving entity. The Securities and Exchange
Commission approved the merger on July 1, 1999.
On August 10, 1999, respondent paidto the BIR
documentary stamp taxes amounting to P524,316.00 on
the original issuance of shares of stock of respondent
issued in exchange for the surrendered SPPC shares
pursuant to Section 175 of the National InternalRevenue
Code of1997 (NIRC or Tax Code).
Confirming the tax-free nature of the merger between
respondent and SPPC, the BIR, in a ruling4 dated October
4, 1999, ruled that pursuant to Section 40 (C)(2) and (6)
(b) of the NIRC, no gain or loss shall be recognized, if, in
pursuance to a planof merger or consolidation, a
shareholder exchanges stock in a corporation which is a

party to the merger or consolidation solely for the stock

ofanother corporation which is also a party to the merger
or consolidation. The BIR ruled, among others, that no
gain or loss shall be recognized by the stockholders of
SPPC on the exchange of their shares of stock of SPPC
solely for shares of stock of respondent pursuant to the
Plan of Merger.
The BIR, however, stated in said Ruling that
3. The issuance by PSPC of its own shares of stock to the
shareholders of SPPC in exchange for the surrendered
certificates of stock of SPPC shall be subject to the
documentary stamp tax (DST) at the rate of Two Pesos
(P2.00) on each Two HundredPesos (P200.00), or
fractional part thereof, based on the total par value of the
PSPC shares of stock issued pursuant to Section 175 of
the Tax Code of 1997.
xxxx
6. The exchange of land and improvements by SPPC to
PSPC for the latters shares of stock shall be subject to
documentary stamp tax imposed under Section 196 of the
Tax Code of 1997, based on the consideration contracted
to be paid for such realty or its fair market value
determined in accordance withSection 6(E) of the said
Code, whichever is higher. x x x5
On May 10, 2000, respondent paid to the BIR the amount
of P22,101,407.64 representing documentary stamp tax
on the transfer of real property from SPPC to respondent.
Believing that it erroneously paid documentary stamp tax
on its absorption of real property owned by SPPC,
respondent filed with petitioner on September 18, 2000, a

248

formal claim for refund or tax credit of the documentary

stamp tax in the amount of P22,101,407.64.
There being no action by petitioner, respondent filed on
May 8, 2002, a petition6 for review with the Court of Tax
Appeals (CTA) in order to suspend the running of the
two-year prescriptive period.
Petitioner filed an Answer7 on June 11, 2002 praying that
the petition for review be dismissed for lack of merit.
Petitioner asserted that in taxdeferred exchanges,
documentary stamp tax is imposed. Petitioner cited BIR
Ruling No. 2-20018 dated February 2, 2001 which states:
In view of all the foregoing, it is the opinion of this
Office, as we hereby hold, that the tax-deferred exchange
of properties of a corporation, which is a party to a
merger or consolidation, solely for shares of stock in a
corporation, which is also a party to the merger or
consolidation, is subject to the documentary stamp tax
under Section 176 if the properties to be transferred are
shares of stock or even certificates of obligations, and
also to the documentary stamp tax under Sec[tion] 196, if
the properties to be transferred are real properties.
Finally, it may be worth mentioning that the original
issuance of shares of stock ofthe surviving corporation in
favor of the stockholders of the absorbed corporation as a
result of the merger, is subject to the documentary stamp
tax under Sec[tion] 175 of the Tax Code of 1997. (BIR
Ruling No. S-40-220-2000, December 21, 2000).9
In its Decision10 promulgated on April 30,2003, the CTA
granted respondents prayer for tax refund or credit.
The CTA held that

Based on the foregoing, it is evident that the transfer of

real property from the absorbed corporation to the
surviving or consolidated corporation pursuant to a
merger or consolidation occurs by operation of
lawinasmuch as the real property is deemed transferred
without further act or deed. In the case at bar, the
petitioners theory is that DST on the transfer of real
property does not apply to a "statutorymerger" where real
property of the absorbed corporation is deemed
automatically vested in the surviving corporation by
operation of law, i.e., without any further act of deed.
xxxx
To reiterate, since the transfer of real property of SPPC to
petitioner was not effected by or dependent on any
voluntary act or deed of the parties to the merger, DST,
therefore, should not attach to the same.
xxxx
A perusal of the above-cited provision would reveal that
the DST is imposed only on all conveyances, deeds,
instruments, or writings where realty sold shall be
conveyed to purchaser or purchasers. Clearly, in case of
merger, as in the case at bar, only by straining the
imagination can the transferee be said to have "bought"
or "purchased" real property from the transferor. The
absorption by petitioner of real property of SPPC as an
inherent legal consequence of the merger is not a sale or
other conveyance of real property for a consideration in
money or moneys worth.
As correctly pointed out by the petitioner, SPPCs real
property was not conveyed to or vested inpetitioner by
means of any deed, instrument or writing, considering
that real properties were automatically vested in

petitioner without"further act or deed".There was a

complete absence of any formal instrument or writing
upon which DST may be imposed. Nor can the realty be
said tohave been "sold" or vested in a "purchaser or
purchasers" within the ordinary meanings of those terms.
xxxx
Moreover, under Revenue Memorandum Circular No. 4486 dated December 4, 1986, which outlines the procedure
in the determination and collection of stamp tax on
instruments of sale or conveyance of real property, it is
clear that the DST applies only if the instrument is a sale
or other conveyance of real property for a consideration
in money or moneys worth.
Finally, the absorption by petitioner of real property of
SPPC by operation of law pursuant to the merger is part
and parcel of a single and continuing transaction.
Accordingly, the same should not be subject to DST as if
it constituted a separate and distinct transaction.
As earlier stated, DST is in the nature of an excise tax
because it is really imposed on the privilege to enter into
a transaction. Its imposition, therefore, should be only
once. And in a statutory merger, there is only one
transaction, i.e., the issuance by the surviving corporation
of its own shares of stock to the stockholdersof the
absorbed corporation in exchange for the shares
surrendered by the shareholders of the absorbed
corporation. All other transactions which are an integral
and inherent part of the merger, such as the absorption of
real property, should no longer be subject to another
round of DST. In other words,all the integral parts of the
merger (e.g., surrender of shares inexchange for shares,
transfer of assets, assumption of liabilities, etc.) should be
treated as a single and continuing transaction subject only

249

to one DST. The transfer of real property is not a

transaction separate and distinct from the merger but an
integral part or a mere continuation of the initial
transaction which was previously consummated.
Applying the same in petitioners case, the absorption by
petitioner of real property of SPPC is not a transaction
separate and distinct from the merger, wherein petitioner
issued its own shares to SPPC shareholders in exchange
for the latters shares in SPPC, the absorbed entity, but a
mere continuation of the initial transaction which was
previously consummated, and for which the required
DST was already paid.11
On June 4, 2003, petitioner filed a petition for review
with the CA. In the herein assailed Decision dated
September 10, 2009, the CA dismissed the petition and
affirmed the Decision of the CTA. The appellate court
held that the transfer of the properties of SPPC to
respondent was not in exchange for the latters shares of
stock but is a legal consequence of the merger. The CA
ruled that the actual transfer of SPPCs real properties to
respondent was not effected by or dependent upon any
voluntary deed, conveyance or assignment but occurred
by operation of law. The CA held that since the basis of
the BIR in imposing the documentary stamp tax is not
applicable to a transfer of realproperty by operation of
law, PSPC erroneously paid the documentary stamp tax
and is therefore, entitled to a tax refund or tax credit.
Petitioner filed a motion for reconsideration which was
denied by the CA in its Resolution dated April 13, 2010.
Hence, petitioner filed the present petition on the sole
ground that
THE COURT OF APPEALS ERRED IN HOLDING
THAT THE TRANSFER OF REAL PROPERTIES OF

SPPC TO RESPONDENT IN EXCHANGE FOR THE

LATTERS SHARES OF STOCK IS NOT SUBJECT TO
THE DST IMPOSED UNDER SECTION 196 OF THE
TAX CODE.12
Petitioner points out that the mergerbetween SPPC and
respondent resulted in the following: (1) the issuanceby
respondent of its own shares of stock to the shareholders
of SPPC in exchange for the surrendered certificates of
stock of SPPC and was imposed a documentary stamp
tax under Section 175 of the Tax Code in the amount
ofP524,316.00; and (2) the transfer of SPPCs real
properties to respondent in exchange for the latters
shares of stock which was imposed a documentary stamp
tax under Section 196 of the Tax Code in the amount
ofP22,101,407.64. Respondent claims that the
documentary stamp tax imposed on the second
transaction had been erroneously paid and seeks to claim
a refund or tax credit in the amount of P22,101,407.64.
Both the CTA and the CA held that respondent is entitled
to refund or tax credit.
Petitioner insists that the transfer of SPPCs real
properties to respondent in exchange for the latters
shares of stock is subject to documentary stamp tax.
Petitioner contends that Section 196 of the Tax Code
covers all transfers of real property for a valuable
consideration and does not only refer to sale of
realtysince it speaks of real property being "granted,
assigned, transferred or otherwise conveyed."
Petitioner also claims that the subject transfer was not
entirely by operation of law since the merger agreement
between respondent and SPPC involves the voluntary act
of the parties. Petitioner avers that it is wrong to say that
no documentary stamp tax isimposable allegedly because
the transfer to respondent of SPPCs realproperties was

not effected by means of any deed, instrument or writing.

Petitioner contends that Section 196 of the Tax Code does
not require that a particular document be executed for the
transfer of real property in order to be subject to
documentary stamp tax. Petitioner adds that it is enough
that a conveyance of real property has been effected since
documentary stamp tax is imposed not on the document
alone but on the transaction. Petitioner avers that the
merger between SPPC and respondent, while constituting
a single transaction, gave riseto several tax incidents
which, for tax purposes, should be treated individually
and apart from the merger as a whole.
Lastly, petitioner argues that the enactment of Republic
Act No. 924313 (RA 9243) which specifically exempts the
transfers of real property in merger or consolidation from
documentary stamp tax only supports further the
conclusion that prior to RA9243, such transfers are
subject to documentary stamp tax. Otherwise, there
would have been no reason to specifically exempt such
transfers from documentary stamp taxes.
Respondent in its Comment14 primarily submits that the
decision sought to be reviewed is already final and
executory and the petition is filed out of time.
Respondent asserts that it is a rule of statutory
construction that a statutes clauses and phrases should
not be taken as detached and isolated expressions, but the
whole and every part thereof must be considered in fixing
the meaning of any of its parts. Respondent claims that
petitioners interpretation that a mere grant, assignment,
transferor conveyance of real property is subject to
documentary stamp tax under Section 196 is erroneous
since petitioner disregarded the qualifyingword "sold"
which describes the kind of transfer that is contemplated
as subject to documentary stamp tax. Respondent also

250

points out that the fact that Section 196 refers to the
words
"sold",
"purchaser"
and
"consideration"undoubtedly leads to the conclusion that
only sales of real property are contemplated. That
contrary to petitioners claim, documentary stamp tax is
not levied on the privilege to convey real properties
regardless of the manner of conveyance. Respondent
emphasizes that the transaction between respondent and
SPPC was not one whereby SPPC transferred its real
properties to respondent in exchange for the latters
shares of stock. SPPC and respondent did not enter into
some Deed of Assignment or a Deed of Exchange
whereby SPPC assigned or conveyed its real properties to
respondent either for cash or in exchange for some
property like shares of stock. Rather, the transaction that
SPPC and respondent entered into was a merger and the
transfer of the real properties of SPPC to respondent was
merely a legal consequence of the merger of SPPC with
respondent. Respondent, therefore,posits that since the
absorption by respondent of SPPCs real properties as a
consequence of the merger is without consideration in
money or moneys worth, the same is not subject to
documentary stamp tax. Furthermore, respondent
maintains that in a statutory merger or consolidation, real
property ofthe absorbed corporation is transferred to and
automatically vested in the surviving corporation purely
and strictly by operation of law and not by voluntary act
of the parties to the merger.
The issues presented for our resolution are as follows: (1)
whether the transfer of SPPCs real properties to
respondent is subject to documentary stamp tax under
Section 196 of the Tax Code; and (2) whether respondent
is entitled to the refund/tax credit inthe amount
of P22,101,407.64 representing documentary stamp tax
paid for the taxable year 2000 in connection with the
transfer of real properties from SPPC to respondent.

Prefatorily, we first address respondents contention that

the petition for review on certiorari was filed late.
Records show that on September 10, 2009, the CA issued
the assailed decision. Petitioner filed a motion for
reconsideration but the motion was denied by the CA in a
Resolution dated April 13, 2010. Petitioner received
notice of the Resolution on April 29, 2010 and thus had
15 days from that date or until May 14, 2010 to file its
petition for review on certiorari. On June 3, 2010, the
Office of the Solicitor General (OSG), representing
petitioner, filed a manifestation and motion (ad cautelam)
requesting for an extension of time within which to file a
petition for review on certiorari. The OSG averred that
petitioner forwarded the case to the OSG for
representation; however, the records ofthe case, due to
inadvertence and without fault of the handling lawyer,
were forwarded to him only on May 26, 2010. Hence, it
was impossible for him to file the petition or a motion for
extension on May 14, 2010. Thereafter, the OSG filed a
motion for extension dated June 10, 2010 requesting for a
second extension of time to file its petition. Petitioner
filed the present petition for review on certiorari on July
9, 2010.
In a Resolution15 dated July 26, 2010, this Court granted
pro hac vice petitioners first and second motions for
extension totalling 45 days from May 26, 2010. Hence,
petitioner had until July 10, 2010 to file its petition for
review on certiorari. Since the present petition was filed
on July 9, 2010, it was filed within the 45-day extension
period granted to petitioner.
We now proceed to the primordial issue of whether the
transfer of SPPCs real properties to respondent issubject
to documentary stamp tax under Section 196 of the Tax
Code. The pertinent provision states, to wit:

SEC. 196. Stamp Tax on Deeds of Sale and Conveyance

of Real Property. On all conveyances, deeds,
instruments, or writings, other than grants, patents, or
original certificates of adjudication issued by the
Government, whereby any land, tenement or other realty
sold shall be granted, assigned, transferred orotherwise
conveyed to the purchaser, or purchasers, or to any other
person or persons designated by such purchaser or
purchasers, there shall be collected a documentary stamp
tax,at the rates herein below prescribed based on the
consideration contracted to be paid for such realty or on
its fair market value determined in accordance with
Section 6(E) of this Code, whichever is higher: Provided,
That when one of the contracting parties is the
Government, the tax herein imposed shall be based on the
actual consideration. (Emphasis and underscoring ours.)
As can be gleaned from the aforequoted provision,
documentary stamp tax is imposed on all conveyances,
deeds, instruments or writings whereby land or realty
sold shall be conveyed to the purchaser or purchasers.
It is a rule in statutory construction that every part of the
statute must be interpreted with reference to the context,
i.e.,that every part of the statute must be considered
together with the other parts, and kept subservient to the
general intent of the whole enactment. 16 The law must not
be read in truncated parts, its provisions must beread in
relation to the whole law.17 The particular words, clauses
and phrases should not be studied as detached and
isolated expression, but the whole and every part of the
statute must be considered in fixing the meaning of any
of its parts and in order to produce a harmonious whole. 18
Here, we do not find merit in petitioners contention that
Section 196 covers all transfers and conveyancesof real
property for a valuable consideration. A perusal of the

251

subject provision would clearly show it pertains only to

sale transactions where real property is conveyed to a
purchaser for a consideration. The phrase "granted,
assigned, transferred or otherwise conveyed" is qualified
by the word "sold" which means that documentary stamp
tax under Section 196 is imposed on the transfer of realty
by way of sale and does not apply to all conveyances of
real property. Indeed, as correctly noted by the
respondent, the fact that Section 196 refers to words
"sold", "purchaser" and "consideration" undoubtedly
leads to the conclusion that only sales of real property are
contemplated therein.
Thus, petitioner obviously erred when it relied on the
phrase "granted, assigned, transferred or otherwise
conveyed" in claiming that all conveyances of real
property regardless of the manner of transfer are subject
to documentary stamp tax under Section 196. It is not
proper to construe the meaning of a statute on the basis of
one part. As we have previously explained,
A statute is passed as a whole and not in parts or sections,
and is animated by one general purpose and intent.
Consequently, each part or section should be construed in
connection with every other part or section so as to
produce a harmonious whole. It is not proper to confine
its intention to the one section construed. It is always an
unsafe way of construing a statute or contract to divide it
by a process of etymological dissection, into separate
words, and then apply to each, thus separated from the
context, some particular meaning to be attached to any
word or phrase usually to be ascertained from the
context.19

phrase granted, assigned, transferred or otherwise

conveyedclearly refers to the phrase whereby any land,
tenement or other realty is sold. This clearly shows that
the legislature intended Section 196 to refer to a transfer
of realty byvirtue of sale. This is further bolstered by the
fact that the property is granted, assigned, transferred or
otherwise conveyed to the purchaser, or purchasers, or to
any other person or persons designated by such purchaser
or purchasers. In addition, the basis of the stamp tax is
the consideration agreed upon by the parties or the
propertys fair market value. Taking all of these into
consideration, it is beyond doubt that Section 196
pertains to a transfer of realty by way of sale. 20
It should be emphasized that in the instant case, the
transfer of SPPCs real property to respondent was
pursuant to their approved plan of merger. In a merger of
two existing corporations, one of the corporations
survives and continues the business, while the other is
dissolved, and all its rights, properties, and liabilities are
acquired by the surviving corporation. 21 Although there is
a dissolution of the absorbed or merged corporations,
there is no winding up of their affairs or liquidation of
their assets because the surviving corporation
automatically acquires all their rights,privileges, and
powers, as well as their liabilities. 22 Here, SPPC ceasedto
have any legal personality and respondent PSPC stepped
into everything that was SPPCs, pursuant to the law and
the terms of their Plan of Merger.
Pertinently, a merger of two corporations produces the
following effects, among others:
Sec. 80. Effects of merger or consolidation. x x x

We quote with approval the following statements of the

appellate court in the assailed decision, Section 196
should be read as a whole and not phrase by phrase. The

4. The surviving or the consolidated corporation shall

thereupon and thereafter possess all the rights, privileges,
immunities and franchises of each of the constituent
corporations; and all property, real or personal, and all
receivables due on whatever account, including
subscriptions to shares and other choses in action, and all
and every other interest of, or belonging to, or due to
each constituent corporations, shall be taken and deemed
to be transferred to and vested in such surviving or
consolidated corporation without further act or deed;
23
(Emphasis supplied.)
In a merger, the real properties are not deemed "sold" to
the surviving corporation and the latter could not be
considered as "purchaser" of realty since the real
properties subject of the merger were merely absorbed by
the surviving corporation by operation of law and these
properties are deemed automatically transferred to and
vestedin the surviving corporation without further act or
deed. Therefore, the transfer of real properties to the
surviving corporation in pursuance of a merger is not
subject to documentary stamp tax. As stated at the outset,
documentary stamp tax is imposed only on all
conveyances, deeds, instruments or writing where realty
sold shall be conveyed to a purchaser or purchasers. The
transfer of SPPCs real property to respondent was
neither a sale nor was it a conveyance of real property for
a consideration contracted to be paidas contemplated
under Section 196 of the Tax Code. Hence, Section 196
ofthe Tax Code is inapplicable and respondent is not
liable for documentary stamp tax.
In fact, as properly cited in the CTA Decision, Section
185 of Revenue Regulations No. 26, otherwise known as
the documentary stamp tax regulations, provides:

xxxx

252

Section 185. Conveyances withoutconsideration.

Conveyances of realty, not in connection with a sale, to
trustees or other persons without consideration are not
taxable.
Furthermore, it should be noted that a documentary
stamp tax is in the nature of an excise tax because it is
imposed upon the privilege, opportunity or facility
offered at exchanges for the transaction of the
business.24Documentary stamp tax is a tax on documents,
instruments, loan agreements, and papers evidencing the
acceptance, assignment, or transfer of an obligation, right
or property incident thereto.25 Documentary stamp tax is
thus imposed on the exercise of these privileges through
the execution of specific instruments, independently of
the legal status of the transactions giving rise
thereto.26 Based on the foregoing, the transfer of real
properties from SPPC to respondent is not subject to
documentary stamp tax considering that the same was not
conveyed to or vested in respondent by means of any
specific deed, instrumentor writing. There was no deed of
assignment and transfer separatelyexecuted by the parties
for the conveyance of the real properties. The conveyance
of real properties not being embodied in a separate
instrumentbut is incorporated in the merger plan, thus,
respondent is not liable to pay documentarystamp tax.
Notably, RA 9243, entitled "An Act Rationalizing the
Provisions of the Documentary Stamp Tax of the
National Internal Revenue Code of 1997" was enacted
and took effect on April 27, 2004 which exempts the
transfer of real property of a corporation, which is a party
to the merger or consolidation, to another corporation,
which is also a party to the merger or consolidation, from
the payment of documentary stamp tax.

Section 9 of the law which amends Section 199 of the

NIRC states,
SECTION 9. Section 199 of the National Internal
Revenue Code of 1997, as amended, is hereby further
amended to read as follows:
Section 199. Documents and
Stamp Tax. The provisions
contrary notwithstanding, the
documents and papers shall
documentary stamp tax:

Papers Not Subject to

of Section 173 to the
following instruments,
be exempt from the

xxxx
(m) Transfer of property pursuant to Section 40 (C)
(2)27 of the National Internal Revenue Code of 1997, as
amended. (Emphasis supplied.)

consideration of tax problems and has necessarily

developed an expertise on the subject, unless there has
been an abuse or improvident exercise of authority on its
part which is not present here.28 WHEREFORE, we
DENY the petition for lack of merit. The Decision dated
September 10, 2009 and Resolution dated April 13, 2010
of the Court of Appeals in CA-G.R. SP No. 77117 are
hereby AFFIRMED.
No pronouncement as to costs.
SO ORDERED.

Commissioner vs Estate
of Toda
[G.R. No. 147188. September 14, 2004]

The enactment of the said law nowremoves any doubt

and had made clear that the transfer of real properties as a
consequence of merger or consolidation is not subject to
documentary stamp tax.1wphi1
Thus, we find no error on the part of the CA in affirming
the Decision of the CTA which ruled that respondent is
entitled to a refund or issuance of a tax credit certificate
in the amount of P22,101,407.64 representing
respondents erroneously paid documentary stamp tax on
the transfer of real property from SPPC torespondent.
We reiterate the well-established doctrine that as a matter
of practice and principle, this Court will not set aside the
conclusion reached by an agency, like the CTA,
especially if affirmed by the CA. By the very nature of its
function, it has dedicated itself to the study and

COMMISSIONER
OF
INTERNAL
REVENUE, petitioner, vs. THE ESTATE OF
BENIGNO P. TODA, JR., Represented by
Special Co-administrators Lorna Kapunan
and Mario Luza Bautista, respondents.
DECISION
DAVIDE, JR., C.J.:
This Court is called upon to determine in this case
whether the tax planning scheme adopted by a
corporation constitutes tax evasion that would justify an
assessment of deficiency income tax.

253

The petitioner seeks the reversal of the

Decision[1] of the Court of Appeals of 31 January 2001 in
CA-G.R. SP No. 57799 affirming the 3 January 2000
Decision[2] of the Court of Tax Appeals (CTA) in C.T.A.
Case No. 5328,[3] which held that the respondent Estate of
Benigno P. Toda, Jr. is not liable for the deficiency
income tax of Cibeles Insurance Corporation (CIC) in the
amount of P79,099,999.22 for the year 1989, and ordered
the cancellation and setting aside of the assessment
issued by Commissioner of Internal Revenue Liwayway
Vinzons-Chato on 9 January 1995.
The case at bar stemmed from a Notice of
Assessment sent to CIC by the Commissioner of Internal
Revenue for deficiency income tax arising from an
alleged simulated sale of a 16-storey commercial
building known as Cibeles Building, situated on two
parcels of land on Ayala Avenue, Makati City.
On 2 March 1989, CIC authorized Benigno P. Toda,
Jr., President and owner of 99.991% of its issued and
outstanding capital stock, to sell the Cibeles Building and
the two parcels of land on which the building stands for
an amount of not less than P90 million.[4]
On 30 August 1989, Toda purportedly sold the
property for P100 million to Rafael A. Altonaga, who, in
turn, sold the same property on the same day to Royal
Match Inc. (RMI) for P200 million. These two
transactions were evidenced by Deeds of Absolute Sale
notarized on the same day by the same notary public. [5]
For the sale of the property to RMI, Altonaga paid
capital gains tax in the amount of P10 million.[6]
On 16 April 1990, CIC filed its corporate annual
income tax return[7] for the year 1989, declaring, among

other things, its gain from the sale of real property in the
amount of P75,728.021. After crediting withholding taxes
of P254,497.00, it paid P26,341,207[8] for its net taxable
income of P75,987,725.
On 12 July 1990, Toda sold his entire shares of
stocks in CIC to Le Hun T. Choa for P12.5 million, as
evidenced by a Deed of Sale of Shares of Stocks. [9] Three
and a half years later, or on 16 January 1994, Toda died.
On 29 March 1994, the Bureau of Internal Revenue
(BIR) sent an assessment notice [10] and demand letter to
the CIC for deficiency income tax for the year 1989 in
the amount of P79,099,999.22.
The new CIC asked for a reconsideration, asserting
that the assessment should be directed against the old
CIC, and not against the new CIC, which is owned by an
entirely different set of stockholders; moreover, Toda had
undertaken to hold the buyer of his stockholdings and the
CIC free from all tax liabilities for the fiscal years 19871989.[11]
On 27 January 1995, the Estate of Benigno P. Toda,
Jr., represented by special co-administrators Lorna
Kapunan and Mario Luza Bautista, received a Notice of
Assessment[12] dated 9 January 1995 from the
Commissioner of Internal Revenue for deficiency income
tax for the year 1989 in the amount of P79,099,999.22,
computed as follows:
Income Tax 1989
Net Income per return P75,987,725.00
Add: Additional gain on sale

of real property taxable under

ordinary corporate income
but were substituted with
individual capital gains
(P200M 100M) 100,000,000.00
Total Net Taxable Income P175,987,725.00
per investigation
Tax Due thereof at 35% P 61,595,703.75
Less: Payment already made
1. Per return P26,595,704.00
2. Thru Capital Gains
Tax made by R.A.
Altonaga 10,000,000.00 36,595
,704.00
Balance of tax due P 24,999,999.75
Add: 50% Surcharge 12,499,999.88
25% Surcharge 6,249,999.94
Total P 43,749,999.57

254

Add: Interest 20% from

4/16/90-4/30/94 (.808) 35,349,999.65
TOTAL
AMT.
DUE
COLLECTIBLE P 79,099,999.22

&

============
The Estate thereafter filed a letter of protest. [13]
In the letter dated 19 October 1995, [14] the
Commissioner dismissed the protest, stating that a
fraudulent scheme was deliberately perpetuated by the
CIC wholly owned and controlled by Toda by covering
up the additional gain of P100 million, which resulted in
the change in the income structure of the proceeds of the
sale of the two parcels of land and the building thereon to
an individual capital gains, thus evading the higher
corporate income tax rate of 35%.
On 15 February 1996, the Estate filed a petition for
review[15] with the CTA alleging that the Commissioner
erred in holding the Estate liable for income tax
deficiency; that the inference of fraud of the sale of the
properties is unreasonable and unsupported; and that the
right of the Commissioner to assess CIC had already
prescribed.
In his Answer[16] and Amended Answer,[17] the
Commissioner argued that the two transactions actually
constituted a single sale of the property by CIC to RMI,
and that Altonaga was neither the buyer of the property
from CIC nor the seller of the same property to RMI. The
additional gain of P100 million (the difference between
the second simulated sale for P200 million and the first

simulated sale for P100 million) realized by CIC was

taxed at the rate of only 5% purportedly as capital gains
tax of Altonaga, instead of at the rate of 35% as corporate
income tax of CIC. The income tax return filed by CIC
for 1989 with intent to evade payment of the tax was thus
false or fraudulent. Since such falsity or fraud was
discovered by the BIR only on 8 March 1991, the
assessment issued on 9 January 1995 was well within the
prescriptive period prescribed by Section 223 (a) of the
National Internal Revenue Code of 1986, which provides
that tax may be assessed within ten years from the
discovery of the falsity or fraud. With the sale being
tainted with fraud, the separate corporate personality of
CIC should be disregarded. Toda, being the registered
owner of the 99.991% shares of stock of CIC and the
beneficial owner of the remaining 0.009% shares
registered in the name of the individual directors of CIC,
should be held liable for the deficiency income tax,
especially because the gains realized from the sale were
withdrawn by him as cash advances or paid to him as
cash dividends. Since he is already dead, his estate shall
answer for his liability.
In its decision[18] of 3 January 2000, the CTA held
that the Commissioner failed to prove that CIC
committed fraud to deprive the government of the taxes
due it. It ruled that even assuming that a pre-conceived
scheme was adopted by CIC, the same constituted mere
tax avoidance, and not tax evasion. There being no proof
of fraudulent transaction, the applicable period for the
BIR to assess CIC is that prescribed in Section 203 of the
NIRC of 1986, which is three years after the last day
prescribed by law for the filing of the return. Thus, the
governments right to assess CIC prescribed on 15 April
1993. The assessment issued on 9 January 1995 was,
therefore, no longer valid. The CTA also ruled that the
mere ownership by Toda of 99.991% of the capital stock

of CIC was not in itself sufficient ground for piercing the

separate corporate personality of CIC. Hence, the CTA
declared that the Estate is not liable for deficiency
income tax of P79,099,999.22 and, accordingly, cancelled
and set aside the assessment issued by the Commissioner
on 9 January 1995.
In
its
motion
for
reconsideration,[19] the
Commissioner insisted that the sale of the property
owned by CIC was the result of the connivance between
Toda and Altonaga. She further alleged that the latter was
a representative, dummy, and a close business associate
of the former, having held his office in a property owned
by CIC and derived his salary from a foreign corporation
(Aerobin, Inc.) duly owned by Toda for representation
services rendered. The CTA denied [20] the motion for
reconsideration, prompting the Commissioner to file a
petition for review[21] with the Court of Appeals.
In its challenged Decision of 31 January 2001, the
Court of Appeals affirmed the decision of the CTA,
reasoning that the CTA, being more advantageously
situated and having the necessary expertise in matters of
taxation, is better situated to determine the correctness,
propriety, and legality of the income tax assessments
assailed by the Toda Estate.[22]
Unsatisfied with the decision of the Court of
Appeals, the Commissioner filed the present petition
invoking the following grounds:
I. THE COURT OF APPEALS ERRED IN
HOLDING
THAT
RESPONDENT
COMMITTED NO FRAUD WITH
INTENT TO EVADE THE TAX ON
THE SALE OF THE PROPERTIES OF

255

CIBELES
CORPORATION.

INSURANCE

II. THE COURT OF APPEALS ERRED IN

NOT
DISREGARDING
THE
SEPARATE
CORPORATE
PERSONALITY
OF
CIBELES
INSURANCE CORPORATION.

For its part, respondent Estate asserts that the

Commissioner failed to present the income tax return of
Altonaga to prove that the latter is financially incapable
of purchasing the Cibeles property.
To resolve the grounds raised by the Commissioner,
the following questions are pertinent:
1. Is this a case of tax evasion or tax avoidance?

III. THE COURT OF APPEALS ERRED IN

HOLDING THAT THE RIGHT OF
PETITIONER
TO
ASSESS
RESPONDENT FOR DEFICIENCY
INCOME TAX FOR THE YEAR 1989
HAD PRESCRIBED.
The Commissioner reiterates her arguments in her
previous pleadings and insists that the sale by CIC of the
Cibeles property was in connivance with its dummy
Rafael Altonaga, who was financially incapable of
purchasing it. She further points out that the documents
themselves prove the fact of fraud in that (1) the two
sales were done simultaneously on the same date, 30
August 1989; (2) the Deed of Absolute Sale between
Altonaga and RMI was notarized ahead of the alleged
sale between CIC and Altonaga, with the former
registered in the Notarial Register of Jocelyn H. Arreza
Pabelana as Doc. 91, Page 20, Book I, Series of 1989;
and the latter, as Doc. No. 92, Page 20, Book I, Series of
1989, of the same Notary Public; (3) as early as 4 May
1989, CIC received P40 million from RMI, and not from
Altonaga. The said amount was debited by RMI in its
trial balance as of 30 June 1989 as investment in Cibeles
Building. The substantial portion of P40 million was
withdrawn by Toda through the declaration of cash
dividends to all its stockholders.

2. Has the period for assessment of

deficiency income tax for the year 1989
prescribed? and
3. Can respondent Estate be held liable for
the deficiency income tax of CIC for
the year 1989, if any?
We shall discuss these questions in seriatim.

less than that known by the taxpayer to be legally due, or

the non-payment of tax when it is shown that a tax is due;
(2) an accompanying state of mind which is described as
being evil, in bad faith, willfull,or deliberate and not
accidental; and (3) a course of action or failure of action
which is unlawful.[24]
All these factors are present in the instant case. It is
significant to note that as early as 4 May 1989, prior to
the purported sale of the Cibeles property by CIC to
Altonaga on 30 August 1989, CIC received P40 million
from RMI,[25] and not from Altonaga. That P40 million
was debited by RMI and reflected in its trial balance [26] as
other inv. Cibeles Bldg. Also, as of 31 July 1989,
another P40 million was debited and reflected in RMIs
trial balance as other inv. Cibeles Bldg. This would show
that the real buyer of the properties was RMI, and not the
intermediary Altonaga.

Tax avoidance and tax evasion are the two most

common ways used by taxpayers in escaping from
taxation. Tax avoidance is the tax saving device within
the means sanctioned by law. This method should be used
by the taxpayer in good faith and at arms length. Tax
evasion, on the other hand, is a scheme used outside of
those lawful means and when availed of, it usually
subjects the taxpayer to further or additional civil or
criminal liabilities.[23]

The investigation conducted by the BIR disclosed

that Altonaga was a close business associate and one of
the many trusted corporate executives of Toda. This
information was revealed by Mr. Boy Prieto, the assistant
accountant of CIC and an old timer in the
company. [27] But Mr. Prieto did not testify on this matter,
hence, that information remains to be hearsay and is thus
inadmissible in evidence. It was not verified either, since
the letter-request for investigation of Altonaga was
unserved,[28] Altonaga having left for the United States of
America in January 1990. Nevertheless, that Altonaga
was a mere conduit finds support in the admission of
respondent Estate that the sale to him was part of the tax
planning scheme of CIC. That admission is borne by the
records. In its Memorandum, respondent Estate declared:

Tax evasion connotes the integration of three

factors: (1) the end to be achieved, i.e., the payment of

Petitioner, however, claims there was a change of

structure of the proceeds of sale. Admitted one hundred

Is this a case of tax evasion

or tax avoidance?

256

percent. But isnt this precisely the definition of tax

planning? Change the structure of the funds and pay a
lower tax. Precisely, Sec. 40 (2) of the Tax Code exists,
allowing tax free transfers of property for stock, changing
the structure of the property and the tax to be paid. As
long as it is done legally, changing the structure of a
transaction to achieve a lower tax is not against the law. It
is absolutely allowed.
Tax planning is by definition to reduce, if not eliminate
altogether, a tax. Surely petitioner [sic] cannot be faulted
for wanting to reduce the tax from 35% to 5%.
[29]
[Underscoring supplied].
The scheme resorted to by CIC in making it appear
that there were two sales of the subject properties, i.e.,
from CIC to Altonaga, and then from Altonaga to RMI
cannot be considered a legitimate tax planning. Such
scheme is tainted with fraud.
Fraud in its general sense, is deemed to comprise
anything calculated to deceive, including all acts,
omissions, and concealment involving a breach of legal
or equitable duty, trust or confidence justly reposed,
resulting in the damage to another, or by which an undue
and unconscionable advantage is taken of another.[30]
Here, it is obvious that the objective of the sale to
Altonaga was to reduce the amount of tax to be paid
especially that the transfer from him to RMI would then
subject the income to only 5% individual capital gains
tax, and not the 35% corporate income tax. Altonagas
sole purpose of acquiring and transferring title of the
subject properties on the same day was to create a tax
shelter. Altonaga never controlled the property and did
not enjoy the normal benefits and burdens of ownership.
The sale to him was merely a tax ploy, a sham, and

without business purpose and economic substance.

Doubtless, the execution of the two sales was calculated
to mislead the BIR with the end in view of reducing the
consequent income tax liability.
In a nutshell, the intermediary transaction, i.e., the
sale of Altonaga, which was prompted more on the
mitigation of tax liabilities than for legitimate business
purposes constitutes one of tax evasion.[31]
Generally, a sale or exchange of assets will have an
income tax incidence only when it is consummated.
[32]
The incidence of taxation depends upon the substance
of a transaction. The tax consequences arising from gains
from a sale of property are not finally to be determined
solely by the means employed to transfer legal title.
Rather, the transaction must be viewed as a whole, and
each step from the commencement of negotiations to the
consummation of the sale is relevant. A sale by one
person cannot be transformed for tax purposes into a sale
by another by using the latter as a conduit through which
to pass title. To permit the true nature of the transaction
to be disguised by mere formalisms, which exist solely to
alter tax liabilities, would seriously impair the effective
administration of the tax policies of Congress. [33]
To allow a taxpayer to deny tax liability on the
ground that the sale was made through another and
distinct entity when it is proved that the latter was merely
a conduit is to sanction a circumvention of our tax laws.
Hence, the sale to Altonaga should be disregarded for
income tax purposes.[34] The two sale transactions should
be treated as a single direct sale by CIC to RMI.
Accordingly, the tax liability of CIC is governed by
then Section 24 of the NIRC of 1986, as amended (now

27 (A) of the Tax Reform Act of 1997), which stated as

follows:
Sec. 24. Rates of tax on corporations. (a) Tax on
domestic corporations.- A tax is hereby imposed upon
the taxable net income received during each taxable year
from all sources by every corporation organized in, or
existing under the laws of the Philippines, and
partnerships, no matter how created or organized but not
including general professional partnerships, in
accordance with the following:
Twenty-five percent upon the amount by which the
taxable net income does not exceed one hundred
thousand pesos; and
Thirty-five percent upon the amount by which the taxable
net income exceeds one hundred thousand pesos.
CIC is therefore liable to pay a 35% corporate tax for its
taxable net income in 1989. The 5% individual capital
gains tax provided for in Section 34 (h) of the NIRC of
1986[35] (now 6% under Section 24 (D) (1) of the Tax
Reform Act of 1997) is inapplicable. Hence, the
assessment for the deficiency income tax issued by the
BIR must be upheld.
Has the period of
assessment prescribed?
No. Section 269 of the NIRC of 1986 (now Section
222 of the Tax Reform Act of 1997) read:
Sec. 269. Exceptions as to period of limitation of
assessment and collection of taxes.-(a) In the case of a

257

false or fraudulent return with intent to evade tax or of

failure to file a return, the tax may be assessed, or a
proceeding in court after the collection of such tax may
be begun without assessment, at any time within ten
years after the discovery of the falsity, fraud or
omission: Provided, That in a fraud assessment which
has become final and executory, the fact of fraud shall be
judicially taken cognizance of in the civil or criminal
action for collection thereof .

have been discovered only on 8 March 1991. [37] The

assessment for the 1989 deficiency income tax of CIC
was issued on 9 January 1995. Clearly, the issuance of
the correct assessment for deficiency income tax was
well within the prescriptive period.

Put differently, in cases of (1) fraudulent returns;

(2) false returns with intent to evade tax; and (3) failure
to file a return, the period within which to assess tax is
ten years from discovery of the fraud, falsification or
omission, as the case may be.

income tax of Cibeles

It is true that in a query dated 24 August 1989,

Altonaga, through his counsel, asked the Opinion of the
BIR on the tax consequence of the two sale transactions.
[36]
Thus, the BIR was amply informed of the transactions
even prior to the execution of the necessary documents to
effect the transfer. Subsequently, the two sales were
openly made with the execution of public documents and
the declaration of taxes for 1989. However, these
circumstances do not negate the existence of fraud. As
earlier discussed those two transactions were tainted with
fraud. And even assuming arguendo that there was no
fraud, we find that the income tax return filed by CIC for
the year 1989 was false. It did not reflect the true or
actual amount gained from the sale of the Cibeles
property. Obviously, such was done with intent to evade
or reduce tax liability.
As stated above, the prescriptive period to assess
the correct taxes in case of false returns is ten years from
the discovery of the falsity. The false return was filed on
15 April 1990, and the falsity thereof was claimed to

Is respondent Estate liable

for the 1989 deficiency

Insurance Corporation?
A corporation has a juridical personality distinct
and separate from the persons owning or composing it.
Thus, the owners or stockholders of a corporation may
not generally be made to answer for the liabilities of a
corporation and vice versa. There are, however, certain
instances in which personal liability may arise. It has
been held in a number of cases that personal liability of a
corporate director, trustee, or officer along, albeit not
necessarily, with the corporation may validly attach
when:
1. He assents to the (a) patently unlawful act
of the corporation, (b) bad faith or gross
negligence in directing its affairs, or (c)
conflict of interest, resulting in damages
to the corporation, its stockholders, or
other persons;
2. He consents to the issuance of watered
down stocks or, having knowledge
thereof, does not forthwith file with the

corporate secretary his written objection

thereto;
3. He agrees to hold himself personally and
solidarily liable with the corporation; or
4. He is made, by specific provision of law, to
personally answer for his corporate
action.[38]
It is worth noting that when the late Toda sold his
shares of stock to Le Hun T. Choa, he knowingly and
voluntarily held himself personally liable for all the tax
liabilities of CIC and the buyer for the years 1987, 1988,
and 1989. Paragraph g of the Deed of Sale of Shares of
Stocks specifically provides:
g. Except for transactions occurring in the ordinary
course of business, Cibeles has no liabilities or
obligations, contingent or otherwise, for taxes, sums of
money or insurance claims other than those reported in its
audited financial statement as of December 31, 1989,
attached hereto as Annex B and made a part hereof. The
business of Cibeles has at all times been conducted in full
compliance with all applicable laws, rules and
regulations. SELLER undertakes and agrees to hold
the BUYER and Cibeles free from any and all income
tax liabilities of Cibeles for the fiscal years 1987, 1988
and 1989.[39] [Underscoring Supplied].
When the late Toda undertook and agreed to hold
the BUYER and Cibeles free from any all income tax
liabilities of Cibeles for the fiscal years 1987, 1988, and
1989, he thereby voluntarily held himself personally
liable therefor. Respondent estate cannot, therefore, deny
liability for CICs deficiency income tax for the year 1989
by invoking the separate corporate personality of CIC,

258

since its obligation arose from Todas contractual

undertaking, as contained in the Deed of Sale of Shares
of Stock.

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.

WHEREFORE, in view of all the foregoing, the

petition is hereby GRANTED. The decision of the Court
of Appeals of 31 January 2001 in CA-G.R. SP No. 57799
is REVERSED and SET ASIDE, and another one is
hereby rendered ordering respondent Estate of Benigno P.
Toda Jr. to pay P79,099,999.22 as deficiency income tax
of Cibeles Insurance Corporation for the year 1989, plus
legal interest from 1 May 1994 until the amount is fully
paid.

Briefly, the facts of the case are summarized as follows:

Costs against respondent.

SO ORDERED.

Delpher Trades vs IAC

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

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:

259

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. 12; p. 134, Rollo)

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;

The lower court's decision was affirmed on appeal by the

Intermediate Appellate Court.

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 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

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

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-inlaw 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 coowners, 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

260

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

261

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?

of view"?) What
are these benefits
to the spouses of
this
deed of
exchange?

A Yes, sir.

Q What are these

advantages to the
said spouses from
the point of view
of taxation in
entering in the
deed
of
exchange?

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

A
Continuous
control of the
property,
tax
exemption
benefits,
and
other
inherent
benefits in a
corporation.

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-subpar.
(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

262

executed the deed

of exchange?

requirements of
the corporation.

A Yes, sir

Q Now also from

the
point
of
taxation, is there
any flexibility in
the holding by
the corporation of
the property in
question?

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

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. 35, 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

263

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

264