G.R. No.

L-28896 February 17, 1988

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
ALGUE, INC., and THE COURT OF TAX APPEALS,
respondents.
CRUZ, J.:
Taxes are the lifeblood of the government and so should
be collected without unnecessary hindrance On the other
hand, such collection should be made in accordance with
law as any arbitrariness will negate the very reason for
government itself. It is therefore necessary to reconcile
the apparently conflicting interests of the authorities and
the taxpayers so that the real purpose of taxation, which
is the promotion of the common good, may be achieved.
The main issue in this case is whether or not the Collector
of Internal Revenue correctly disallowed the P75,000.00
deduction claimed by private respondent Algue as
legitimate business expenses in its income tax returns.
The corollary issue is whether or not the appeal of the
private respondent from the decision of the Collector of
Internal Revenue was made on time and in accordance
with law.
We deal first with the procedural question.
The record shows that on January 14, 1965, the private
respondent, a domestic corporation engaged in
engineering, construction and other allied activities,
received a letter from the petitioner assessing it in the
total amount of P83,183.85 as delinquency income taxes
for the years 1958 and 1959. 1 On January 18, 1965,
Algue flied a letter of protest or request for
reconsideration, which letter was stamp received on the
same day in the office of the petitioner. 2 On March 12,
1965, a warrant of distraint and levy was presented to the
private respondent, through its counsel, Atty. Alberto
Guevara, Jr., who refused to receive it on the ground of
the pending protest. 3 A search of the protest in the

dockets of the case proved fruitless. Atty. Guevara

produced his file copy and gave a photostat to BIR agent
Ramon Reyes, who deferred service of the warrant. 4 On
April 7, 1965, Atty. Guevara was finally informed that the
BIR was not taking any action on the protest and it was
only then that he accepted the warrant of distraint and
levy earlier sought to be served. 5 Sixteen days later, on
April 23, 1965, Algue filed a petition for review of the
decision of the Commissioner of Internal Revenue with the
Court of Tax Appeals. 6
The above chronology shows that the petition was filed
seasonably. According to Rep. Act No. 1125, the appeal
may be made within thirty days after receipt of the
decision or ruling challenged. 7 It is true that as a rule the
warrant of distraint and levy is "proof of the finality of the
assessment" 8 and renders hopeless a request for
reconsideration," 9 being "tantamount to an outright
denial thereof and makes the said request deemed
rejected." 10 But there is a special circumstance in the
case at bar that prevents application of this accepted
doctrine.
The proven fact is that four days after the private
respondent
received
the
petitioner's
notice
of
assessment, it filed its letter of protest. This was
apparently not taken into account before the warrant of
distraint and levy was issued; indeed, such protest could
not be located in the office of the petitioner. It was only
after Atty. Guevara gave the BIR a copy of the protest that
it was, if at all, considered by the tax authorities. During
the intervening period, the warrant was premature and
could therefore not be served.
As the Court of Tax Appeals correctly noted," 11 the
protest filed by private respondent was not pro forma and
was based on strong legal considerations. It thus had the
effect of suspending on January 18, 1965, when it was
filed, the reglementary period which started on the date
the assessment was received, viz., January 14, 1965. The
period started running again only on April 7, 1965, when
the private respondent was definitely informed of the

implied rejection of the said protest and the warrant was

finally served on it. Hence, when the appeal was filed on
April 23, 1965, only 20 days of the reglementary period
had been consumed.

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

Now for the substantive question.

The petitioner contends that the claimed deduction of
P75,000.00 was properly disallowed because it was not an
ordinary reasonable or necessary business expense. The
Court of Tax Appeals had seen it differently. Agreeing with
Algue, it held that the said amount had been legitimately
paid by the private respondent for actual services
rendered. The payment was in the form of promotional
fees. These were collected by the Payees for their work in
the creation of the Vegetable Oil Investment Corporation
of the Philippines and its subsequent purchase of the
properties of the Philippine Sugar Estate Development
Company.
Parenthetically, it may be observed that the petitioner had
Originally claimed these promotional fees to be personal
holding company income 12 but later conformed to the
decision of the respondent court rejecting this assertion.
13 In fact, as the said court found, the amount was
earned through the joint efforts of the persons among
whom it was distributed It has been established that the
Philippine Sugar Estate Development Company had
earlier appointed Algue as its agent, authorizing it to sell
its land, factories and oil manufacturing process. Pursuant
to such authority, Alberto Guevara, Jr., Eduardo Guevara,
Isabel Guevara, Edith, O'Farell, and Pablo Sanchez, worked
for the formation of the Vegetable Oil Investment
Corporation, inducing other persons to invest in it. 14
Ultimately, after its incorporation largely through the
promotion of the said persons, this new corporation
purchased the PSEDC properties. 15 For this sale, Algue
received as agent a commission of P126,000.00, and it
was from this commission that the P75,000.00
promotional fees were paid to the aforenamed individuals.
16

The petitioner claims that these payments are fictitious

because most of the payees are members of the same
family in control of Algue. It is argued that no indication
was made as to how such payments were made, whether
by check or in cash, and there is not enough
substantiation of such payments. In short, the petitioner
suggests a tax dodge, an attempt to evade a legitimate
assessment by involving an imaginary deduction.
We find that these suspicions were adequately met by the
private respondent when its President, Alberto Guevara,
and the accountant, Cecilia V. de Jesus, testified that the
payments were not made in one lump sum but
periodically and in different amounts as each payee's
need arose. 19 It should be remembered that this was a
family corporation where strict business procedures were
not applied and immediate issuance of receipts was not
required. Even so, at the end of the year, when the books
were to be closed, each payee made an accounting of all
of the fees received by him or her, to make up the total of
P75,000.00. 20 Admittedly, everything seemed to be
informal. This arrangement was understandable, however,
in view of the close relationship among the persons in the
family corporation.
We agree with the respondent court that the amount of
the promotional fees was not excessive. The total
commission paid by the Philippine Sugar Estate
Development Co. to the private respondent was
P125,000.00. 21 After deducting the said fees, Algue still
had a balance of P50,000.00 as clear profit from the
transaction. The amount of P75,000.00 was 60% of the
total commission. This was a reasonable proportion,
considering that it was the payees who did practically
everything, from the formation of the Vegetable Oil
Investment Corporation to the actual purchase by it of the

Sugar Estate properties. This finding of the respondent

court is in accord with the following provision of the Tax
Code:
SEC. 30. Deductions from gross income.--In computing net
income there shall be allowed as deductions
(a) Expenses:
(1)
In general.--All the ordinary and necessary
expenses paid or incurred during the taxable year in
carrying on any trade or business, including a reasonable
allowance for salaries or other compensation for personal
services actually rendered; ... 22
and Revenue Regulations No. 2, Section 70 (1), reading as
follows:
SEC. 70. Compensation for personal services.--Among the
ordinary and necessary expenses paid or incurred in
carrying on any trade or business may be included a
reasonable allowance for salaries or other compensation
for personal services actually rendered. The test of
deductibility in the case of compensation payments is
whether they are reasonable and are, in fact, payments
purely for service. This test and deductibility in the case
of compensation payments is whether they are
reasonable and are, in fact, payments purely for service.
This test and its practical application may be further
stated and illustrated as follows:
Any amount paid in the form of compensation, but not in
fact as the purchase price of services, is not deductible.
(a) An ostensible salary paid by a corporation may be a
distribution of a dividend on stock. This is likely to occur in
the case of a corporation having few stockholders,
Practically all of whom draw salaries. If in such a case the
salaries are in excess of those ordinarily paid for similar
services, and the excessive payment correspond or bear a
close relationship to the stockholdings of the officers of
employees, it would seem likely that the salaries are not
paid wholly for services rendered, but the excessive

payments are a distribution of earnings upon the stock. . .

. (Promulgated Feb. 11, 1931, 30 O.G. No. 18, 325.)
It is worth noting at this point that most of the payees
were not in the regular employ of Algue nor were they its
controlling stockholders. 23
The Solicitor General is correct when he says that the
burden is on the taxpayer to prove the validity of the
claimed deduction. In the present case, however, we find
that the onus has been discharged satisfactorily. The
private respondent has proved that the payment of the
fees was necessary and reasonable in the light of the
efforts exerted by the payees in inducing investors and
prominent businessmen to venture in an experimental
enterprise and involve themselves in a new business
requiring millions of pesos. This was no mean feat and
should be, as it was, sufficiently recompensed.
It is said that taxes are what we pay for civilization
society. Without taxes, the government would be
paralyzed for lack of the motive power to activate and
operate it. Hence, despite the natural reluctance to
surrender part of one's hard earned income to the taxing
authorities, every person who is able to must contribute
his share in the running of the government. The
government for its part, is expected to respond in the
form of tangible and intangible benefits intended to
improve the lives of the people and enhance their moral
and material values. This symbiotic relationship is the
rationale of taxation and should dispel the erroneous
notion that it is an arbitrary method of exaction by those
in the seat of power.
But even as we concede the inevitability and
indispensability of taxation, it is a requirement in all
democratic regimes that it be exercised reasonably and in
accordance with the prescribed procedure. If it is not, then
the taxpayer has a right to complain and the courts will
then come to his succor. For all the awesome power of the
tax collector, he may still be stopped in his tracks if the

taxpayer can demonstrate, as it has here, that the law

has not been observed.
We hold that the appeal of the private respondent from
the decision of the petitioner was filed on time with the
respondent court in accordance with Rep. Act No. 1125.
And we also find that the claimed deduction by the
private respondent was permitted under the Internal
Revenue Code and should therefore not have been
disallowed by the petitioner.
ACCORDINGLY, the appealed decision of the Court of Tax
Appeals is AFFIRMED in toto, without costs.
SO ORDERED.
Teehankee, C.J., Narvasa, Gancayco and Grio-Aquino, JJ.,
concur.

June 18, 1987

G.R. No. L-75697
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:

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;

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.

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
industry-wide
displacement
and
unemployment due to the shutdown of numerous
moviehouses and theaters;

On October 23, 1986, the Greater Manila Theaters

Association, Integrated Movie Producers, Importers and

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;

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;

5.
WHEREAS, proper taxation of the activities of
videogram 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;

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;

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 well-being;
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
of paragraphs supplied).
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;

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
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.
xxx

xxx

xxx

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 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
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 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
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.
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.

The argument is untenable. As this Court held in the

recent case of Vallarta vs. Court of Appeals, et al. 15
... 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 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, 639641). 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
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.
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
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.
WHEREFORE, the instant Petition is hereby dismissed.

No costs.
SO ORDERED.
Teehankee, (C.J.), Yap, Fernan, Narvasa, Gutierrez, Jr.,
Cruz, Paras, Feliciano, Gancayco, Padilla, Bidin, Sarmiento
and Cortes, JJ., concur.

PHILIPPINE HEALTH CARE G.R. No. 167330

PROVIDERS, INC.,
Petitioner,
v.
COMMISSIONER
OF
INTERNAL
REVENUE,
Respondent. Promulgated: September 18, 2009
x - - -- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x
RESOLUTION
CORONA, J.:

and disabled persons enrolled in the health care plan and

to provide for the administrative, legal, and financial
responsibilities of the organization. Individuals enrolled in
its health care programs pay an annual membership fee
and are entitled to various preventive, diagnostic and
curative medical services provided by its duly licensed
physicians, specialists and other professional technical
staff participating in the group practice health delivery
system at a hospital or clinic owned, operated or
accredited by it.
xxx xxx xxx

ARTICLE II
Declaration of Principles and State Policies
Section 15. The State shall protect and promote the right
to health of the people and instill health consciousness
among them.
ARTICLE XIII
Social Justice and Human Rights
Section 11. The State shall adopt an integrated and
comprehensive approach to health development which
shall endeavor to make essential goods, health and other
social services available to all the people at affordable
cost. There shall be priority for the needs of the
underprivileged sick, elderly, disabled, women, and
children. The State shall endeavor to provide free medical
care to paupers.[1]
For resolution are a motion for reconsideration and
supplemental motion for reconsideration dated July 10,
2008 and July 14, 2008, respectively, filed by petitioner
Philippine Health Care Providers, Inc.[2]

On January 27, 2000, respondent Commissioner of

Internal Revenue [CIR] sent petitioner a formal demand
letter and the corresponding assessment notices
demanding the payment of deficiency taxes, including
surcharges and interest, for the taxable years 1996 and
1997 in the total amount of P224,702,641.18. xxxx
The
deficiency
[documentary
stamp
tax
(DST)]
assessment was imposed on petitioners health care
agreement with the members of its health care program
pursuant to Section 185 of the 1997 Tax Code xxxx
xxx xxx xxx
Petitioner protested the assessment in a letter dated
February 23, 2000. As respondent did not act on the
protest, petitioner filed a petition for review in the Court
of Tax Appeals (CTA) seeking the cancellation of the
deficiency VAT and DST assessments.

We recall the facts of this case, as follows:

On April 5, 2002, the CTA rendered a decision, the

dispositive portion of which read:

Petitioner is a domestic corporation whose primary

purpose is [t]o establish, maintain, conduct and operate a
prepaid group practice health care delivery system or a
health maintenance organization to take care of the sick

WHEREFORE, in view of the foregoing, the instant Petition

for Review is PARTIALLY GRANTED. Petitioner is hereby
ORDERED to PAY the deficiency VAT amounting to
P22,054,831.75 inclusive of 25% surcharge plus 20%

interest from January 20, 1997 until fully paid for the 1996
VAT deficiency and P31,094,163.87 inclusive of 25%
surcharge plus 20% interest from January 20, 1998 until
fully paid for the 1997 VAT deficiency. Accordingly, VAT
Ruling No. [231]-88 is declared void and without force and
effect. The 1996 and 1997 deficiency DST assessment
against petitioner is hereby CANCELLED AND SET ASIDE.
Respondent is ORDERED to DESIST from collecting the
said DST deficiency tax.
SO ORDERED.
Respondent appealed the CTA decision to the [Court of
Appeals (CA)] insofar as it cancelled the DST assessment.
He claimed that petitioners health care agreement was a
contract of insurance subject to DST under Section 185 of
the 1997 Tax Code.
On August 16, 2004, the CA rendered its decision. It held
that petitioners health care agreement was in the nature
of a non-life insurance contract subject to DST.
WHEREFORE, the petition for review is GRANTED. The
Decision of the Court of Tax Appeals, insofar as it
cancelled and set aside the 1996 and 1997 deficiency
documentary stamp tax assessment and ordered
petitioner to desist from collecting the same is REVERSED
and SET ASIDE.
Respondent is ordered to pay the amounts of
P55,746,352.19 and P68,450,258.73 as deficiency
Documentary Stamp Tax for 1996 and 1997, respectively,
plus 25% surcharge for late payment and 20% interest
per annum from January 27, 2000, pursuant to Sections
248 and 249 of the Tax Code, until the same shall have
been fully paid.

xxx xxx xxx

In a decision dated June 12, 2008, the Court denied the
petition and affirmed the CAs decision. We held that
petitioners health care agreement during the pertinent
period was in the nature of non-life insurance which is a
contract of indemnity, citing Blue Cross Healthcare, Inc. v.
Olivares[3] and Philamcare Health Systems, Inc. v. CA.[4]
We also ruled that petitioners contention that it is a health
maintenance organization (HMO) and not an insurance
company is irrelevant because contracts between
companies like petitioner and the beneficiaries under their
plans are treated as insurance contracts. Moreover, DST is
not a tax on the business transacted but an excise on the
privilege, opportunity or facility offered at exchanges for
the transaction of the business.
Unable to accept our verdict, petitioner filed the present
motion for reconsideration and supplemental motion for
reconsideration, asserting the following arguments:
(a) The DST under Section 185 of the National Internal
Revenue of 1997 is imposed only on a company engaged
in the business of fidelity bonds and other insurance
policies. Petitioner, as an HMO, is a service provider, not
an insurance company.
(b) The Court, in dismissing the appeal in CIR v. Philippine
National Bank, affirmed in effect the CAs disposition that
health care services are not in the nature of an insurance
business.
(c) Section 185 should be strictly construed.
(d) Legislative intent to exclude health care agreements
from items subject to DST is clear, especially in the light
of the amendments made in the DST law in 2002.

SO ORDERED.
Petitioner moved for reconsideration but the CA denied it.
Hence, petitioner filed this case.

(e) Assuming arguendo that petitioners agreements are

contracts of indemnity, they are not those contemplated
under Section 185.

(f) Assuming arguendo that petitioners agreements are

akin to health insurance, health insurance is not covered
by Section 185.
(g) The agreements do not fall under the phrase other
branch of insurance mentioned in Section 185.
(h) The June 12, 2008 decision should only apply
prospectively.
(i) Petitioner availed of the tax amnesty benefits under
RA[5] 9480 for the taxable year 2005 and all prior years.
Therefore, the questioned assessments on the DST are
now rendered moot and academic.[6]
Oral arguments were held in Baguio City on April 22,
2009. The parties submitted their memoranda on June 8,
2009.
In its motion for reconsideration, petitioner reveals for the
first time that it availed of a tax amnesty under RA
9480[7] (also known as the Tax Amnesty Act of 2007) by
fully paying the amount of P5,127,149.08 representing 5%
of its net worth as of the year ending December 31, 2005.
[8]
We find merit in petitioners motion for reconsideration.
Petitioner was formally registered and incorporated with
the Securities and Exchange Commission on June 30,
1987.[9] It is engaged in the dispensation of the following
medical services to individuals who enter into health care
agreements with it:
Preventive medical services such as periodic monitoring
of health problems, family planning counseling,
consultation and advices on diet, exercise and other
healthy habits, and immunization;
Diagnostic medical services such as routine physical
examinations, x-rays, urinalysis, fecalysis, complete blood
count, and the like and

Curative medical services which pertain to the performing

of other remedial and therapeutic processes in the event
of an injury or sickness on the part of the enrolled
member.[10]
Individuals enrolled in its health care program pay an
annual membership fee. Membership is on a year-to-year
basis. The medical services are dispensed to enrolled
members in a hospital or clinic owned, operated or
accredited by petitioner, through physicians, medical and
dental practitioners under contract with it. It negotiates
with such health care practitioners regarding payment
schemes, financing and other procedures for the delivery
of health services. Except in cases of emergency, the
professional services are to be provided only by
petitioner's physicians, i.e. those directly employed by
it[11] or whose services are contracted by it.[12]
Petitioner also provides hospital services such as room
and board accommodation, laboratory services, operating
rooms, x-ray facilities and general nursing care.[13] If and
when a member avails of the benefits under the
agreement, petitioner pays the participating physicians
and other health care providers for the services rendered,
at pre-agreed rates.[14]
To avail of petitioners health care programs, the individual
members are required to sign and execute a standard
health care agreement embodying the terms and
conditions for the provision of the health care services.
The same agreement contains the various health care
services that can be engaged by the enrolled member,
i.e., preventive, diagnostic and curative medical services.
Except for the curative aspect of the medical service
offered, the enrolled member may actually make use of
the health care services being offered by petitioner at any
time.
HEALTH MAINTENANCE ORGANIZATIONS
ENGAGED IN THE INSURANCE BUSINESS

ARE

NOT

We said in our June 12, 2008 decision that it is irrelevant

that petitioner is an HMO and not an insurer because its
agreements are treated as insurance contracts and the
DST is not a tax on the business but an excise on the
privilege, opportunity or facility used in the transaction of
the business.[15]
Petitioner, however, submits that it is of critical
importance to characterize the business it is engaged in,
that is, to determine whether it is an HMO or an insurance
company, as this distinction is indispensable in turn to the
issue of whether or not it is liable for DST on its health
care agreements.[16]
A second hard look at the relevant law and jurisprudence
convinces the Court that the arguments of petitioner are
meritorious.
Section 185 of the National Internal Revenue Code of
1997 (NIRC of 1997) provides:
Section 185. Stamp tax on fidelity bonds and other
insurance policies. On all policies of insurance or bonds or
obligations of the nature of indemnity for loss, damage, or
liability made or renewed by any person, association or
company or corporation transacting the business of
accident, fidelity, employers liability, plate, glass, steam
boiler, burglar, elevator, automatic sprinkler, or other
branch of insurance (except life, marine, inland, and fire
insurance), and all bonds, undertakings, or recognizances,
conditioned for the performance of the duties of any office
or position, for the doing or not doing of anything therein
specified, and on all obligations guaranteeing the validity
or legality of any bond or other obligations issued by any
province, city, municipality, or other public body or
organization, and on all obligations guaranteeing the title
to any real estate, or guaranteeing any mercantile credits,
which may be made or renewed by any such person,
company or corporation, there shall be collected a
documentary stamp tax of fifty centavos (P0.50) on each
four pesos (P4.00), or fractional part thereof, of the
premium charged. (Emphasis supplied)

It is a cardinal rule in statutory construction that no word,

clause, sentence, provision or part of a statute shall be
considered surplusage or superfluous, meaningless, void
and insignificant. To this end, a construction which
renders every word operative is preferred over that which
makes some words idle and nugatory.[17] This principle is
expressed in the maxim Ut magis valeat quam pereat,
that is, we choose the interpretation which gives effect to
the whole of the statute its every word.[18]
From the language of Section 185, it is evident that two
requisites must concur before the DST can apply, namely:
(1) the document must be a policy of insurance or an
obligation in the nature of indemnity and (2) the maker
should be transacting the business of accident, fidelity,
employers liability, plate, glass, steam boiler, burglar,
elevator, automatic sprinkler, or other branch of insurance
(except life, marine, inland, and fire insurance).
Petitioner is admittedly an HMO. Under RA 7875 (or The
National Health Insurance Act of 1995), an HMO is an
entity that provides, offers or arranges for coverage of
designated health services needed by plan members for a
fixed prepaid premium.[19] The payments do not vary
with the extent, frequency or type of services provided.
The question is: was petitioner, as an HMO, engaged in
the business of insurance during the pertinent taxable
years? We rule that it was not.
Section 2 (2) of PD[20] 1460 (otherwise known as the
Insurance Code) enumerates what constitutes doing an
insurance business or transacting an insurance business:
a)
making or proposing to make, as insurer,
any insurance contract;
b)
making or proposing to make, as surety, any
contract of suretyship as a vocation and not as merely
incidental to any other legitimate business or activity of
the surety;

c)
doing any kind of business, including a
reinsurance
business,
specifically
recognized
as
constituting the doing of an insurance business within the
meaning of this Code;
d)
doing or proposing to do any business in
substance equivalent to any of the foregoing in a manner
designed to evade the provisions of this Code.
In the application of the provisions of this Code, the fact
that no profit is derived from the making of insurance
contracts, agreements or transactions or that no separate
or direct consideration is received therefore, shall not be
deemed conclusive to show that the making thereof does
not constitute the doing or transacting of an insurance
business.
Various courts in the United States, whose jurisprudence
has a persuasive effect on our decisions,[21] have
determined that HMOs are not in the insurance business.
One test that they have applied is whether the
assumption of risk and indemnification of loss (which are
elements of an insurance business) are the principal
object and purpose of the organization or whether they
are merely incidental to its business. If these are the
principal objectives, the business is that of insurance. But
if they are merely incidental and service is the principal
purpose, then the business is not insurance.
Applying the principal object and purpose test,[22] there
is significant American case law supporting the argument
that a corporation (such as an HMO, whether or not
organized for profit), whose main object is to provide the
members of a group with health services, is not engaged
in the insurance business.
The rule was enunciated in Jordan v. Group Health
Association[23] wherein the Court of Appeals of the
District of Columbia Circuit held that Group Health
Association should not be considered as engaged in
insurance activities since it was created primarily for the

distribution of health care services rather than the

assumption of insurance risk.
xxx Although Group Healths activities may be considered
in one aspect as creating security against loss from illness
or accident more truly they constitute the quantity
purchase of well-rounded, continuous medical service by
its members. xxx The functions of such an organization
are not identical with those of insurance or indemnity
companies. The latter are concerned primarily, if not
exclusively, with risk and the consequences of its descent,
not with service, or its extension in kind, quantity or
distribution; with the unusual occurrence, not the daily
routine of living. Hazard is predominant. On the other
hand, the cooperative is concerned principally with
getting service rendered to its members and doing so at
lower prices made possible by quantity purchasing and
economies in operation. Its primary purpose is to reduce
the cost rather than the risk of medical care; to broaden
the service to the individual in kind and quantity; to
enlarge the number receiving it; to regularize it as an
everyday incident of living, like purchasing food and
clothing or oil and gas, rather than merely protecting
against the financial loss caused by extraordinary and
unusual occurrences, such as death, disaster at sea, fire
and tornado. It is, in this instance, to take care of colds,
ordinary aches and pains, minor ills and all the temporary
bodily discomforts as well as the more serious and
unusual illness. To summarize, the distinctive features of
the cooperative are the rendering of service, its
extension, the bringing of physician and patient together,
the preventive features, the regularization of service as
well as payment, the substantial reduction in cost by
quantity purchasing in short, getting the medical job done
and paid for; not, except incidentally to these features,
the indemnification for cost after the services is rendered.
Except the last, these are not distinctive or generally
characteristic of the insurance arrangement. There is,
therefore, a substantial difference between contracting in
this way for the rendering of service, even on the
contingency that it be needed, and contracting merely to
stand its cost when or after it is rendered.

That an incidental element of risk distribution or

assumption may be present should not outweigh all other
factors. If attention is focused only on that feature, the
line between insurance or indemnity and other types of
legal arrangement and economic function becomes faint,
if not extinct. This is especially true when the contract is
for the sale of goods or services on contingency. But
obviously it was not the purpose of the insurance statutes
to regulate all arrangements for assumption or
distribution of risk. That view would cause them to engulf
practically all contracts, particularly conditional sales and
contingent service agreements. The fallacy is in looking
only at the risk element, to the exclusion of all others
present or their subordination to it. The question turns,
not on whether risk is involved or assumed, but on
whether that or something else to which it is related in
the particular plan is its principal object purpose.[24]
(Emphasis supplied)
In California Physicians Service v. Garrison,[25] the
California court felt that, after scrutinizing the plan of
operation as a whole of the corporation, it was service
rather than indemnity which stood as its principal
purpose.
There is another and more compelling reason for holding
that the service is not engaged in the insurance business.
Absence or presence of assumption of risk or peril is not
the sole test to be applied in determining its status. The
question, more broadly, is whether, looking at the plan of
operation as a whole, service rather than indemnity is its
principal object and purpose. Certainly the objects and
purposes of the corporation organized and maintained by
the California physicians have a wide scope in the field of
social service. Probably there is no more impelling need
than that of adequate medical care on a voluntary, lowcost basis for persons of small income. The medical
profession unitedly is endeavoring to meet that need.
Unquestionably this is service of a high order and not
indemnity.[26] (Emphasis supplied)

American courts have pointed out that the main

difference between an HMO and an insurance company is
that HMOs undertake to provide or arrange for the
provision of medical services through participating
physicians while insurance companies simply undertake
to indemnify the insured for medical expenses incurred up
to a pre-agreed limit. Somerset Orthopedic Associates,
P.A. v. Horizon Blue Cross and Blue Shield of New
Jersey[27] is clear on this point:
The
basic
distinction
between
medical
service
corporations and ordinary health and accident insurers is
that the former undertake to provide prepaid medical
services through participating physicians, thus relieving
subscribers of any further financial burden, while the
latter only undertake to indemnify an insured for medical
expenses up to, but not beyond, the schedule of rates
contained in the policy.
xxx xxx xxx
The primary purpose of a medical service corporation,
however, is an undertaking to provide physicians who will
render services to subscribers on a prepaid basis. Hence,
if there are no physicians participating in the medical
service corporations plan, not only will the subscribers be
deprived of the protection which they might reasonably
have expected would be provided, but the corporation
will, in effect, be doing business solely as a health and
accident indemnity insurer without having qualified as
such and rendering itself subject to the more stringent
financial requirements of the General Insurance Laws.
A participating provider of health care services is one who
agrees in writing to render health care services to or for
persons covered by a contract issued by health service
corporation in return for which the health service
corporation agrees to make payment directly to the
participating provider.[28] (Emphasis supplied)
Consequently, the mere presence of risk would be
insufficient to override the primary purpose of the

business to provide medical services as needed, with

payment made directly to the provider of these services.
[29] In short, even if petitioner assumes the risk of paying
the cost of these services even if significantly more than
what the member has prepaid, it nevertheless cannot be
considered as being engaged in the insurance business.
By the same token, any indemnification resulting from the
payment for services rendered in case of emergency by
non-participating health providers would still be incidental
to petitioners purpose of providing and arranging for
health care services and does not transform it into an
insurer. To fulfill its obligations to its members under the
agreements, petitioner is required to set up a system and
the facilities for the delivery of such medical services. This
indubitably shows that indemnification is not its sole
object.
In fact, a substantial portion of petitioners services covers
preventive and diagnostic medical services intended to
keep members from developing medical conditions or
diseases.[30] As an HMO, it is its obligation to maintain
the good health of its members. Accordingly, its health
care programs are designed to prevent or to minimize the
possibility of any assumption of risk on its part. Thus, its
undertaking under its agreements is not to indemnify its
members against any loss or damage arising from a
medical condition but, on the contrary, to provide the
health and medical services needed to prevent such loss
or damage.[31]
Overall, petitioner appears to provide insurance-type
benefits to its members (with respect to its curative
medical services), but these are incidental to the principal
activity of providing them medical care. The insurance-like
aspect of petitioners business is miniscule compared to its
noninsurance activities. Therefore, since it substantially
provides health care services rather than insurance
services, it cannot be considered as being in the
insurance business.
It is important to emphasize that, in adopting the principal
purpose test used in the above-quoted U.S. cases, we are

not saying that petitioners operations are identical in

every respect to those of the HMOs or health providers
which were parties to those cases. What we are stating is
that, for the purpose of determining what doing an
insurance business means, we have to scrutinize the
operations of the business as a whole and not its mere
components. This is of course only prudent and
appropriate, taking into account the burdensome and
strict laws, rules and regulations applicable to insurers
and other entities engaged in the insurance business.
Moreover, we are also not unmindful that there are other
American authorities who have found particular HMOs to
be actually engaged in insurance activities.[32]
Lastly, it is significant that petitioner, as an HMO, is not
part of the insurance industry. This is evident from the
fact that it is not supervised by the Insurance Commission
but by the Department of Health.[33] In fact, in a letter
dated September 3, 2000, the Insurance Commissioner
confirmed that petitioner is not engaged in the insurance
business. This determination of the commissioner must be
accorded great weight. It is well-settled that the
interpretation of an administrative agency which is tasked
to implement a statute is accorded great respect and
ordinarily controls the interpretation of laws by the courts.
The reason behind this rule was explained in Nestle
Philippines, Inc. v. Court of Appeals:[34]
The rationale for this rule relates not only to the
emergence of the multifarious needs of a modern or
modernizing society and the establishment of diverse
administrative agencies for addressing and satisfying
those needs; it also relates to the accumulation of
experience and growth of specialized capabilities by the
administrative agency charged with implementing a
particular statute. In Asturias Sugar Central, Inc. vs.
Commissioner of Customs,[35] the Court stressed that
executive officials are presumed to have familiarized
themselves with all the considerations pertinent to the
meaning and purpose of the law, and to have formed an
independent, conscientious and competent expert opinion
thereon. The courts give much weight to the government

agency officials charged with the implementation of the

law, their competence, expertness, experience and
informed judgment, and the fact that they frequently are
the drafters of the law they interpret.[36]

A HEALTH CARE AGREEMENT IS NOT AN INSURANCE

CONTRACT CONTEMPLATED UNDER SECTION 185 OF THE
NIRC OF 1997

member cannot be predicted beforehand, if they can be

predicted at all. Petitioner assumes the risk of paying for
the costs of the services even if they are significantly and
substantially more than what the member has "prepaid."
Petitioner does not bear the costs alone but distributes or
spreads them out among a large group of persons bearing
a similar risk, that is, among all the other members of the
health care program. This is insurance.[37]
We reconsider. We shall quote once again the pertinent
portion of Section 185:

Section 185 states that DST is imposed on all policies of

insurance or obligations of the nature of indemnity for
loss, damage, or liability. In our decision dated June 12,
2008, we ruled that petitioners health care agreements
are contracts of indemnity and are therefore insurance
contracts:
It is incorrect to say that the health care agreement is not
based on loss or damage because, under the said
agreement, petitioner assumes the liability and
indemnifies its member for hospital, medical and related
expenses (such as professional fees of physicians). The
term "loss or damage" is broad enough to cover the
monetary expense or liability a member will incur in case
of illness or injury.
Under the health care agreement, the rendition of
hospital, medical and professional services to the member
in case of sickness, injury or emergency or his availment
of so-called "out-patient services" (including physical
examination, x-ray and laboratory tests, medical
consultations, vaccine administration and family planning
counseling) is the contingent event which gives rise to
liability on the part of the member. In case of exposure of
the member to liability, he would be entitled to
indemnification by petitioner.
Furthermore, the fact that petitioner must relieve its
member from liability by paying for expenses arising from
the stipulated contingencies belies its claim that its
services are prepaid. The expenses to be incurred by each

Section 185. Stamp tax on fidelity bonds and other

insurance policies. On all policies of insurance or bonds or
obligations of the nature of indemnity for loss, damage, or
liability made or renewed by any person, association or
company or corporation transacting the business of
accident, fidelity, employers liability, plate, glass, steam
boiler, burglar, elevator, automatic sprinkler, or other
branch of insurance (except life, marine, inland, and fire
insurance), xxxx (Emphasis supplied)
In construing this provision, we should be guided by the
principle that tax statutes are strictly construed against
the taxing authority.[38] This is because taxation is a
destructive power which interferes with the personal and
property rights of the people and takes from them a
portion of their property for the support of the
government.[39] Hence, tax laws may not be extended by
implication beyond the clear import of their language, nor
their operation enlarged so as to embrace matters not
specifically provided.[40]
We are aware that, in Blue Cross and Philamcare, the
Court pronounced that a health care agreement is in the
nature of non-life insurance, which is primarily a contract
of indemnity. However, those cases did not involve the
interpretation of a tax provision. Instead, they dealt with
the liability of a health service provider to a member
under the terms of their health care agreement. Such
contracts, as contracts of adhesion, are liberally

interpreted in favor of the member and strictly against the

HMO. For this reason, we reconsider our ruling that Blue
Cross and Philamcare are applicable here.
Section 2 (1) of the Insurance Code defines a contract of
insurance as an agreement whereby one undertakes for a
consideration to indemnify another against loss, damage
or liability arising from an unknown or contingent event.
An insurance contract exists where the following elements
concur:
1.

The insured has an insurable interest;

2.
The insured is subject to a risk of loss by the
happening of the designed peril;
3.

The insurer assumes the risk;

4.
Such assumption of risk is part of a general
scheme to distribute actual losses among a large group of
persons bearing a similar risk and
5.
In consideration of the insurers promise, the
insured pays a premium.[41]
Do the agreements between petitioner and its members
possess all these elements? They do not.
First. In our jurisdiction, a commentator of our insurance
laws has pointed out that, even if a contract contains all
the elements of an insurance contract, if its primary
purpose is the rendering of service, it is not a contract of
insurance:
It does not necessarily follow however, that a contract
containing all the four elements mentioned above would
be an insurance contract. The primary purpose of the
parties in making the contract may negate the existence
of an insurance contract. For example, a law firm which
enters into contracts with clients whereby in consideration
of periodical payments, it promises to represent such
clients in all suits for or against them, is not engaged in

the insurance business. Its contracts are simply for the

purpose of rendering personal services. On the other
hand, a contract by which a corporation, in consideration
of a stipulated amount, agrees at its own expense to
defend a physician against all suits for damages for
malpractice is one of insurance, and the corporation will
be deemed as engaged in the business of insurance.
Unlike the lawyers retainer contract, the essential purpose
of such a contract is not to render personal services, but
to indemnify against loss and damage resulting from the
defense of actions for malpractice.[42] (Emphasis
supplied)
Second. Not all the necessary elements of a contract of
insurance are present in petitioners agreements. To begin
with, there is no loss, damage or liability on the part of
the member that should be indemnified by petitioner as
an HMO. Under the agreement, the member pays
petitioner a predetermined consideration in exchange for
the hospital, medical and professional services rendered
by the petitioners physician or affiliated physician to him.
In case of availment by a member of the benefits under
the agreement, petitioner does not reimburse or
indemnify the member as the latter does not pay any
third party. Instead, it is the petitioner who pays the
participating physicians and other health care providers
for the services rendered at pre-agreed rates. The
member does not make any such payment.
In other words, there is nothing in petitioner's agreements
that gives rise to a monetary liability on the part of the
member to any third party-provider of medical services
which might in turn necessitate indemnification from
petitioner. The terms indemnify or indemnity presuppose
that a liability or claim has already been incurred. There is
no indemnity precisely because the member merely avails
of medical services to be paid or already paid in advance
at a pre-agreed price under the agreements.

Third. According to the agreement, a member can take

advantage of the bulk of the benefits anytime, e.g.
laboratory services, x-ray, routine annual physical
examination and consultations, vaccine administration as
well as family planning counseling, even in the absence of
any peril, loss or damage on his or her part.
Fourth. In case of emergency, petitioner is obliged to
reimburse the member who receives care from a nonparticipating physician or hospital. However, this is only a
very minor part of the list of services available. The
assumption of the expense by petitioner is not confined to
the happening of a contingency but includes incidents
even in the absence of illness or injury.
In Michigan Podiatric Medical Association v. National Foot
Care Program, Inc.,[43] although the health care contracts
called for the defendant to partially reimburse a
subscriber for treatment received from a non-designated
doctor, this did not make defendant an insurer. Citing
Jordan, the Court determined that the primary activity of
the defendant (was) the provision of podiatric services to
subscribers in consideration of prepayment for such
services.[44] Since indemnity of the insured was not the
focal point of the agreement but the extension of medical
services to the member at an affordable cost, it did not
partake of the nature of a contract of insurance.
Fifth. Although risk is a primary element of an insurance
contract, it is not necessarily true that risk alone is
sufficient to establish it. Almost anyone who undertakes a
contractual obligation always bears a certain degree of
financial risk. Consequently, there is a need to distinguish
prepaid service contracts (like those of petitioner) from
the usual insurance contracts.
Indeed, petitioner, as an HMO, undertakes a business risk
when it offers to provide health services: the risk that it
might fail to earn a reasonable return on its investment.
But it is not the risk of the type peculiar only to insurance
companies. Insurance risk, also known as actuarial risk, is
the risk that the cost of insurance claims might be higher
than the premiums paid. The amount of premium is

calculated on the basis of assumptions made relative to

the insured.[45]
However, assuming that petitioners commitment to
provide medical services to its members can be construed
as an acceptance of the risk that it will shell out more
than the prepaid fees, it still will not qualify as an
insurance contract because petitioners objective is to
provide medical services at reduced cost, not to distribute
risk like an insurer.
In sum, an examination of petitioners agreements with its
members leads us to conclude that it is not an insurance
contract within the context of our Insurance Code.
THERE WAS NO LEGISLATIVE INTENT TO IMPOSE DST ON
HEALTH CARE AGREEMENTS OF HMOS
Furthermore, militating in convincing fashion against the
imposition of DST on petitioners health care agreements
under Section 185 of the NIRC of 1997 is the provisions
legislative history. The text of Section 185 came into U.S.
law as early as 1904 when HMOs and health care
agreements were not even in existence in this jurisdiction.
It was imposed under Section 116, Article XI of Act No.
1189 (otherwise known as the Internal Revenue Law of
1904)[46] enacted on July 2, 1904 and became effective
on August 1, 1904. Except for the rate of tax, Section 185
of the NIRC of 1997 is a verbatim reproduction of the
pertinent portion of Section 116, to wit:

ARTICLE XI
Stamp Taxes on Specified Objects
Section 116. There shall be levied, collected, and paid for
and in respect to the several bonds, debentures, or
certificates of stock and indebtedness, and other
documents, instruments, matters, and things mentioned

and described in this section, or for or in respect to the

vellum, parchment, or paper upon which such instrument,
matters, or things or any of them shall be written or
printed by any person or persons who shall make, sign, or
issue the same, on and after January first, nineteen
hundred and five, the several taxes following:
xxx xxx xxx
Third xxx (c) on all policies of insurance or bond or
obligation of the nature of indemnity for loss, damage, or
liability made or renewed by any person, association,
company, or corporation transacting the business of
accident, fidelity, employers liability, plate glass, steam
boiler, burglar, elevator, automatic sprinkle, or other
branch of insurance (except life, marine, inland, and fire
insurance) xxxx (Emphasis supplied)
On February 27, 1914, Act No. 2339 (the Internal Revenue
Law of 1914) was enacted revising and consolidating the
laws relating to internal revenue. The aforecited pertinent
portion of Section 116, Article XI of Act No. 1189 was
completely reproduced as Section 30 (l), Article III of Act
No. 2339. The very detailed and exclusive enumeration of
items subject to DST was thus retained.
On December 31, 1916, Section 30 (l), Article III of Act No.
2339 was again reproduced as Section 1604 (l), Article IV
of Act No. 2657 (Administrative Code). Upon its
amendment on March 10, 1917, the pertinent DST
provision became Section 1449 (l) of Act No. 2711,
otherwise known as the Administrative Code of 1917.
Section 1449 (1) eventually became Sec. 222 of
Commonwealth Act No. 466 (the NIRC of 1939), which
codified all the internal revenue laws of the Philippines. In
an amendment introduced by RA 40 on October 1, 1946,
the DST rate was increased but the provision remained
substantially the same.
Thereafter, on June 3, 1977, the same provision with the
same DST rate was reproduced in PD 1158 (NIRC of 1977)
as Section 234. Under PDs 1457 and 1959, enacted on

June 11, 1978 and October 10, 1984 respectively, the DST
rate was again increased.
Effective January 1, 1986, pursuant to Section 45 of PD
1994, Section 234 of the NIRC of 1977 was renumbered as
Section 198. And under Section 23 of EO[47] 273 dated
July 25, 1987, it was again renumbered and became
Section 185.
On December 23, 1993, under RA 7660, Section 185 was
amended but, again, only with respect to the rate of tax.
Notwithstanding the comprehensive amendment of the
NIRC of 1977 by RA 8424 (or the NIRC of 1997), the
subject legal provision was retained as the present
Section 185. In 2004, amendments to the DST provisions
were introduced by RA 9243[48] but Section 185 was
untouched.
On the other hand, the concept of an HMO was introduced
in the Philippines with the formation of Bancom Health
Care Corporation in 1974. The same pioneer HMO was
later reorganized and renamed Integrated Health Care
Services, Inc. (or Intercare). However, there are those who
claim that Health Maintenance, Inc. is the HMO industry
pioneer, having set foot in the Philippines as early as 1965
and having been formally incorporated in 1991.
Afterwards, HMOs proliferated quickly and currently, there
are 36 registered HMOs with a total enrollment of more
than 2 million.[49]
We can clearly see from these two histories (of the DST on
the one hand and HMOs on the other) that when the law
imposing the DST was first passed, HMOs were yet
unknown in the Philippines. However, when the various
amendments to the DST law were enacted, they were
already in existence in the Philippines and the term had in
fact already been defined by RA 7875. If it had been the
intent of the legislature to impose DST on health care
agreements, it could have done so in clear and
categorical terms. It had many opportunities to do so. But
it did not. The fact that the NIRC contained no specific
provision on the DST liability of health care agreements of
HMOs at a time they were already known as such, belies

any legislative intent to impose it on them. As a matter of

fact, petitioner was assessed its DST liability only on
January 27, 2000, after more than a decade in the
business as an HMO.[50]
Considering that Section 185 did not change since 1904
(except for the rate of tax), it would be safe to say that
health care agreements were never, at any time,
recognized as insurance contracts or deemed engaged in
the business of insurance within the context of the
provision.
THE POWER TO TAX IS NOT
THE POWER TO DESTROY
As a general rule, the power to tax is an incident of
sovereignty and is unlimited in its range, acknowledging
in its very nature no limits, so that security against its
abuse is to be found only in the responsibility of the
legislature which imposes the tax on the constituency
who is to pay it.[51] So potent indeed is the power that it
was once opined that the power to tax involves the power
to destroy.[52]
Petitioner claims that the assessed DST to date which
amounts to P376 million[53] is way beyond its net worth
of P259 million.[54] Respondent never disputed these
assertions. Given the realities on the ground, imposing the
DST on petitioner would be highly oppressive. It is not the
purpose of the government to throttle private business.
On the contrary, the government ought to encourage
private enterprise.[55] Petitioner, just like any concern
organized for a lawful economic activity, has a right to
maintain a legitimate business.[56] As aptly held in Roxas,
et al. v. CTA, et al.:[57]
The power of taxation is sometimes called also the power
to destroy. Therefore it should be exercised with caution
to minimize injury to the proprietary rights of a taxpayer.
It must be exercised fairly, equally and uniformly, lest the
tax collector kill the hen that lays the golden egg.[58]

Legitimate enterprises enjoy the constitutional protection

not to be taxed out of existence. Incurring losses because
of a tax imposition may be an acceptable consequence
but killing the business of an entity is another matter and
should not be allowed. It is counter-productive and
ultimately subversive of the nations thrust towards a
better economy which will ultimately benefit the majority
of our people.[59]
PETITIONERS TAX LIABILITY
WAS EXTINGUISHED UNDER
THE PROVISIONS OF RA 9840
Petitioner asserts that, regardless of the arguments, the
DST assessment for taxable years 1996 and 1997 became
moot and academic[60] when it availed of the tax
amnesty under RA 9480 on December 10, 2007. It paid
P5,127,149.08 representing 5% of its net worth as of the
year ended December 31, 2005 and complied with all
requirements of the tax amnesty. Under Section 6(a) of RA
9480, it is entitled to immunity from payment of taxes as
well as additions thereto, and the appurtenant civil,
criminal or administrative penalties under the 1997 NIRC,
as amended, arising from the failure to pay any and all
internal revenue taxes for taxable year 2005 and prior
years.[61]
Far from disagreeing with
manifested in its memorandum:

petitioner,

respondent

Section 6 of [RA 9840] provides that availment of tax

amnesty entitles a taxpayer to immunity from payment of
the tax involved, including the civil, criminal, or
administrative penalties provided under the 1997 [NIRC],
for tax liabilities arising in 2005 and the preceding years.
In view of petitioners availment of the benefits of [RA
9840], and without conceding the merits of this case as
discussed above, respondent concedes that such tax
amnesty extinguishes the tax liabilities of petitioner. This
admission, however, is not meant to preclude a

revocation of the amnesty granted in case it is found to

have been granted under circumstances amounting to tax
fraud under Section 10 of said amnesty law.[62]
(Emphasis supplied)
Furthermore, we held in a recent case that DST is one of
the taxes covered by the tax amnesty program under RA
9480.[63] There is no other conclusion to draw than that
petitioners liability for DST for the taxable years 1996 and
1997 was totally extinguished by its availment of the tax
amnesty under RA 9480.
IS THE COURT BOUND BY A MINUTE RESOLUTION IN
ANOTHER CASE?
Petitioner raises another interesting issue in its motion for
reconsideration: whether this Court is bound by the ruling
of the CA[64] in CIR v. Philippine National Bank[65] that a
health care agreement of Philamcare Health Systems is
not an insurance contract for purposes of the DST.
In support of its argument, petitioner cites the August 29,
2001 minute resolution of this Court dismissing the appeal
in Philippine National Bank (G.R. No. 148680).[66]
Petitioner argues that the dismissal of G.R. No. 148680 by
minute resolution was a judgment on the merits; hence,
the Court should apply the CA ruling there that a health
care agreement is not an insurance contract.
It is true that, although contained in a minute resolution,
our dismissal of the petition was a disposition of the
merits of the case. When we dismissed the petition, we
effectively affirmed the CA ruling being questioned. As a
result, our ruling in that case has already become final.
[67] When a minute resolution denies or dismisses a
petition for failure to comply with formal and substantive
requirements, the challenged decision, together with its
findings of fact and legal conclusions, are deemed
sustained.[68] But what is its effect on other cases?

With respect to the same subject matter and the same

issues concerning the same parties, it constitutes res
judicata.[69] However, if other parties or another subject
matter (even with the same parties and issues) is
involved, the minute resolution is not binding precedent.
Thus, in CIR v. Baier-Nickel,[70] the Court noted that a
previous case, CIR v. Baier-Nickel[71] involving the same
parties and the same issues, was previously disposed of
by the Court thru a minute resolution dated February 17,
2003 sustaining the ruling of the CA. Nonetheless, the
Court ruled that the previous case ha(d) no bearing on the
latter case because the two cases involved different
subject matters as they were concerned with the taxable
income of different taxable years.[72]
Besides, there are substantial, not simply formal,
distinctions between a minute resolution and a decision.
The constitutional requirement under the first paragraph
of Section 14, Article VIII of the Constitution that the facts
and the law on which the judgment is based must be
expressed clearly and distinctly applies only to decisions,
not to minute resolutions. A minute resolution is signed
only by the clerk of court by authority of the justices,
unlike a decision. It does not require the certification of
the Chief Justice. Moreover, unlike decisions, minute
resolutions are not published in the Philippine Reports.
Finally, the proviso of Section 4(3) of Article VIII speaks of
a decision.[73] Indeed, as a rule, this Court lays down
doctrines or principles of law which constitute binding
precedent in a decision duly signed by the members of
the Court and certified by the Chief Justice.
Accordingly, since petitioner was not a party in G.R. No.
148680 and since petitioners liability for DST on its health
care agreement was not the subject matter of G.R. No.
148680, petitioner cannot successfully invoke the minute
resolution in that case (which is not even binding
precedent) in its favor. Nonetheless, in view of the
reasons already discussed, this does not detract in any
way from the fact that petitioners health care agreements
are not subject to DST.
A FINAL NOTE

No costs.
Taking into account that health care agreements are
clearly not within the ambit of Section 185 of the NIRC
and there was never any legislative intent to impose the
same on HMOs like petitioner, the same should not be
arbitrarily and unjustly included in its coverage.
It is a matter of common knowledge that there is a great
social need for adequate medical services at a cost which
the average wage earner can afford. HMOs arrange,
organize and manage health care treatment in the
furtherance of the goal of providing a more efficient and
inexpensive health care system made possible by
quantity purchasing of services and economies of scale.
They offer advantages over the pay-for-service system
(wherein individuals are charged a fee each time they
receive medical services), including the ability to control
costs. They protect their members from exposure to the
high cost of hospitalization and other medical expenses
brought about by a fluctuating economy. Accordingly, they
play an important role in society as partners of the State
in achieving its constitutional mandate of providing its
citizens with affordable health services.
The rate of DST under Section 185 is equivalent to 12.5%
of the premium charged.[74] Its imposition will elevate
the cost of health care services. This will in turn
necessitate an increase in the membership fees, resulting
in either placing health services beyond the reach of the
ordinary wage earner or driving the industry to the
ground. At the end of the day, neither side wins,
considering the indispensability of the services offered by
HMOs.
WHEREFORE, the motion for reconsideration is GRANTED.
The August 16, 2004 decision of the Court of Appeals in
CA-G.R. SP No. 70479 is REVERSED and SET ASIDE. The
1996 and 1997 deficiency DST assessment against
petitioner is hereby CANCELLED and SET ASIDE.
Respondent is ordered to desist from collecting the said
tax.

SO ORDERED.

[G.R. No. 120082. September 11, 1996]

MACTAN
CEBU
INTERNATIONAL
AIRPORT
AUTHORITY, petitioner, vs. HON. FERDINAND J.
MARCOS, in his capacity as the Presiding Judge of
the Regional Trial Court, Branch 20, Cebu City, THE
CITY OF CEBU, represented by its Mayor, HON.
TOMAS R. OSMEA, and EUSTAQUIO B. CESA,
respondents.
DECISION
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 it raises
issues dwelling on the scope of the taxing power of local
government units and the limits of tax exemption
privileges
of
government-owned
and
controlled
corporations.
The uncontradicted factual antecedents are summarized
in the instant petition as follows:
Petitioner Mactan Cebu International Airport Authority
(MCIAA) was created by virtue of Republic Act No. 6958,
mandated to principally undertake the economical,
efficient and effective control, management and
supervision of the Mactan International Airport in the
Province of Cebu and the Lahug Airport in Cebu City, x x x
and such other airports as may be established in the
Province of Cebu x x x (Sec. 3, RA 6958). It is also
mandated to:
a) encourage, promote and develop international and
domestic air traffic in the Central Visayas and Mindanao

regions as a means of making the regions centers of

international trade and tourism, and accelerating the
development of the means of transportation and
communication in the country; and,
b) upgrade the services and facilities of the airports and
to formulate internationally acceptable standards of
airport accommodation and service.
Since the time of its creation, petitioner MCIAA enjoyed
the privilege of exemption from payment of realty taxes in
accordance with Section 14 of its Charter:
Sec. 14. Tax Exemptions. -- The Authority shall be exempt
from realty taxes imposed by the National Government or
any of its political subdivisions, agencies and
instrumentalities x x x.
On October 11, 1994, however, Mr. Eustaquio B. Cesa,
Officer-in-Charge, Office of the Treasurer of the City of
Cebu, demanded payment for realty taxes on several
parcels of land belonging to the petitioner (Lot Nos. 913G, 743, 88 SWO, 948-A, 989-A, 474, 109(931), I-M, 918,
919, 913-F, 941, 942, 947, 77 Psd., 746 and 991-A),
located at Barrio Apas and Barrio Kasambagan, Lahug,
Cebu City, in the total amount of P2,229,078.79.
Petitioner objected to such demand for payment as
baseless and unjustified, claiming in its favor the
aforecited Section 14 of RA 6958 which exempts it from
payment of realty taxes. It was also asserted that it is an
instrumentality
of
the
government
performing
governmental functions, citing Section 133 of the Local
Government Code of 1991 which puts limitations on the
taxing powers of local government units:
Section 133. Common Limitations on the Taxing Powers of
Local Government Units. -- Unless otherwise provided
herein, the exercise of the taxing powers of provinces,
cities, municipalities, and barangays shall not extend to
the levy of the following:

a) x x x
xxx
o) Taxes, fees or charges of any kind on the National
Government, its agencies and instrumentalities, and local
government units. (underscoring supplied)
Respondent City refused to cancel and set aside
petitioners 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 Government Code that
took effect on January 1, 1992:
Section 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, nonstock and non-profit hospitals and educational institutions,
are hereby withdrawn upon the effectivity of this Code.
(underscoring supplied)
xxx

As the City of Cebu was about to issue a warrant of levy

against the properties of petitioner, the latter was
compelled to pay its tax account under protest and
thereafter filed a Petition for Declaratory Relief with the
Regional Trial Court of Cebu, Branch 20, on December 29,
1994. MCIAA basically contended that the taxing powers
of local government units do not extend to the levy of
taxes or fees of any kind on an instrumentality of the
national government. Petitioner insisted that while it is
indeed a government-owned corporation, it nonetheless
stands on the same footing as an agency or
instrumentality of the national government by the very
nature of its powers and functions.
Respondent City, however, asserted that MCIAA 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:

Section 234. Exemptions from Real Property Taxes. x x x

(e) x x x

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]

Except as provided herein, any exemption from payment

of real property tax previously granted to, or presently
enjoyed by all persons, whether natural or juridical,
including government-owned or controlled corporations
are hereby withdrawn upon the effectivity of this Code.

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).

(a) x x x
xxx

However, RA 7160 expressly provides that All general and

special laws, acts, city charters, decrees [sic], executive
orders, proclamations and administrative regulations, or
part of 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 Courts 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. Toward 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. x x x[5]

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
Mactan-Cebu International Airport, but more importantly,
to carry out the Government policies of promoting and
developing the Central Visayas and Mindanao regions as
centers of international trade and tourism, and
accelerating the development of the means of
transportation and communication in the country,[7] and
that it is an attached agency of the Department of
Transportation and Communication (DOTC),[8] the
petitioner may stand in [sic] the same footing as an
agency or instrumentality of the national government.
Hence, its tax exemption privilege under Section 14 of its
Charter cannot be considered withdrawn with the passage
of the Local Government Code of 1991 (hereinafter LGC)
because Section 133 thereof specifically states that the
`taxing powers of local government units shall not extend
to the levy of taxes or fees or charges of any kind on the
national government, its agencies and instrumentalities.

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:

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]

I. RESPONDENT JUDGE ERRED IN FAILING TO RULE THAT

THE PETITIONER IS VESTED WITH GOVERNMENT POWERS
AND FUNCTIONS WHICH PLACE IT IN THE SAME CATEGORY
AS AN INSTRUMENTALITY OR AGENCY OF THE
GOVERNMENT.

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 stock are owned by 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. (McCulloch 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 to
seriously burden it in the accomplishment of them.
(Antieau, Modern Constitutional Law, Vol. 2, p. 140)
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 for 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. (underscoring 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
government
corporation
performing
governmental
functions as against one performing merely proprietary
ones such that the exemption privilege withdrawn under
the said Code would apply to all government corporations.
For it is clear from Section 133, in relation to Section 234,
of the LGC that the legislature meant to exclude
instrumentalities of the national government from the
taxing powers of the local government units.
In its comment, respondent City of Cebu alleges that as a
local 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 petitioners 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 or controlled corporations
performing
governmental
and
purely
proprietary
functions. Respondent City of Cebu urges this Court to
apply by analogy its ruling that the Manila International
Airport Authority is a government-owned corporation,[12]
and to reject the application of Basco because it was
promulgated . . . before the enactment and the signing
into law of R.A. No. 7160, and was not, therefore, decided
in the light of the spirit and intention of the framers of the
said law.
As a general rule, the power to tax is an incident of
sovereignty and is unlimited in its range, acknowledging
in its very nature no limits, so that security against its

abuse is to be found only in the responsibility of the

legislature which imposes the tax on the constituency
who are to pay it. Nevertheless, effective limitations
thereon may be imposed by the people through their
Constitutions.[13] Our Constitution, for instance, provides
that the rule of taxation shall be uniform and equitable
and Congress shall evolve a progressive system of
taxation.[14] So potent indeed is the power that it was
once opined that the power to tax involves the power to
destroy.[15] Verily, taxation is a destructive power which
interferes with the personal and property rights of the
people and takes from them a portion of their 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 taxpayer and
liberally in favor of the taxing authority.[18] A claim of
exemption from tax payments 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]

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 nonimpairment clause of the Constitution.[23]

The power to tax is primarily vested in the Congress;

however, in our jurisdiction, it may be exercised by local
legislative bodies, no longer merely by virtue of a valid
delegation as before, but pursuant to direct authority
conferred by Section 5, Article X of the Constitution.[22]
Under the latter, the exercise of the power may be subject
to such guidelines and limitations as the Congress may
provide which, however, must be consistent with the basic
policy of local autonomy.

(c) Taxes on estates, inheritance, gifts, legacies and other

acquisitions mortis causa, except as otherwise provided
herein;

There can be no question that under Section 14 of R.A.

No. 6958 the petitioner is exempt from the payment of

(e) Taxes, fees and charges and other impositions upon

goods carried into or out of, or passing through, the

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 exemptions from taxation.
Section 133 of the LGC prescribes the common limitations
on the taxing powers of local government units as follows:
SEC. 133. Common Limitations on the Taxing Power of
Local Government Units. Unless otherwise provided
herein, the exercise of the taxing powers of provinces,
cities, municipalities, and barangays shall not extend to
the levy of the following:
(a) Income tax, except when levied on banks and other
financial institutions;
(b) Documentary stamp tax;

(d) Customs duties, registration fees of vessel and

wharfage on wharves, tonnage dues, and all other kinds
of customs fees, charges and dues except wharfage on
wharves constructed and maintained by the local
government unit concerned;

territorial jurisdictions of local government units in the

guise of charges for wharfage, tolls for bridges or
otherwise, or other taxes, fees or charges in any form
whatsoever upon such goods or merchandise;
(f) Taxes, fees or charges on agricultural and aquatic
products when sold by marginal farmers or fishermen;
(g) Taxes on business enterprises certified to by the Board
of Investments as pioneer or non-pioneer for a period of
six (6) and four (4) years, respectively from the date of
registration;
(h) Excise taxes on articles enumerated under the
National Internal Revenue Code, as amended, and taxes,
fees or charges on petroleum products;
(i) Percentage or value-added tax (VAT) on sales, barters
or exchanges or similar transactions on goods or services
except as otherwise provided herein;
(j) Taxes on the gross receipts of transportation
contractors and persons engaged in the transportation of
passengers or freight by hire and common carriers by air,
land or water, except as provided in this Code;
(k) Taxes on premiums paid by way of 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 thereof, except, tricycles;
(m) Taxes, fees, or other charges on Philippine products
actually exported, except as otherwise provided herein;
(n) Taxes, fees, or charges, on Countryside and Barangay
Business Enterprises and cooperatives duly registered
under R.A. No. 6810 and Republic Act Numbered Sixtynine hundred thirty-eight (R.A. No. 6938) otherwise known
as the Cooperatives Code of the Philippines respectively;
and

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

NATIONAL
GOVERNMENT,
ITS
AGENCIES
AND
INSTRUMENTALITIES, AND LOCAL GOVERNMENT UNITS.
(emphasis supplied)
Needless to say, the last item (item o) is pertinent to 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 light of the
above enumeration. The term fees means charges fixed
by law or ordinance for the regulation or inspection of
business or activity,[24] while charges are pecuniary
liabilities such as rents or fees against persons 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 an annual ad valorem tax on real property such
as land, building, machinery, and other improvements not
hereafter specifically exempted.
Section 234 of the 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 consideration
or otherwise, to a taxable person;

(b) Charitable institutions, churches, parsonages or

convents appurtenant thereto, mosques, nonprofit or
religious cemeteries and all lands, buildings and
improvements actually, directly, and exclusively used for
religious, charitable or educational purposes;
(c) All machineries and equipment that are actually,
directly and exclusively used by local water districts and
government-owned or controlled corporations engaged in
the supply and distribution of water and/or generation and
transmission of electric power;
(d) All real property owned by duly registered
cooperatives as provided for under R.A. No. 6938; and
(e) Machinery and equipment used for pollution control
and environmental protection.
Except as provided herein, any exemption 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 this 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 directly and exclusively

used for religious, charitable or educational purposes; (ii)
all machineries and equipment actually, directly and
exclusively used by local water districts or by
government-owned or controlled corporations engaged in
the supply and distribution of water and/or generation and
transmission of electric power; and (iii) all machinery and
equipment used for pollution control and environmental
protection.
To help provide a healthy environment in the midst of the
modernization of the country, all machinery and
equipment for pollution control and environmental
protection may not be taxed by local governments.
2. Other Exemptions Withdrawn. All other exemptions
previously granted to natural or juridical persons including
government-owned or controlled corporations are
withdrawn upon the effectivity of the Code.[26]
Section 193 of the LGC is the general provision on
withdrawal of tax exemption privileges. It provides:
SEC. 193. Withdrawal of Tax Exemption Privileges. Unless
otherwise provided in this Code, tax exemptions or
incentives granted to, or presently enjoyed by all persons,
whether natural or juridical, including government-owned
or controlled corporations, except local water districts,
cooperatives duly registered under R.A. 6938, non-stock
and non-profit hospitals and educational institutions, 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 speak 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 or provisos in these sections, as shown by the
following clauses:

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.

(1) unless otherwise provided herein in the opening

paragraph of Section 133;

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 powers of local government units
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 item (a) of the first
paragraph of Section 234.

(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 are explicitly indicated in the next. For
instance, in item (a) which excepts income taxes when
levied on banks and other financial institutions; item (d)
which excepts wharfage on wharves constructed and
maintained by the local government unit concerned; and
item (1) which excepts taxes, fees and charges for the
registration and issuance of licenses or permits for the
driving of tricycles. It may also be observed that within
the body itself of the section, there are exceptions which
can be found only in other parts of the LGC, but the
section interchangeably uses therein the clause except as
otherwise provided herein as in items (c) and (i), or the
clause except as provided in this Code in item (j). These
clauses would be obviously unnecessary or mere
surplusages if the opening clause of the section were

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 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 insofar as real property taxes are concerned by
limiting the retention only to those enumerated therein;
all others not included in the enumeration lost the
privilege upon the effectivity of the LGC. Moreover, even
as to real property 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 a taxable person for

consideration or otherwise.
Since the last paragraph of Section 234 unequivocally
withdrew, upon the effectivity of the LGC, exemptions
from payment of 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 governmentowned 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 Sections
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.
It 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
none exists. In light of the petitioners theory that it is an
instrumentality of the Government, it could only be within
the first item of the first paragraph of the section by
expanding the scope of the term Republic of the
Philippines to embrace its instrumentalities and agencies.
For expediency, we quote:
(a) 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.

This view does not persuade us. In the first place, the
petitioners 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
subdivisions in Section 234(a).
The terms Republic of the Philippines and National
Government are not interchangeable. The former is
broader and synonymous with Government of the
Republic of the Philippines which the Administrative Code
of 1987 defines as the corporate governmental entity
through which the functions of government are exercised
throughout the Philippines, including, save as the contrary
appears from the context, the various arms through which
political authority is made affective in the Philippines,
whether pertaining to the autonomous regions, the
provincial, city, municipal or barangay subdivisions or
other forms of local government.[27] These autonomous
regions,
provincial, city, municipal
or barangay
subdivisions are the political subdivisions.[28]
On the other hand, National Government refers to the
entire machinery of the central government, as
distinguished from the different forms of local
governments.[29] The National Government then is
composed of the three great departments: the executive,
the legislative and the judicial.[30]
An agency of the Government refers to any of the various
units of the Government, including a department, bureau,
office, instrumentality, or government-owned or controlled
corporation, or a local government or a distinct unit
therein;[31] while an instrumentality refers to any agency
of the National Government, not integrated within the
department framework, vested with special functions or
jurisdiction by law, endowed with some if not all corporate
powers, administering special funds, and enjoying

operational autonomy, usually through a charter. This

term includes regulatory agencies, chartered institutions
and government-owned and controlled corporations.[32]
If Section 234(a) intended to extend the exception therein
to the withdrawal of the exemption from payment of real
property taxes under the last sentence of the said section
to the agencies and instrumentalities of the National
Government mentioned in Section 133(o), then it should
have restated the wording of the latter. Yet, it did not.
Moreover, that Congress did not wish to expand the scope
of the exemption in Section 234(a) to include real
property owned by other instrumentalities or agencies of
the government including government-owned and
controlled corporations is further borne out by the fact
that the source of this exemption is Section 40(a) of P.D.
No. 464, otherwise known as The Real Property Tax Code,
which reads:
SEC. 40. Exemptions from
exemption shall be as follows:

Real

Property

Tax.

The

(a) Real property owned by the Republic of the Philippines

or any of its political subdivisions and any governmentowned or controlled corporation so exempt by its charter:
Provided, however, That this exemption shall not apply to
real property of the above-mentioned entities the
beneficial use of which has been granted, for
consideration or otherwise, to a taxable person.
Note that as 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,
especially in light of the general provision on withdrawal
of tax exemption privileges in Section 193 and the special
provision on withdrawal of exemption from payment of
real 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 these
entities to share in the requirements of 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 petitioners 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, aerodrome control towers, crash, fire, and
rescue facilities are hereby transferred to the Authority:
Provided, however, that the operations control of all
equipment necessary for the operation of radio aids to air
navigation, airways communication, the approach control
office, and the area control center shall be retained by the
Air Transportation Office. No equipment, however, shall be
removed by the Air Transportation Office from Mactan

without the concurrence of the Authority. The Authority

may assist in the maintenance of the Air Transportation
Office equipment.
The airports referred to are the Lahug Air Port in Cebu City
and the Mactan International Airport in the Province of
Cebu,[36] which belonged to the Republic of the
Philippines, then under the Air Transportation Office (ATO).
[37]
It may be reasonable to assume that the term lands refer
to lands in Cebu City then administered by the Lahug Air
Port and includes the parcels of land the respondent City
of Cebu seeks to levy on for real property taxes. This
section involves a transfer of the lands, among other
things, to the petitioner and not just the transfer of the
beneficial use thereof, with the ownership being retained
by the Republic of the Philippines.
This transfer is actually an absolute conveyance of the
ownership thereof because the petitioners authorized
capital stock consists of, inter alia, the value of such real
estate owned and/or administered by the airports.[38]
Hence, the petitioner is now the owner of the land in
question and the exception in Section 234(c) of the LGC is
inapplicable.
Moreover, the petitioner cannot claim that it was never a
taxable person under its Charter. It was only exempted
from the payment of real property taxes. The grant of the
privilege only in respect of this tax is conclusive proof of
the legislative intent to make it a taxable person subject
to all taxes, except real property tax.
Finally, even if the petitioner was originally not a taxable
person for purposes of real property tax, in light of the
foregoing disquisitions, it had already become, even if it
be conceded to be an agency or instrumentality of the
Government, a taxable person for such purpose in view of
the withdrawal in the last paragraph of Section 234 of
exemptions from the payment of real property taxes,
which, as earlier adverted to, applies to the petitioner.

Accordingly, the position taken by the petitioner is

untenable. Reliance on Basco vs. Philippine Amusement
and Gaming Corporation[39] is unavailing since it was
decided before the effectivity of the LGC. Besides, nothing
can prevent Congress from decreeing that even
instrumentalities or agencies of the Government
performing governmental functions may be subject to tax.
Where it is done precisely to fulfill a constitutional
mandate and national policy, no one can doubt its
wisdom.
WHEREFORE, the instant petition is DENIED. The
challenged decision and order of the Regional Trial Court
of Cebu, Branch 20, in Civil Case No. CEB-16900 are
AFFIRMED.
No pronouncement as to costs.
SO ORDERED.
Narvasa,
C.J.,
(Chairman),
Panganiban, JJ., concur.

Melo,

Francisco,

and

G.R. No. 149110

April 9, 2003

NATIONAL POWER CORPORATION, petitioner,

vs.
CITY OF CABANATUAN, respondent.
PUNO, J.:
This is a petition for review1 of the Decision2 and the
Resolution3 of the Court of Appeals dated March 12, 2001
and July 10, 2001, respectively, finding petitioner National
Power Corporation (NPC) liable to pay franchise tax to
respondent City of Cabanatuan.
Petitioner is a government-owned and controlled
corporation created under Commonwealth Act No. 120, as
amended.4 It is tasked to undertake the "development of
hydroelectric generations of power and the production of
electricity from nuclear, geothermal and other sources, as
well as, the transmission of electric power on a nationwide
basis."5 Concomitant to its mandated duty, petitioner has,
among others, the power to construct, operate and
maintain power plants, auxiliary plants, power stations
and substations for the purpose of developing hydraulic
power and supplying such power to the inhabitants.6
For many years now, petitioner sells electric power to the
residents of Cabanatuan City, posting a gross income of
P107,814,187.96 in 1992.7 Pursuant to section 37 of
Ordinance No. 165-92,8 the respondent assessed the
petitioner a franchise tax amounting to P808,606.41,
representing 75% of 1% of the latter's gross receipts for
the preceding year.9
Petitioner, whose capital stock was subscribed and paid
wholly by the Philippine Government,10 refused to pay
the tax assessment. It argued that the respondent has no
authority to impose tax on government entities. Petitioner
also contended that as a non-profit organization, it is
exempted from the payment of all forms of taxes,
charges, duties or fees11 in accordance with sec. 13 of
Rep. Act No. 6395, as amended, viz:

"Sec.13. Non-profit Character of the Corporation;

Exemption from all Taxes, Duties, Fees, Imposts and Other
Charges
by
Government
and
Governmental
Instrumentalities.- The Corporation shall be non-profit and
shall devote all its return from its capital investment, as
well as excess revenues from its operation, for expansion.
To enable the Corporation to pay its indebtedness and
obligations
and
in
furtherance
and
effective
implementation of the policy enunciated in Section one of
this Act, the Corporation is hereby exempt:
(a) From the payment of all taxes, duties, fees, imposts,
charges, costs and service fees in any court or
administrative proceedings in which it may be a party,
restrictions and duties to the Republic of the Philippines,
its provinces, cities, municipalities and other government
agencies and instrumentalities;
(b) From all income taxes, franchise taxes and realty taxes
to be paid to the National Government, its provinces,
cities, municipalities and other government agencies and
instrumentalities;
(c) From all import duties, compensating taxes and
advanced sales tax, and wharfage fees on import of
foreign goods required for its operations and projects; and
(d) From all taxes, duties, fees, imposts, and all other
charges imposed by the Republic of the Philippines, its
provinces, cities, municipalities and other government
agencies and instrumentalities, on all petroleum products
used by the Corporation in the generation, transmission,
utilization, and sale of electric power."12
The respondent filed a collection suit in the Regional Trial
Court of Cabanatuan City, demanding that petitioner pay
the assessed tax due, plus a surcharge equivalent to 25%
of the amount of tax, and 2% monthly interest.13
Respondent alleged that petitioner's exemption from local
taxes has been repealed by section 193 of Rep. Act No.
7160,14 which reads as follows:

"Sec. 193. Withdrawal of Tax Exemption Privileges.- Unless

otherwise provided in this Code, tax exemptions or
incentives granted to, or presently enjoyed by all persons,
whether natural or juridical, including government owned
or controlled corporations, except local water districts,
cooperatives duly registered under R.A. No. 6938, nonstock 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 dispersal and needs
of rural electrification are primary objectives of the
nations which shall be pursued coordinately and
supported by all instrumentalities and agencies of the
government,
including
its
financial
institutions.'
(underscoring supplied). To allow plaintiff to subject
defendant to its tax-ordinance would be to impede the
avowed goal of this government instrumentality.
Unlike the State, a city or municipality has no inherent
power of taxation. Its taxing power is limited to that which
is provided for in its charter or other statute. Any grant of

taxing power is to be construed strictly, with doubts

resolved against its existence.
From the existing law and the rulings of the Supreme
Court itself, it is very clear that the plaintiff could not
impose the subject tax on the defendant."16
On appeal, the Court of Appeals reversed the trial court's
Order17 on the ground that section 193, in relation to
sections 137 and 151 of the LGC, expressly withdrew the
exemptions granted to the petitioner.18 It ordered the
petitioner to pay the respondent city government the
following: (a) the sum of P808,606.41 representing the
franchise tax due based on gross receipts for the year
1992, (b) the tax due every year thereafter based in the
gross receipts earned by NPC, (c) in all cases, to pay a
surcharge of 25% of the tax due and unpaid, and (d) the
sum of P 10,000.00 as litigation expense.19
On April 4, 2001, the petitioner filed a Motion for
Reconsideration on the Court of Appeal's Decision. This
was denied by the appellate court, viz:
"The Court finds no merit in NPC's motion for
reconsideration. Its arguments reiterated therein that the
taxing power of the province under Art. 137 (sic) of the
Local Government Code refers merely to private persons
or corporations in which category it (NPC) does not
belong, and that the LGC (RA 7160) which is a general law
may not impliedly repeal the NPC Charter which is a
special lawfinds the answer in Section 193 of the LGC to
the effect that 'tax exemptions or incentives granted to,
or presently enjoyed by all persons, whether natural or
juridical, including government-owned or controlled
corporations except local water districts xxx are hereby
withdrawn.' The repeal is direct and unequivocal, not
implied.
IN VIEW WHEREOF, the motion for reconsideration is
hereby DENIED.
SO ORDERED."20

In this petition for review, petitioner raises the following

issues:
"A. THE COURT OF APPEALS GRAVELY
THAT NPC, A PUBLIC NON-PROFIT
LIABLE TO PAY A FRANCHISE TAX
CONSIDER THAT SECTION 137
GOVERNMENT CODE IN RELATION
APPLIES ONLY TO PRIVATE PERSONS
ENJOYING A FRANCHISE.

ERRED IN HOLDING
CORPORATION, IS
AS IT FAILED TO
OF THE LOCAL
TO SECTION 131
OR CORPORATIONS

B. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING

THAT NPC'S EXEMPTION FROM ALL FORMS OF TAXES HAS
BEEN REPEALED BY THE PROVISION OF THE LOCAL
GOVERNMENT CODE AS THE ENACTMENT OF A LATER
LEGISLATION, WHICH IS A GENERAL LAW, CANNOT BE
CONSTRUED TO HAVE REPEALED A SPECIAL LAW.
C. THE COURT OF APPEALS GRAVELY ERRED IN NOT
CONSIDERING THAT AN EXERCISE OF POLICE POWER
THROUGH TAX EXEMPTION SHOULD PREVAIL OVER THE
LOCAL GOVERNMENT CODE."21
It is beyond dispute that the respondent city government
has the authority to issue Ordinance No. 165-92 and
impose an annual tax on "businesses enjoying a
franchise," pursuant to section 151 in relation to section
137 of the LGC, viz:
"Sec. 137. Franchise Tax. - Notwithstanding any
exemption granted by any law or other special law, the
province may impose a tax on businesses enjoying a
franchise, at a rate not exceeding fifty percent (50%) of
one percent (1%) of the gross annual receipts for the
preceding calendar year based on the incoming receipt, or
realized, within its territorial jurisdiction.
In the case of a newly started business, the tax shall not
exceed one-twentieth (1/20) of one percent (1%) of the
capital investment. In the succeeding calendar year,
regardless of when the business started to operate, the

tax shall be based on the gross receipts for the preceding

calendar year, or any fraction thereof, as provided
herein." (emphasis supplied)
x

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
instrumentalities of the National Government.

to

tax

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)

between a general law and a special statute, the special

statute should prevail since it evinces the legislative
intent more clearly than the general statute."28

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 petition is without merit.

The power to tax which was called by Justice Marshall as

the 'power to destroy' (Mc Culloch v. Maryland, supra)
cannot be allowed to defeat an instrumentality or creation
of the very entity which has the inherent power to wield
it."27
Petitioner contends that section 193 of Rep. Act No. 7160,
withdrawing the tax privileges of government-owned or
controlled corporations, is in the nature of an implied
repeal. A special law, its charter cannot be amended or
modified impliedly by the local government code which is
a general law. Consequently, petitioner claims that its
exemption from all taxes, fees or charges under its
charter subsists despite the passage of the LGC, viz:
"It is a well-settled rule of statutory construction that
repeals of statutes by implication are not favored and as
much as possible, effect must be given to all enactments
of the legislature. Moreover, it has to be conceded that
the charter of the NPC constitutes a special law. Republic
Act No. 7160, is a general law. It is a basic rule in
statutory construction that the enactment of a later
legislation which is a general law cannot be construed to
have repealed a special law. Where there is a conflict

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

Taxes are the lifeblood of the government,30 for without

taxes, the government can neither exist nor endure. A
principal attribute of sovereignty,31 the exercise of taxing
power derives its source from the very existence of the
state whose social contract with its citizens obliges it to
promote public interest and common good. The theory
behind the exercise of the power to tax emanates from
necessity;32 without taxes, government cannot fulfill its
mandate of promoting the general welfare and well-being
of the people.
In recent years, the increasing social challenges of the
times expanded the scope of state activity, and taxation
has become a tool to realize social justice and the
equitable distribution of wealth, economic progress and
the protection of local industries as well as public welfare
and similar objectives.33 Taxation assumes even greater
significance with the ratification of the 1987 Constitution.
Thenceforth, the power to tax is no longer vested
exclusively on Congress; local legislative bodies are now
given direct authority to levy taxes, fees and other
charges34 pursuant to Article X, section 5 of the 1987
Constitution, viz:
"Section 5.- Each Local Government unit shall have the
power to create its own sources of revenue, to levy taxes,
fees and charges subject to such guidelines and
limitations as the Congress may provide, consistent with

the basic policy of local autonomy. Such taxes, fees and

charges
shall
accrue
exclusively
to
the
Local
Governments."
This paradigm shift results from the realization that
genuine development can be achieved only by
strengthening
local
autonomy
and
promoting
decentralization of governance. For a long time, the
country's highly centralized government structure has
bred a culture of dependence among local government
leaders upon the national leadership. It has also
"dampened the spirit of initiative, innovation and
imaginative resilience in matters of local development on
the part of local government leaders."35 The only way to
shatter this culture of dependence is to give the LGUs a
wider role in the delivery of basic services, and confer
them sufficient powers to generate their own sources for
the purpose. To achieve this goal, section 3 of Article X of
the 1987 Constitution mandates Congress to enact a local
government code that will, consistent with the basic
policy of local autonomy, set the guidelines and
limitations to this grant of taxing powers, viz:
"Section 3. The Congress shall enact a local government
code which shall provide for a more responsive and
accountable local government structure instituted through
a system of decentralization with effective mechanisms of
recall, initiative, and referendum, allocate among the
different
local
government
units
their
powers,
responsibilities, and resources, and provide for the
qualifications, election, appointment and removal, term,
salaries, powers and functions and duties of local officials,
and all other matters relating to the organization and
operation of the local units."
To recall, prior to the enactment of the Rep. Act No.
7160,36 also known as the Local Government Code of
1991 (LGC), various measures have been enacted to
promote local autonomy. These include the Barrio Charter
of 1959,37 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
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
development of water power in any part of
Philippines;

the
the

(f) To take water from any public stream, river, creek, lake,
spring or waterfall in the Philippines, for the purposes
specified in this Act; to intercept and divert the flow of
waters from lands of riparian owners and from persons
owning or interested in waters which are or may be
necessary for said purposes, upon payment of just
compensation therefor; to alter, straighten, obstruct or
increase the flow of water in streams or water channels
intersecting or connecting therewith or contiguous to its
works or any part thereof: Provided, That just
compensation shall be paid to any person or persons
whose property is, directly or indirectly, adversely
affected or damaged thereby;
(g) To construct, operate and maintain power plants,
auxiliary plants, dams, reservoirs, pipes, mains,
transmission lines, power stations and substations, and
other works for the purpose of developing hydraulic power
from any river, creek, lake, spring and waterfall in the
Philippines and supplying such power to the inhabitants
thereof; to acquire, construct, install, maintain, operate,
and improve gas, oil, or steam engines, and/or other
prime movers, generators and machinery in plants and/or

auxiliary plants for the production of electric power; to

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

(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.

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.

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

Petitioner was created to "undertake the development of

hydroelectric generation of power and the production of
electricity from nuclear, geothermal and other sources, as
well as the transmission of electric power on a nationwide
basis."66 Pursuant to this mandate, petitioner generates
power and sells electricity in bulk. Certainly, these

activities do not partake of the sovereign functions of the

government. They are purely private and commercial
undertakings, albeit imbued with public interest. The
public interest involved in its activities, however, does not
distract from the true nature of the petitioner as a
commercial enterprise, in the same league with similar
public utilities like telephone and telegraph companies,
railroad companies, water supply and irrigation
companies, gas, coal or light companies, power plants, ice
plant among others; all of which are declared by this
Court as ministrant or proprietary functions of
government aimed at advancing the general interest of
society.67
A closer reading of its charter reveals that even the
legislature treats the character of the petitioner's
enterprise as a "business," although it limits petitioner's
profits to twelve percent (12%), viz:68
"(n) When essential to the proper administration of its
corporate affairs or necessary for the proper transaction
of its business or to carry out the purposes for which it
was organized, to contract indebtedness and issue bonds
subject
to
approval
of
the
President
upon
recommendation of the Secretary of Finance;
(o) To exercise such powers and do such things as may be
reasonably necessary to carry out the business and
purposes for which it was organized, or which, from time
to time, may be declared by the Board to be necessary,
useful, incidental or auxiliary to accomplish the said
purpose xxx."(emphases supplied)
It is worthy to note that all other private franchise holders
receiving at least sixty percent (60%) of its electricity
requirement from the petitioner are likewise imposed the
cap of twelve percent (12%) on profits.69 The main
difference is that the petitioner is mandated to devote "all
its returns from its capital investment, as well as excess
revenues from its operation, for expansion"70 while other
franchise holders have the option to distribute their profits
to its stockholders by declaring dividends. We do not see

why this fact can be a source of difference in tax

treatment. In both instances, the taxable entity is the
corporation, which exercises the franchise, and not the
individual stockholders.
We also do not find merit in the petitioner's contention
that its tax exemptions under its charter subsist despite
the passage of the LGC.
As a rule, tax exemptions are construed strongly against
the claimant. Exemptions must be shown to exist clearly
and categorically, and supported by clear legal
provisions.71 In the case at bar, the petitioner's sole
refuge is section 13 of Rep. Act No. 6395 exempting from,
among others, "all income taxes, franchise taxes and
realty taxes to be paid to the National Government, its
provinces, cities, municipalities and other government
agencies and instrumentalities." However, section 193 of
the LGC withdrew, subject to limited exceptions, the
sweeping tax privileges previously enjoyed by private and
public corporations. Contrary to the contention of
petitioner, section 193 of the LGC is an express, albeit
general, repeal of all statutes granting tax exemptions
from local taxes.72 It reads:
"Sec. 193. Withdrawal of Tax Exemption Privileges.- Unless
otherwise provided in this Code, tax exemptions or
incentives granted to, or presently enjoyed by all persons,
whether natural or juridical, including government-owned
or controlled corporations, except local water districts,
cooperatives duly registered under R.A. No. 6938, nonstock and non-profit hospitals and educational institutions,
are hereby withdrawn upon the effectivity of this Code."
(emphases supplied)
It is a basic precept of statutory construction that the
express mention of one person, thing, act, or
consequence excludes all others as expressed in the
familiar maxim expressio unius est exclusio alterius.73
Not being a local water district, a cooperative registered
under R.A. No. 6938, or a non-stock and non-profit
hospital or educational institution, petitioner clearly does

not belong to the exception. It is therefore incumbent

upon the petitioner to point to some provisions of the LGC
that expressly grant it exemption from local taxes.
But this would be an exercise in futility. Section 137 of the
LGC clearly states that the LGUs can impose franchise tax
"notwithstanding any exemption granted by any law or
other special law." This particular provision of the LGC
does not admit any exception. In City Government of San
Pablo, Laguna v. Reyes,74 MERALCO's exemption from the
payment of franchise taxes was brought as an issue
before this Court. The same issue was involved in the
subsequent case of Manila Electric Company v. Province of
Laguna.75 Ruling in favor of the local government in both
instances, we ruled that the franchise tax in question is
imposable despite any exemption enjoyed by MERALCO
under special laws, viz:
"It is our view that petitioners correctly rely on provisions
of Sections 137 and 193 of the LGC to support their
position that MERALCO's tax exemption has been
withdrawn. The explicit language of section 137 which
authorizes the province to impose franchise tax
'notwithstanding any exemption granted by any law or
other special law' is all-encompassing and clear. The
franchise tax is imposable despite any exemption enjoyed
under special laws.
Section 193 buttresses the withdrawal of extant tax
exemption privileges. By stating that unless otherwise
provided in this Code, tax exemptions or incentives
granted to or presently enjoyed by all persons, whether
natural or juridical, including government-owned or
controlled corporations except (1) local water districts, (2)
cooperatives duly registered under R.A. 6938, (3) nonstock and non-profit hospitals and educational institutions,
are withdrawn upon the effectivity of this code, the
obvious import is to limit the exemptions to the three
enumerated entities. It is a basic precept of statutory
construction that the express mention of one person,
thing, act, or consequence excludes all others as
expressed in the familiar maxim expressio unius est

exclusio alterius. In the absence of any provision of the

Code to the contrary, and we find no other provision in
point, any existing tax exemption or incentive enjoyed by
MERALCO under existing law was clearly intended to be
withdrawn.
Reading together sections 137 and 193 of the LGC, we
conclude that under the LGC the local government unit
may now impose a local tax at a rate not exceeding 50%
of 1% of the gross annual receipts for the preceding
calendar based on the incoming receipts realized within
its territorial jurisdiction. The legislative purpose to
withdraw tax privileges enjoyed under existing law or
charter is clearly manifested by the language used on
(sic) Sections 137 and 193 categorically withdrawing such
exemption subject only to the exceptions enumerated.
Since it would be not only tedious and impractical to
attempt to enumerate all the existing statutes providing
for special tax exemptions or privileges, the LGC provided
for an express, albeit general, withdrawal of such
exemptions or privileges. No more unequivocal language
could have been used."76 (emphases supplied).
It is worth mentioning that section 192 of the LGC
empowers the LGUs, through ordinances duly approved,
to grant tax exemptions, initiatives or reliefs.77 But in
enacting section 37 of Ordinance No. 165-92 which
imposes an annual franchise tax "notwithstanding any
exemption granted by law or other special law," the
respondent city government clearly did not intend to
exempt the petitioner from the coverage thereof.
Doubtless, the power to tax is the most effective
instrument to raise needed revenues to finance and
support myriad activities of the local government units for
the delivery of basic services essential to the promotion of
the general welfare and the enhancement of peace,
progress, and prosperity of the people. As this Court
observed in the Mactan case, "the original reasons for the
withdrawal of tax exemption privileges granted to
government-owned or controlled corporations and all
other units of government were that such privilege

resulted in serious tax base erosion and distortions in the

tax treatment of similarly situated enterprises."78 With
the added burden of devolution, it is even more
imperative for government entities to share in the
requirements of development, fiscal or otherwise, by
paying taxes or other charges due from them.
IN VIEW WHEREOF, the instant petition is DENIED and the
assailed Decision and Resolution of the Court of Appeals
dated March 12, 2001 and July 10, 2001, respectively, are
hereby AFFIRMED.
SO ORDERED.
Panganiban, Sandoval-Gutierrez, Corona,
Morales, JJ., concur.

and Carpio-

ABAKADA GURO PARTY LIST (Formerly AASJAS)

OFFICERS SAMSON S. ALCANTARA and ED VINCENT
S. ALBANO,G.R. No. 168056
Petitioners,
- versus THE HONORABLE EXECUTIVE SECRETARY EDUARDO
ERMITA;
HONORABLE
SECRETARY
OF
THE
DEPARTMENT OF FINANCE CESAR PURISIMA; and
HONORABLE
COMMISSIONER
OF
INTERNAL
REVENUE GUILLERMO PARAYNO, JR.,Respondents.
x-------------------------x
AQUILINO Q. PIMENTEL, JR., LUISA P. EJERCITOESTRADA, JINGGOY E. ESTRADA, PANFILO M.
LACSON, ALFREDO S. LIM, JAMBY A.S. MADRIGAL,
AND SERGIO R. OSMEA III, G.R. No. 168207
Petitioners,
- versus EXECUTIVE SECRETARY EDUARDO R. ERMITA, CESAR
V. PURISIMA, SECRETARY OF FINANCE, GUILLERMO
L. PARAYNO, JR., COMMISSIONER OF THE BUREAU
OF INTERNAL REVENUE,Respondents.
x-------------------------x
ASSOCIATION OF PILIPINAS SHELL DEALERS, INC.
represented by its President, ROSARIO ANTONIO;
PETRON DEALERS ASSOCIATION represented by its
President, RUTH E. BARBIBI; ASSOCIATION OF
CALTEX DEALERS OF THE PHILIPPINES represented
by its President, MERCEDITAS A. GARCIA; ROSARIO
ANTONIO doing business under the name and style
of ANB NORTH SHELL SERVICE STATION; LOURDES
MARTINEZ doing business under the name and
style of SHELL GATE N. DOMINGO; BETHZAIDA TAN
doing business under the name and style of
ADVANCE SHELL STATION; REYNALDO P. MONTOYA
doing business under the name and style of NEW
LAMUAN SHELL SERVICE STATION; EFREN SOTTO
doing business under the name and style of RED
FIELD
SHELL
SERVICE
STATION;
DONICA
CORPORATION represented by its President, DESI
TOMACRUZ; RUTH E. MARBIBI doing business under
the name and style of R&R PETRON STATION; PETER
M. UNGSON doing business under the name and

style of CLASSIC STAR GASOLINE SERVICE STATION;

MARIAN SHEILA A. LEE doing business under the
name and style of NTE GASOLINE & SERVICE
STATION; JULIAN CESAR P. POSADAS doing business
under the name and style of STARCARGA
ENTERPRISES; ADORACION MAEBO doing business
under the name and style of CMA MOTORISTS
CENTER; SUSAN M. ENTRATA doing business under
the name and style of LEONAS GASOLINE STATION
and SERVICE CENTER; CARMELITA BALDONADO
doing business under the name and style of FIRST
CHOICE SERVICE CENTER; MERCEDITAS A. GARCIA
doing business under the name and style of
LORPED SERVICE CENTER; RHEAMAR A. RAMOS
doing business under the name and style of RJRAM
PTT GAS STATION; MA. ISABEL VIOLAGO doing
business under the name and style of VIOLAGO-PTT
SERVICE CENTER; MOTORISTS HEART CORPORATION
represented by its Vice-President for Operations,
JOSELITO F. FLORDELIZA; MOTORISTS HARVARD
CORPORATION represented by its Vice-President for
Operations, JOSELITO F. FLORDELIZA; MOTORISTS
HERITAGE CORPORATION represented by its VicePresident for Operations, JOSELITO F. FLORDELIZA;
PHILIPPINE
STANDARD
OIL
CORPORATION
represented by its Vice-President for Operations,
JOSELITO F. FLORDELIZA; ROMEO MANUEL doing
business under the name and style of ROMMAN
GASOLINE STATION; ANTHONY ALBERT CRUZ III
doing business under the name and style of TRUE
SERVICE STATION,G.R. No. 168461
Petitioners,
- versus CESAR V. PURISIMA, in his capacity as Secretary of
the Department of Finance and GUILLERMO L.
PARAYNO, JR., in his capacity as Commissioner of
Internal Revenue,Respondents.
------------------x
FRANCIS
JOSEPH
G.
ESCUDERO,
VINCENT
CRISOLOGO, EMMANUEL JOEL J. VILLANUEVA,
RODOLFO
G.
PLAZA,
DARLENE
ANTONINOCUSTODIO, OSCAR G. MALAPITAN, BENJAMIN C.

AGARAO, JR. JUAN EDGARDO M. ANGARA, JUSTIN

MARC SB. CHIPECO, FLORENCIO G. NOEL, MUJIV S.
HATAMAN, RENATO B. MAGTUBO, JOSEPH A.
SANTIAGO, TEOFISTO DL. GUINGONA III, RUY ELIAS
C. LOPEZ, RODOLFO Q. AGBAYANI and TEODORO A.
CASIO,G.R. No. 168463
Petitioners,
- versus CESAR V. PURISIMA, in his capacity as Secretary of
Finance, GUILLERMO L. PARAYNO, JR., in his
capacity as Commissioner of Internal Revenue, and
EDUARDO R. ERMITA, in his capacity as Executive
Secretary, Respondents.
x-------------------------x

BATAAN GOVERNOR ENRIQUE T. GARCIA, JR.

G.R. No. 168730
Petitioner,
- versus HON. EDUARDO R. ERMITA, in his capacity as the
Executive Secretary; HON. MARGARITO TEVES, in
his capacity as Secretary of Finance; HON. JOSE
MARIO BUNAG, in his capacity as the OIC
Commissioner of the Bureau of Internal Revenue;
and HON. ALEXANDER AREVALO, in his capacity as
the OIC Commissioner of the Bureau of Customs,
Promulgated:
Respondents.
September 1, 2005
x---------------------------------------------------x
DECISION
AUSTRIA-MARTINEZ, J.:

The expenses of government, having for their object the

interest of all, should be borne by everyone, and the more
man enjoys the advantages of society, the more he ought
to hold himself honored in contributing to those expenses.
-Anne Robert Jacques Turgot (1727-1781)
French statesman and economist
Mounting budget deficit, revenue generation, inadequate
fiscal allocation for education, increased emoluments for
health workers, and wider coverage for full value-added
tax benefits these are the reasons why Republic Act No.
9337 (R.A. No. 9337)[1] was enacted. Reasons, the wisdom
of which, the Court even with its extensive constitutional
power of review, cannot probe. The petitioners in these
cases, however, question not only the wisdom of the law,
but also perceived constitutional infirmities in its passage.
Every law enjoys in its favor the presumption of
constitutionality.
Their
arguments
notwithstanding,
petitioners failed to justify their call for the invalidity of
the law. Hence, R.A. No. 9337 is not unconstitutional.
LEGISLATIVE HISTORY
R.A. No. 9337 is a consolidation of three legislative bills
namely, House Bill Nos. 3555 and 3705, and Senate Bill
No. 1950.
House Bill No. 3555[2] was introduced on first reading
on January 7, 2005. The House Committee on Ways and
Means approved the bill, in substitution of House Bill No.
1468, which Representative (Rep.) Eric D. Singson
introduced on August 8, 2004. The President certified the
bill on January 7, 2005 for immediate enactment.
On January 27, 2005, the House of Representatives
approved the bill on second and third reading.
House Bill No. 3705[3] on the other hand, substituted
House Bill No. 3105 introduced by Rep. Salacnib F.
Baterina, and House Bill No. 3381 introduced by Rep.
Jacinto V. Paras. Its mother bill is House Bill No. 3555. The
House Committee on Ways and Means approved the bill

on February 2, 2005. The President also certified it as

urgent onFebruary 8, 2005. The House of Representatives
approved the bill on second and third reading on February
28, 2005.
Meanwhile, the Senate Committee on Ways and Means
approved Senate Bill No. 1950[4] on March 7, 2005, in
substitution of Senate Bill Nos. 1337, 1838 and 1873,
taking into consideration House Bill Nos. 3555 and 3705.
Senator Ralph G. Recto sponsored Senate Bill No. 1337,
while Senate Bill Nos. 1838 and 1873 were both
sponsored by Sens. Franklin M. Drilon, Juan M. Flavier and
Francis N. Pangilinan. The President certified the bill
on March 11, 2005, and was approved by the Senate on
second and third reading on April 13, 2005.
On the same date, April 13, 2005, the Senate agreed to
the request of the House of Representatives for a
committee conference on the disagreeing provisions of
the proposed bills.
Before long, the Conference Committee on the
Disagreeing Provisions of House Bill No. 3555, House Bill
No. 3705, and Senate Bill No. 1950, after having met and
discussed in full free and conference, recommended the
approval of its report, which the Senate did on May 10,
2005, and with the House of Representatives agreeing
thereto the next day, May 11, 2005.

Artemio V. Panganiban, voiced the rationale for its

issuance of the temporary restraining order on July 1,
2005, to wit:
J. PANGANIBAN : . . . But before I go into the details of
your presentation, let me just tell you a little background.
You know when the law took effect on July 1, 2005, the
Court issued a TRO at about 5 oclock in the afternoon. But
before that, there was a lot of complaints aired on
television and on radio. Some people in a gas station were
complaining that the gas prices went up by 10%. Some
people were complaining that their electric bill will go up
by 10%. Other times people riding in domestic air carrier
were complaining that the prices that theyll have to pay
would have to go up by 10%. While all that was being
aired, per your presentation and per our own
understanding of the law, thats not true. Its not true that
the e-vat law necessarily increased prices by 10%
uniformly isnt it?
ATTY. BANIQUED : No, Your Honor.
J. PANGANIBAN : It is not?
ATTY. BANIQUED : Its not, because, Your Honor, there is an
Executive Order that granted the Petroleum companies
some subsidy . . . interrupted
J. PANGANIBAN : Thats correct . . .

On May 23, 2005, the enrolled copy of the consolidated

House and Senate version was transmitted to the
President, who signed the same into law on May 24, 2005.
Thus, came R.A. No. 9337.
July 1, 2005 is the effectivity date of R.A. No. 9337.
[5]
When said date came, the Court issued a temporary
restraining order, effective immediately and continuing
until further orders, enjoining respondents from enforcing
and implementing the law.
Oral arguments were held on July 14, 2005. Significantly,
during the hearing, the Court speaking through Mr. Justice

ATTY. BANIQUED : . . . and therefore that was meant to

temper the impact . . . interrupted
J. PANGANIBAN : . . . mitigating measures . . .
ATTY. BANIQUED : Yes, Your Honor.
J. PANGANIBAN : As a matter of fact a part of the
mitigating measures would be the elimination of the
Excise Tax and the import duties. That is why, it is not

correct to say that the VAT as to petroleum dealers

increased prices by 10%.
ATTY. BANIQUED : Yes, Your Honor.
J. PANGANIBAN : And therefore, there is no justification for
increasing the retail price by 10% to cover the E-Vat tax. If
you consider the excise tax and the import duties, the Net
Tax would probably be in the neighborhood of 7%? We are
not going into exact figures I am just trying to deliver a
point that different industries, different products, different
services are hit differently. So its not correct to say that all
prices must go up by 10%.
ATTY. BANIQUED : Youre right, Your Honor.
J. PANGANIBAN : Now. For instance, Domestic Airline
companies, Mr. Counsel, are at present imposed a Sales
Tax of 3%. When this E-Vat law took effect the Sales Tax
was also removed as a mitigating measure. So, therefore,
there is no justification to increase the fares by 10% at
best 7%, correct?
ATTY. BANIQUED : I guess so, Your Honor, yes.
J. PANGANIBAN : There are other products that the people
were complaining on that first day, were being increased
arbitrarily by 10%. And thats one reason among many
others this Court had to issue TRO because of the
confusion in the implementation. Thats why we added as
an issue in this case, even if its tangentially taken up by
the pleadings of the parties, the confusion in the
implementation of the E-vat. Our people were subjected
to the mercy of that confusion of an across the board
increase of 10%, which you yourself now admit and I think
even the Government will admit is incorrect. In some
cases, it should be 3% only, in some cases it should be
6% depending on these mitigating measures and the
location and situation of each product, of each service, of
each company, isnt it?
ATTY. BANIQUED : Yes, Your Honor.

J. PANGANIBAN : Alright. So thats one reason why we had

to issue a TRO pending the clarification of all these and
we wish the government will take time to clarify all these
by means of a more detailed implementing rules, in case
the law is upheld by this Court. . . . [6]
The Court also directed the parties to file their respective
Memoranda.
G.R. No. 168056
Before R.A. No. 9337 took effect, petitioners ABAKADA
GURO Party List, et al., filed a petition for prohibition
on May 27, 2005. They question the constitutionality of
Sections 4, 5 and 6 of R.A. No. 9337, amending Sections
106, 107 and 108, respectively, of the National Internal
Revenue Code (NIRC). Section 4 imposes a 10% VAT on
sale of goods and properties, Section 5 imposes a 10%
VAT on importation of goods, and Section 6 imposes a
10% VAT on sale of services and use or lease of
properties. These questioned provisions contain a
uniform proviso authorizing
the
President,
upon
recommendation of the Secretary of Finance, to raise the
VAT rate to 12%, effective January 1, 2006, after any of
the following conditions have been satisfied, to wit:
. . . That the President, upon the recommendation of the
Secretary of Finance, shall, effective January 1, 2006,
raise the rate of value-added tax to twelve percent (12%),
after any of the following conditions has been satisfied:
(i) Value-added tax collection as a percentage of Gross
Domestic Product (GDP) of the previous year exceeds two
and four-fifth percent (2 4/5%); or
(ii) National government deficit as a percentage of GDP of
the previous year exceeds one and one-half percent (1
%).

Petitioners argue that the law is unconstitutional, as it

constitutes abandonment by Congress of its exclusive
authority to fix the rate of taxes under Article VI, Section
28(2) of the 1987 Philippine Constitution.
G.R. No. 168207
On June 9, 2005, Sen. Aquilino Q. Pimentel, Jr., et al., filed
a
petition
for certiorari likewise
assailing
the
constitutionality of Sections 4, 5 and 6 of R.A. No. 9337.
Aside from questioning the so-called stand-by authority of
the President to increase the VAT rate to 12%, on the
ground that it amounts to an undue delegation of
legislative power, petitioners also contend that the
increase in the VAT rate to 12% contingent on any of the
two conditions being satisfied violates the due process
clause embodied in Article III, Section 1 of the
Constitution, as it imposes an unfair and additional tax
burden on the people, in that: (1) the 12% increase is
ambiguous because it does not state if the rate would be
returned to the original 10% if the conditions are no
longer satisfied; (2) the rate is unfair and unreasonable,
as the people are unsure of the applicable VAT rate from
year to year; and (3) the increase in the VAT rate, which is
supposed to be an incentive to the President to raise the
VAT collection to at least 2 4/5 of the GDP of the previous
year, should only be based on fiscal adequacy.
Petitioners further claim that the inclusion of a stand-by
authority granted to the President by the Bicameral
Conference Committee is a violation of the noamendment rule upon last reading of a bill laid down in
Article VI, Section 26(2) of the Constitution.

excluding the VAT components, exceeds One Million Pesos

(P1, 000,000.00);
2) Section 8, amending Section 110 (B) of the NIRC,
imposing a 70% limit on the amount of input tax to be
credited against the output tax; and
3) Section 12, amending Section 114 (c) of the NIRC,
authorizing the Government or any of its political
subdivisions, instrumentalities or agencies, including
GOCCs, to deduct a 5% final withholding tax on gross
payments of goods and services, which are subject to
10% VAT under Sections 106 (sale of goods and
properties) and 108 (sale of services and use or lease of
properties) of the NIRC.
Petitioners
contend
that
these
provisions
are
unconstitutional for being arbitrary, oppressive, excessive,
and confiscatory.
Petitioners argument is premised on the constitutional
right of non-deprivation of life, liberty or property without
due process of law under Article III, Section 1 of the
Constitution. According to petitioners, the contested
sections impose limitations on the amount of input tax
that may be claimed. Petitioners also argue that the input
tax partakes the nature of a property that may not be
confiscated, appropriated, or limited without due process
of law. Petitioners further contend that like any other
property or property right, the input tax credit may be
transferred or disposed of, and that by limiting the same,
the government gets to tax a profit or value-added even if
there is no profit or value-added.

G.R. No. 168461

Thereafter, a petition for prohibition was filed on June 29,
2005, by the Association of Pilipinas Shell Dealers, Inc., et
al., assailing the following provisions of R.A. No. 9337:
1) Section 8, amending Section 110 (A)(2) of the NIRC,
requiring that the input tax on depreciable goods shall be
amortized over a 60-month period, if the acquisition,

Petitioners also believe that these provisions violate the

constitutional guarantee of equal protection of the law
under Article III, Section 1 of the Constitution, as the
limitation on the creditable input tax if: (1) the entity has
a high ratio of input tax; or (2) invests in capital
equipment; or (3) has several transactions with the

government, is not based on real and

differences to meet a valid classification.

substantial

Lastly, petitioners contend that the 70% limit is anything

but progressive, violative of Article VI, Section 28(1) of the
Constitution, and that it is the smaller businesses with
higher input tax to output tax ratio that will suffer the
consequences thereof for it wipes out whatever meager
margins the petitioners make.
G.R. No. 168463
Several members of the House of Representatives led by
Rep. Francis Joseph G. Escudero filed this petition
for certiorari on June 30, 2005. They question the
constitutionality of R.A. No. 9337 on the following
grounds:
1) Sections 4, 5, and 6 of R.A. No. 9337 constitute an
undue delegation of legislative power, in violation of
Article VI, Section 28(2) of the Constitution;
2) The Bicameral Conference Committee acted without
jurisdiction in deleting the no pass on provisions present
in Senate Bill No. 1950 and House Bill No. 3705; and
3) Insertion by the Bicameral Conference Committee of
Sections 27, 28, 34, 116, 117, 119, 121, 125,[7] 148, 151,
236, 237 and 288, which were present in Senate Bill No.
1950, violates Article VI, Section 24(1) of the Constitution,
which provides that all appropriation, revenue or tariff
bills shall originate exclusively in the House of
Representatives

collection and revenue should be solely allocated for

public purposes and expenditures. Petitioner Garcia
further claims that allowing these establishments to pass
on the tax to the consumers is inequitable, in violation of
Article VI, Section 28(1) of the Constitution.
RESPONDENTS COMMENT
The Office of the Solicitor General (OSG) filed a Comment
in behalf of respondents. Preliminarily, respondents
contend that R.A. No. 9337 enjoys the presumption of
constitutionality and petitioners failed to cast doubt on its
validity.
Relying on the case of Tolentino vs. Secretary of Finance,
235 SCRA
630 (1994), respondents argue that the procedural issues
raised by petitioners, i.e., legality of the bicameral
proceedings, exclusive origination of revenue measures
and the power of the Senate concomitant thereto, have
already been settled. With regard to the issue of undue
delegation of legislative power to the President,
respondents contend that the law is complete and leaves
no discretion to the President but to increase the rate to
12% once any of the two conditions provided therein
arise.

G.R. No. 168730

Respondents also refute petitioners argument that the

increase to 12%, as well as the 70% limitation on the
creditable input tax, the 60-month amortization on the
purchase
or
importation
of
capital
goods
exceeding P1,000,000.00, and the 5% final withholding
tax by government agencies, is arbitrary, oppressive, and
confiscatory, and that it violates the constitutional
principle on progressive taxation, among others.

On the eleventh hour, Governor Enrique T. Garcia filed a

petition for certiorari and prohibition on July 20, 2005,
alleging unconstitutionality of the law on the ground that
the limitation on the creditable input tax in effect allows
VAT-registered establishments to retain a portion of the
taxes they collect, thus violating the principle that tax

Finally, respondents manifest that R.A. No. 9337 is the

anchor of the governments fiscal reform agenda. A reform
in the value-added system of taxation is the core revenue
measure that will tilt the balance towards a sustainable
macroeconomic environment necessary for economic
growth.

ISSUES
The Court defined the issues, as follows:
PROCEDURAL ISSUE
Whether R.A. No. 9337 violates the following provisions of
the Constitution:
a. Article VI, Section 24, and
b. Article VI, Section 26(2)
SUBSTANTIVE ISSUES
1. Whether Sections 4, 5 and 6 of R.A. No. 9337,
amending Sections 106, 107 and 108 of the NIRC, violate
the following provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article VI, Section 28(2)
2. Whether Section 8 of R.A. No. 9337, amending Sections
110(A)(2) and 110(B) of the NIRC; and Section 12 of R.A.
No. 9337, amending Section 114(C) of the NIRC, violate
the following provisions of the Constitution:

the amount of tax paid to the buyer, [9] with the seller
acting merely as a tax collector. [10] The burden of VAT is
intended to fall on the immediate buyers and ultimately,
the end-consumers.
In contrast, a direct tax is a tax for which a taxpayer is
directly liable on the transaction or business it engages in,
without transferring the burden to someone else.
[11]
Examples are individual and corporate income taxes,
transfer taxes, and residence taxes.[12]
In the Philippines, the value-added system of sales
taxation has long been in existence, albeit in a different
mode. Prior to 1978, the system was a single-stage tax
computed under the cost deduction method and was
payable only by the original sellers. The single-stage
system was subsequently modified, and a mixture of the
cost deduction method and tax credit method was used to
determine the value-added tax payable. [13] Under the tax
credit method, an entity can credit against or subtract
from the VAT charged on its sales or outputs the VAT paid
on its purchases, inputs and imports. [14]
It was only in 1987, when President Corazon C. Aquino
issued Executive Order No. 273, that the VAT system was
rationalized by imposing a multi-stage tax rate of 0% or
10% on all sales using the tax credit method. [15]

a. Article VI, Section 28(1), and

b. Article III, Section 1
RULING OF THE COURT
As a prelude, the Court deems it apt to restate the
general principles and concepts of value-added tax (VAT),
as the confusion and inevitably, litigation, breeds from a
fallacious notion of its nature.
The VAT is a tax on spending or consumption. It is levied
on the sale, barter, exchange or lease of goods or
properties and services.[8] Being an indirect tax on
expenditure, the seller of goods or services may pass on

E.O. No. 273 was followed by R.A. No. 7716 or the

Expanded VAT Law,[16] R.A. No. 8241 or the Improved VAT
Law,[17] R.A. No. 8424 or the Tax Reform Act of 1997,
[18]
and finally, the presently beleaguered R.A. No. 9337,
also referred to by respondents as the VAT Reform Act.
The Court will now discuss the issues in logical sequence.
PROCEDURAL ISSUE
I.
Whether R.A. No. 9337 violates the following provisions of
the Constitution:

a. Article VI, Section 24, and

b. Article VI, Section 26(2)

Thus, Rule XIV, Sections 88 and 89 of the Rules of House

of Representatives provides as follows:

A. The Bicameral Conference Committee

Sec. 88. Conference Committee. In the event that the

House does not agree with the Senate on the amendment
to any bill or joint resolution, the differences may be
settled by the conference committees of both chambers.

Petitioners Escudero, et al., and Pimentel, et al., allege

that the Bicameral Conference Committee exceeded its
authority by:

2) Deleting entirely the no pass-on provisions found in

both the House and Senate bills;

In resolving the differences with the Senate, the House

panel shall, as much as possible, adhere to and support
the House Bill. If the differences with the Senate are so
substantial that they materially impair the House Bill, the
panel shall report such fact to the House for the latters
appropriate action.

3) Inserting the provision imposing a 70% limit on the

amount of input tax to be credited against the output tax;
and

Sec. 89. Conference Committee Reports. . . . Each report

shall contain a detailed, sufficiently explicit statement of
the changes in or amendments to the subject measure.

4) Including the amendments introduced only by Senate

Bill No. 1950 regarding other kinds of taxes in addition to
the value-added tax.

...

1) Inserting the stand-by authority in favor of

President in Sections 4, 5, and 6 of R.A. No. 9337;

the

Petitioners now beseech the Court to define the powers of

the Bicameral Conference Committee.
It should be borne in mind that the power of internal
regulation and discipline are intrinsic in any legislative
body for, as unerringly elucidated by Justice Story, [i]f
the power did not exist, it would be utterly
impracticable to transact the business of the
nation, either at all, or at least with decency,
deliberation, and order.[19] Thus, Article VI, Section 16
(3) of the Constitution provides that each House may
determine the rules of its proceedings. Pursuant to this
inherent constitutional power to promulgate and
implement its own rules of procedure, the respective rules
of each house of Congress provided for the creation of a
Bicameral Conference Committee.

The Chairman of the House panel may be interpellated on

the Conference Committee Report prior to the voting
thereon. The House shall vote on the Conference
Committee Report in the same manner and procedure as
it votes on a bill on third and final reading.
Rule XII, Section 35 of the Rules of the Senate states:
Sec. 35. In the event that the Senate does not agree with
the House of Representatives on the provision of any bill
or joint resolution, the differences shall be settled by a
conference committee of both Houses which shall meet
within ten (10) days after their composition. The President
shall designate the members of the Senate Panel in the
conference committee with the approval of the Senate.
Each Conference Committee Report shall contain a
detailed and sufficiently explicit statement of the changes
in, or amendments to the subject measure, and shall be

signed by a majority of the members of each House panel,

voting separately.

passage of the law nullified R.A. No. 9006, or the Fair

Election Act.

A comparative presentation of the conflicting House and

Senate provisions and a reconciled version thereof with
the explanatory statement of the conference committee
shall be attached to the report.

Striking down such argument, the Court held thus:

...
The creation of such conference committee was
apparently in response to a problem, not addressed by
any constitutional provision, where the two houses of
Congress find themselves in disagreement over changes
or amendments introduced by the other house in a
legislative bill. Given that one of the most basic powers of
the legislative branch is to formulate and implement its
own rules of proceedings and to discipline its members,
may the Court then delve into the details of how Congress
complies with its internal rules or how it conducts its
business of passing legislation? Note that in the present
petitions, the issue is not whether provisions of the rules
of both houses creating the bicameral conference
committee are unconstitutional, but whether the
bicameral conference committee has strictly
complied with the rules of both houses, thereby
remaining within the jurisdiction conferred upon it
by Congress.
In the recent case of Farias vs. The Executive Secretary,
[20]
the
Court En
Banc, unanimously reiterated
and
emphasized its adherence to the enrolled bill doctrine,
thus, declining therein petitioners plea for the Court to go
behind the enrolled copy of the bill. Assailed in said case
was Congresss creation of two sets of bicameral
conference committees, the lack of records of said
committees proceedings, the alleged violation of said
committees of the rules of both houses, and the
disappearance or deletion of one of the provisions in the
compromise bill submitted by the bicameral conference
committee. It was argued that such irregularities in the

Under the enrolled bill doctrine, the signing of a bill by the

Speaker of the House and the Senate President and the
certification of the Secretaries of both Houses of Congress
that it was passed are conclusive of its due enactment. A
review of cases reveals the Courts consistent adherence
to the rule. The Court finds no reason to deviate
from the salutary rule in this case where the
irregularities alleged by the petitioners mostly
involved the internal rules of Congress, e.g.,
creation of the 2nd or 3rd Bicameral Conference
Committee by the House. This Court is not the
proper forum for the enforcement of these internal
rules of Congress, whether House or Senate.
Parliamentary rules are merely procedural and with
their observance the courts have no concern.
Whatever doubts there may be as to the formal
validity of Rep. Act No. 9006 must be resolved in its
favor. The Court reiterates its ruling inArroyo vs. De
Venecia, viz.:
But the cases, both here and abroad, in varying
forms of expression, all deny to the courts the
power to inquire into allegations that, in enacting a
law, a House of Congress failed to comply with its
own rules, in the absence of showing that there
was a violation of a constitutional provision or the
rights of private individuals. InOsmea v. Pendatun, it
was held: At any rate, courts have declared that the rules
adopted by deliberative bodies are subject to revocation,
modification or waiver at the pleasure of the body
adopting
them. And
it
has
been
said
that
Parliamentary rules are merely procedural, and
with their observance, the courts have no concern.
They may be waived or disregarded by the
legislative body. Consequently, mere failure to
conform to parliamentary usage will not invalidate
the action (taken by a deliberative body) when the

requisite number of members have agreed to a

particular measure.[21] (Emphasis supplied)
The foregoing declaration is exactly in point with the
present cases, where petitioners allege irregularities
committed by the conference committee in introducing
changes or deleting provisions in the House and Senate
bills. Akin to the Farias case,[22] the present petitions also
raise an issue regarding the actions taken by the
conference committee on matters regarding Congress
compliance with its own internal rules. As stated earlier,
one of the most basic and inherent power of the
legislature is the power to formulate rules for its
proceedings and the discipline of its members. Congress
is the best judge of how it should conduct its own
business expeditiously and in the most orderly manner. It
is also the sole
concern of Congress to instill discipline among the
members of its conference committee if it believes that
said members violated any of its rules of proceedings.
Even the expanded jurisdiction of this Court cannot apply
to questions regarding only the internal operation of
Congress, thus, the Court is wont to deny a review of the
internal proceedings of a co-equal branch of government.
Moreover, as far back as 1994 or more than ten years
ago, in the case of Tolentino vs. Secretary of Finance,

[23]

the Court already made the pronouncement that [i]f a

change is desired in the practice [of the Bicameral
Conference Committee] it must be sought in
Congress since this question is not covered by any
constitutional provision but is only an internal rule
of each house. [24] To date, Congress has not seen it fit to
make such changes adverted to by the Court. It seems,
therefore, that Congress finds the practices of the
bicameral conference committee to be very useful for
purposes of prompt and efficient legislative action.
Nevertheless, just to put minds at ease that no blatant
irregularities tainted the proceedings of the bicameral
conference committees, the Court deems it necessary to
dwell on the issue. The Court observes that there was a
necessity for a conference committee because a
comparison of the provisions of House Bill Nos. 3555 and
3705 on one hand, and Senate Bill No. 1950 on the other,
reveals that there were indeed disagreements. As pointed
out in the petitions, said disagreements were as follows:

House Bill No. 3555

House Bill No.3705

Senate Bill No. 1950

With regard to Stand-By Authority in favor of President

Provides for 12% VAT on every
sale of goods or properties
(amending Sec. 106 of NIRC);
12% VAT on importation of goods
(amending Sec. 107 of NIRC); and
12% VAT on sale of services and
use or lease of properties
(amending Sec. 108 of NIRC)

Provides for 12% VAT in general on

sales of goods or properties and
reduced rates for sale of certain
locally manufactured goods and
petroleum products and raw materials
to be used in the manufacture thereof
(amending Sec. 106 of NIRC); 12% VAT
on importation of goods and reduced
rates for certain imported products
including
petroleum
products
(amending Sec. 107 of NIRC); and 12%
VAT on sale of services and use or
lease of properties and a reduced rate
for certain services including power
generation (amending Sec. 108 of
NIRC)

Provides for a single rate of 10% VAT on

sale of goods or properties (amending
Sec. 106 of NIRC), 10% VAT on sale of
services including sale of electricity by
generation companies, transmission
and distribution companies, and use or
lease of properties (amending Sec. 108
of NIRC)

With regard to the no pass-on provision

No similar provision

Provides that the VAT imposed on

power generation and on the sale of
petroleum products shall be absorbed
by generation companies or sellers,
respectively, and shall not be passed
on to consumers

Provides that the VAT imposed on sales

of electricity by generation companies
and services of transmission companies
and distribution companies, as well as
those of franchise grantees of electric
utilities shall not apply to residential
end-users. VAT shall be absorbed by
generation,
transmission,
and
distribution companies.

With regard to 70% limit on input tax credit

Provides that the input tax credit
for capital goods on which a VAT
has been paid shall be equally
distributed over 5 years or the
depreciable life of such capital

No similar provision

Provides that the input tax credit for

capital goods on which a VAT has been
paid shall be equally distributed over 5
years or the depreciable life of such
capital goods; the input tax credit for

goods; the input tax credit for

goods and services other than
capital goods shall not exceed
5% of the total amount of such
goods and services; and for
persons engaged in retail trading
of goods, the allowable input tax
credit shall not exceed 11% of
the total amount of goods
purchased.

goods and services other than capital

goods shall not exceed 90% of the
output VAT.

With regard to amendments to be made to NIRC

provisions regarding income and excise taxes
No
similar
provision

No
similar
provision

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

The disagreements between the provisions in the House

bills and the Senate bill were with regard to (1) what rate
of VAT is to be imposed; (2) whether only the VAT imposed
on electricity generation, transmission and distribution
companies should not be passed on to consumers, as
proposed in the Senate bill, or both the VAT imposed on
electricity generation, transmission and distribution
companies and the VAT imposed on sale of petroleum
products should not be passed on to consumers, as
proposed in the House bill; (3) in what manner input tax
credits should be limited; (4) and whether the NIRC
provisions on corporate income taxes, percentage,
franchise and excise taxes should be amended.

There being differences and/or disagreements on the

foregoing provisions of the House and Senate bills, the
Bicameral Conference Committee was mandated by the
rules of both houses of Congress to act on the same by
settling said differences and/or disagreements. The
Bicameral
Conference
Committee acted on
the
disagreeing provisions by making the following changes:
1. With regard to the disagreement on the rate of VAT to
be imposed, it would appear from the Conference
Committee Report that the Bicameral Conference
Committee tried to bridge the gap in the difference
between the 10% VAT rate proposed by the Senate, and
the various rates with 12% as the highest VAT rate
proposed by the House, by striking a compromise
whereby the present 10% VAT rate would be retained until
certain conditions arise, i.e., the value-added tax
collection as a percentage of gross domestic product
(GDP) of the previous year exceeds 2 4/5%, or National
Government deficit as a percentage of GDP of the
previous year exceeds 1%, when the President, upon
recommendation of the Secretary of Finance shall raise
the rate of VAT to 12% effective January 1, 2006.
2. With regard to the disagreement on whether only the
VAT imposed on electricity generation, transmission and
distribution companies should not be passed on to
consumers or whether both the VAT imposed on electricity
generation, transmission and distribution companies and
the VAT imposed on sale of petroleum products may be
passed on to consumers, the Bicameral Conference
Committee chose to settle such disagreement by

altogether deleting
on provision.

from

its

Report

any no

pass-

3. With regard to the disagreement on whether input tax

credits should be limited or not, the Bicameral Conference
Committee decided to adopt the position of the House by
putting a limitation on the amount of input tax that may
be credited against the output tax, although it crafted its
own language as to the amount of the limitation on input
tax credits and the manner of computing the same by
providing thus:
(A) Creditable Input Tax. . . .
...
Provided, The input tax on goods purchased or imported
in a calendar month for use in trade or business for which
deduction for depreciation is allowed under this Code,
shall be spread evenly over the month of acquisition and
the fifty-nine (59) succeeding months if the aggregate
acquisition cost for such goods, excluding the VAT
component
thereof,
exceeds
one
million
Pesos
(P1,000,000.00): PROVIDED, however, that if the
estimated useful life of the capital good is less than five
(5) years, as used for depreciation purposes, then the
input VAT shall be spread over such shorter period: . . .
(B) Excess Output or Input Tax. If at the end of any
taxable quarter the output tax exceeds the input tax, the
excess shall be paid by the VAT-registered person. If the
input tax exceeds the output tax, the excess shall be
carried over to the succeeding quarter or quarters:
PROVIDED that the input tax inclusive of input VAT carried
over from the previous quarter that may be credited in
every quarter shall not exceed seventy percent (70%) of
the output VAT: PROVIDED, HOWEVER, THAT any input tax
attributable to zero-rated sales by a VAT-registered person
may at his option be refunded or credited against other
internal revenue taxes, . . .

4. With regard to the amendments to other provisions of

the NIRC on corporate income tax, franchise, percentage
and excise taxes, the conference committee decided to
include such amendments and basically adopted the
provisions found in Senate Bill No. 1950, with some
changes as to the rate of the tax to be imposed.
Under the provisions of both the Rules of the House of
Representatives and Senate Rules, the Bicameral
Conference Committee is mandated to settle the
differences between the disagreeing provisions in the
House bill and the Senate bill. The term settle is
synonymous to reconcile and harmonize.[25] To reconcile or
harmonize
disagreeing
provisions,
the
Bicameral
Conference Committee may then (a) adopt the specific
provisions of either the House bill or Senate bill, (b)
decide that neither provisions in the House bill or the
provisions in the Senate bill would
be carried into the final form of the bill, and/or (c) try to
arrive at a compromise between the disagreeing
provisions.
In the present case, the changes introduced by the
Bicameral
Conference
Committee
on
disagreeing
provisions were meant only to reconcile and harmonize
the disagreeing provisions for it did not inject any idea or
intent that is wholly foreign to the subject embraced by
the original provisions.
The so-called stand-by authority in favor of the President,
whereby the rate of 10% VAT wanted by the Senate is
retained until such time that certain conditions arise when
the 12% VAT wanted by the House shall be imposed,
appears to be a compromise to try to bridge the
difference in the rate of VAT proposed by the two houses
of Congress. Nevertheless, such compromise is still totally
within the subject of what rate of VAT should be imposed
on taxpayers.
The no pass-on provision was deleted altogether. In the
transcripts of the proceedings of the Bicameral

Conference Committee held on May 10, 2005, Sen. Ralph

Recto, Chairman of the Senate Panel, explained the
reason for deleting the no pass-on provision in this wise:
. . . the thinking was just to keep the VAT law or the VAT
bill simple. And we were thinking that no sector should be
a beneficiary of legislative grace, neither should any
sector be discriminated on. The VAT is an indirect tax. It
is a pass on-tax. And lets keep it plain and simple. Lets
not confuse the bill and put a no pass-on provision. Twothirds of the world have a VAT system and in this twothirds of the globe, I have yet to see a VAT with a no passthough provision. So, the thinking of the Senate is
basically simple, lets keep the VAT simple. [26](Emphasis
supplied)
Rep. Teodoro Locsin further made the manifestation that
the no pass-on provision never really enjoyed the support
of either House.[27]
With regard to the amount of input tax to be credited
against output tax, the Bicameral Conference Committee
came to a compromise on the percentage rate of the
limitation or cap on such input tax credit, but again, the
change introduced by the Bicameral Conference
Committee was totally within the intent of both houses
to put a cap on input tax that may be
credited against the output tax. From the inception of the
subject revenue bill in the House of Representatives, one
of the major objectives was to plug a glaring loophole in
the tax policy and administration by creating vital
restrictions on the claiming of input VAT tax credits . . .
and [b]y introducing limitations on the claiming of tax
credit, we are capping a major leakage that has placed
our collection efforts at an apparent disadvantage. [28]

Thus, all the changes or modifications made by the

Bicameral Conference Committee were germane to
subjects of the provisions referred
to it for reconciliation. Such being the case, the Court
does not see any grave abuse of discretion amounting to
lack or excess of jurisdiction committed by the Bicameral
Conference Committee. In the earlier cases of Philippine
Judges
Association
vs.
Prado[29] and Tolentino
vs.
[30]
Secretary of Finance,
the Court recognized the longstanding legislative practice of giving said conference
committee ample latitude for compromising differences
between the Senate and the House. Thus, in
the Tolentino case, it was held that:
. . . it is within the power of a conference committee to
include in its report an entirely new provision that is not
found either in the House bill or in the Senate bill. If the
committee can propose an amendment consisting of one
or two provisions, there is no reason why it cannot
propose several provisions, collectively considered as an
amendment in the nature of a substitute, so long as such
amendment is germane to the subject of the bills before
the committee. After all, its report was not final but
needed the approval of both houses of Congress to
become valid as an act of the legislative department. The
charge that in this case the Conference Committee
acted as a third legislative chamber is thus without
any basis.[31] (Emphasis supplied)
B. R.A. No. 9337 Does Not Violate Article VI, Section 26(2)
of the Constitution on the No-Amendment Rule
Article VI, Sec. 26 (2) of the Constitution, states:

As to the amendments to NIRC provisions on taxes other

than the value-added tax proposed in Senate Bill No.
1950, since said provisions were among those referred to
it, the conference committee had to act on the same and
it basically adopted the version of the Senate.

No bill passed by either House shall become a law unless

it has passed three readings on separate days, and
printed copies thereof in its final form have been
distributed to its Members three days before its passage,
except when the President certifies to the necessity of its
immediate enactment to meet a public calamity or

emergency. Upon the last reading of a bill, no amendment

thereto shall be allowed, and the vote thereon shall be
taken immediately thereafter, and the yeas and nays
entered in the Journal.
Petitioners argument that the practice where a bicameral
conference committee is allowed to add or delete
provisions in the House bill and the Senate bill after these
had passed three readings is in effect a circumvention of
the no amendment rule (Sec. 26 (2), Art. VI of the 1987
Constitution), fails to convince the Court to deviate from
its ruling in the Tolentino case that:
Nor is there any reason for requiring that the Committees
Report in these cases must have undergone three
readings in each of the two houses. If that be the case,
there would be no end to negotiation since each house
may seek modification of the compromise bill. . . .
Art. VI. 26 (2) must, therefore, be construed as
referring only to bills introduced for the first time
in either house of Congress, not to the conference
committee report.[32](Emphasis supplied)
The Court reiterates here that the no-amendment rule
refers only to the procedure to be followed by each
house of Congress with regard to bills initiated in
each of said respective houses, before said bill is
transmitted to the other house for its concurrence
or amendment. Verily, to construe said provision in a
way as to proscribe any further changes to a bill after one
house has voted on it would lead to absurdity as this
would mean that the other house of Congress would be
deprived of its constitutional power to amend or introduce
changes to said bill. Thus, Art. VI, Sec. 26 (2) of the
Constitution cannot be taken to mean that the
introduction by the Bicameral Conference Committee of
amendments and modifications to disagreeing provisions
in bills that have been acted upon by both houses of
Congress is prohibited.

C. R.A. No. 9337 Does Not Violate Article VI, Section 24 of

the Constitution on Exclusive Origination of Revenue Bills
Coming to the issue of the validity of the amendments
made regarding the NIRC provisions on corporate income
taxes and percentage, excise taxes. Petitioners refer to
the following provisions, to wit:
Section
27
28(A)(1)
28(B)(1)
34(B)(1)
116
117
119
121
148
151
236
237
288

Rates
of
Income
Tax
on
Domestic
Corporation
Tax on Resident Foreign Corporation
Inter-corporate Dividends
Inter-corporate Dividends
Tax on Persons Exempt from VAT
Percentage Tax on domestic carriers and
keepers of Garage
Tax on franchises
Tax on banks and Non-Bank Financial
Intermediaries
Excise Tax on manufactured oils and other
fuels
Excise Tax on mineral products
Registration requirements
Issuance of receipts or sales or commercial
invoices
Disposition of Incremental Revenue

Petitioners claim that the amendments to these provisions

of the NIRC did not at all originate from the House. They
aver that House Bill No. 3555 proposed amendments only
regarding Sections 106, 107, 108, 110 and 114 of the
NIRC, while House Bill No. 3705 proposed amendments
only to Sections 106, 107,108, 109, 110 and 111 of the
NIRC; thus, the other sections of the NIRC which the
Senate amended but which amendments were not found
in the House bills are not intended to be amended by the
House of Representatives. Hence, they argue that since
the proposed amendments did not originate from the

House, such amendments are a violation of Article VI,

Section 24 of the Constitution.
The argument does not hold water.
Article VI, Section 24 of the Constitution reads:
Sec. 24. All appropriation, revenue or tariff bills, bills
authorizing increase of the public debt, bills of local
application, and private bills shall originate exclusively in
the House of Representatives but the Senate may propose
or concur with amendments.
In the present cases, petitioners admit that it was indeed
House Bill Nos. 3555 and 3705 that initiated the move for
amending provisions of the NIRC dealing mainly with the
value-added tax. Upon transmittal of said House bills to
the Senate, the Senate came out with Senate Bill No.
1950 proposing amendments not only to NIRC provisions
on the value-added tax but also amendments to NIRC
provisions on other kinds of taxes. Is the introduction by
the Senate of provisions not dealing directly with the
value- added tax, which is the only kind of tax being
amended in the House bills, still within the purview of the
constitutional provision authorizing the Senate to propose
or concur with amendments to a revenue bill that
originated from the House?
The foregoing question had been squarely answered in
the Tolentino case, wherein the Court held, thus:
. . . To begin with, it is not the law but the revenue bill
which is required by the Constitution to originate
exclusively in the House of Representatives. It is
important to emphasize this, because a bill originating in
the House may undergo such extensive changes in the
Senate that the result may be a rewriting of the
whole. . . . At this point, what is important to note is that,
as a result of the Senate action, a distinct bill may be
produced. To insist that a revenue statute and not
only the bill which initiated the legislative process

culminating in the enactment of the law must

substantially be the same as the House bill would
be to deny the Senates power not only to concur
with
amendments but
also
to propose
amendments. It would be to violate the coequality of
legislative power of the two houses of Congress and in
fact make the House superior to the Senate.
Given, then, the power of the Senate to propose
amendments, the Senate can propose its own
version even with respect to bills which are
required by the Constitution to originate in the
House.
...
Indeed, what the Constitution simply means is that the
initiative for filing revenue, tariff or tax bills, bills
authorizing an increase of the public debt, private bills
and bills of local application must come from the House of
Representatives on the theory that, elected as they are
from the districts, the members of the House can be
expected to be more sensitive to the local needs
and problems. On the other hand, the senators,
who are elected at large, are expected to approach
the same problems from the national perspective.
Both views are thereby made to bear on the
enactment of such laws.[33] (Emphasis supplied)
Since there is no question that the revenue bill exclusively
originated in the House of Representatives, the Senate
was acting within its
constitutional power to introduce amendments to the
House bill when it included provisions in Senate Bill No.
1950 amending corporate income taxes, percentage,
excise and franchise taxes. Verily, Article VI, Section 24 of
the Constitution does not contain any prohibition or
limitation on the extent of the amendments that may be
introduced by the Senate to the House revenue bill.

Furthermore, the amendments introduced by the Senate

to the NIRC provisions that had not been touched in the
House bills are still in furtherance of the intent of the
House in initiating the subject revenue bills. The
Explanatory Note of House Bill No. 1468, the very first
House bill introduced on the floor, which was later
substituted by House Bill No. 3555, stated:
One of the challenges faced by the present administration
is the urgent and daunting task of solving the countrys
serious financial problems. To do this, government
expenditures must be strictly monitored and controlled
and revenues must be significantly increased. This may
be easier said than done, but our fiscal authorities are still
optimistic the government will be operating on a balanced
budget by the year 2009. In fact, several measures that
will result to significant expenditure savings have been
identified by the administration. It is supported with a
credible package of revenue measures that include
measures to improve tax administration and
control the leakages in revenues from income taxes
and the value-added tax (VAT). (Emphasis supplied)
Rep. Eric D. Singson, in his sponsorship speech for House
Bill No. 3555, declared that:
In the budget message of our President in the year 2005,
she reiterated that we all acknowledged that on top of our
agenda must be the restoration of the health of our fiscal
system.
In order to considerably lower the consolidated public
sector deficit and eventually achieve a balanced budget
by the year 2009, we need to seize windows of
opportunities which might seem poignant in the
beginning, but in the long run prove effective and
beneficial to the overall status of our economy. One
such opportunity is a review of existing tax rates,
evaluating the relevance given our present
conditions.[34] (Emphasis supplied)

Notably therefore, the main purpose of the bills

emanating from the House of Representatives is to bring
in sizeable revenues for the government
to supplement our countrys serious financial problems,
and improve tax administration and control of the
leakages in revenues from income taxes and value-added
taxes. As these house bills were transmitted to the
Senate, the latter, approaching the measures from the
point of national perspective, can introduce amendments
within the purposes of those bills. It can provide for ways
that would soften the impact of the VAT measure on the
consumer, i.e., by distributing the burden across all
sectors instead of putting it entirely on the shoulders of
the consumers. The sponsorship speech of Sen. Ralph
Recto on why the provisions on income tax on corporation
were included is worth quoting:
All in all, the proposal of the Senate Committee on Ways
and Means will raise P64.3 billion in additional revenues
annually even while by mitigating prices of power,
services and petroleum products.
However, not all of this will be wrung out of VAT. In fact,
only P48.7 billion amount is from the VAT on twelve goods
and services. The rest of the tab P10.5 billion- will be
picked by corporations.
What we therefore prescribe is a burden sharing between
corporate Philippines and the consumer. Why should the
latter bear all the pain? Why should the fiscal salvation be
only on the burden of the consumer?
The corporate worlds equity is in form of the increase in
the corporate income tax from 32 to 35 percent, but up to
2008 only. This will raise P10.5 billion a year. After that,
the rate will slide back, not to its old rate of 32 percent,
but two notches lower, to 30 percent.
Clearly, we are telling those with the capacity to pay,
corporations, to bear with this emergency provision that
will be in effect for 1,200 days, while we put our fiscal

house in order. This fiscal medicine will have an expiry

date.

however bring down the excise tax on socially sensitive

products such as diesel, bunker, fuel and kerosene.

For their assistance, a reward of tax reduction awaits

them. We intend to keep the length of their sacrifice brief.
We would like to assure them that not because there is a
light at the end of the tunnel, this government will keep
on making the tunnel long.

...

The responsibility will not rest solely on the weary

shoulders of the small man. Big business will be there to
share the burden.[35]
As the Court has said, the Senate can propose
amendments and in fact, the amendments made on
provisions in the tax on income of corporations are
germane to the purpose of the house bills which is to
raise revenues for the government.
Likewise, the Court finds the sections referring to other
percentage and excise taxes germane to the reforms to
the VAT system, as these sections would cushion the
effects of VAT on consumers. Considering that certain
goods and services which were subject to percentage tax
and excise tax would no longer be VAT-exempt, the
consumer would be burdened more as they would be
paying the VAT in addition to these taxes. Thus, there is a
need to amend these sections to soften the impact of VAT.
Again, in his sponsorship speech, Sen. Recto said:
However, for power plants that run on oil, we will reduce
to zero the present excise tax on bunker fuel, to lessen
the effect of a VAT on this product.
For electric utilities like Meralco, we will wipe out the
franchise tax in exchange for a VAT.
And in the case of petroleum, while we will levy the VAT
on oil products, so as not to destroy the VAT chain, we will

What do all these exercises point to? These are not

contortions of giving to the left hand what was taken from
the right. Rather, these sprang from our concern of
softening the impact of VAT, so that the people can
cushion the blow of higher prices they will have to pay as
a result of VAT.[36]
The other sections amended by the Senate pertained to
matters of tax administration which are necessary for the
implementation of the changes in the VAT system.
To reiterate, the sections introduced by the Senate are
germane to the subject matter and purposes of the house
bills, which is to supplement our countrys fiscal deficit,
among others. Thus, the Senate acted within its power to
propose those amendments.
SUBSTANTIVE ISSUES
I.
Whether Sections 4, 5 and 6 of R.A. No. 9337, amending
Sections 106, 107 and 108 of the NIRC, violate the
following provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article VI, Section 28(2)
A. No Undue Delegation of Legislative Power
Petitioners ABAKADA GURO Party List, et al., Pimentel,
Jr., et al., and Escudero, et al. contend in common that
Sections 4, 5 and 6 of R.A. No. 9337, amending Sections
106, 107 and 108, respectively, of the NIRC giving the
President the stand-by authority to raise the VAT rate from
10% to 12% when a certain condition is met, constitutes
undue delegation of the legislative power to tax.
The assailed provisions read as follows:

SEC. 4. Sec. 106 of the same Code, as amended, is hereby

further amended to read as follows:
SEC. 106. Value-Added Tax on Sale of Goods or Properties.
(A) Rate and Base of Tax. There shall be levied, assessed
and collected on every sale, barter or exchange of goods
or properties, a value-added tax equivalent to ten percent
(10%) of the gross selling price or gross value in money of
the goods or properties sold, bartered or exchanged, such
tax to be paid by the seller or transferor: provided,
that the President, upon the recommendation of
the Secretary of Finance, shall, effective January 1,
2006, raise the rate of value-added tax to twelve
percent (12%), after any of the following conditions
has been satisfied.
(i)
value-added
tax
collection
as
a
percentage of Gross Domestic Product (GDP) of the
previous year exceeds two and four-fifth percent (2
4/5%) or
(ii) national government deficit as a percentage of
GDP of the previous year exceeds one and one-half
percent (1 %).
SEC. 5. Section 107 of the same Code, as amended, is
hereby further amended to read as follows:
SEC. 107. Value-Added Tax on Importation of Goods.
(A) In General. There shall be levied, assessed and
collected on every importation of goods a value-added tax
equivalent to ten percent (10%) based on the total value
used by the Bureau of Customs in determining tariff and
customs duties, plus customs duties, excise taxes, if any,
and other charges, such tax to be paid by the importer
prior to the release of such goods from customs custody:
Provided, That where the customs duties are determined
on the basis of the quantity or volume of the goods, the
value-added tax shall be based on the landed cost plus
excise taxes, if any: provided, further, that the

President, upon the recommendation of the

Secretary of Finance, shall, effective January 1,
2006, raise the rate of value-added tax to twelve
percent (12%) after any of the following conditions
has been satisfied.
(i) value-added tax collection as a percentage of
Gross Domestic Product (GDP) of the previous year
exceeds two and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of
GDP of the previous year exceeds one and one-half
percent (1 %).
SEC. 6. Section 108 of the same Code, as amended, is
hereby further amended to read as follows:
SEC. 108. Value-added Tax on Sale of Services and Use or
Lease of Properties
(A) Rate and Base of Tax. There shall be levied, assessed
and collected, a value-added tax equivalent to ten
percent (10%) of gross receipts derived from the sale or
exchange of services: provided, that the President,
upon the recommendation of the Secretary of
Finance, shall, effective January 1, 2006, raise the
rate of value-added tax to twelve percent (12%),
after any of the following conditions has been
satisfied.
(i) value-added tax collection as a percentage of
Gross Domestic Product (GDP) of the previous year
exceeds two and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of
GDP of the previous year exceeds one and one-half
percent (1 %). (Emphasis supplied)
Petitioners allege that the grant of the stand-by
authority to the President to increase the VAT rate is a
virtual abdication by Congress of its exclusive power to
tax because such delegation is not within the purview of
Section 28 (2), Article VI of the Constitution, which
provides:

The Congress may, by law, authorize the President to fix

within specified limits, and may impose, tariff rates,
import and export quotas, tonnage and wharfage dues,
and other duties or imposts within the framework of the
national development program of the government.
They argue that the VAT is a tax levied on the sale, barter
or exchange of goods and properties as well as on the
sale or exchange of services, which cannot be included
within the purview of tariffs under the exempted
delegation as the latter refers to customs duties, tolls or
tribute payable upon merchandise to the government and
usually imposed on goods or merchandise imported or
exported.
Petitioners ABAKADA GURO Party List, et al., further
contend that delegating to the President the legislative
power to tax is contrary to republicanism. They insist that
accountability, responsibility and transparency should
dictate the actions of Congress and they should not pass
to the President the decision to impose taxes. They also
argue that the law also effectively nullified the Presidents
power of control, which includes the authority to set aside
and nullify the acts of her subordinates like the Secretary
of Finance, by mandating the fixing of the tax rate by the
President upon the recommendation of the Secretary of
Finance.
Petitioners Pimentel, et al. aver that the President has
ample powers to cause, influence or create the conditions
provided by the law to bring about either or both the
conditions precedent.
On the other hand, petitioners Escudero, et al. find bizarre
and revolting the situation that the imposition of the 12%
rate would be subject to the whim of the Secretary of
Finance, an unelected bureaucrat, contrary to the
principle of no taxation without representation. They
submit that the Secretary of Finance is not mandated to
give a favorable recommendation and he may not even

give his recommendation. Moreover, they allege that no

guiding standards are provided in the law on what basis
and as to how he will make his recommendation. They
claim, nonetheless, that any recommendation of the
Secretary of Finance can easily be brushed aside by the
President since the former is a mere alter ego of the
latter, such that, ultimately, it is the President who
decides whether to impose the increased tax rate or not.
A brief discourse on the principle of non-delegation of
powers is instructive.
The principle of separation of powers ordains that each of
the three great branches of government has exclusive
cognizance of and is supreme in matters falling within its
own constitutionally allocated sphere.[37] A logical
corollary to the doctrine of separation of powers is the
principle of non-delegation of powers, as expressed in the
Latin maxim: potestas delegata non delegari potest which
means what has been delegated, cannot be delegated.
[38]
This doctrine is based on the ethical principle that such
as delegated power constitutes not only a right but a duty
to be performed by the delegate through the
instrumentality of his own judgment and not through the
intervening mind of another.[39]
With respect to the Legislature, Section 1 of Article VI of
the Constitution provides that the Legislative power shall
be vested in the Congress of the Philippines which shall
consist of a Senate and a House of Representatives. The
powers which Congress is prohibited from delegating are
those which are strictly, or inherently and exclusively,
legislative. Purely legislative power, which can never be
delegated, has been described as the authority to make
a complete law complete as to the time when it
shall take effect and as to whom it shall be
applicable and to determine the expediency of its
enactment.[40] Thus, the rule is that in order that a court
may be justified in holding a statute unconstitutional as a
delegation of legislative power, it must appear that the
power involved is purely legislative in nature that is, one
appertaining exclusively to the legislative department. It

is the nature of the power, and not the liability of its use
or the manner of its exercise, which determines the
validity of its delegation.

nothing was left to the judgment of any other appointee

or delegate of the legislature.
...

Nonetheless, the general rule barring delegation of

legislative powers is subject to the following recognized
limitations or exceptions:
(1) Delegation of tariff powers to the President under
Section 28 (2) of Article VI of the Constitution;
(2) Delegation of emergency powers to the President
under Section 23 (2) of Article VI of the Constitution;
(3) Delegation to the people at large;
(4) Delegation to local governments; and
(5) Delegation to administrative bodies.
In every case of permissible delegation, there must be a
showing that the delegation itself is valid. It is valid only if
the law (a) is complete in itself, setting forth therein the
policy to be executed, carried out, or implemented by the
delegate;[41] and (b) fixes a standard the limits of which
are sufficiently determinate and determinable to which
the delegate must conform in the performance of his
functions.[42] A sufficient standard is one which defines
legislative policy, marks its limits, maps out its boundaries
and specifies the public agency to apply it. It indicates the
circumstances under which the legislative command is to
be effected.[43] Both tests are intended to prevent a total
transference of legislative authority to the delegate, who
is not allowed to step into the shoes of the legislature and
exercise a power essentially legislative.[44]
In People vs. Vera,[45] the Court, through eminent Justice
Jose P. Laurel, expounded on the concept and extent of
delegation of power in this wise:
In testing whether a statute constitutes an undue
delegation of legislative power or not, it is usual to inquire
whether the statute was complete in all its terms and
provisions when it left the hands of the legislature so that

The true distinction, says Judge Ranney, is between

the delegation of power to make the law, which
necessarily involves a discretion as to what it shall
be, and conferring an authority or discretion as to
its execution, to be exercised under and in
pursuance of the law. The first cannot be done; to
the latter no valid objection can be made.
...
It is contended, however, that a legislative act may be
made to the effect as law after it leaves the hands of the
legislature. It is true that laws may be made effective on
certain contingencies, as by proclamation of the executive
or the adoption by the people of a particular community.
In Wayman vs. Southard, the Supreme Court of the United
States ruled that the legislature may delegate a power not
legislative which it may itself rightfully exercise. The
power to ascertain facts is such a power which may
be delegated. There is nothing essentially
legislative in ascertaining the existence of facts or
conditions as the basis of the taking into effect of a
law. That is a mental process common to all
branches of the government.Notwithstanding the
apparent tendency, however, to relax the rule prohibiting
delegation of legislative authority on account of the
complexity arising from social and economic forces at
work in this modern industrial age, the orthodox
pronouncement of Judge Cooley in his work on
Constitutional Limitations finds restatement in Prof.
Willoughby's treatise on the Constitution of the United
States in the following language speaking of declaration
of legislative power to administrative agencies: The
principle which permits the legislature to provide
that the administrative agent may determine when
the circumstances are such as require the
application of a law is defended upon the ground

that at the time this authority is granted, the rule

of public policy, which is the essence of the
legislative act, is determined by the legislature. In
other words, the legislature, as it is its duty to do,
determines that, under given circumstances,
certain executive or administrative action is to be
taken, and that, under other circumstances,
different or no action at all is to be taken. What is
thus left to the administrative official is not the
legislative determination of what public policy
demands, but simply the ascertainment of what the
facts of the case require to be done according to
the terms of the law by which he is governed. The
efficiency of an Act as a declaration of legislative
will must, of course, come from Congress, but the
ascertainment of the contingency upon which the
Act shall take effect may be left to such agencies as
it may designate. The legislature, then, may
provide that a law shall take effect upon the
happening of future specified contingencies leaving
to some other person or body the power to
determine when the specified contingency has
arisen. (Emphasis supplied).[46]
In Edu vs. Ericta,[47] the Court reiterated:
What cannot be delegated is the authority under the
Constitution to make laws and to alter and repeal them;
the test is the completeness of the statute in all its terms
and provisions when it leaves the hands of the legislature.
To determine whether or not there is an undue delegation
of legislative power, the inquiry must be directed to the
scope and definiteness of the measure enacted. The
legislative does not abdicate its functions when it
describes what job must be done, who is to do it,
and what is the scope of his authority. For a complex
economy, that may be the only way in which the
legislative process can go forward. A distinction has
rightfully been made between delegation of power
to make the laws which necessarily involves a
discretion as to what it shall be, which

constitutionally may not be done, and delegation of

authority or discretion as to its execution to be
exercised under and in pursuance of the law, to
which no valid objection can be made. The
Constitution is thus not to be regarded as denying the
legislature the necessary resources of flexibility and
practicability. (Emphasis supplied).[48]
Clearly, the legislature may delegate to executive officers
or bodies the power to determine certain facts or
conditions, or the happening of contingencies, on which
the operation of a statute is, by its terms, made to
depend, but the legislature must prescribe sufficient
standards, policies or limitations on their authority.
[49]
While the power to tax cannot be delegated to
executive agencies, details as to the enforcement and
administration of an exercise of such power may be left to
them, including the power to determine the existence of
facts on which its operation depends.[50]
The rationale for this is that the preliminary
ascertainment of facts as basis for the enactment of
legislation is not of itself a legislative function, but is
simply ancillary to legislation. Thus, the duty of
correlating information and making recommendations is
the kind of subsidiary activity which the legislature may
perform through its members, or which it may delegate to
others to perform. Intelligent legislation on the
complicated problems of modern society is impossible in
the absence of accurate information on the part of the
legislators, and any reasonable method of securing such
information
is
proper.[51] The
Constitution
as
a
continuously operative charter of government does not
require that Congress find for itself
every fact upon which it desires to base legislative action
or that it make for itself detailed determinations which it
has declared to be prerequisite to application of
legislative policy to particular facts and circumstances
impossible for Congress itself properly to investigate. [52]

In the present case, the challenged section of R.A. No.

9337 is the common proviso in Sections 4, 5 and 6 which
reads as follows:
That the President, upon the recommendation of the
Secretary of Finance, shall, effective January 1, 2006,
raise the rate of value-added tax to twelve percent (12%),
after any of the following conditions has been satisfied:
(i) Value-added tax collection as a percentage of Gross
Domestic Product (GDP) of the previous year exceeds two
and four-fifth percent (2 4/5%); or
(ii) National government deficit as a percentage of GDP of
the previous year exceeds one and one-half percent (1
%).
The case before the Court is not a delegation of legislative
power. It is simply a delegation of ascertainment of facts
upon which enforcement and administration of the
increase rate under the law is contingent. The legislature
has made the operation of the 12% rate effective January
1, 2006, contingent upon a specified fact or condition. It
leaves the entire operation or non-operation of the 12%
rate upon factual matters outside of the control of the
executive.
No discretion would be exercised by the President.
Highlighting the absence of discretion is the fact that the
word shall is used in the common proviso. The use of the
word shall connotes a mandatory order. Its use in a
statute denotes an imperative obligation and is
inconsistent with the idea of discretion.[53] Where the law
is clear and unambiguous, it must be taken to mean
exactly what it says, and courts have no choice but to see
to it that the mandate is obeyed.[54]
Thus, it is the ministerial duty of the President to
immediately impose the 12% rate upon the existence of
any of the conditions specified by Congress. This is a duty
which cannot be evaded by the President. Inasmuch as

the law specifically uses the word shall, the exercise of

discretion by the President does not come into play. It is a
clear directive to impose the 12% VAT rate when the
specified conditions are present. The time of taking into
effect of the 12% VAT rate is based on the happening of a
certain specified contingency, or upon the ascertainment
of certain facts or conditions by a person or body other
than the legislature itself.
The Court finds no merit to the contention of
petitioners ABAKADA GURO Party List, et al. that the law
effectively nullified the Presidents power of control over
the Secretary of Finance by mandating the fixing of the
tax rate by the President upon the recommendation of the
Secretary of Finance. The Court cannot also subscribe to
the position of petitioners
Pimentel, et al. that the word shall should be interpreted
to mean may in view of the phrase upon the
recommendation of the Secretary of Finance. Neither does
the Court find persuasive the submission of petitioners
Escudero, et al. that any recommendation by the
Secretary of Finance can easily be brushed aside by the
President since the former is a mere alter ego of the
latter.
When one speaks of the Secretary of Finance as the alter
ego of the President, it simply means that as head of the
Department of Finance he is the assistant and agent of
the Chief Executive. The multifarious executive and
administrative functions of the Chief Executive are
performed by and through the executive departments,
and the acts of the secretaries of such departments, such
as the Department of Finance, performed and
promulgated in the regular course of business, are, unless
disapproved or reprobated by the Chief Executive,
presumptively the acts of the Chief Executive. The
Secretary of Finance, as such, occupies a political position
and holds office in an advisory capacity, and, in the
language of Thomas Jefferson, "should be of the
President's bosom confidence" and, in the language of
Attorney-General Cushing, is subject to the direction of
the President."[55]

economy that is frequently the only way in which the

legislative process can go forward.[58]
In the present case, in making his recommendation to the
President on the existence of either of the two conditions,
the Secretary of Finance is not acting as the alter ego of
the President or even her subordinate. In such instance,
he is not subject to the power of control and direction of
the President. He is acting as the agent of the legislative
department, to determine and declare the event upon
which its expressed will is to take effect. [56] The Secretary
of Finance becomes the means or tool by which legislative
policy is determined and implemented, considering that
he possesses all the facilities to gather data and
information and has a much broader perspective to
properly evaluate them. His function is to gather and
collate statistical data and other pertinent information
and verify if any of the two conditions laid out by
Congress is present. His personality in such instance is in
reality but a projection of that of Congress. Thus, being
the agent of Congress and not of the President, the
President cannot alter or modify or nullify, or set aside the
findings of the Secretary of Finance and to substitute the
judgment of the former for that of the latter.
Congress simply granted the Secretary of Finance the
authority to ascertain the existence of a fact, namely,
whether by December 31, 2005, the value-added tax
collection as a percentage of Gross Domestic Product
(GDP) of the previous year exceeds two and four-fifth
percent (24/5%) or the national government deficit as a
percentage of GDP of the previous year exceeds one and
one-half percent (1%). If either of these two instances has
occurred, the Secretary of Finance, by legislative
mandate, must submit such information to the President.
Then the 12% VAT rate must be imposed by the President
effective January
1,
2006. There
is
no
undue
delegation of legislative power but only of the
discretion as to the execution of a law. This is
constitutionally permissible.[57] Congress does not
abdicate its functions or unduly delegate power when it
describes what job must be done, who must do it, and
what is the scope of his authority; in our complex

As to the argument of petitioners ABAKADA GURO Party

List, et al. that delegating to the President the legislative
power to tax is contrary to the principle of republicanism,
the same deserves scant consideration. Congress did not
delegate the power to tax but the mere implementation of
the law. The intent and will to increase the VAT rate to
12% came from Congress and the task of the President is
to simply execute the legislative policy. That Congress
chose to do so in such a manner is not within the province
of the Court to inquire into, its task being to interpret the
law.[59]
The insinuation by petitioners Pimentel, et al. that the
President has ample powers to cause, influence or create
the conditions to bring about either or both the conditions
precedent does not deserve any merit as this argument is
highly speculative. The Court does not rule on allegations
which are manifestly conjectural, as these may not exist
at all.The Court deals with facts, not fancies; on realities,
not appearances. When the Court acts on appearances
instead of realities, justice and law will be short-lived.
B. The 12% Increase VAT Rate Does Not Impose an Unfair
and Unnecessary Additional Tax Burden
Petitioners Pimentel, et al. argue that the 12% increase in
the VAT rate imposes an unfair and additional tax burden
on the people. Petitioners also argue that the 12%
increase, dependent on any of the 2 conditions set forth in
the contested provisions, is ambiguous because it does
not state if the VAT rate would be returned to the original
10% if the rates are no longer satisfied. Petitioners also
argue that such rate is unfair and unreasonable, as the
people are unsure of the applicable VAT rate from year to
year.
Under the common provisos of Sections 4, 5 and 6 of R.A.
No. 9337, if any of the two conditions set forth therein are

satisfied, the President shall increase the VAT rate to 12%.

The provisions of the law are clear. It does not provide for
a return to the 10% rate nor does it empower the
President to so revert if, after the rate is increased to
12%, the VAT collection goes below the 24/5 of the GDP of
the previous year or that the national government deficit
as a percentage of GDP of the previous year does not
exceed 1%.
Therefore, no statutory construction or interpretation is
needed. Neither can conditions or limitations be
introduced where none is provided for. Rewriting the law
is a forbidden ground that only Congress may tread upon.
[60]

Thus, in the absence of any provision providing for a

return to the 10% rate, which in this case the Court finds
none, petitioners argument is, at best, purely speculative.
There is no basis for petitioners fear of a fluctuating VAT
rate because the law itself does not provide that the rate
should go back to 10% if the conditions provided in
Sections 4, 5 and 6 are no longer present. The rule is that
where the provision of the law is clear and unambiguous,
so that there is no occasion for the court's seeking the
legislative intent, the law must be taken as it is, devoid of
judicial addition or subtraction.[61]
Petitioners also contend that the increase in the VAT rate,
which was allegedly an incentive to the President to raise
the VAT collection to at least 2 4/5 of the GDP of the
previous year, should be based on fiscal adequacy.
Petitioners obviously overlooked that increase in VAT
collection is not the only condition. There is another
condition, i.e., the national government deficit as a
percentage of GDP of the previous year exceeds one and
one-half percent (1 %).
Respondents explained the philosophy behind these
alternative conditions:
1.

VAT/GDP Ratio > 2.8%

The condition set for increasing VAT rate to 12% have

economic or fiscal meaning. If VAT/GDP is less than 2.8%,
it means that government has weak or no capability of
implementing the VAT or that VAT is not effective in the
function of the tax collection. Therefore, there is no value
to increase it to 12% because such action will also be
ineffectual.
2.

Natl Govt Deficit/GDP >1.5%

The condition set for increasing VAT when deficit/GDP is

1.5% or less means the fiscal condition of government has
reached a relatively sound position or is towards the
direction of a balanced budget position. Therefore, there
is no need to increase the VAT rate since the fiscal house
is in a relatively healthy position. Otherwise stated, if the
ratio is more than 1.5%, there is indeed a need to
increase the VAT rate.[62]
That the first condition amounts to an incentive to the
President to increase the VAT collection does not render it
unconstitutional so long as there is a public purpose for
which the law was passed, which in this case, is mainly to
raise revenue. In fact, fiscal adequacy dictated the need
for a raise in revenue.
The principle of fiscal adequacy as a characteristic of a
sound tax system was originally stated by Adam Smith in
his Canons of Taxation (1776), as:
IV. Every tax ought to be so contrived as both to take out
and to keep out of the pockets of the people as little as
possible over and above what it brings into the public
treasury of the state.[63]
It simply means that sources of revenues must be
adequate to meet government expenditures and their
variations.[64]

The dire need for revenue cannot be ignored. Our country

is in a quagmire of financial woe. During the Bicameral
Conference Committee hearing, then Finance Secretary
Purisima bluntly depicted the countrys gloomy state of
economic affairs, thus:
First, let me explain the position that the Philippines finds
itself in right now. We are in a position where 90 percent
of our revenue is used for debt service. So, for every peso
of revenue that we currently raise, 90 goes to debt
service. Thats interest plus amortization of our debt. So
clearly, this is not a sustainable situation. Thats the first
fact.
The second fact is that our debt to GDP level is way out of
line compared to other peer countries that borrow money
from that international financial markets. Our debt to GDP
is approximately equal to our GDP. Again, that shows you
that this is not a sustainable situation.
The third thing that Id like to point out is the environment
that we are presently operating in is not as benign as
what it used to be the past five years.
What do I mean by that?
In the past five years, weve been lucky because we were
operating in a period of basically global growth and low
interest rates. The past few months, we have seen an
inching up, in fact, a rapid increase in the interest rates in
the leading economies of the world. And, therefore, our
ability to borrow at reasonable prices is going to be
challenged. In fact, ultimately, the question is our ability
to access the financial markets.
When the President made her speech in July last year, the
environment was not as bad as it is now, at least based
on the forecast of most financial institutions. So, we were
assuming that raising 80 billion would put us in a position
where we can then convince them to improve our ability
to borrow at lower rates. But conditions have changed on
us because the interest rates have gone up. In fact, just

within this room, we tried to access the market for a

billion
dollars
because
for
this
year
alone,
the Philippines will have to borrow 4 billion dollars. Of that
amount, we have borrowed 1.5 billion. We issued last
January a 25-year bond at 9.7 percent cost. We were
trying to access last week and the market was not as
favorable and up to now we have not accessed and we
might pull back because the conditions are not very good.
So given this situation, we at the Department of Finance
believe that we really need to front-end our deficit
reduction. Because it is deficit that is causing the increase
of the debt and we are in what we call a debt spiral. The
more debt you have, the more deficit you have because
interest and debt service eats and eats more of your
revenue. We need to get out of this debt spiral. And the
only way, I think, we can get out of this debt spiral is
really have a front-end adjustment in our revenue base. [65]
The image portrayed is chilling. Congress passed the law
hoping for rescue from an inevitable catastrophe. Whether
the law is indeed sufficient to answer the states economic
dilemma is not for the Court to judge. In the Farias case,
the Court refused to consider the various arguments
raised therein that dwelt on the wisdom of Section 14 of
R.A. No. 9006 (The Fair Election Act), pronouncing that:
. . . policy matters are not the concern of the Court.
Government policy is within the exclusive dominion of the
political branches of the government. It is not for this
Court to look into the wisdom or propriety of legislative
determination. Indeed, whether an enactment is wise or
unwise, whether it is based on sound economic theory,
whether it is the best means to achieve the desired
results, whether, in short, the legislative discretion within
its prescribed limits should be exercised in a particular
manner are matters for the judgment of the legislature,
and the serious conflict of opinions does not suffice to
bring them within the range of judicial cognizance. [66]

In the same vein, the Court in this case will not dawdle on
the purpose of Congress or the executive policy, given
that it is not for the judiciary to "pass upon questions of
wisdom, justice or expediency of legislation. [67]
II.
Whether Section 8 of R.A. No. 9337, amending Sections
110(A)(2) and 110(B) of the NIRC; and Section 12 of R.A.
No. 9337, amending Section 114(C) of the NIRC, violate
the following provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article III, Section 1
A. Due Process and Equal Protection Clauses
Petitioners Association of Pilipinas Shell Dealers, Inc., et
al. argue that Section 8 of R.A. No. 9337, amending
Sections 110 (A)(2), 110 (B), and Section 12 of R.A. No.
9337, amending Section 114 (C) of the NIRC are arbitrary,
oppressive, excessive and confiscatory. Their argument is
premised on the constitutional right against deprivation of
life, liberty of property without due process of law, as
embodied in Article III, Section 1 of the Constitution.
Petitioners also contend that these provisions violate the
constitutional guarantee of equal protection of the law.
The doctrine is that where the due process and equal
protection clauses are invoked, considering that they are
not fixed rules but rather broad standards, there is a need
for proof of such persuasive character as would lead to
such a conclusion. Absent such a showing, the
presumption of validity must prevail.[68]
Section 8 of R.A. No. 9337, amending Section 110(B) of
the NIRC imposes a limitation on the amount of input tax
that may be credited against the output tax. It states, in
part: [P]rovided, that the input tax inclusive of the input
VAT carried over from the previous quarter that may be

credited in every quarter shall not exceed seventy percent

(70%) of the output VAT:
Input Tax is defined under Section 110(A) of the NIRC, as
amended, as the value-added tax due from or paid by a
VAT-registered person on the importation of goods or local
purchase of good and services, including lease or use of
property, in the course of trade or business, from a VATregistered person, and Output Tax is the value-added
taxdue on the sale or lease of taxable goods or properties
or services by any person registered or required to
register under the law.
Petitioners claim that the contested sections impose
limitations on the amount of input tax that may be
claimed. In effect, a portion of the input tax that has
already been paid cannot now be credited against the
output tax.
Petitioners argument is not absolute. It assumes that the
input tax exceeds 70% of the output tax, and therefore,
the input tax in excess of 70% remains uncredited.
However, to the extent that the input tax is less than 70%
of the output tax, then 100% of such input tax is still
creditable.
More importantly, the excess input tax, if any, is retained
in a businesss books of accounts and remains creditable
in the succeeding quarter/s. This is explicitly allowed by
Section 110(B), which provides that if the input tax
exceeds the output tax, the excess shall be carried over
to the succeeding quarter or quarters. In addition, Section
112(B) allows a VAT-registered person to apply for the
issuance of a tax credit certificate or refund for any
unused input taxes, to the extent that such input taxes
have not been applied against the output taxes. Such
unused input tax may be used in payment of his other
internal revenue taxes.
The non-application of the unutilized input tax in a given
quarter is not ad infinitum, as petitioners exaggeratedly

contend. Their analysis of the effect of the 70% limitation

is incomplete and one-sided. It ends at the net effect that
there will be unapplied/unutilized inputs VAT for a given
quarter. It does not proceed further to the fact that such
unapplied/unutilized input tax may be credited in the
subsequent periods as allowed by the carry-over provision
of Section 110(B) or that it may later on be refunded
through a tax credit certificate under Section 112(B).
Therefore, petitioners argument must be rejected.
On the other hand, it appears that petitioner Garcia failed
to comprehend the operation of the 70% limitation on the
input tax. According to petitioner, the limitation on the
creditable input tax in effect allows VAT-registered
establishments to retain a portion of the taxes they
collect, which violates the principle that tax collection and
revenue should be for public purposes and expenditures
As earlier stated, the input tax is the tax paid by a person,
passed on to him by the seller, when he buys goods.
Output tax meanwhile is the tax due to the person when
he sells goods. In computing the VAT payable, three
possible scenarios may arise:
First, if at the end of a taxable quarter the output taxes
charged by the seller are equal to the input taxes that he
paid and passed on by the suppliers, then no payment is
required;
Second, when the output taxes exceed the input taxes,
the person shall be liable for the excess, which has to be
paid to the Bureau of Internal Revenue (BIR); [69] and
Third, if the input taxes exceed the output taxes, the
excess shall be carried over to the succeeding quarter or
quarters. Should the input taxes result from zero-rated or
effectively zero-rated transactions, any excess over the
output taxes shall instead be refunded to the taxpayer or
credited against other internal revenue taxes, at the
taxpayers option.[70]

Section 8 of R.A. No. 9337 however, imposed a 70%

limitation on the input tax. Thus, a person can credit his
input tax only up to the extent of 70% of the output tax.
In laymans term, the value-added taxes that a
person/taxpayer paid and passed on to him by a seller
can only be credited up to 70% of the value-added taxes
that is due to him on a taxable transaction. There is no
retention
of
any
tax
collection
because
the
person/taxpayer has already previously paid the input tax
to a seller, and the seller will subsequently remit such
input tax to the BIR. The party directly liable for the
payment of the tax is the seller. [71] What only needs to be
done is for the person/taxpayer to apply or credit these
input taxes, as evidenced by receipts, against his output
taxes.
Petitioners Association of Pilipinas Shell Dealers, Inc., et
al. also argue that the input tax partakes the nature of a
property that may not be confiscated, appropriated, or
limited without due process of law.
The input tax is not a property or a property right within
the constitutional purview of the due process clause. A
VAT-registered persons entitlement to the creditable input
tax is a mere statutory privilege.
The distinction between statutory privileges and vested
rights must be borne in mind for persons have no vested
rights in statutory privileges. The state may change or
take away rights, which were created by the law of the
state, although it may not take away property, which was
vested by virtue of such rights. [72]
Under the previous system of single-stage taxation, taxes
paid at every level of distribution are not recoverable from
the taxes payable, although it becomes part of the cost,
which is deductible from the gross revenue. When Pres.
Aquino issued E.O. No. 273 imposing a 10% multi-stage
tax on all sales, it was then that the crediting of the input
tax paid on purchase or importation of goods and services
by VAT-registered persons against the output tax was
introduced.[73] This was adopted by the Expanded VAT Law

(R.A. No. 7716),[74] and The Tax Reform Act of 1997 (R.A.
No. 8424).[75] The right to credit input tax as against the
output tax is clearly a privilege created by law, a privilege
that also the law can remove, or in this case, limit.
Petitioners also contest as arbitrary, oppressive, excessive
and confiscatory, Section 8 of R.A. No. 9337, amending
Section 110(A) of the NIRC, which provides:
SEC. 110. Tax Credits.

[76]

In the same breath, Congress also justified its move by

saying that the provision was designed to raise an annual
revenue of 22.6 billion.[77] The legislature also dispelled
the fear that the provision will fend off foreign
investments, saying that foreign investors have other tax
incentives provided by law, and citing the case of China,
where despite a 17.5% non-creditable VAT, foreign
investments were not deterred. [78] Again, for whatever is
the purpose of the 60-month amortization, this involves
executive economic policy and legislative wisdom in
which the Court cannot intervene.

(A) Creditable Input Tax.

Provided, That the input tax on goods purchased or
imported in a calendar month for use in trade or business
for which deduction for depreciation is allowed under this
Code, shall be spread evenly over the month of
acquisition and the fifty-nine (59) succeeding months if
the aggregate acquisition cost for such goods, excluding
the VAT component thereof, exceeds One million pesos
(P1,000,000.00): Provided, however, That if the estimated
useful life of the capital goods is less than five (5) years,
as used for depreciation purposes, then the input VAT
shall
be
spread
over
such
a
shorter
period: Provided, finally, That in the case of purchase of
services, lease or use of properties, the input tax shall be
creditable to the purchaser, lessee or license upon
payment of the compensation, rental, royalty or fee.
The foregoing section imposes a 60-month period within
which to amortize the creditable input tax on purchase or
importation of capital goods with acquisition cost of P1
Million pesos, exclusive of the VAT component. Such
spread out only poses a delay in the crediting of the input
tax. Petitioners argument is without basis because the
taxpayer is not permanently deprived of his privilege to
credit the input tax.
It is worth mentioning that Congress admitted that the
spread-out of the creditable input tax in this case
amounts to a 4-year interest-free loan to the government.

With regard to the 5% creditable withholding tax imposed

on payments made by the government for taxable
transactions, Section 12 of R.A. No. 9337, which amended
Section 114 of the NIRC, reads:
SEC. 114. Return and Payment of Value-added Tax.
(C) Withholding of Value-added Tax. The Government or
any of its political subdivisions, instrumentalities or
agencies, including government-owned or controlled
corporations (GOCCs) shall, before making payment on
account of each purchase of goods and services which are
subject to the value-added tax imposed in Sections 106
and 108 of this Code, deduct and withhold a final valueadded tax at the rate of five percent (5%) of the gross
payment thereof: Provided, That the payment for lease or
use of properties or property rights to nonresident owners
shall be subject to ten percent (10%) withholding tax at
the time of payment. For purposes of this Section, the
payor or person in control of the payment shall be
considered as the withholding agent.
The value-added tax withheld under this Section shall be
remitted within ten (10) days following the end of the
month the withholding was made.
Section 114(C) merely provides a method of collection, or
as stated by respondents, a more simplified VAT
withholding system. The government in this case is

constituted as a withholding agent with respect to their

payments for goods and services.
Prior to its amendment, Section 114(C) provided for
different rates of value-added taxes to be withheld -- 3%
on gross payments for purchases of goods; 6% on gross
payments for services supplied by contractors other than
by public works contractors; 8.5% on gross payments for
services supplied by public work contractors; or 10% on
payment for the lease or use of properties or property
rights to nonresident owners. Under the present Section
114(C), these different rates, except for the 10% on lease
or property rights payment to nonresidents, were deleted,
and a uniform rate of 5% is applied.
The Court observes, however, that the law the used the
word final. In tax usage, final, as opposed to creditable,
means full. Thus, it is provided in Section 114(C): final
value-added tax at the rate of five percent (5%).
In Revenue Regulations No. 02-98, implementing R.A. No.
8424 (The Tax Reform Act of 1997), the concept of final
withholding tax on income was explained, to wit:
SECTION 2.57. Withholding of Tax at Source
(A) Final Withholding Tax. Under the final withholding tax
system the amount of income tax withheld by the
withholding agent is constituted as full and final
payment of the income tax due from the payee on the
said income. The liability for payment of the tax rests
primarily on the payor as a withholding agent. Thus, in
case of his failure to withhold the tax or in case of
underwithholding, the deficiency tax shall be collected
from the payor/withholding agent.
(B) Creditable Withholding Tax. Under the creditable
withholding tax system, taxes withheld on certain income
payments are intended to equal or at least approximate
the tax due of the payee on said income. Taxes withheld
on income payments covered by the expanded
withholding tax (referred to in Sec. 2.57.2 of these

regulations) and compensation income (referred to in Sec.

2.78 also of these regulations) are creditable in nature.
As applied to value-added tax, this means that taxable
transactions with the government are subject to a 5%
rate, which constitutes as full payment of the tax payable
on the transaction. This represents the net VAT payable of
the seller. The other 5% effectively accounts for the
standard input VAT (deemed input VAT), in lieu of the
actual input VAT directly or attributable to the taxable
transaction.[79]
The Court need not explore the rationale behind the
provision. It is clear that Congress intended to treat
differently taxable transactions with the government.
[80]
This is supported by the fact that under the old
provision, the 5% tax withheld by the government
remains creditable against the tax liability of the seller or
contractor, to wit:
SEC. 114. Return and Payment of Value-added Tax.
(C) Withholding of Creditable Value-added Tax. The
Government or any of its political subdivisions,
instrumentalities or agencies, including governmentowned or controlled corporations (GOCCs) shall, before
making payment on account of each purchase of goods
from sellers and services rendered by contractors which
are subject to the value-added tax imposed in Sections
106 and 108 of this Code, deduct and withhold the valueadded tax due at the rate of three percent (3%) of the
gross payment for the purchase of goods and six percent
(6%) on gross receipts for services rendered by
contractors on every sale or installment payment which
shall be creditable against the value-added tax
liability of the seller or contractor: Provided, however,
That in the case of government public works contractors,
the withholding rate shall be eight and one-half percent
(8.5%): Provided, further, That the payment for lease or
use of properties or property rights to nonresident owners
shall be subject to ten percent (10%) withholding tax at

the time of payment. For this purpose, the payor or

person in control of the payment shall be considered as
the withholding agent.

matter of exception that a business will sell goods or

services without profit or value-added. It cannot be
overstressed that a business is created precisely for profit.

The valued-added tax withheld under this Section shall be

remitted within ten (10) days following the end of the
month the withholding was made. (Emphasis supplied)

The equal protection clause under the Constitution means

that no person or class of persons shall be deprived of the
same protection of laws which is enjoyed by other persons
or other classes in the same place and in like
circumstances.[83]

As amended, the use of the word final and the deletion of

the word creditable exhibits Congresss intention to treat
transactions with the government differently. Since it has
not been shown that the class subject to the 5% final
withholding tax has been unreasonably narrowed, there is
no reason to invalidate the provision. Petitioners, as
petroleum dealers, are not the only ones subjected to the
5% final withholding tax. It applies to all those who deal
with the government.
Moreover, the actual input tax is not totally lost or
uncreditable, as petitioners believe. Revenue Regulations
No. 14-2005 or the Consolidated Value-Added Tax
Regulations 2005 issued by the BIR, provides that should
the actual input tax exceed 5% of gross payments, the
excess may form part of the cost. Equally, should the
actual input tax be less than 5%, the difference is treated
as income.[81]
Petitioners also argue that by imposing a limitation on the
creditable input tax, the government gets to tax a profit
or value-added even if there is no profit or value-added.
Petitioners stance is purely hypothetical, argumentative,
and again, one-sided. The Court will not engage in a legal
joust where premises are what ifs, arguments, theoretical
and facts, uncertain. Any disquisition by the Court on this
point will only be, as Shakespeare describes life
in Macbeth,[82] full of sound and fury, signifying nothing.
Whats more, petitioners contention assumes the
proposition that there is no profit or value-added. It need
not take an astute businessman to know that it is a

The power of the State to make reasonable and natural

classifications for the purposes of taxation has long been
established. Whether it relates to the subject of taxation,
the kind of property, the rates to be levied, or the
amounts to be raised, the methods of assessment,
valuation and collection, the States power is entitled to
presumption of validity. As a rule, the judiciary will not
interfere with such power absent a clear showing of
unreasonableness, discrimination, or arbitrariness. [84]
Petitioners point out that the limitation on the creditable
input tax if the entity has a high ratio of input tax, or
invests in capital equipment, or has several transactions
with the government, is not based on real and substantial
differences to meet a valid classification.
The argument is pedantic, if not outright baseless. The
law does not make any classification in the subject of
taxation, the kind of property, the rates to be levied or the
amounts to be raised, the methods of assessment,
valuation and collection. Petitioners alleged distinctions
are based on variables that bear different consequences.
While the implementation of the law may yield varying
end results depending on ones profit margin and valueadded, the Court cannot go beyond what the legislature
has laid down and interfere with the affairs of business.
The equal protection clause does not require the universal
application of the laws on all persons or things without
distinction. This might in fact sometimes result in unequal
protection. What the clause requires is equality among
equals as determined according to a valid classification.
By classification is meant the grouping of persons or

things similar to each other in certain particulars and

different from all others in these same particulars. [85]
Petitioners brought to the Courts attention the
introduction of Senate Bill No. 2038 by Sens. S.R. Osmea
III and Ma. Ana Consuelo A.S. Madrigal on June 6, 2005,
and House Bill No. 4493 by Rep. Eric D. Singson. The
proposed legislation seeks to amend the 70% limitation
by increasing the same to 90%. This, according to
petitioners, supports their stance that the 70% limitation
is arbitrary and confiscatory. On this score, suffice it to say
that these are still proposed legislations. Until Congress
amends the law, and absent any unequivocal basis for its
unconstitutionality, the 70% limitation stays.

paid on purchase of capital goods or the 5% final

withholding tax by the government. It must be stressed
that the rule of uniform taxation does not deprive
Congress of the power to classify subjects of taxation, and
only demands uniformity within the particular class. [87]
R.A. No. 9337 is also equitable. The law is equipped with a
threshold margin. The VAT rate of 0% or 10% (or 12%)
does not apply to sales of goods or services with gross
annual sales or receipts not exceeding P1,500,000.00.
[88]
Also, basic marine and agricultural food products in
their original state are still not subject to the tax, [89] thus
ensuring that prices at the grassroots level will remain
accessible. As was stated in Kapatiran ng mga
Naglilingkod sa Pamahalaan ng Pilipinas, Inc. vs. Tan:[90]

B. Uniformity and Equitability of Taxation

Article VI, Section 28(1) of the Constitution reads:
The rule of taxation shall be uniform and equitable. The
Congress shall evolve a progressive system of taxation.
Uniformity in taxation means that all taxable articles or
kinds of property of the same class shall be taxed at the
same rate. Different articles may be taxed at different
amounts provided that the rate is uniform on the same
class everywhere with all people at all times. [86]
In this case, the tax law is uniform as it provides a
standard rate of 0% or 10% (or 12%) on all goods and
services. Sections 4, 5 and 6 of R.A. No. 9337, amending
Sections 106, 107 and 108, respectively, of the NIRC,
provide for a rate of 10% (or 12%) on sale of goods and
properties, importation of goods, and sale of services and
use or lease of properties. These same sections also
provide for a 0% rate on certain sales and transaction.
Neither does the law make any distinction as to the type
of industry or trade that will bear the 70% limitation on
the creditable input tax, 5-year amortization of input tax

The disputed sales tax is also equitable. It is imposed only

on sales of goods or services by persons engaged in
business with an aggregate gross annual sales
exceeding P200,000.00. Small corner sari-sari stores are
consequently exempt from its application. Likewise
exempt from the tax are sales of farm and marine
products, so that the costs of basic food and other
necessities, spared as they are from the incidence of the
VAT, are expected to be relatively lower and within the
reach of the general public.
It is admitted that R.A. No. 9337 puts a premium on
businesses with low profit margins, and unduly favors
those with high profit margins. Congress was not oblivious
to this. Thus, to equalize the weighty burden the law
entails, the law, under Section 116, imposed a 3%
percentage tax on VAT-exempt persons under Section
109(v), i.e., transactions with gross annual sales and/or
receipts not exceeding P1.5 Million. This acts as a
equalizer because in effect, bigger businesses that qualify
for VAT coverage and VAT-exempt taxpayers stand on
equal-footing.
Moreover, Congress provided mitigating measures to
cushion the impact of the imposition of the tax on those

previously
exempt.
Excise
taxes
on
petroleum
products[91]and natural gas[92] were reduced. Percentage
tax on domestic carriers was removed. [93] Power producers
are now exempt from paying franchise tax. [94]
Aside from these, Congress also increased the income tax
rates of corporations, in order to distribute the burden of
taxation. Domestic, foreign, and non-resident corporations
are now subject to a 35% income tax rate, from a
previous 32%.[95] Intercorporate dividends of non-resident
foreign corporations are still subject to 15% final
withholding tax but the tax credit allowed on the
corporations domicile was increased to 20%. [96] The
Philippine Amusement and Gaming Corporation (PAGCOR)
is not exempt from income taxes anymore. [97] Even the
sale by an artist of his works or services performed for the
production of such works was not spared.
All these were designed to ease, as well as spread out,
the burden of taxation, which would otherwise rest largely
on the consumers. It cannot therefore be gainsaid that
R.A. No. 9337 is equitable.
C.

The VAT is an antithesis of progressive taxation. By its

very nature, it is regressive. The principle of progressive
taxation has no relation with the VAT system inasmuch as
the VAT paid by the consumer or business for every goods
bought or services enjoyed is the same regardless of
income. In
other words, the VAT paid eats the same portion of an
income, whether big or small. The disparity lies in the
income earned by a person or profit margin marked by a
business, such that the higher the income or profit
margin, the smaller the portion of the income or profit
that is eaten by VAT. A converso, the lower the income or
profit margin, the bigger the part that the VAT eats away.
At the end of the day, it is really the lower income group
or businesses with low-profit margins that is always
hardest hit.
Nevertheless, the Constitution does not really prohibit the
imposition of indirect taxes, like the VAT. What it simply
provides is that Congress shall "evolve a progressive
system of taxation." The Court stated in the Tolentino
case, thus:

Progressivity of Taxation

Lastly, petitioners contend that the limitation on the

creditable input tax is anything but regressive. It is the
smaller business with higher input tax-output tax ratio
that will suffer the consequences.
Progressive taxation is built on the principle of the
taxpayers ability to pay. This principle was also lifted from
Adam Smiths Canons of Taxation, and it states:
I. The subjects of every state ought to contribute towards
the support of the government, as nearly as possible, in
proportion to their respective abilities; that is, in
proportion to the revenue which they respectively enjoy
under the protection of the state.
Taxation is progressive when its rate goes up depending
on the resources of the person affected. [98]

The Constitution does not really prohibit the imposition of

indirect taxes which, like the VAT, are regressive. What it
simply provides is that Congress shall evolve a
progressive system of taxation. The constitutional
provision has been interpreted to mean simply that direct
taxes are . . . to be preferred [and] as much as possible,
indirect taxes should be minimized. (E. FERNANDO, THE
CONSTITUTION OF THE PHILIPPINES 221 (Second ed.
1977)) Indeed, the mandate to Congress is not to
prescribe, but to evolve, a progressive tax system.
Otherwise, sales taxes, which perhaps are the oldest form
of indirect taxes, would have been prohibited with the
proclamation of Art. VIII, 17 (1) of the 1973 Constitution
from which the present Art. VI, 28 (1) was taken. Sales
taxes are also regressive.
Resort to indirect taxes should be minimized but not
avoided entirely because it is difficult, if not impossible, to

avoid them by imposing such taxes according to the

taxpayers' ability to pay. In the case of the VAT, the law
minimizes the regressive effects of this imposition by
providing for zero rating of certain transactions (R.A. No.
7716, 3, amending 102 (b) of the NIRC), while granting
exemptions to other transactions. (R.A. No. 7716, 4
amending 103 of the NIRC)[99]
CONCLUSION
It has been said that taxes are the lifeblood of the
government. In this case, it is just an enema, a first-aid
measure to resuscitate an economy in distress. The Court
is neither blind nor is it turning a deaf ear on the plight of
the masses. But it does not have the panacea for the
malady that the law seeks to remedy. As in other cases,
the Court cannot strike down a law as unconstitutional
simply because of its yokes.
Let us not be overly influenced by the plea that for every
wrong there is a remedy, and that the judiciary should
stand ready to afford relief. There are undoubtedly many
wrongs the judicature may not correct, for instance, those
involving political questions. . . .
Let us likewise disabuse our minds from the notion that
the judiciary is the repository of remedies for all political
or social ills; We should not forget that the Constitution
has judiciously allocated the powers of government to
three distinct and separate compartments; and that
judicial interpretation has tended to the preservation of
the independence of the three, and a zealous regard of
the prerogatives of each, knowing full well that one is not
the guardian of the others and that, for official wrongdoing, each may be brought to account, either by
impeachment, trial or by the ballot box. [100]
The words of the Court in Vera vs. Avelino[101] holds true
then, as it still holds true now. All things considered, there

is no raison d'tre for the unconstitutionality of R.A. No.

9337.
WHEREFORE, Republic Act No. 9337 not being
unconstitutional, the petitions in G.R. Nos. 168056,
168207,
168461,
168463,
and
168730,
are
hereby DISMISSED.
There being no constitutional impediment to the full
enforcement and implementation of R.A. No. 9337, the
temporary restraining order issued by the Court on July 1,
2005 is LIFTED upon finality of herein decision.
SO ORDERED.

G.R. No. 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

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.
G.R. No. 115754

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 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, INC., petitioner,

vs.
THE SECRETARY OF FINANCE and COMMISSIONER OF
INTERNAL REVENUE, respondents.
G.R. No. 115873

October 30, 1995

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.:

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."

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 contention has no merit.

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.

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.

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

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.

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:

807, which was approved by the Senate on October 21,

1991.

THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED

(February 24, 1993)

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:

House Bill No. 1470, October 20, 1992

Senate Bill No. 35, November 19, 1992
4.

R.A. NO. 7649

House Bill No. 2165, October 5, 1992

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)

Senate Bill No. 32, December 7, 1992

House Bill No. 5260, January 26, 1993

2.

Senate Bill No. 1141, March 30, 1993

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).

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)

5.

House Bill No. 1503, September 3, 1992

House Bill No. 11024, November 3, 1993

Senate Bill No. 968, December 7, 1992

Senate Bill No. 1168, November 3, 1993

3.

6.

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

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)

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)

AMENDMENTS

House Bill No. 7789, May 31, 1993

xxx

Senate Bill No. 1330, November 18, 1993

68. Not more than one amendment to the original

amendment shall be considered.

7.

xxx

xxx

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)

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.

House Bill No. 9187, November 3, 1993

xxx

xxx

xxx

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."

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:

Indeed, so far as pertinent, the Rules of the Senate only

provide:
RULE XXIX

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 twothirds of all the members of the Assembly. And upon such
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 re-write 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.
(A. TOLENTINO, THE GOVERNMENT OF THE PHILIPPINES
258 (1950))
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
moment was being considered. Otherwise, to follow
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.

taken immediately thereafter, and the yeas and nays

entered in the Journal.

Art. VI, 21 (2) of the 1935 Constitution originally

provided:

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.

(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

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.
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, but this 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 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 copies thereof 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.
(Id. at 710. (emphasis added))
It is interesting to note the following description of
conference committees in the Philippines in a 1979 study:
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 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.
(R. Jackson, Committees in the Philippine Congress, in
COMMITTEES AND LEGISLATURES: A COMPARATIVE
ANALYSIS 163 (J. D. LEES AND M. SHAW, eds.)).

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. 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 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 special
use 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.
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)

livestock, poultry feeds, fertilizer, ingredients used for the

manufacture of feeds).

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.

(d)
Educational services, medical, dental, hospital and
veterinary services, and services rendered under
employer-employee relationship.

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:

(g)

(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,

(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.

(e)
Works of art and similar creations sold by the artist
himself.
(f)
Transactions exempted under special laws, or
international agreements.
Export-sales by persons not VAT-registered.

(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
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." (PhilippineAmerican 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 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. . . .

from which the present Art. VI, 28(1) was taken. Sales
taxes are also regressive.

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%.

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).

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

Thus, the following transactions involving basic and

essential goods and services are exempted from the VAT:
(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) 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.
(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 VAT-registered.

(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)

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)

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

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.
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.
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.
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
jurisdiction, this Court cannot inquire into any allegation
of grave abuse of discretion by the other departments of
the government.
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:
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
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).

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.

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

[G.R. No. 144104. June 29, 2004]

LUNG CENTER OF THE PHILIPPINES, petitioner, vs.
QUEZON CITY and CONSTANTINO P. ROSAS, in his
capacity as City Assessor of Quezon City,
respondents.
DECISION
CALLEJO, SR., J.:
This is a petition for review on certiorari under Rule 45 of
the Rules of Court, as amended, of the Decision[1] dated
July 17, 2000 of the Court of Appeals in CA-G.R. SP No.
57014 which affirmed the decision of the Central Board of
Assessment Appeals holding that the lot owned by the
petitioner and its hospital building constructed thereon
are subject to assessment for purposes of real property
tax.
The Antecedents
The petitioner Lung Center of the Philippines is a nonstock and non-profit entity established on January 16,
1981 by virtue of Presidential Decree No. 1823.[2] It is the
registered owner of a parcel of land, particularly described
as Lot No. RP-3-B-3A-1-B-1, SWO-04-000495, located at
Quezon Avenue corner Elliptical Road, Central District,
Quezon City. The lot has an area of 121,463 square
meters and is covered by Transfer Certificate of Title (TCT)
No. 261320 of the Registry of Deeds of Quezon City.
Erected in the middle of the aforesaid lot is a hospital
known as the Lung Center of the Philippines. A big space
at the ground floor is being leased to private parties, for
canteen and small store spaces, and to medical or
professional practitioners who use the same as their
private clinics for their patients whom they charge for
their professional services. Almost one-half of the entire
area on the left side of the building along Quezon Avenue
is vacant and idle, while a big portion on the right side, at
the corner of Quezon Avenue and Elliptical Road, is being
leased for commercial purposes to a private enterprise
known as the Elliptical Orchids and Garden Center.

The petitioner accepts paying and non-paying patients. It

also renders medical services to out-patients, both paying
and non-paying. Aside from its income from paying
patients, the petitioner receives annual subsidies from the
government.
On June 7, 1993, both the land and the hospital building of
the petitioner were assessed for real property taxes in the
amount of P4,554,860 by the City Assessor of Quezon
City.[3] Accordingly, Tax Declaration Nos. C-021-01226
(16-2518) and C-021-01231 (15-2518-A) were issued for
the land and the hospital building, respectively.[4] On
August 25, 1993, the petitioner filed a Claim for
Exemption[5] from real property taxes with the City
Assessor, predicated on its claim that it is a charitable
institution. The petitioners request was denied, and a
petition was, thereafter, filed before the Local Board of
Assessment Appeals of Quezon City (QC-LBAA, for brevity)
for the reversal of the resolution of the City Assessor. The
petitioner alleged that under Section 28, paragraph 3 of
the 1987 Constitution, the property is exempt from real
property taxes. It averred that a minimum of 60% of its
hospital beds are exclusively used for charity patients and
that the major thrust of its hospital operation is to serve
charity patients. The petitioner contends that it is a
charitable institution and, as such, is exempt from real
property taxes. The QC-LBAA rendered judgment
dismissing the petition and holding the petitioner liable
for real property taxes.[6]
The QC-LBAAs decision was, likewise, affirmed on appeal
by the Central Board of Assessment Appeals of Quezon
City (CBAA, for brevity)[7] which ruled that the petitioner
was not a charitable institution and that its real properties
were not actually, directly and exclusively used for
charitable purposes; hence, it was not entitled to real
property tax exemption under the constitution and the
law. The petitioner sought relief from the Court of
Appeals, which rendered judgment affirming the decision
of the CBAA.[8]

Undaunted, the petitioner filed its petition in this Court

contending that:
A. THE COURT A QUO ERRED IN DECLARING PETITIONER
AS NOT ENTITLED TO REALTY TAX EXEMPTIONS ON THE
GROUND THAT ITS LAND, BUILDING AND IMPROVEMENTS,
SUBJECT OF ASSESSMENT, ARE NOT ACTUALLY, DIRECTLY
AND EXCLUSIVELY DEVOTED FOR CHARITABLE PURPOSES.
B. WHILE PETITIONER IS NOT DECLARED AS REAL
PROPERTY TAX EXEMPT UNDER ITS CHARTER, PD 1823,
SAID EXEMPTION MAY NEVERTHELESS BE EXTENDED
UPON PROPER APPLICATION.
The petitioner avers that it is a charitable institution
within the context of Section 28(3), Article VI of the 1987
Constitution. It asserts that its character as a charitable
institution is not altered by the fact that it admits paying
patients and renders medical services to them, leases
portions of the land to private parties, and rents out
portions of the hospital to private medical practitioners
from which it derives income to be used for operational
expenses. The petitioner points out that for the years
1995 to 1999, 100% of its out-patients were charity
patients and of the hospitals 282-bed capacity, 60%
thereof, or 170 beds, is allotted to charity patients. It
asserts that the fact that it receives subsidies from the
government attests to its character as a charitable
institution. It contends that the exclusivity required in the
Constitution does not necessarily mean solely. Hence,
even if a portion of its real estate is leased out to private
individuals from whom it derives income, it does not lose
its character as a charitable institution, and its exemption
from the payment of real estate taxes on its real property.
The petitioner cited our ruling in Herrera v. QC-BAA[9] to
bolster its pose. The petitioner further contends that even
if P.D. No. 1823 does not exempt it from the payment of
real estate taxes, it is not precluded from seeking tax
exemption under the 1987 Constitution.
In their comment on the petition, the respondents aver
that the petitioner is not a charitable entity. The

petitioners real property is not exempt from the payment

of real estate taxes under P.D. No. 1823 and even under
the 1987 Constitution because it failed to prove that it is a
charitable institution and that the said property is
actually, directly and exclusively used for charitable
purposes. The respondents noted that in a newspaper
report, it appears that graft charges were filed with the
Sandiganbayan against the director of the petitioner, its
administrative
officer,
and
Zenaida
Rivera,
the
proprietress of the Elliptical Orchids and Garden Center,
for entering into a lease contract over 7,663.13 square
meters of the property in 1990 for only P20,000 a month,
when the monthly rental should be P357,000 a month as
determined by the Commission on Audit; and that instead
of complying with the directive of the COA for the
cancellation of the contract for being grossly prejudicial to
the government, the petitioner renewed the same on
March 13, 1995 for a monthly rental of only P24,000. They
assert that the petitioner uses the subsidies granted by
the government for charity patients and uses the rest of
its income from the property for the benefit of paying
patients, among other purposes. They aver that the
petitioner failed to adduce substantial evidence that
100% of its out-patients and 170 beds in the hospital are
reserved for indigent patients. The respondents further
assert, thus:
13. That the claims/allegations of the Petitioner LCP do
not speak well of its record of service. That before a
patient is admitted for treatment in the Center, first
impression is that it is pay-patient and required to pay a
certain amount as deposit. That even if a patient is living
below the poverty line, he is charged with high hospital
bills. And, without these bills being first settled, the poor
patient cannot be allowed to leave the hospital or be
discharged without first paying the hospital bills or issue a
promissory note guaranteed and indorsed by an
influential agency or person known only to the Center;
that even the remains of deceased poor patients suffered
the same fate. Moreover, before a patient is admitted for
treatment as free or charity patient, one must undergo a
series of interviews and must submit all the requirements

needed by the Center, usually accompanied by

endorsement by an influential agency or person known
only to the Center. These facts were heard and admitted
by the Petitioner LCP during the hearings before the
Honorable QC-BAA and Honorable CBAA. These are the
reasons of indigent patients, instead of seeking treatment
with the Center, they prefer to be treated at the Quezon
Institute. Can such practice by the Center be called
charitable?[10]
The Issues
The issues for resolution are the following: (a) whether the
petitioner is a charitable institution within the context of
Presidential Decree No. 1823 and the 1973 and 1987
Constitutions and Section 234(b) of Republic Act No.
7160; and (b) whether the real properties of the petitioner
are exempt from real property taxes.
The Courts Ruling
The petition is partially granted.
On the first issue, we hold that the petitioner is a
charitable institution within the context of the 1973 and
1987 Constitutions. To determine whether an enterprise is
a charitable institution/entity or not, the elements which
should be considered include the statute creating the
enterprise, its corporate purposes, its constitution and bylaws, the methods of administration, the nature of the
actual work performed, the character of the services
rendered, the indefiniteness of the beneficiaries, and the
use and occupation of the properties.[11]
In the legal sense, a charity may be fully defined as a gift,
to be applied consistently with existing laws, for the
benefit of an indefinite number of persons, either by
bringing their minds and hearts under the influence of
education or religion, by assisting them to establish
themselves in life or otherwise lessening the burden of
government.[12] It may be applied to almost anything
that tend to promote the well-doing and well-being of

social man. It embraces the improvement and promotion

of the happiness of man.[13] The word charitable is not
restricted to relief of the poor or sick.[14] The test of a
charity and a charitable organization are in law the same.
The test whether an enterprise is charitable or not is
whether it exists to carry out a purpose reorganized in law
as charitable or whether it is maintained for gain, profit,
or private advantage.
Under P.D. No. 1823, the petitioner is a non-profit and
non-stock corporation which, subject to the provisions of
the decree, is to be administered by the Office of the
President of the Philippines with the Ministry of Health and
the Ministry of Human Settlements. It was organized for
the welfare and benefit of the Filipino people principally to
help combat the high incidence of lung and pulmonary
diseases in the Philippines. The raison detre for the
creation of the petitioner is stated in the decree, viz:
Whereas, for decades, respiratory diseases have been a
priority concern, having been the leading cause of illness
and death in the Philippines, comprising more than 45%
of the total annual deaths from all causes, thus, exacting
a tremendous toll on human resources, which ailments
are likely to increase and degenerate into serious lung
diseases
on
account
of
unabated
pollution,
industrialization and unchecked cigarette smoking in the
country;
Whereas, the more common lung diseases are, to a great
extent, preventable, and curable with early and adequate
medical care, immunization and through prompt and
intensive prevention and health education programs;
Whereas, there is an urgent need to consolidate and
reinforce existing programs, strategies and efforts at
preventing, treating and rehabilitating people affected by
lung diseases, and to undertake research and training on
the cure and prevention of lung diseases, through a Lung
Center which will house and nurture the above and
related activities and provide tertiary-level care for more
difficult and problematical cases;

Whereas, to achieve this purpose, the Government

intends to provide material and financial support towards
the establishment and maintenance of a Lung Center for
the welfare and benefit of the Filipino people.[15]
The purposes for which the petitioner was created are
spelled out in its Articles of Incorporation, thus:
SECOND: That the purposes for which such corporation is
formed are as follows:
1. To construct, establish, equip, maintain, administer and
conduct an integrated medical institution which shall
specialize in the treatment, care, rehabilitation and/or
relief of lung and allied diseases in line with the concern
of the government to assist and provide material and
financial support in the establishment and maintenance of
a lung center primarily to benefit the people of the
Philippines and in pursuance of the policy of the State to
secure the well-being of the people by providing them
specialized health and medical services and by
minimizing the incidence of lung diseases in the country
and elsewhere.
2. To promote the noble undertaking of scientific research
related to the prevention of lung or pulmonary ailments
and the care of lung patients, including the holding of a
series of relevant congresses, conventions, seminars and
conferences;
3. To stimulate and, whenever possible, underwrite
scientific researches on the biological, demographic,
social, economic, eugenic and physiological aspects of
lung or pulmonary diseases and their control; and to
collect and publish the findings of such research for public
consumption;
4. To facilitate the dissemination of ideas and public
acceptance of information on lung consciousness or
awareness, and the development of fact-finding,
information and reporting facilities for and in aid of the

general purposes or objects aforesaid, especially in

human lung requirements, general health and physical
fitness, and other relevant or related fields;
5. To encourage the training of physicians, nurses, health
officers, social workers and medical and technical
personnel in the practical and scientific implementation of
services to lung patients;
6. To assist universities and research institutions in their
studies about lung diseases, to encourage advanced
training in matters of the lung and related fields and to
support educational programs of value to general health;
7. To encourage the formation of other organizations on
the national, provincial and/or city and local levels; and to
coordinate their various efforts and activities for the
purpose of achieving a more effective programmatic
approach on the common problems relative to the
objectives enumerated herein;
8. To seek and obtain assistance in any form from both
international and local foundations and organizations; and
to administer grants and funds that may be given to the
organization;
9. To extend, whenever possible and expedient, medical
services to the public and, in general, to promote and
protect the health of the masses of our people, which has
long been recognized as an economic asset and a social
blessing;
10. To help prevent, relieve and alleviate the lung or
pulmonary afflictions and maladies of the people in any
and all walks of life, including those who are poor and
needy, all without regard to or discrimination, because of
race, creed, color or political belief of the persons helped;
and to enable them to obtain treatment when such
disorders occur;

11. To participate, as circumstances may warrant, in any

activity designed and carried on to promote the general
health of the community;
12. To acquire and/or borrow funds and to own all funds or
equipment, educational materials and supplies by
purchase, donation, or otherwise and to dispose of and
distribute the same in such manner, and, on such basis as
the Center shall, from time to time, deem proper and
best, under the particular circumstances, to serve its
general and non-profit purposes and objectives;
13. To buy, purchase, acquire, own, lease, hold, sell,
exchange, transfer and dispose of properties, whether real
or personal, for purposes herein mentioned; and
14. To do everything necessary, proper, advisable or
convenient for the accomplishment of any of the powers
herein set forth and to do every other act and thing
incidental thereto or connected therewith.[16]
Hence, the medical services of the petitioner are to be
rendered to the public in general in any and all walks of
life including those who are poor and the needy without
discrimination. After all, any person, the rich as well as
the poor, may fall sick or be injured or wounded and
become a subject of charity.[17]
As a general principle, a charitable institution does not
lose its character as such and its exemption from taxes
simply because it derives income from paying patients,
whether out-patient, or confined in the hospital, or
receives subsidies from the government, so long as the
money received is devoted or used altogether to the
charitable object which it is intended to achieve; and no
money inures to the private benefit of the persons
managing
or
operating
the
institution.[18]
In
Congregational Sunday School, etc. v. Board of Review,
[19] the State Supreme Court of Illinois held, thus:
[A]n institution does not lose its charitable character, and
consequent exemption from taxation, by reason of the

fact that those recipients of its benefits who are able to

pay are required to do so, where no profit is made by the
institution and the amounts so received are applied in
furthering its charitable purposes, and those benefits are
refused to none on account of inability to pay therefor.
The fundamental ground upon which all exemptions in
favor of charitable institutions are based is the benefit
conferred upon the public by them, and a consequent
relief, to some extent, of the burden upon the state to
care for and advance the interests of its citizens.[20]
As aptly stated by the State Supreme Court of South
Dakota in Lutheran Hospital Association of South Dakota
v. Baker:[21]
[T]he fact that paying patients are taken, the profits
derived from attendance upon these patients being
exclusively devoted to the maintenance of the charity,
seems rather to enhance the usefulness of the institution
to the poor; for it is a matter of common observation
amongst those who have gone about at all amongst the
suffering classes, that the deserving poor can with
difficulty be persuaded to enter an asylum of any kind
confined to the reception of objects of charity; and that
their honest pride is much less wounded by being placed
in an institution in which paying patients are also
received. The fact of receiving money from some of the
patients does not, we think, at all impair the character of
the charity, so long as the money thus received is
devoted altogether to the charitable object which the
institution is intended to further.[22]
The money received by the petitioner becomes a part of
the trust fund and must be devoted to public trust
purposes and cannot be diverted to private profit or
benefit.[23]
Under P.D. No. 1823, the petitioner is entitled to receive
donations. The petitioner does not lose its character as a
charitable institution simply because the gift or donation
is in the form of subsidies granted by the government. As

held by the State Supreme Court of Utah in Yorgason v.

County Board of Equalization of Salt Lake County:[24]
Second, the government subsidy payments are provided
to the project. Thus, those payments are like a gift or
donation of any other kind except they come from the
government. In both Intermountain Health Care and the
present case, the crux is the presence or absence of
material reciprocity. It is entirely irrelevant to this analysis
that the government, rather than a private benefactor,
chose to make up the deficit resulting from the exchange
between St. Marks Tower and the tenants by making a
contribution to the landlord, just as it would have been
irrelevant in Intermountain Health Care if the patients
income supplements had come from private individuals
rather than the government.
Therefore, the fact that subsidization of part of the cost of
furnishing such housing is by the government rather than
private charitable contributions does not dictate the
denial of a charitable exemption if the facts otherwise
support such an exemption, as they do here.[25]
In this case, the petitioner adduced substantial evidence
that it spent its income, including the subsidies from the
government for 1991 and 1992 for its patients and for the
operation of the hospital. It even incurred a net loss in
1991 and 1992 from its operations.
Even as we find that the petitioner is a charitable
institution, we hold, anent the second issue, that those
portions of its real property that are leased to private
entities are not exempt from real property taxes as these
are not actually, directly and exclusively used for
charitable purposes.
The settled rule in this jurisdiction is that 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. The
effect of an exemption is equivalent to an appropriation.
Hence, a claim for exemption from tax payments must be

clearly shown and based on language in the law too plain

to be mistaken.[26] As held in Salvation Army v. Hoehn:
[27]
An intention on the part of the legislature to grant an
exemption from the taxing power of the state will never
be implied from language which will admit of any other
reasonable construction. Such an intention must be
expressed in clear and unmistakable terms, or must
appear by necessary implication from the language used,
for it is a well settled principle that, when a special
privilege or exemption is claimed under a statute, charter
or act of incorporation, it is to be construed strictly
against the property owner and in favor of the public. This
principle applies with peculiar force to a claim of
exemption from taxation . [28]
Section 2 of Presidential Decree No. 1823, relied upon by
the petitioner, specifically provides that the petitioner
shall enjoy the tax exemptions and privileges:
SEC. 2. TAX EXEMPTIONS AND PRIVILEGES. Being a nonprofit, non-stock corporation organized primarily to help
combat the high incidence of lung and pulmonary
diseases in the Philippines, all donations, contributions,
endowments and equipment and supplies to be imported
by authorized entities or persons and by the Board of
Trustees of the Lung Center of the Philippines, Inc., for the
actual use and benefit of the Lung Center, shall be
exempt from income and gift taxes, the same further
deductible in full for the purpose of determining the
maximum deductible amount under Section 30,
paragraph (h), of the National Internal Revenue Code, as
amended.
The Lung Center of the Philippines shall be exempt from
the payment of taxes, charges and fees imposed by the
Government or any political subdivision or instrumentality
thereof with respect to equipment purchases made by, or
for the Lung Center.[29]

It is plain as day that under the decree, the petitioner

does not enjoy any property tax exemption privileges for
its real properties as well as the building constructed
thereon. If the intentions were otherwise, the same should
have been among the enumeration of tax exempt
privileges under Section 2:

(3) Charitable institutions, churches and parsonages or

convents appurtenant thereto, mosques, non-profit
cemeteries, and all lands, buildings, and improvements,
actually, directly and exclusively used for religious,
charitable or educational purposes shall be exempt from
taxation.[32]

It is a settled rule of statutory construction that the

express mention of one person, thing, or consequence
implies the exclusion of all others. The rule is expressed in
the familiar maxim, expressio unius est exclusio alterius.

The tax exemption under this constitutional provision

covers property taxes only.[33] As Chief Justice Hilario G.
Davide, Jr., then a member of the 1986 Constitutional
Commission, explained: . . . what is exempted is not the
institution itself . . .; those exempted from real estate
taxes are lands, buildings and improvements actually,
directly and exclusively used for religious, charitable or
educational purposes.[34]

The rule of expressio unius est exclusio alterius is

formulated in a number of ways. One variation of the rule
is principle that what is expressed puts an end to that
which is implied. Expressium facit cessare tacitum. Thus,
where a statute, by its terms, is expressly limited to
certain matters, it may not, by interpretation or
construction, be extended to other matters.
...
The rule of expressio unius est exclusio alterius and its
variations are canons of restrictive interpretation. They
are based on the rules of logic and the natural workings of
the human mind. They are predicated upon ones own
voluntary act and not upon that of others. They proceed
from the premise that the legislature would not have
made specified enumeration in a statute had the intention
been not to restrict its meaning and confine its terms to
those expressly mentioned.[30]
The exemption must not be so enlarged by construction
since the reasonable presumption is that the State has
granted in express terms all it intended to grant at all,
and that unless the privilege is limited to the very terms
of the statute the favor would be intended beyond what
was meant.[31]
Section 28(3), Article VI
Constitution provides, thus:

of

the

1987

Philippine

Consequently, the constitutional provision is implemented

by Section 234(b) of Republic Act No. 7160 (otherwise
known as the Local Government Code of 1991) as follows:
SECTION 234. Exemptions from Real Property Tax. The
following are exempted from payment of the real property
tax:
...
(b) Charitable institutions, churches, parsonages or
convents appurtenant thereto, mosques, non-profit or
religious cemeteries and all lands, buildings, and
improvements actually, directly, and exclusively used for
religious, charitable or educational purposes.[35]
We note that under the 1935 Constitution, ... all lands,
buildings, and improvements used exclusively for
charitable purposes shall be exempt from taxation.[36]
However, under the 1973 and the present Constitutions,
for lands, buildings, and improvements of the charitable
institution to be considered exempt, the same should not
only be exclusively used for charitable purposes; it is
required that such property be used actually and directly
for such purposes.[37]

In light of the foregoing substantial changes in the

Constitution, the petitioner cannot rely on our ruling in
Herrera v. Quezon City Board of Assessment Appeals
which was promulgated on September 30, 1961 before
the 1973 and 1987 Constitutions took effect.[38] As this
Court held in Province of Abra v. Hernando:[39]
Under the 1935 Constitution: Cemeteries, churches, and
parsonages or convents appurtenant thereto, and all
lands, buildings, and improvements used exclusively for
religious, charitable, or educational purposes shall be
exempt from taxation. The present Constitution added
charitable
institutions,
mosques,
and
non-profit
cemeteries and required that for the exemption of lands,
buildings, and improvements, they should not only be
exclusively but also actually and directly used for religious
or charitable purposes. The Constitution is worded
differently. The change should not be ignored. It must be
duly taken into consideration. Reliance on past decisions
would have sufficed were the words actually as well as
directly not added. There must be proof therefore of the
actual and direct use of the lands, buildings, and
improvements for religious or charitable purposes to be
exempt from taxation.
Under the 1973 and 1987 Constitutions and Rep. Act No.
7160 in order to be entitled to the exemption, the
petitioner is burdened to prove, by clear and unequivocal
proof, that (a) it is a charitable institution; and (b) its real
properties are ACTUALLY, DIRECTLY and EXCLUSIVELY used
for charitable purposes. Exclusive is defined as possessed
and enjoyed to the exclusion of others; debarred from
participation or enjoyment; and exclusively is defined, in a
manner to exclude; as enjoying a privilege exclusively.[40]
If real property is used for one or more commercial
purposes, it is not exclusively used for the exempted
purposes but is subject to taxation.[41] The words
dominant use or principal use cannot be substituted for
the words used exclusively without doing violence to the
Constitutions and the law.[42] Solely is synonymous with
exclusively.[43]

What is meant by actual, direct and exclusive use of the

property for charitable purposes is the direct and
immediate and actual application of the property itself to
the purposes for which the charitable institution is
organized. It is not the use of the income from the real
property that is determinative of whether the property is
used for tax-exempt purposes.[44]
The petitioner failed to discharge its burden to prove that
the entirety of its real property is actually, directly and
exclusively used for charitable purposes. While portions of
the hospital are used for the treatment of patients and the
dispensation of medical services to them, whether paying
or non-paying, other portions thereof are being leased to
private individuals for their clinics and a canteen. Further,
a portion of the land is being leased to a private individual
for her business enterprise under the business name
Elliptical Orchids and Garden Center. Indeed, the
petitioners evidence shows that it collected P1,136,483.45
as rentals in 1991 and P1,679,999.28 for 1992 from the
said lessees.
Accordingly, we hold that the portions of the land leased
to private entities as well as those parts of the hospital
leased to private individuals are not exempt from such
taxes.[45] On the other hand, the portions of the land
occupied by the hospital and portions of the hospital used
for its patients, whether paying or non-paying, are exempt
from real property taxes.
IN LIGHT OF ALL THE FOREGOING, the petition is
PARTIALLY GRANTED. The respondent Quezon City
Assessor is hereby DIRECTED to determine, after due
hearing, the precise portions of the land and the area
thereof which are leased to private persons, and to
compute the real property taxes due thereon as provided
for by law.
SO ORDERED.

[G.R. No. 124043. October 14, 1998]

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs. COURT OF APPEALS, COURT OF TAX APPEALS
and YOUNG MENS CHRISTIAN ASSOCIATION OF THE
PHILIPPINES, INC., respondents.
DECISION
PANGANIBAN, J.:
Is the income derived from rentals of real property owned
by the Young Mens Christian Association of the
Philippines, Inc. (YMCA) established as a welfare,
educational and charitable non-profit corporation -subject to income tax under the National Internal Revenue
Code (NIRC) and the Constitution?
The Case
This is the main question raised before us in this petition
for review on certiorari challenging two Resolutions issued
by the Court of Appeals[1] on September 28, 1995[2] and
February 29, 1996[3] in CA-GR SP No. 32007. Both
Resolutions affirmed the Decision of the Court of Tax
Appeals (CTA) allowing the YMCA to claim tax exemption
on the latters income from the lease of its real property.
The Facts
The Facts are undisputed.[4] Private Respondent YMCA is
a non-stock, non-profit institution, which conducts various
programs and activities that are beneficial to the public,
especially the young people, pursuant to its religious,
educational and charitable objectives.
In 1980, private respondent earned, among others, an
income of P676,829.80 from leasing out a portion of its
premises to small shop owners, like restaurants and
canteen operators, and P44,259.00 from parking fees
collected from non-members. On July 2, 1984, the
commissioner of internal revenue (CIR) issued an
assessment to private respondent, in the total amount of
P415,615.01 including surcharge and interest, for

deficiency income tax, deficiency expanded withholding

taxes on rentals and professional fees and deficiency
withholding tax on wages. Private respondent formally
protested the assessment and, as a supplement to its
basic protest, filed a letter dated October 8, 1985. In
reply, the CIR denied the claims of YMCA.
Contesting the denial of its protest, the YMCA filed a
petition for review at the Court if Tax Appeals (CTA) on
March 14, 1989. In due course, the CTA issued this ruling
in favor of the YMCA:
xxx [T]he leasing of private respondents facilities to small
shop owners, to restaurant and canteen operators and the
operation of the parking lot are reasonably incidental to
and reasonably necessary for the accomplishment of the
objectives of the [private respondents]. It appears from
the testimonies of the witnesses for the [private
respondent] particularly Mr. James C. Delote, former
accountant of YMCA, that these facilities were leased to
members and that they have to service the needs of its
members and their guests. The Rentals were minimal as
for example, the barbershop was only charged P300 per
month. He also testified that there was actually no lot
devoted for parking space but the parking was done at
the sides of the building. The parking was primarily for
members with stickers on the windshields of their cars
and they charged P.50 for non-members. The rentals and
parking fees were just enough to cover the costs of
operation and maintenance only. The earning[s] from
these rentals and parking charges including those from
lodging and other charges for the use of the recreational
facilities constitute [the] bulk of its income which [is]
channeled to support its many activities and attainment
of its objectives. As pointed out earlier, the membership
dues are very insufficient to support its program. We find
it reasonably necessary therefore for [private respondent]
to make [the] most out [of] its existing facilities to earn
some income. It would have been different if under the
circumstances, [private respondent] will purchase a lot
and convert it to a parking lot to cater to the needs of the
general public for a fee, or construct a building and lease

it out to the highest bidder or at the market rate for

commercial purposes, or should it invest its funds in the
buy and sell of properties, real or personal. Under these
circumstances, we could conclude that the activities are
already profit oriented, not incidental and reasonably
necessary to the pursuit of the objectives of the
association and therefore, will fall under the last
paragraph of section 27 of the Tax Code and any income
derived therefrom shall be taxable.
Considering our findings that [private respondent] was not
engaged in the business of operating or contracting [a]
parking lot, we find no legal basis also for the imposition
of [a] deficiency fixed tax and [a] contractors tax in the
amount[s] of P353.15 and P3,129.73, respectively.

operators and the operation of the parking lot are

reasonably incidental to and reasonably necessary for the
accomplishment of the objectives of the petitioners,' and
the income derived therefrom are tax exempt, must be
reversed.
WHEREFORE, the appealed decision is hereby REVERSED
in so far as it dismissed the assessment for:
1980 Deficiency Income Tax P 353.15
1980 Deficiency Contractors Tax P 3,129.23, &
1980 Deficiency Income Tax P372,578.20,
but the same is AFFIRMED in all other respect.[7]
Aggrieved, the YMCA asked for reconsideration based on
the following grounds:

xxxxxxxxx
I
WHEREFORE, in view of all the foregoing, the following
assessments are hereby dismissed for lack of merit:
1980 Deficiency Fixed Tax P353,15;
1980 Deficiency Contractors Tax P3,129.23;
1980 Deficiency Income Tax P372,578.20.
While the following assessments are hereby sustained:
1980 Deficiency Expanded Withholding Tax P1,798.93;
1980 Deficiency Withholding Tax on Wages P33,058.82
plus 10% surcharge and 20% interest per annum from July
2, 1984 until fully paid but not to exceed three (3) years
pursuant to Section 51 (e)(2) & (3) of the National Internal
Revenue Code effective as of 1984.[5]
Dissatisfied with the CTA ruling, the CIR elevated the case
to the Court of Appeals (CA). In its Decision of February
16, 1994, the CA[6] initially decided in favor of the CIR
and disposed of the appeal in the following manner:
Following the ruling in the afore-cited cases of Province of
Abra vs. Hernando and Abra Valley College Inc. vs.
Aquino, the ruling of the respondent Court of Tax Appeals
that the leasing of petitioners (herein respondent)
facilities to small shop owners, to restaurant and canteen

The findings of facts of the Public Respondent Court of Tax

Appeals being supported by substantial evidence [are]
final and conclusive.
II
The conclusions of law of [p]ublic [r]espondent exempting
[p]rivate [r]espondent from the income on rentals of small
shops and parking fees [are] in accord with the applicable
law and jurisprudence.[8]
Finding merit in the Motion for Reconsideration filed by
the YMCA, the CA reversed itself and promulgated on
September 28, 1995 its first assailed Resolution which, in
part, reads:
The Court cannot depart from the CTAs findings of fact, as
they are supported by evidence beyond what is
considered as substantial.
xxxxxxxxx

The second ground raised is that the respondent CTA did

not err in saying that the rental from small shops and
parking fees do not result in the loss of the exemption.
Not even the petitioner would hazard the suggestion that
YMCA is designed for profit. Consequently, the little
income from small shops and parking fees help[s] to keep
its head above the water, so to speak, and allow it to
continue with its laudable work.
The Court, therefore, finds the second ground of the
motion to be meritorious and in accord with law and
jurisprudence.
WHEREFORE, the motion for reconsideration is GRANTED;
the respondent CTAs decision is AFFIRMED in toto.[9]
The internal revenue commissioners own Motion for
Reconsideration was denied by Respondent Court in its
second assailed Resolution of February 29, 1996. Hence,
this petition for review under Rule 45 of the Rules of
Court.[10]
The Issues
Before us, petitioner imputes to the Court of Appeals the
following errors:
I
In holding that it had departed from the findings of fact of
Respondent Court of Tax Appeals when it rendered its
Decision dated February 16, 1994; and
II
In affirming the conclusion of Respondent Court of Tax
Appeals that the income of private respondent from
rentals of small shops and parking fees [is] exempt from
taxation.[11]
This Courts Ruling

The Petition is meritorious.

First Issue:
Factual Findings of the CTA
Private respondent contends that the February 16, 1994
CA Decision reversed the factual findings of the CTA. On
the other hand, petitioner argues that the CA merely
reversed the ruling of the CTA that the leasing of private
respondents facilities to small shop owners, to restaurant
and canteen operators and the operation of parking lots
are reasonably incidental to and reasonably necessary for
the accomplishment of the objectives of the private
respondent and that the income derived therefrom are tax
exempt.[12] Petitioner insists that what the appellate
court reversed was the legal conclusion, not the factual
finding, of the CTA.[13] The commissioner has a point.
Indeed, it is a basic rule in taxation that the factual
findings of the CTA, when supported by substantial
evidence, will not be disturbed on appeal unless it is
shown that the said court committed gross error in the
appreciation of facts.[14] In the present case, this Court
finds that the February 16, 1994 Decision of the CA did
not deviate from this rule. The latter merely applied the
law to the facts as found by the CTA and ruled on the
issue raised by the CIR: Whether or not the collection or
earnings of rental income from the lease of certain
premises and income earned from parking fees shall fall
under the last paragraph of Section 27 of the National
Internal Revenue Code of 1977, as amended.[15]
Clearly, the CA did not alter any fact or evidence. It
merely resolved the aforementioned issue, as indeed it
was expected to. That it did so in a manner different from
that of the CTA did not necessarily imply a reversal of
factual findings.
The distinction between a question of law and a question
of fact is clear-cut. It has been held that [t]here is a
question of law in a given case when the doubt or
difference arises as to what the law is on a certain state of

facts; there is a question of fact when the doubt or

difference arises as to the truth or falsehood of alleged
facts.[16] In the present case, the CA did not doubt, much
less change, the facts narrated by the CTA. It merely
applied the law to the facts. That its interpretation or
conclusion is different from that of the CTA is not irregular
or abnormal.
Second Issue:
Is the Rental Income of the YMCA Taxable?
We now come to the crucial issue: Is the rental income of
the YMCA from its real estate subject to tax? At the
outset, we set forth the relevant provision of the NIRC:
SEC. 27. Exemptions from tax on corporations. -- The
following organizations shall not be taxed under this Title
in respect to income received by them as such -xxxxxxxxx
(g) Civic league or organization not organized for profit
but operated exclusively for the promotion of social
welfare;
(h) Club organized and operated exclusively for pleasure,
recreation, and other non-profitable purposes, no part of
the net income of which inures to the benefit of any
private stockholder or member;
xxxxxxxxx
Notwithstanding the
provision
in
the
preceding
paragraphs, the income of whatever kind and character of
the foregoing organization from any of their properties,
real or personal, or from any of their activities conducted
for profit, regardless of the disposition made of such
income, shall be subject to the tax imposed under this
Code. (as amended by Pres. Decree No. 1457)
Petitioners argues that while the income received by the
organizations enumerated in Section 27 (now Section 26)

of the NIRC is, as a rule, exempted from the payment of

tax in respect to income received by them as such, the
exemption does not apply to income derived xxx from any
if their properties, real or personal, or from any of their
activities conducted for profit, regardless, of the
disposition made of such income xxx.
Petitioner adds that rented income derived by a taxexempt organization from the lease of its properties, real
or personal, [is] not, therefore, exempt from income
taxation, even if such income [is] exclusively used for the
accomplishment of its objectives.[17] We agree with the
commissioner.
Because taxes are the lifeblood of the nation, the Court
has always applied the doctrine of strict interpretation in
construing tax exemptions.[18] Furthermore, a claim of
statutory exemption from taxation should be manifest and
unmistakable from the language of the law on which it is
based. Thus, the claimed exemption must expressly be
granted in a statute stated in a language too clear to be
mistaken.[19]
In the instant case, the exemption claimed by the YMCA is
expressly disallowed by the very wording of the last
paragraph of then Section 27 of the NIRC which mandates
that the income of exempt organizations (such as the
YMCA) from any of their properties, real or personal, be
subject to the imposed by the same Code. Because the
last paragraph of said section unequivocally subjects to
tax the rent income f the YMCA from its rental property,
[20] the Court is duty-bound to abide strictly by its literal
meaning and to refrain from resorting to any convoluted
attempt at construction.
It is axiomatic that where the language of the law is clear
and unambiguous, its express terms must be applied.[21]
Parenthetically, a consideration of the question of
construction must not even begin, particularly when such
question is on whether to apply a strict construction or a
literal one on statutes that grant tax exemptions to

religious, charitable
institutions.[22]

and

educational

propert[ies]

or

The last paragraph of Section 27, the YMCA argues,

should be subject to the qualification that the income
from the properties must arise from activities conducted
for profit before it may be considered taxable.[23] This
argument is erroneous. As previously stated, a reading of
said paragraph ineludibly shows that the income from any
property of exempt organizations, as well as that arising
from any activity it conducts for profit, is taxable. The
phrase any of their activities conducted for profit does not
qualify the word properties. This makes income from the
property of the organization taxable, regardless of how
that income is used -- whether for profit or for lofty nonprofit purposes.
Verba legis non est recedendum. Hence, Respondent
Court of Appeals committed reversible error when it
allowed, on reconsideration, the tax exemption claimed
by YMCA on income it derived from renting out its real
property, on the solitary but unconvincing ground that the
said income is not collected for profit but is merely
incidental to its operation. The law does not make a
distinction. The rental income is taxable regardless of
whence such income is derived and how it used or
disposed of. Where the law does not distinguish, neither
should we.
Constitutional Provisions
on Taxation
Invoking not only the NIRC but also the fundamental law,
private respondent submits that Article VI, Section 28 of
par. 3 of the 1987 Constitution,[24] exempts charitable
institutions from the payment not only of property taxes
but also of income tax from any source.[25] In support of
its novel theory, it compares the use of the words
charitable institutions, actually and directly in the 1973
and the 1987 Constitutions, on the hand; and in Article VI
Section 22, par. 3 of the 1935 Constitution, on the other
hand.[26]

Private respondent enunciates three points. First, the

present provision is divisible into two categories: (1)
[c]haritable institutions, churches and parsonages or
convents appurtenant thereto, mosques and non-profit
cemeteries, the incomes of which are, from whatever
source, all tax-exempt;[27] and (2) [a]ll lands, buildings
and improvements actually and directly used for religious,
charitable or educational purposes, which are exempt only
from property taxes.[28] Second, Lladoc v. Commissioner
of Internal Revenue,[29] which limited the exemption only
to the payment of property taxes, referred to the provision
of the 1935 Constitution and not to its counterparts in the
1973 and the 1987 Constitutions.[30] Third, the phrase
actually, directly and exclusively used for religious,
charitable or educational purposes refers not only to all
lands, buildings and improvements, but also to the abovequoted first category which
includes charitable
institutions like the private respondent.[31]
The Court is not persuaded. The debates, interpellations
and expressions of opinion of the framers of the
Constitution reveal their intent which, in turn, may have
guided the people in ratifying the Charter.[32] Such intent
must be effectuated.
Accordingly, Justice Hilario G. Davide, Jr., a former
constitutional commissioner, who is now a member of this
Court, stressed during the Concom debates that xxx what
is exempted is not the institution itself xxx; those
exempted from real estate taxes are lands, buildings and
improvements actually, directly and exclusively used for
religious, charitable or educational purposes.[33] Father
Joaquin G. Bernas, an eminent authority on the
Constitution and also a member of the Concom, adhered
to the same view that the exemption created by said
provision pertained only to property taxes.[34]
In his treatise on taxation, Mr. Justice Jose C. Vitug
concurs, stating that [t]he tax exemption covers property
taxes only."[35] Indeed, the income tax exemption

claimed by private respondent finds no basis in Article VI,

Section 28, par. 3 of the Constitution.

even hints that it is a school or an educational institution.

[44]

Private respondent also invokes Article XIV, Section 4, par.

3 of the Charter,[36] claiming that the YMCA is a nonstock, non-profit educational institution whose revenues
and assets are used actually, directly and exclusively for
educational purposes so it is exempt from taxes on its
properties and income.[37] We reiterate that private
respondent is exempt from the payment of property tax,
but not income tax on the rentals from its property. The
bare allegation alone that it is a non-stock, non-profit
educational institution is insufficient to justify its
exemption from the payment of income tax.

Furthermore, under the Education Act of 1982, even nonformal education is understood to be school-based and
private auspices such as foundations and civic-spirited
organizations are ruled out.[45] It is settled that the term
educational institution, when used in laws granting tax
exemptions, refers to a xxx school seminary, college or
educational establishment xxx.[46] Therefore, the private
respondent cannot be deemed one of the educational
institutions covered by the constitutional provision under
consideration.

As previously discussed, laws allowing tax exemption are

construed strictissimi juris. Hence, for the YMCA to be
granted the exemption it claims under the aforecited
provision, it must prove with substantial evidence that (1)
it falls under the classification non-stock, non-profit
educational institution; and (2) the income it seeks to be
exempted from taxation is used actually, directly, and
exclusively for educational purposes. However, the Court
notes that not a scintilla of evidence was submitted by
private respondent to prove that it met the said
requisites.
Is the YMCA an educational institution within the purview
of Article XIV, Section 4, par.3 of the Constitution? We rule
that it is not. The term educational institution or
institution of learning has acquired a well-known technical
meaning, of which the members of the Constitutional
Commission are deemed cognizant.[38] Under the
Education Act of 1982, such term refers to schools.[39]
The school system is synonymous with formal education,
[40] which refers to the hierarchically structured and
chronological graded learnings organized and provided by
the formal school system and for which certification is
required in order for the learner to progress through the
grades or move to the higher levels.[41] The Court has
examined the Amended Articles of Incorporation[42] and
By-Laws[43] of the YMCA, but found nothing in them that

xxx Words used in the Constitution are to be taken in their

ordinary acceptation. While in its broadest and best sense
education embraces all forms and phrases of instruction,
improvement and development of mind and body, and as
well of religious and moral sentiments, yet in the common
understanding and application it means a place where
systematic instruction in any or all of the useful branches
of learning is given by methods common to schools and
institutions of learning. That we conceive to be the true
intent and scope of the term [educational institutions,] as
used in the Constitution.[47]
Moreover, without conceding that Private Respondent
YMCA is an educational institution, the Court also notes
that the former did not submit proof of the proportionate
amount of the subject income that was actually, directly
and exclusively used for educational purposes. Article XIII,
Section 5 of the YMCA by-laws, which formed part of the
evidence submitted, is patently insufficient, since the
same merely signified that [t]he net income derived from
the rentals of the commercial buildings shall be
apportioned to the Federation and Member Associations
as the National Board may decide.[48] In sum, we find no
basis for granting the YMCA exemption from income tax
under the constitutional provision invoked
Cases Cited by Private
Respondent Inapplicable

The cases[49] relied on by private respondent do not

support its cause. YMCA of Manila v. Collector of Internal
Revenue[50] and Abra Valley College, Inc. v. Aquino[51]
are not applicable, because the controversy in both cases
involved exemption from the payment of property tax, not
income tax. Hospital de San Juan de Dios, Inc. v. Pasay
City[52] is not in point either, because it involves a claim
for exemption from the payment of regulatory fees,
specifically electrical inspection fees, imposed by an
ordinance of Pasay City -- an issue not at all related to
that involved in a claimed exemption from the payment if
income taxes imposed on property leases. In Jesus Sacred
Heart College v. Com. Of Internal Revenue,[53] the party
therein, which claimed an exemption from the payment of
income tax, was an educational institution which
submitted substantial evidence that the income subject of
the controversy had been devoted or used solely for
educational purposes. On the other hand, the private
respondent in the present case had not given any proof
that it is an educational institution, or that of its rent
income is actually, directly and exclusively used for
educational purposes.
Epilogue
In deliberating on this petition, the Court expresses its
sympathy with private respondent. It appreciates the
nobility its cause. However, the Courts power and function
are limited merely to applying the law fairly and
objectively. It cannot change the law or bend it to suit its
sympathies and appreciations. Otherwise, it would be
overspilling its role and invading the realm of legislation.
We concede that private respondent deserves the help
and the encouragement of the government. It needs laws
that can facilitate, and not frustrate, its humanitarian
tasks. But the Court regrets that, given its limited
constitutional authority, it cannot rule on the wisdom or
propriety of legislation. That prerogative belongs to the
political departments of government. Indeed, some of the
member of the Court may even believe in the wisdom and

prudence of granting more tax exemptions to private

respondent. But such belief, however well-meaning and
sincere, cannot bestow upon the Court the power to
change or amend the law.
WHEREFORE, the petition is GRANTED. The Resolutions of
the Court of Appeals dated September 28, 1995 and
February 29, 1996 are hereby dated February 16, 1995 is
REVERSED and SET ASIDE. The Decision of the Court of
Appeals dated February 16, 1995 is REINSTATED, insofar
as it ruled that the income tax. No pronouncement as to
costs.
SO ORDERED.
Davide, Jr. (Chairman), Vitug and Quisumbing, JJ., concur.
Bellosillo, J., see Dissenting Opinion.

G.R. No. 195909

September 26, 2012
COMMISSIONER
OF
INTERNAL
REVENUE, PETITIONER,
vs.
ST. LUKE'S MEDICAL CENTER, INC., RESPONDENT.
x-----------------------x
G.R. No. 195960
ST. LUKE'S MEDICAL CENTER, INC., PETITIONER,
vs.
COMMISSIONER
OF
INTERNAL
REVENUE, RESPONDENT.
DECISION
CARPIO, J.:
The Case
These are consolidated 1 petitions for review on certiorari
under Rule 45 of the Rules of Court assailing the Decision
of 19 November 2010 of the Court of Tax Appeals (CTA) En
Banc and its Resolution 2 of 1 March 2011 in CTA Case No.
6746. This Court resolves this case on a pure question of
law, which involves the interpretation of Section 27(B) vis-vis Section 30(E) and (G) of the National Internal
Revenue Code of the Philippines (NIRC), on the income tax
treatment of proprietary non-profit hospitals.
The Facts
St. Luke's Medical Center, Inc. (St. Luke's) is a hospital
organized as a non-stock and non-profit corporation.
Under its articles of incorporation, among its corporate
purposes are:
(a) To establish, equip, operate and maintain a non-stock,
non-profit Christian, benevolent, charitable and scientific
hospital which shall give curative, rehabilitative and
spiritual care to the sick, diseased and disabled persons;
provided that purely medical and surgical services shall
be performed by duly licensed physicians and surgeons
who may be freely and individually contracted by
patients;

(b) To provide a career of health science education and

provide medical services to the community through
organized clinics in such specialties as the facilities and
resources of the corporation make possible;
(c) To carry on educational activities related to the
maintenance and promotion of health as well as provide
facilities for scientific and medical researches which, in
the opinion of the Board of Trustees, may be justified by
the facilities, personnel, funds, or other requirements that
are available;
(d) To cooperate with organized medical societies,
agencies of both government and private sector; establish
rules and regulations consistent with the highest
professional ethics;
xxxx

On 16 December 2002, the Bureau of Internal Revenue

(BIR) assessed St. Luke's deficiency taxes amounting
toP76,063,116.06 for 1998, comprised of deficiency
income tax, value-added tax, withholding tax on
compensation and expanded withholding tax. The BIR
reduced the amount to P63,935,351.57 during trial in the
First Division of the CTA. 4
On 14 January 2003, St. Luke's filed an administrative
protest with the BIR against the deficiency tax
assessments. The BIR did not act on the protest within the
180-day period under Section 228 of the NIRC. Thus, St.
Luke's appealed to the CTA.
The BIR argued before the CTA that Section 27(B) of the
NIRC, which imposes a 10% preferential tax rate on the
income of proprietary non-profit hospitals, should be
applicable to St. Luke's. According to the BIR, Section
27(B), introduced in 1997, "is a new provision intended to
amend the exemption on non-profit hospitals that were
previously
categorized
as
non-stock,
non-profit
corporations under Section 26 of the 1997 Tax Code x x
x." 5 It is a specific provision which prevails over the

general exemption on income tax granted under Section

30(E) and (G) for non-stock, non-profit charitable
institutions and civic organizations promoting social
welfare. 6
The BIR claimed that St. Luke's was actually operating for
profit in 1998 because only 13% of its revenues came
from charitable purposes. Moreover, the hospital's board
of trustees, officers and employees directly benefit from
its profits and assets. St. Luke's had total revenues
of P1,730,367,965 or approximately P1.73 billion from
patient services in 1998. 7
St. Luke's contended that the BIR should not consider its
total revenues, because its free services to patients
wasP218,187,498 or 65.20% of its 1998 operating income
(i.e.,
total
revenues
less
operating
expenses)
ofP334,642,615. 8 St. Luke's also claimed that its income
does not inure to the benefit of any individual.
St. Luke's maintained that it is a non-stock and non-profit
institution for charitable and social welfare purposes
under Section 30(E) and (G) of the NIRC. It argued that
the making of profit per se does not destroy its income
tax exemption.
The petition of the BIR before this Court in G.R. No.
195909 reiterates its arguments before the CTA that
Section 27(B) applies to St. Luke's. The petition raises the
sole issue of whether the enactment of Section 27(B)
takes proprietary non-profit hospitals out of the income
tax exemption under Section 30 of the NIRC and instead,
imposes a preferential rate of 10% on their taxable
income. The BIR prays that St. Luke's be ordered to
payP57,659,981.19 as deficiency income and expanded
withholding tax for 1998 with surcharges and interest for
late payment.
The petition of St. Luke's in G.R. No. 195960 raises factual
matters on the treatment and withholding of a part of its
income, 9 as well as the payment of surcharge and
delinquency interest. There is no ground for this Court to

undertake
such
a
factual
review.
Under
the
Constitution 10 and the Rules of Court, 11 this Court's
review power is generally limited to "cases in which only
an error or question of law is involved." 12 This Court
cannot depart from this limitation if a party fails to invoke
a recognized exception.
The Ruling of the Court of Tax Appeals
The CTA En Banc Decision on 19 November 2010 affirmed
in toto the CTA First Division Decision dated 23 February
2009 which held:
WHEREFORE, the Amended Petition for Review [by St.
Luke's] is hereby PARTIALLY GRANTED. Accordingly, the
1998 deficiency VAT assessment issued by respondent
against petitioner in the amount of P110,000.00 is hereby
CANCELLED and WITHDRAWN. However, petitioner is
hereby ORDERED to PAY deficiency income tax and
deficiency expanded withholding tax for the taxable year
1998 in the respective amounts of P5,496,963.54
andP778,406.84 or in the sum of P6,275,370.38, x x x.
xxxx
In addition, petitioner is hereby ORDERED to PAY twenty
percent (20%) delinquency interest on the total amount
of P6,275,370.38 counted from October 15, 2003 until full
payment thereof, pursuant to Section 249(C)(3) of the
NIRC of 1997.
SO ORDERED.

13

The deficiency income tax of P5,496,963.54, ordered by

the CTA En Banc to be paid, arose from the failure of St.
Luke's to prove that part of its income in 1998 (declared
as "Other Income-Net") 14 came from charitable activities.
The CTA cancelled the remainder of the P63,113,952.79
deficiency assessed by the BIR based on the 10% tax rate
under Section 27(B) of the NIRC, which the CTA En Banc
held was not applicable to St. Luke's. 15

The CTA ruled that St. Luke's is a non-stock and non-profit

charitable institution covered by Section 30(E) and (G) of
the NIRC. This ruling would exempt all income derived by
St. Luke's from services to its patients, whether paying or
non-paying. The CTA reiterated its earlier decision in St.
Luke's Medical Center, Inc. v. Commissioner of Internal
Revenue, 16 which examined the primary purposes of St.
Luke's under its articles of incorporation and various
documents 17 identifying St. Luke's as a charitable
institution.

charitable "corporation or association" in Section 30(E) of

the NIRC. According to the CTA, this is unique in the
present tax code, indicating an intent to exempt this type
of charitable organization from income tax. Section 27(B)
does not require that the hospital be "non-stock." The CTA
stated, "it is clear that non-stock, non-profit hospitals
operated exclusively for charitable purpose are exempt
from income tax on income received by them as such,
applying the provision of Section 30(E) of the NIRC of
1997, as amended." 25

The CTA adopted the test in Hospital de San Juan de Dios,

Inc. v. Pasay City, 18 which states that "a charitable
institution does not lose its charitable character and its
consequent exemption from taxation merely because
recipients of its benefits who are able to pay are required
to do so, where funds derived in this manner are devoted
to the charitable purposes of the institution x x x." 19 The
generation of income from paying patients does not per
se destroy the charitable nature of St. Luke's.

The Issue

Hospital de San Juan cited Jesus Sacred Heart College v.

Collector of Internal Revenue, 20 which ruled that the old
NIRC
(Commonwealth
Act
No.
466,
as
amended) 21 "positively exempts from taxation those
corporations or associations which, otherwise, would be
subject thereto, because of the existence of x x x net
income." 22 The NIRC of 1997 substantially reproduces the
provision on charitable institutions of the old NIRC. Thus,
in rejecting the argument that tax exemption is lost
whenever there is net income, the Court in Jesus Sacred
Heart College declared: "[E]very responsible organization
must be run to at least insure its existence, by operating
within the limits of its own resources, especially its regular
income. In other words, it should always strive, whenever
possible, to have a surplus." 23
The CTA held that Section 27(B) of the present NIRC does
not apply to St. Luke's. 24 The CTA explained that to apply
the 10% preferential rate, Section 27(B) requires a
hospital to be "non-profit." On the other hand, Congress
specifically used the word "non-stock" to qualify a

The sole issue is whether St. Luke's is liable for deficiency

income tax in 1998 under Section 27(B) of the NIRC,
which imposes a preferential tax rate of 10% on the
income of proprietary non-profit hospitals.
The Ruling of the Court
St. Luke's Petition in G.R. No. 195960
As a preliminary matter, this Court denies the petition of
St. Luke's in G.R. No. 195960 because the petition raises
factual issues. Under Section 1, Rule 45 of the Rules of
Court, "[t]he petition shall raise only questions of law
which must be distinctly set forth." St. Luke's cites
Martinez v. Court of Appeals 26 which permits factual
review "when the Court of Appeals [in this case, the CTA]
manifestly overlooked certain relevant facts not disputed
by the parties and which, if properly considered, would
justify a different conclusion." 27
This Court does not see how the CTA overlooked relevant
facts. St. Luke's itself stated that the CTA "disregarded the
testimony of [its] witness, Romeo B. Mary, being allegedly
self-serving, to show the nature of the 'Other Income-Net'
x x x." 28 This is not a case of overlooking or failing to
consider relevant evidence. The CTA obviously considered
the evidence and concluded that it is self-serving. The CTA
declared that it has "gone through the records of this case
and found no other evidence aside from the self-serving

affidavit executed by [the] witnesses [of St. Luke's] x x

x." 29
The deficiency tax on "Other Income-Net" stands. Thus,
St. Luke's is liable to pay the 25% surcharge under
Section 248(A)(3) of the NIRC. There is "[f]ailure to pay
the deficiency tax within the time prescribed for its
payment in the notice of assessment[.]" 30 St. Luke's is
also liable to pay 20% delinquency interest under Section
249(C)(3) of the NIRC. 31 As explained by the CTA En Banc,
the amount of P6,275,370.38 in the dispositive portion of
the CTA First Division Decision includes only deficiency
interest under Section 249(A) and (B) of the NIRC and not
delinquency interest. 32
The Main Issue
The issue raised by the BIR is a purely legal one. It
involves the effect of the introduction of Section 27(B) in
the NIRC of 1997 vis--vis Section 30(E) and (G) on the
income tax exemption of charitable and social welfare
institutions. The 10% income tax rate under Section 27(B)
specifically pertains to proprietary educational institutions
and proprietary non-profit hospitals. The BIR argues that
Congress intended to remove the exemption that nonprofit hospitals previously enjoyed under Section 27(E) of
the NIRC of 1977, which is now substantially reproduced
in Section 30(E) of the NIRC of 1997. 33 Section 27(B) of
the present NIRC provides:

tax prescribed in Subsection (A) hereof shall be imposed

on the entire taxable income. For purposes of this
Subsection, the term 'unrelated trade, business or other
activity' means any trade, business or other activity, the
conduct of which is not substantially related to the
exercise or performance by such educational institution or
hospital of its primary purpose or function. A 'proprietary
educational institution' is any private school maintained
and administered by private individuals or groups with an
issued permit to operate from the Department of
Education, Culture and Sports (DECS), or the Commission
on Higher Education (CHED), or the Technical Education
and Skills Development Authority (TESDA), as the case
may be, in accordance with existing laws and regulations.
(Emphasis supplied)
St. Luke's claims tax exemption under Section 30(E) and
(G) of the NIRC. It contends that it is a charitable
institution and an organization promoting social welfare.
The arguments of St. Luke's focus on the wording of
Section 30(E) exempting from income tax non-stock, nonprofit charitable institutions. 34 St. Luke's asserts that the
legislative intent of introducing Section 27(B) was only to
remove the exemption for "proprietary non-profit"
hospitals. 35 The relevant provisions of Section 30 state:
SEC. 30. Exemptions from Tax on Corporations. - The
following organizations shall not be taxed under this Title
in respect to income received by them as such:

SEC. 27. Rates of Income Tax on Domestic Corporations. -

xxxx

xxxx

(E) Nonstock corporation or association organized and

operated exclusively for religious, charitable, scientific,
athletic, or cultural purposes, or for the rehabilitation of
veterans, no part of its net income or asset shall belong to
or inure to the benefit of any member, organizer, officer
or any specific person;

(B) Proprietary Educational Institutions and Hospitals. Proprietary educational institutions and hospitals which
are non-profit shall pay a tax of ten percent (10%) on their
taxable income except those covered by Subsection (D)
hereof: Provided, That if the gross income from unrelated
trade, business or other activity exceeds fifty percent
(50%) of the total gross income derived by such
educational institutions or hospitals from all sources, the

xxxx

(G) Civic league or organization not organized for profit

but operated exclusively for the promotion of social
welfare;
xxxx
Notwithstanding the provisions in the preceding
paragraphs, the income of whatever kind and character of
the foregoing organizations from any of their properties,
real or personal, or from any of their activities conducted
for profit regardless of the disposition made of such
income, shall be subject to tax imposed under this Code.
(Emphasis supplied)
The Court partly grants the petition of the BIR but on a
different ground. We hold that Section 27(B) of the NIRC
does not remove the income tax exemption of proprietary
non-profit hospitals under Section 30(E) and (G). Section
27(B) on one hand, and Section 30(E) and (G) on the other
hand, can be construed together without the removal of
such tax exemption. The effect of the introduction of
Section 27(B) is to subject the taxable income of two
specific institutions, namely, proprietary non-profit
educational institutions 36 and proprietary non-profit
hospitals, among the institutions covered by Section 30,
to the 10% preferential rate under Section 27(B) instead
of the ordinary 30% corporate rate under the last
paragraph of Section 30 in relation to Section 27(A)(1).
Section 27(B) of the NIRC imposes a 10% preferential tax
rate on the income of (1) proprietary non-profit
educational institutions and (2) proprietary non-profit
hospitals. The only qualifications for hospitals are that
they must be proprietary and non-profit. "Proprietary"
means private, following the definition of a "proprietary
educational institution" as "any private school maintained
and administered by private individuals or groups" with a
government permit. "Non-profit" means no net income or
asset accrues to or benefits any member or specific
person, with all the net income or asset devoted to the
institution's purposes and all its activities conducted not
for profit.

"Non-profit" does not necessarily mean "charitable." In

Collector of Internal Revenue v. Club Filipino Inc. de
Cebu,37 this Court considered as non-profit a sports club
organized for recreation and entertainment of its
stockholders and members. The club was primarily funded
by membership fees and dues. If it had profits, they were
used for overhead expenses and improving its golf
course. 38 The club was non-profit because of its purpose
and there was no evidence that it was engaged in a profitmaking enterprise. 39
The sports club in Club Filipino Inc. de Cebu may be nonprofit, but it was not charitable. The Court defined
"charity" in Lung Center of the Philippines v. Quezon
City 40 as "a gift, to be applied consistently with existing
laws, for the benefit of an indefinite number of persons,
either by bringing their minds and hearts under the
influence of education or religion, by assisting them to
establish themselves in life or [by] otherwise lessening
the burden of government." 41 A non-profit club for the
benefit of its members fails this test. An organization may
be considered as non-profit if it does not distribute any
part of its income to stockholders or members. However,
despite its being a tax exempt institution, any income
such institution earns from activities conducted for profit
is taxable, as expressly provided in the last paragraph of
Section 30.
To be a charitable institution, however, an organization
must meet the substantive test of charity in Lung Center.
The issue in Lung Center concerns exemption from real
property tax and not income tax. However, it provides for
the test of charity in our jurisdiction. Charity is essentially
a gift to an indefinite number of persons which lessens
the burden of government. In other words, charitable
institutions provide for free goods and services to the
public which would otherwise fall on the shoulders of
government. Thus, as a matter of efficiency, the
government forgoes taxes which should have been spent
to address public needs, because certain private entities
already assume a part of the burden. This is the rationale
for the tax exemption of charitable institutions. The loss of

taxes by the government is compensated by its relief from

doing public works which would have been funded by
appropriations from the Treasury. 42
Charitable institutions, however, are not ipso facto
entitled to a tax exemption. The requirements for a tax
exemption are specified by the law granting it. The power
of Congress to tax implies the power to exempt from tax.
Congress can create tax exemptions, subject to the
constitutional provision that "[n]o law granting any tax
exemption shall be passed without the concurrence of a
majority of all the Members of Congress." 43 The
requirements for a tax exemption are strictly construed
against the taxpayer 44 because an exemption restricts
the collection of taxes necessary for the existence of the
government.
The Court in Lung Center declared that the Lung Center of
the Philippines is a charitable institution for the purpose of
exemption from real property taxes. This ruling uses the
same premise as Hospital de San Juan 45and Jesus Sacred
Heart College 46 which says that receiving income from
paying patients does not destroy the charitable nature of
a hospital.
As a general principle, a charitable institution does not
lose its character as such and its exemption from taxes
simply because it derives income from paying patients,
whether out-patient, or confined in the hospital, or
receives subsidies from the government, so long as the
money received is devoted or used altogether to the
charitable object which it is intended to achieve; and no
money inures to the private benefit of the persons
managing or operating the institution. 47
For real property taxes, the incidental generation of
income is permissible because the test of exemption is
the use of the property. The Constitution provides that
"[c]haritable institutions, churches and personages or
convents appurtenant thereto, mosques, non-profit
cemeteries, and all lands, buildings, and improvements,
actually, directly, and exclusively used for religious,

charitable, or educational purposes shall be exempt from

taxation." 48The test of exemption is not strictly a
requirement on the intrinsic nature or character of the
institution. The test requires that the institution use the
property in a certain way, i.e. for a charitable purpose.
Thus, the Court held that the Lung Center of the
Philippines did not lose its charitable character when it
used a portion of its lot for commercial purposes. The
effect of failing to meet the use requirement is simply to
remove from the tax exemption that portion of the
property not devoted to charity.
The Constitution exempts charitable institutions only from
real property taxes. In the NIRC, Congress decided to
extend the exemption to income taxes. However, the way
Congress crafted Section 30(E) of the NIRC is materially
different from Section 28(3), Article VI of the Constitution.
Section 30(E) of the NIRC defines the corporation or
association that is exempt from income tax. On the other
hand, Section 28(3), Article VI of the Constitution does not
define a charitable institution, but requires that the
institution "actually, directly and exclusively" use the
property for a charitable purpose.
Section 30(E) of the NIRC provides that a charitable
institution must be:
(1) A non-stock corporation or association;
(2) Organized exclusively for charitable purposes;
(3) Operated exclusively for charitable purposes; and
(4) No part of its net income or asset shall belong to or
inure to the benefit of any member, organizer, officer or
any specific person.
Thus, both the organization and operations of the
charitable institution must be devoted "exclusively" for
charitable purposes. The organization of the institution
refers to its corporate form, as shown by its articles of
incorporation, by-laws and other constitutive documents.

Section 30(E) of the NIRC specifically requires that the

corporation or association be non-stock, which is defined
by the Corporation Code as "one where no part of its
income is distributable as dividends to its members,
trustees, or officers" 49 and that any profit "obtain[ed] as
an incident to its operations shall, whenever necessary or
proper, be used for the furtherance of the purpose or
purposes
for
which
the
corporation
was
50
organized." However, under Lung Center, any profit by a
charitable institution must not only be plowed back
"whenever necessary or proper," but must be "devoted or
used altogether to the charitable object which it is
intended to achieve." 51
The operations of the charitable institution generally refer
to its regular activities. Section 30(E) of the NIRC requires
that these operations be exclusive to charity. There is also
a specific requirement that "no part of [the] net income or
asset shall belong to or inure to the benefit of any
member, organizer, officer or any specific person." The
use of lands, buildings and improvements of the
institution is but a part of its operations.
There is no dispute that St. Luke's is organized as a nonstock and non-profit charitable institution. However, this
does not automatically exempt St. Luke's from paying
taxes. This only refers to the organization of St. Luke's.
Even if St. Luke's meets the test of charity, a charitable
institution is not ipso facto tax exempt. To be exempt from
real property taxes, Section 28(3), Article VI of the
Constitution requires that a charitable institution use the
property "actually, directly and exclusively" for charitable
purposes. To be exempt from income taxes, Section 30(E)
of the NIRC requires that a charitable institution must be
"organized and operated exclusively" for charitable
purposes. Likewise, to be exempt from income taxes,
Section 30(G) of the NIRC requires that the institution be
"operated exclusively" for social welfare.
However, the last paragraph of Section 30 of the NIRC
qualifies the words "organized and operated exclusively"
by providing that:

Notwithstanding the provisions in the preceding

paragraphs, the income of whatever kind and character of
the foregoing organizations from any of their properties,
real or personal, or from any of their activities conducted
for profit regardless of the disposition made of such
income, shall be subject to tax imposed under this Code.
(Emphasis supplied)
In short, the last paragraph of Section 30 provides that if
a tax exempt charitable institution conducts "any" activity
for profit, such activity is not tax exempt even as its notfor-profit activities remain tax exempt. This paragraph
qualifies the requirements in Section 30(E) that the
"[n]on-stock corporation or association [must be]
organized and operated exclusively for x x x charitable x x
x purposes x x x." It likewise qualifies the requirement in
Section 30(G) that the civic organization must be
"operated exclusively" for the promotion of social welfare.
Thus, even if the charitable institution must be "organized
and operated exclusively" for charitable purposes, it is
nevertheless allowed to engage in "activities conducted
for profit" without losing its tax exempt status for its notfor-profit activities. The only consequence is that the
"income of whatever kind and character" of a charitable
institution "from any of its activities conducted for profit,
regardless of the disposition made of such income, shall
be subject to tax." Prior to the introduction of Section
27(B), the tax rate on such income from for-profit
activities was the ordinary corporate rate under Section
27(A). With the introduction of Section 27(B), the tax rate
is now 10%.
In 1998, St. Luke's had total revenues of P1,730,367,965
from services to paying patients. It cannot be disputed
that a hospital which receives approximately P1.73 billion
from paying patients is not an institution "operated
exclusively" for charitable purposes. Clearly, revenues
from paying patients are income received from "activities
conducted for profit." 52 Indeed, St. Luke's admits that it
derived profits from its paying patients. St. Luke's
declared P1,730,367,965 as "Revenues from Services to

Patients" in contrast to its "Free Services" expenditure

ofP218,187,498. In its Comment in G.R. No. 195909, St.
Luke's showed the following "calculation" to support its
claim that 65.20% of its "income after expenses was
allocated to free or charitable services" in 1998. 53
REVENUES FROM SERVICES P1,730,367,96
TO PATIENTS
5.00

OTHER INCOME

OPERATING EXPENSES
Professional care of patients

INCOME FROM OPERATIONS, P116,455,117.

Net of FREE SERVICES
00

34.80
%

17,482,304.00

EXCESS OF REVENUES OVER P133,937,42

EXPENSES
1.00
P1,016,608,39
4.00

Administrative

287,319,334.0
0

Household and Property

91,797,622.00

In Lung Center, this Court declared: "[e]xclusive" is

defined as possessed and enjoyed to the exclusion of
others; debarred from participation or enjoyment; and
"exclusively" is defined, "in a manner to exclude; as
enjoying a privilege exclusively." x x x The words
"dominant use" or "principal use" cannot be substituted
for the words "used exclusively" without doing violence to
the Constitution and the law. Solely is synonymous with
exclusively. 54

P1,395,725,35
0.00

INCOME FROM OPERATIONS

P334,642,615.
00

100%

Free Services

218,187,498.
00

65.20
%

The Court cannot expand the meaning of the words

"operated exclusively" without violating the NIRC.
Services to paying patients are activities conducted for
profit. They cannot be considered any other way. There is
a "purpose to make profit over and above the cost" of
services. 55 The P1.73 billion total revenues from paying
patients is not even incidental to St. Luke's charity
expenditure of P218,187,498 for non-paying patients.
St.
Luke's
claims
that
its
charity
expenditure
of P218,187,498 is 65.20% of its operating income in
1998. However, if a part of the remaining 34.80% of the
operating income is reinvested in property, equipment or
facilities used for services to paying and non-paying
patients, then it cannot be said that the income is

"devoted or used altogether to the charitable object which

it is intended to achieve." 56 The income is plowed back to
the corporation not entirely for charitable purposes, but
for profit as well. In any case, the last paragraph of
Section 30 of the NIRC expressly qualifies that income
from activities for profit is taxable "regardless of the
disposition made of such income."
Jesus Sacred Heart College declared that there is no
official legislative record explaining the phrase "any
activity conducted for profit." However, it quoted a
deposition of Senator Mariano Jesus Cuenco, who was a
member of the Committee of Conference for the Senate,
which introduced the phrase "or from any activity
conducted for profit."
P. Cuando ha hablado de la Universidad de Santo Toms
que tiene un hospital, no cree Vd. que es una actividad
esencial dicho hospital para el funcionamiento del colegio
de medicina de dicha universidad?
xxxx
R. Si el hospital se limita a recibir enformos pobres, mi
contestacin seria afirmativa; pero considerando que el
hospital tiene cuartos de pago, y a los mismos
generalmente van enfermos de buena posicin social
econmica, lo que se paga por estos enfermos debe estar
sujeto a 'income tax', y es una de las razones que hemos
tenido para insertar las palabras o frase 'or from any
activity conducted for profit.' 57
The question was whether having a hospital is essential to
an educational institution like the College of Medicine of
the University of Santo Tomas. Senator Cuenco answered
that if the hospital has paid rooms generally occupied by
people of good economic standing, then it should be
subject to income tax. He said that this was one of the
reasons Congress inserted the phrase "or any activity
conducted for profit."

The question in Jesus Sacred Heart College involves an

educational institution. 58 However, it is applicable to
charitable institutions because Senator Cuenco's response
shows an intent to focus on the activities of charitable
institutions. Activities for profit should not escape the
reach of taxation. Being a non-stock and non-profit
corporation does not, by this reason alone, completely
exempt an institution from tax. An institution cannot use
its corporate form to prevent its profitable activities from
being taxed.
The Court finds that St. Luke's is a corporation that is not
"operated exclusively" for charitable or social welfare
purposes insofar as its revenues from paying patients are
concerned. This ruling is based not only on a strict
interpretation of a provision granting tax exemption, but
also on the clear and plain text of Section 30(E) and (G).
Section 30(E) and (G) of the NIRC requires that an
institution be "operated exclusively" for charitable or
social welfare purposes to be completely exempt from
income tax. An institution under Section 30(E) or (G) does
not lose its tax exemption if it earns income from its forprofit activities. Such income from for-profit activities,
under the last paragraph of Section 30, is merely subject
to income tax, previously at the ordinary corporate rate
but now at the preferential 10% rate pursuant to Section
27(B).
A tax exemption is effectively a social subsidy granted by
the State because an exempt institution is spared from
sharing in the expenses of government and yet benefits
from them. Tax exemptions for charitable institutions
should therefore be limited to institutions beneficial to the
public and those which improve social welfare. A profitmaking entity should not be allowed to exploit this
subsidy to the detriment of the government and other
taxpayers.1wphi1
St. Luke's fails to meet the requirements under Section
30(E) and (G) of the NIRC to be completely tax exempt
from all its income. However, it remains a proprietary nonprofit hospital under Section 27(B) of the NIRC as long as

it does not distribute any of its profits to its members and

such profits are reinvested pursuant to its corporate
purposes. St. Luke's, as a proprietary non-profit hospital,
is entitled to the preferential tax rate of 10% on its net
income from its for-profit activities.
St. Luke's is therefore liable for deficiency income tax in
1998 under Section 27(B) of the NIRC. However, St. Luke's
has good reasons to rely on the letter dated 6 June 1990
by the BIR, which opined that St. Luke's is "a corporation
for purely charitable and social welfare purposes"59 and
thus exempt from income tax. 60 In Michael J. Lhuillier, Inc.
v. Commissioner of Internal Revenue, 61 the Court said
that "good faith and honest belief that one is not subject
to tax on the basis of previous interpretation of
government agencies tasked to implement the tax law,
are sufficient justification to delete the imposition of
surcharges and interest." 62
WHEREFORE, the petition of the Commissioner of Internal
Revenue in G.R. No. 195909 is PARTLY GRANTED. The
Decision of the Court of Tax Appeals En Banc dated 19
November 2010 and its Resolution dated 1 March 2011 in
CTA Case No. 6746 are MODIFIED. St. Luke's Medical
Center, Inc. is ORDERED TO PAY the deficiency income tax
in 1998 based on the 10% preferential income tax rate
under Section 27(B) of the National Internal Revenue
Code. However, it is not liable for surcharges and interest
on such deficiency income tax under Sections 248 and
249 of the National Internal Revenue Code. All other parts
of the Decision and Resolution of the Court of Tax Appeals
are AFFIRMED. The petition of St. Luke's Medical Center,
Inc. in G.R. No. 195960 is DENIED for violating Section 1,
Rule 45 of the Rules of Court.
SO ORDERED.

G.R. No. L-31156

February 27, 1976

PEPSI-COLA
BOTTLING
COMPANY
OF
THE
PHILIPPINES, INC., plaintiff-appellant,
vs.
MUNICIPALITY OF TANAUAN, LEYTE, THE MUNICIPAL
MAYOR, ET AL., defendant appellees.
Sabido, Sabido & Associates for appellant.
Provincial Fiscal Zoila M. Redona & Assistant
Provincial Fiscal Bonifacio R Matol and Assistant
Solicitor General Conrado T. Limcaoco & Solicitor
Enrique M. Reyes for appellees.
MARTIN, J.:
This is an appeal from the decision of the Court of First
Instance of Leyte in its Civil Case No. 3294, which was
certified to Us by the Court of Appeals on October 6,
1969, as involving only pure questions of law, challenging
the power of taxation delegated to municipalities under
the Local Autonomy Act (Republic Act No. 2264, as
amended, June 19, 1959).

municipality, sought to enforce compliance by the latter

of the provisions of said Ordinance No. 27, series of 1962.
Municipal Ordinance No. 23, of Tanauan, Leyte, which was
approved on September 25, 1962, levies and collects
"from soft drinks producers and manufacturers a tai of
one-sixteenth (1/16) of a centavo for every bottle of soft
drink corked." 2 For the purpose of computing the taxes
due, the person, firm, company or corporation producing
soft drinks shall submit to the Municipal Treasurer a
monthly report, of the total number of bottles produced
and corked during the month. 3
On the other hand, Municipal Ordinance No. 27, which was
approved on October 28, 1962, levies and collects "on soft
drinks produced or manufactured within the territorial
jurisdiction of this municipality a tax of ONE CENTAVO
(P0.01) on each gallon (128 fluid ounces, U.S.) of volume
capacity." 4 For the purpose of computing the taxes due,
the person, fun company, partnership, corporation or
plant producing soft drinks shall submit to the Municipal
Treasurer a monthly report of the total number of gallons
produced or manufactured during the month. 5

On February 14, 1963, the plaintiff-appellant, Pepsi-Cola

Bottling Company of the Philippines, Inc., commenced a
complaint with preliminary injunction before the Court of
First Instance of Leyte for that court to declare Section 2
of Republic Act No. 2264. 1 otherwise known as the Local
Autonomy Act, unconstitutional as an undue delegation of
taxing authority as well as to declare Ordinances Nos. 23
and 27, series of 1962, of the municipality of Tanauan,
Leyte, null and void.

The tax imposed in both Ordinances Nos. 23 and 27 is

denominated as "municipal production tax.'

On July 23, 1963, the parties entered into a Stipulation of

Facts, the material portions of which state that, first, both
Ordinances Nos. 23 and 27 embrace or cover the same
subject matter and the production tax rates imposed
therein are practically the same, and second, that on
January 17, 1963, the acting Municipal Treasurer of
Tanauan, Leyte, as per his letter addressed to the
Manager of the Pepsi-Cola Bottling Plant in said

From this judgment, the plaintiff Pepsi-Cola Bottling

Company appealed to the Court of Appeals, which, in turn,
elevated the case to Us pursuant to Section 31 of the
Judiciary Act of 1948, as amended.

On October 7, 1963, the Court of First Instance of Leyte

rendered judgment "dismissing the complaint and
upholding the constitutionality of [Section 2, Republic Act
No. 2264] declaring Ordinance Nos. 23 and 27 legal and
constitutional; ordering the plaintiff to pay the taxes due
under the oft the said Ordinances; and to pay the costs."

There are three capital questions raised in this appeal:

1. Is Section 2, Republic Act No. 2264 an undue

delegation of power, confiscatory and oppressive?
2. Do Ordinances Nos. 23 and 27 constitute double
taxation and impose percentage or specific taxes?
3. Are Ordinances Nos. 23 and 27 unjust and unfair?
1.
The power of taxation is an essential and inherent
attribute of sovereignty, belonging as a matter of right to
every independent government, without being expressly
conferred by the people. 6 It is a power that is purely
legislative and which the central legislative body cannot
delegate either to the executive or judicial department of
the government without infringing upon the theory of
separation of powers. The exception, however, lies in the
case of municipal corporations, to which, said theory does
not apply. Legislative powers may be delegated to local
governments in respect of matters of local concern. 7 This
is sanctioned by immemorial practice. 8 By necessary
implication, the legislative power to create political
corporations for purposes of local self-government carries
with it the power to confer on such local governmental
agencies the power to tax. 9 Under the New Constitution,
local governments are granted the autonomous authority
to create their own sources of revenue and to levy taxes.
Section 5, Article XI provides: "Each local government unit
shall have the power to create its sources of revenue and
to levy taxes, subject to such limitations as may be
provided by law." Withal, it cannot be said that Section 2
of Republic Act No. 2264 emanated from beyond the
sphere of the legislative power to enact and vest in local
governments the power of local taxation.
The plenary nature of the taxing power thus delegated,
contrary to plaintiff-appellant's pretense, would not suffice
to invalidate the said law as confiscatory and oppressive.
In delegating the authority, the State is not limited 6 the
exact measure of that which is exercised by itself. When it
is said that the taxing power may be delegated to
municipalities and the like, it is meant that there may be
delegated such measure of power to impose and collect

taxes as the legislature may deem expedient. Thus,

municipalities may be permitted to tax subjects which for
reasons of public policy the State has not deemed wise to
tax for more general purposes. 10 This is not to say
though that the constitutional injunction against
deprivation of property without due process of law may be
passed over under the guise of the taxing power, except
when the taking of the property is in the lawful exercise of
the taxing power, as when (1) the tax is for a public
purpose; (2) the rule on uniformity of taxation is
observed; (3) either the person or property taxed is within
the jurisdiction of the government levying the tax; and (4)
in the assessment and collection of certain kinds of taxes
notice and opportunity for hearing are provided. 11 Due
process is usually violated where the tax imposed is for a
private as distinguished from a public purpose; a tax is
imposed on property outside the State, i.e., extraterritorial
taxation; and arbitrary or oppressive methods are used in
assessing and collecting taxes. But, a tax does not violate
the due process clause, as applied to a particular
taxpayer, although the purpose of the tax will result in an
injury rather than a benefit to such taxpayer. Due process
does not require that the property subject to the tax or
the amount of tax to be raised should be determined by
judicial inquiry, and a notice and hearing as to the amount
of the tax and the manner in which it shall be apportioned
are generally not necessary to due process of law. 12
There is no validity to the assertion that the delegated
authority can be declared unconstitutional on the theory
of double taxation. It must be observed that the
delegating authority specifies the limitations and
enumerates the taxes over which local taxation may not
be exercised. 13 The reason is that the State has
exclusively reserved the same for its own prerogative.
Moreover, double taxation, in general, is not forbidden by
our fundamental law, since We have not adopted as part
thereof the injunction against double taxation found in the
Constitution of the United States and some states of the
Union. 14 Double taxation becomes obnoxious only where
the taxpayer is taxed twice for the benefit of the same
governmental entity 15 or by the same jurisdiction for the

same purpose, 16 but not in a case where one tax is

imposed by the State and the other by the city or
municipality. 17
2.
The plaintiff-appellant submits that Ordinance No.
23 and 27 constitute double taxation, because these two
ordinances cover the same subject matter and impose
practically the same tax rate. The thesis proceeds from its
assumption that both ordinances are valid and legally
enforceable. This is not so. As earlier quoted, Ordinance
No. 23, which was approved on September 25, 1962,
levies or collects from soft drinks producers or
manufacturers a tax of one-sixteen (1/16) of a centavo for
.every bottle corked, irrespective of the volume contents
of the bottle used. When it was discovered that the
producer or manufacturer could increase the volume
contents of the bottle and still pay the same tax rate, the
Municipality of Tanauan enacted Ordinance No. 27,
approved on October 28, 1962, imposing a tax of one
centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of
volume capacity. The difference between the two
ordinances clearly lies in the tax rate of the soft drinks
produced: in Ordinance No. 23, it was 1/16 of a centavo
for every bottle corked; in Ordinance No. 27, it is one
centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of
volume capacity. The intention of the Municipal Council of
Tanauan in enacting Ordinance No. 27 is thus clear: it was
intended as a plain substitute for the prior Ordinance No.
23, and operates as a repeal of the latter, even without
words to that effect. 18 Plaintiff-appellant in its brief
admitted that defendants-appellees are only seeking to
enforce Ordinance No. 27, series of 1962. Even the
stipulation of facts confirms the fact that the Acting
Municipal Treasurer of Tanauan, Leyte sought t6 compel
compliance by the plaintiff-appellant of the provisions of
said Ordinance No. 27, series of 1962. The
aforementioned admission shows that only Ordinance No.
27, series of 1962 is being enforced by defendantsappellees. Even the Provincial Fiscal, counsel for
defendants-appellees admits in his brief "that Section 7 of
Ordinance No. 27, series of 1962 clearly repeals

Ordinance No. 23 as the provisions of the latter are

inconsistent with the provisions of the former."
That brings Us to the question of whether the remaining
Ordinance No. 27 imposes a percentage or a specific tax.
Undoubtedly, the taxing authority conferred on local
governments under Section 2, Republic Act No. 2264, is
broad enough as to extend to almost "everything,
accepting those which are mentioned therein." As long as
the text levied under the authority of a city or municipal
ordinance is not within the exceptions and limitations in
the law, the same comes within the ambit of the general
rule, pursuant to the rules of exclucion attehus and
exceptio firmat regulum in cabisus non excepti 19 The
limitation applies, particularly, to the prohibition against
municipalities and municipal districts to impose "any
percentage tax or other taxes in any form based thereon
nor impose taxes on articles subject to specific tax except
gasoline, under the provisions of the National Internal
Revenue Code." For purposes of this particular limitation,
a municipal ordinance which prescribes a set ratio
between the amount of the tax and the volume of sale of
the taxpayer imposes a sales tax and is null and void for
being outside the power of the municipality to enact. 20
But, the imposition of "a tax of one centavo (P0.01) on
each gallon (128 fluid ounces, U.S.) of volume capacity"
on all soft drinks produced or manufactured under
Ordinance No. 27 does not partake of the nature of a
percentage tax on sales, or other taxes in any form based
thereon. The tax is levied on the produce (whether sold or
not) and not on the sales. The volume capacity of the
taxpayer's production of soft drinks is considered solely
for purposes of determining the tax rate on the products,
but there is not set ratio between the volume of sales and
the amount of the tax. 21
Nor can the tax levied be treated as a specific tax.
Specific taxes are those imposed on specified articles,
such as distilled spirits, wines, fermented liquors, products
of tobacco other than cigars and cigarettes, matches
firecrackers, manufactured oils and other fuels, coal,
bunker fuel oil, diesel fuel oil, cinematographic films,

playing cards, saccharine, opium and other habit-forming

drugs. 22 Soft drink is not one of those specified.
3.
The tax of one (P0.01) on each gallon (128 fluid
ounces, U.S.) of volume capacity on all softdrinks,
produced or manufactured, or an equivalent of 1-
centavos per case, 23 cannot be considered unjust and
unfair. 24 an increase in the tax alone would not support
the claim that the tax is oppressive, unjust and
confiscatory. Municipal corporations are allowed much
discretion in determining the reates of imposable taxes.
25 This is in line with the constutional policy of according
the widest possible autonomy to local governments in
matters of local taxation, an aspect that is given
expression in the Local Tax Code (PD No. 231, July 1,
1973). 26 Unless the amount is so excessive as to be
prohibitive, courts will go slow in writing off an ordinance
as unreasonable. 27 Reluctance should not deter
compliance with an ordinance such as Ordinance No. 27 if
the purpose of the law to further strengthen local
autonomy were to be realized. 28
Finally, the municipal license tax of P1,000.00 per corking
machine with five but not more than ten crowners or
P2,000.00 with ten but not more than twenty crowners
imposed on manufacturers, producers, importers and
dealers of soft drinks and/or mineral waters under
Ordinance No. 54, series of 1964, as amended by
Ordinance No. 41, series of 1968, of defendant
Municipality, 29 appears not to affect the resolution of the
validity of Ordinance No. 27. Municipalities are
empowered to impose, not only municipal license taxes
upon persons engaged in any business or occupation but
also to levy for public purposes, just and uniform taxes.
The ordinance in question (Ordinance No. 27) comes
within the second power of a municipality. ACCORDINGLY,
the constitutionality of Section 2 of Republic Act No. 2264,
otherwise known as the Local Autonomy Act, as amended,
is hereby upheld and Municipal Ordinance No. 27 of the
Municipality of Tanauan, Leyte, series of 1962, re-pealing
Municipal Ordinance No. 23, same series, is hereby
declared of valid and legal effect. Costs against petitionerappellant.
SO ORDERED.

[G. R. No. 119775. October 24, 2003]

JOHN HAY PEOPLES ALTERNATIVE COALITION,
MATEO CARIO FOUNDATION INC., CENTER FOR
ALTERNATIVE SYSTEMS FOUNDATION INC., REGINA
VICTORIA A. BENAFIN REPRESENTED AND JOINED BY
HER MOTHER MRS. ELISA BENAFIN, IZABEL M. LUYK
REPRESENTED AND JOINED BY HER MOTHER MRS.
REBECCA
MOLINA
LUYK,
KATHERINE
PE
REPRESENTED AND JOINED BY HER MOTHER
ROSEMARIE G. PE, SOLEDAD S. CAMILO, ALICIA C.
PACALSO ALIAS KEVAB, BETTY I. STRASSER, RUBY
C. GIRON, URSULA C. PEREZ ALIAS BA-YAY,
EDILBERTO T. CLARAVALL, CARMEN CAROMINA,
LILIA G. YARANON, DIANE MONDOC, petitioners, vs.
VICTOR LIM, PRESIDENT, BASES CONVERSION
DEVELOPMENT AUTHORITY; JOHN HAY PORO POINT
DEVELOPMENT CORPORATION, CITY OF BAGUIO,
TUNTEX
(B.V.I.)
CO.
LTD.,
ASIAWORLD
INTERNATIONALE GROUP, INC., DEPARTMENT OF
ENVIRONMENT
AND
NATURAL
RESOURCES, respondents.
DECISION
CARPIO MORALES, J.:
By the present petition for prohibition, mandamus and
declaratory relief with prayer for a temporary restraining
order (TRO) and/or writ of preliminary injunction,
petitioners assail, in the main, the constitutionality of
Presidential Proclamation No. 420, Series of 1994,
CREATING AND DESIGNATING A PORTION OF THE AREA
COVERED BY THE FORMER CAMP JOHN [HAY] AS THE JOHN
HAY SPECIAL ECONOMIC ZONE PURSUANT TO REPUBLIC
ACT NO. 7227.
Republic Act No. 7227, AN ACT ACCELERATING THE
CONVERSION OF MILITARY RESERVATIONS INTO OTHER
PRODUCTIVE USES, CREATING THE BASES CONVERSION
AND DEVELOPMENT AUTHORITY FOR THIS PURPOSE,
PROVIDING FUNDS THEREFOR AND FOR OTHER
PURPOSES, otherwise known as the Bases Conversion and
Development Act of 1992, which was enacted on March

13, 1992, set out the policy of the government to

accelerate the sound and balanced conversion into
alternative productive uses of the former military bases
under the 1947 Philippines-United States of America
Military Bases Agreement, namely, the Clark and Subic
military reservations as well as their extensions including
the John Hay Station (Camp John Hay or the camp) in the
City of Baguio.[1]
As noted in its title, R.A. No. 7227 created public
respondent
Bases
Conversion
and
Development
Authority[2] (BCDA), vesting it with powers pertaining to
the multifarious aspects of carrying out the ultimate
objective of utilizing the base areas in accordance with
the declared government policy.
R.A. No. 7227 likewise created the Subic Special Economic
[and Free Port] Zone (Subic SEZ) the metes and bounds of
which were to be delineated in a proclamation to be
issued by the President of the Philippines. [3]
R.A. No. 7227 granted the Subic SEZ incentives ranging
from tax and duty-free importations, exemption of
businesses therein from local and national taxes, to other
hallmarks of a liberalized financial and business climate. [4]
And R.A. No. 7227 expressly gave authority to the
President to create through executive proclamation,
subject to the concurrence of the local government units
directly affected, other Special Economic Zones (SEZ) in
the areas covered respectively by the Clark military
reservation, the Wallace Air Station in San Fernando, La
Union, and Camp John Hay.[5]
On August 16, 1993, BCDA entered into a Memorandum of
Agreement and Escrow Agreement with private
respondents Tuntex (B.V.I.) Co., Ltd (TUNTEX) and
Asiaworld Internationale Group, Inc. (ASIAWORLD), private
corporations registered under the laws of the British Virgin
Islands, preparatory to the formation of a joint venture for
the development of Poro Point in La Union and Camp John
Hay as premier tourist destinations and recreation
centers. Four months later or on December 16, 1993,
BCDA, TUNTEX and ASIAWORD executed a Joint Venture

Agreement[6] whereby they bound themselves to put up a

joint venture company known as the Baguio International
Development and Management Corporation which would
lease areas within Camp John Hay and Poro Point for the
purpose of turning such places into principal tourist and
recreation spots, as originally envisioned by the parties
under their Memorandum of Agreement.
The Baguio City government meanwhile passed a number
of resolutions in response to the actions taken by BCDA as
owner and administrator of Camp John Hay.
By Resolution[7] of September 29, 1993, the Sangguniang
Panlungsod of Baguio City (the sanggunian) officially
asked BCDA to exclude all the barangays partly or totally
located within Camp John Hay from the reach or coverage
of any plan or program for its development.
By a subsequent Resolution[8] dated January 19, 1994,
the sanggunian sought from BCDA an abdication, waiver
or quitclaim of its ownership over the home lots being
occupied by residents of nine (9) barangays surrounding
the military reservation.
Still by another resolution passed on February 21, 1994,
the sanggunian adopted and submitted to BCDA a 15point concept for the development of Camp John Hay.
[9]
Thesanggunians vision expressed, among other things,
a kind of development that affords protection to the
environment, the making of a family-oriented type of
tourist destination, priority in employment opportunities
for Baguio residents and free access to the base area,
guaranteed participation of the city government in the
management and operation of the camp, exclusion of the
previously named nine barangays from the area for
development, and liability for local taxes of businesses to
be established within the camp.[10]
BCDA, TUNTEX and ASIAWORLD agreed to some, but
rejected
or
modified
the
other
proposals
of
the sanggunian.[11] They stressed the need to declare
Camp John Hay a SEZ as a condition precedent to its full
development in accordance with the mandate of R.A. No.
7227.[12]

On May 11, 1994, the sanggunian passed a resolution

requesting the Mayor to order the determination of realty
taxes which may otherwise be collected from real
properties of Camp John Hay. [13] The resolution was
intended
to
intelligently
guide
the sanggunian in
determining its position on whether Camp John Hay be
declared a SEZ, it (the sanggunian) being of the view that
such declaration would exempt the camps property and
the economic activity therein from local or national
taxation.

and verified by the Department of Environment and

Natural Resources (DENR) as defined by the following
technical description:

More than a month later, however, the sanggunian passed

Resolution No. 255, (Series of 1994), [14] seeking and
supporting, subject to its concurrence, the issuance by
then President Ramos of a presidential proclamation
declaring an area of 288.1 hectares of the camp as a SEZ
in accordance with the provisions of R.A. No. 7227.
Together with this resolution was submitted a draft of the
proposed proclamation for consideration by the President.

Lot 1, Lot 2, Lot 3, Lot 4, Lot 5, Lot 6, Lot 7, Lot 13, Lot 14,
Lot 15, and Lot 20 of Ccs-131102-000030

[15]

On July 5, 1994 then President Ramos issued Proclamation

No. 420,[16] the title of which was earlier indicated, which
established a SEZ on a portion of Camp John Hay and
which reads as follows:
xxx
Pursuant to the powers vested in me by the law and the
resolution of concurrence by the City Council of Baguio, I,
FIDEL V. RAMOS, President of the Philippines, do hereby
create and designate a portion of the area covered by the
former John Hay reservation as embraced, covered, and
defined by the 1947 Military Bases Agreement between
the Philippines and the United States of America, as
amended, as the John Hay Special Economic Zone, and
accordingly order:
SECTION 1. Coverage of John Hay Special Economic
Zone. The John Hay Special Economic Zone shall cover
the area consisting of Two Hundred Eighty Eight and
one/tenth (288.1) hectares, more or less, of the total of
Six Hundred Seventy-Seven (677) hectares of the John
Hay Reservation, more or less, which have been surveyed

A parcel of land, situated in the City of Baguio, Province of

Benguet, Island of Luzon, and particularly described in
survey plans Psd-131102-002639 and Ccs-131102-000030
as approved on 16 August 1993 and 26 August 1993,
respectively, by the Department of Environment and
Natural Resources, in detail containing :

-andLot 3, Lot 4, Lot 5, Lot 6, Lot 7, Lot 8, Lot 9, Lot 10, Lot 11,
Lot 14, Lot 15, Lot 16, Lot 17, and Lot 18 of Psd-131102002639 being portions of TCT No. T-3812, LRC Rec. No. 87.
With a combined area of TWO HUNDRED EIGHTY EIGHT
AND ONE/TENTH HECTARES (288.1 hectares); Provided
that the area consisting of approximately Six and
two/tenth (6.2) hectares, more or less, presently occupied
by the VOA and the residence of the Ambassador of the
United States, shall be considered as part of the SEZ only
upon turnover of the properties to the government of the
Republic of the Philippines.
Sec. 2. Governing Body of the John Hay Special Economic
Zone. Pursuant to Section 15 of Republic Act No. 7227,
the Bases Conversion and Development Authority is
hereby established as the governing body of the John Hay
Special Economic Zone and, as such, authorized to
determine the utilization and disposition of the lands
comprising it, subject to private rights, if any, and in
consultation and coordination with the City Government of
Baguio after consultation with its inhabitants, and to
promulgate the necessary policies, rules, and regulations
to govern and regulate the zone thru the John Hay Poro
Point Development Corporation, which is its implementing
arm for its economic development and optimum
utilization.

Sec. 3. Investment Climate in John Hay Special Economic

Zone. Pursuant to Section 5(m) and Section 15 of Republic
Act No. 7227, the John Hay Poro Point Development
Corporation shall implement all necessary policies, rules,
and regulations governing the zone, including investment
incentives, in consultation with pertinent government
departments. Among others, the zone shall have all the
applicable incentives of the Special Economic Zone under
Section 12 of Republic Act No. 7227 and those applicable
incentives granted in the Export Processing Zones, the
Omnibus Investment Code of 1987, the Foreign
Investment Act of 1991, and new investment laws that
may hereinafter be enacted.
Sec. 4. Role of Departments, Bureaus, Offices, Agencies
and Instrumentalities. All Heads of departments, bureaus,
offices, agencies, and instrumentalities of the government
are hereby directed to give full support to Bases
Conversion and Development Authority and/or its
implementing subsidiary or joint venture to facilitate the
necessary approvals to expedite the implementation of
various projects of the conversion program.

Joint Venture Agreement between public respondent BCDA

and private respondents TUNTEX andASIAWORLD.
Petitioners allege as grounds for the allowance of the
petition the following:
I. PRESIDENTIAL PROCLAMATION NO. 420, SERIES OF 1990
(sic) IN SO FAR AS IT GRANTS TAX EXEMPTIONS IS INVALID
AND ILLEGAL AS IT IS AN UNCONSTITUTIONAL EXERCISE
BY THE PRESIDENT OF A POWER GRANTED ONLY TO THE
LEGISLATURE.
II. PRESIDENTIAL PROCLAMATION NO. 420, IN SO FAR AS
IT LIMITS THE POWERS AND INTERFERES WITH THE
AUTONOMY OF THE CITY OF BAGUIO IS INVALID, ILLEGAL
AND UNCONSTITUTIONAL.
III. PRESIDENTIAL PROCLAMATION NO. 420, SERIES OF
1994 IS UNCONSTITUTIONAL IN THAT IT VIOLATES THE
RULE THAT ALL TAXES SHOULD BE UNIFORM AND
EQUITABLE.

Sec. 5. Local Authority. Except as herein provided, the

affected local government units shall retain their basic
autonomy and identity.

IV. THE MEMORANDUM OF AGREEMENT ENTERED INTO BY

AND BETWEEN PRIVATE AND PUBLIC RESPONDENTS
BASES CONVERSION DEVELOPMENT AUTHORITY HAVING
BEEN ENTERED INTO ONLY BY DIRECT NEGOTIATION IS
ILLEGAL.

Sec. 6. Repealing Clause. All orders, rules, and

regulations, or parts thereof, which are inconsistent with
the provisions of this Proclamation, are hereby repealed,
amended, or modified accordingly.

V. THE TERMS AND CONDITIONS OF THE MEMORANDUM

OF AGREEMENT ENTERED INTO BY AND BETWEEN PRIVATE
AND
PUBLIC
RESPONDENT
BASES
CONVERSION
DEVELOPMENT AUTHORITY IS (sic) ILLEGAL.

Sec. 7. Effectivity. This proclamation shall take effect

immediately.
Done in the City of Manila, this 5th day of July, in the year
of Our Lord, nineteen hundred and ninety-four.

VI.
THE
CONCEPTUAL
DEVELOPMENT
PLAN
OF
RESPONDENTS NOT
HAVING
UNDERGONE
ENVIRONMENTAL
IMPACT
ASSESSMENT
IS
BEING
ILLEGALLY
CONSIDERED
WITHOUT
A
VALID
ENVIRONMENTAL IMPACT ASSESSMENT.

The issuance of Proclamation No. 420 spawned the

present
petition[17] for
prohibition, mandamus and
declaratory relief which was filed on April 25, 1995
challenging, in the main, its constitutionality or validity as
well as the legality of the Memorandum of Agreement and

A temporary restraining order and/or writ of preliminary

injunction was prayed for to enjoin BCDA, John Hay Poro
Point Development Corporation and the city government
from
implementing
Proclamation
No.
420,
and TUNTEX and ASIAWORLD from proceeding with their

plan respecting Camp John Hays development pursuant to

their Joint Venture Agreement with BCDA.[18]

they possess the standing to bring the petition which is a

taxpayers suit.

Public respondents, by their separate Comments, allege

as moot and academic the issues raised by the petition,
the questioned Memorandum of Agreement and Joint
Venture Agreement having already been deemed
abandoned by the inaction of the parties thereto prior to
the filing of the petition as in fact, by letter of November
21,
1995,
BCDA
formally
notifiedTUNTEX and
ASIAWORLD of the revocation of their said agreements.[19]

Public respondents have filed their Rejoinder [21] and the

parties have filed their respective memoranda.

In maintaining the validity of Proclamation No. 420,

respondents contend that by extending to the John Hay
SEZ economic incentives similar to those enjoyed by the
Subic SEZ which was established under R.A. No. 7227, the
proclamation is merely implementing the legislative intent
of said law to turn the US military bases into hubs of
business activity or investment. They underscore the
point that the governments policy of bases conversion
can not be achieved without extending the same tax
exemptions granted by R.A. No. 7227 to Subic SEZ to
other SEZs.
Denying that Proclamation No. 420 is in derogation of the
local autonomy of Baguio City or that it is violative of the
constitutional guarantee of equal protection, respondents
assail petitioners lack of standing to bring the present suit
even as taxpayers and in the absence of any actual case
or controversy to warrant this Courts exercise of its power
of judicial review over the proclamation.
Finally, respondents seek the outright dismissal of the
petition for having been filed in disregard of the hierarchy
of courts and of the doctrine of exhaustion of
administrative remedies.
Replying,[20] petitioners aver that the doctrine of
exhaustion of administrative remedies finds no application
herein since they are invoking the exclusive authority of
this Court under Section 21 of R.A. No. 7227 to enjoin or
restrain implementation of projects for conversion of the
base areas; that the established exceptions to the
aforesaid doctrine obtain in the present petition; and that

Before dwelling on the core issues, this Court shall first

address the preliminary procedural questions confronting
the petition.
The judicial policy is and has always been that this Court
will not entertain direct resort to it except when the
redress sought cannot be obtained in the proper courts, or
when exceptional and compelling circumstances warrant
availment of a remedy within and calling for the exercise
of this Courts primary jurisdiction.[22] Neither will it
entertain an action for declaratory relief, which is partly
the nature of this petition, over which it has no original
jurisdiction.
Nonetheless, as it is only this Court which has the power
under Section 21[23] of R.A. No. 7227 to enjoin
implementation of projects for the development of the
former US military reservations, the issuance of which
injunction petitioners pray for, petitioners direct filing of
the present petition with it is allowed. Over and above this
procedural objection to the present suit, this Court retains
full discretionary power to take cognizance of a petition
filed directly to it if compelling reasons, or the nature and
importance of the issues raised, warrant. [24] Besides,
remanding the case to the lower courts now would just
unduly prolong adjudication of the issues.
The transformation of a portion of the area covered by
Camp John Hay into a SEZ is not simply a re-classification
of an area, a mere ascription of a status to a place. It
involves turning the former US military reservation into a
focal point for investments by both local and foreign
entities. It is to be made a site of vigorous business
activity, ultimately serving as a spur to the countrys long
awaited economic growth. For, as R.A. No. 7227
unequivocally declares, it is the governments policy to
enhance the benefits to be derived from the base areas in
order to promote the economic and social development of

Central Luzon in particular and the country in general.

[25]
Like the Subic SEZ, the John Hay SEZ should also be
turned into a self-sustaining, industrial, commercial,
financial and investment center. [26]
More than the economic interests at stake, the
development of Camp John Hay as well as of the other
base areas unquestionably has critical links to a host of
environmental and social concerns. Whatever use to
which these lands will be devoted will set a chain of
events that can affect one way or another the social and
economic way of life of the communities where the bases
are located, and ultimately the nation in general.
Underscoring the fragility of Baguio Citys ecology with its
problem on the scarcity of its water supply, petitioners
point out that the local and national government are
faced with the challenge of how to provide for an
ecologically sustainable, environmentally sound, equitable
transition for the city in the wake of Camp John Hays
reversion to the mass of government property. [27] But that
is why R.A. No. 7227 emphasizes the sound and balanced
conversion of the Clark and Subic military reservations
and
their
extensions consistent
with
ecological
andenvironmental standards.[28] It cannot thus be gainsaid
that the matter of conversion of the US bases into SEZs,
in this case Camp John Hay, assumes importance of a
national magnitude.
Convinced then that the present petition embodies crucial
issues, this Court assumes jurisdiction over the petition.
As far as the questioned agreements between BCDA
and TUNTEX and ASIAWORLD are concerned, the legal
questions being raised thereon by petitioners have indeed
been rendered moot and academic by the revocation of
such agreements. There are, however, other issues posed
by the petition, those which center on the constitutionality
of Proclamation No. 420, which have not been mooted by
the said supervening event upon application of the rules
for the judicial scrutiny of constitutional cases. The issues
boil down to:

(1) Whether the present petition complies with the

requirements for this Courts exercise of jurisdiction over
constitutional issues;
(2) Whether Proclamation No. 420 is constitutional by
providing for national and local tax exemption within and
granting other economic incentives to the John Hay
Special Economic Zone; and
(3) Whether Proclamation No. 420 is constitutional for
limiting or interfering with the local autonomy of Baguio
City;
It is settled that when questions of constitutional
significance are raised, the court can exercise its power of
judicial review only if the following requisites are present:
(1) the existence of an actual and appropriate case; (2) a
personal and substantial interest of the party raising the
constitutional question; (3) the exercise of judicial review
is pleaded at the earliest opportunity; and (4) the
constitutional question is the lis mota of the case.[29]
An actual case or controversy refers to an existing case or
controversy that is appropriate or ripe for determination,
not conjectural or anticipatory.[30] The controversy needs
to be definite and concrete, bearing upon the legal
relations of parties who are pitted against each other due
to their adverse legal interests.[31] There is in the present
case a real clash of interests and rights between
petitioners and respondents arising from the issuance of a
presidential proclamation that converts a portion of the
area covered by Camp John Hay into a SEZ, the former
insisting that such proclamation contains unconstitutional
provisions, the latter claiming otherwise.
R.A. No. 7227 expressly requires the concurrence of the
affected local government units to the creation of SEZs
out of all the base areas in the country. [32] The grant by
the law on local government units of the right of
concurrence on the bases conversion is equivalent to
vesting a legal standing on them, for it is in effect a
recognition of the real interests that communities nearby
or surrounding a particular base area have in its
utilization. Thus, the interest of petitioners, being

inhabitants of Baguio, in assailing the legality of

Proclamation No. 420, is personal and substantial such
that they have sustained or will sustain direct injury as a
result of the government act being challenged. [33] Theirs is
a material interest, an interest in issue affected by the
proclamation and not merely an interest in the question
involved or an incidental interest, [34] for what is at stake in
the enforcement of Proclamation No. 420 is the very
economic and social existence of the people of Baguio
City.
Petitioners locus standi parallels that of the petitioner and
other residents of Bataan, specially of the town of Limay,
in Garcia v. Board of Investments[35] where this Court
characterized their interest in the establishment of a
petrochemical plant in their place as actual, real, vital and
legal, for it would affect not only their economic life but
even the air they breathe.
Moreover, petitioners Edilberto T. Claravall and Lilia G.
Yaranon were duly elected councilors of Baguio at the
time, engaged in the local governance of Baguio City and
whose duties included deciding for and on behalf of their
constituents the question of whether to concur with the
declaration of a portion of the area covered by Camp John
Hay as a SEZ. Certainly then, petitioners Claravall and
Yaranon,
as
city
officials
who
voted
against[36] the sanggunian Resolution No. 255 (Series of
1994) supporting the issuance of the now challenged
Proclamation No. 420, have legal standing to bring the
present petition.
That there is herein a dispute on legal rights and interests
is thus beyond doubt. The mootness of the issues
concerning the questioned agreements between public
and private respondents is of no moment.
By the mere enactment of the questioned law or the
approval of the challenged act, the dispute is deemed to
have ripened into a judicial controversy even without any
other overt act. Indeed, even a singular violation of the
Constitution and/or the law is enough to awaken judicial
duty.[37]

As to the third and fourth requisites of a judicial inquiry,

there is likewise no question that they have been
complied with in the case at bar. This is an action filed
purposely to bring forth constitutional issues, ruling on
which this Court must take up. Besides, respondents
never raised issues with respect to these requisites,
hence, they are deemed waived.
Having cleared the way for judicial review, the
constitutionality of Proclamation No. 420, as framed in the
second and third issues above, must now be addressed
squarely.
The second issue refers to petitioners objection against
the creation by Proclamation No. 420 of a regime of tax
exemption within the John Hay SEZ. Petitioners argue that
nowhere in R. A. No. 7227 is there a grant of tax
exemption to SEZs yet to be established in base areas,
unlike the grant under Section 12 thereof of tax
exemption and investment incentives to the therein
established Subic SEZ. The grant of tax exemption to the
John Hay SEZ, petitioners conclude, thus contravenes
Article VI, Section 28 (4) of the Constitution which
provides that No law granting any tax exemption shall be
passed without the concurrence of a majority of all the
members of Congress.
Section 3 of Proclamation No. 420, the challenged
provision, reads:
Sec. 3. Investment Climate in John Hay Special Economic
Zone. Pursuant to Section 5(m) and Section 15 of Republic
Act No. 7227, the John Hay Poro Point Development
Corporation shall implement all necessary policies, rules,
and regulations governing the zone, including investment
incentives, in consultation with pertinent government
departments. Among others, the zone shall have all
the applicable incentives of the Special Economic
Zone under Section 12 of Republic Act No.
7227 and those applicable incentives granted in the
Export Processing Zones, the Omnibus Investment
Code of 1987, the Foreign Investment Act of 1991,

and new investment laws that may hereinafter be

enacted. (Emphasis and underscoring supplied)
Upon the other hand, Section 12 of R.A. No. 7227
provides:
xxx
(a) Within the framework and subject to the mandate and
limitations of the Constitution and the pertinent provisions
of the Local Government Code, the Subic Special
Economic Zone shall be developed into a self-sustaining,
industrial, commercial, financial and investment center to
generate employment opportunities in and around the
zone and to attract and promote productive foreign
investments;
b) The Subic Special Economic Zone shall be operated
and managed as a separate customs territory ensuring
free flow or movement of goods and capital within, into
and exported out of the Subic Special Economic Zone, as
well as provide incentives such as tax and duty free
importations of raw materials, capital and equipment.
However, exportation or removal of goods from the
territory of the Subic Special Economic Zone to the other
parts of the Philippine territory shall be subject to customs
duties and taxes under the Customs and Tariff Code and
other relevant tax laws of the Philippines;
(c) The provisions of existing laws, rules and regulations
to the contrary notwithstanding, no taxes, local and
national, shall be imposed within the Subic Special
Economic Zone. In lieu of paying taxes, three percent
(3%) of the gross income earned by all businesses and
enterprises within the Subic Special Economic Zone shall
be remitted to the National Government, one percent
(1%) each to the local government units affected by the
declaration of the zone in proportion to their population
area, and other factors. In addition, there is hereby
established a development fund of one percent (1%) of
the gross income earned by all businesses and
enterprises within the Subic Special Economic Zone to be
utilized for the Municipality of Subic, and other
municipalities contiguous to be base areas. In case of

conflict between national and local laws with respect to

tax exemption privileges in the Subic Special Economic
Zone, the same shall be resolved in favor of the latter;
(d) No exchange control policy shall be applied and free
markets for foreign exchange, gold, securities and futures
shall be allowed and maintained in the Subic Special
Economic Zone;
(e) The Central Bank, through the Monetary Board, shall
supervise and regulate the operations of banks and other
financial institutions within the Subic Special Economic
Zone;
(f) Banking and Finance shall be liberalized with the
establishment of foreign currency depository units of local
commercial banks and offshore banking units of foreign
banks with minimum Central Bank regulation;
(g) Any investor within the Subic Special Economic
Zone whose continuing investment shall not be less than
Two Hundred fifty thousand dollars ($250,000), his/her
spouse and dependent children under twenty-one (21)
years of age, shall be granted permanent resident status
within the Subic Special Economic Zone. They shall have
freedom of ingress and egress to and from the Subic
Special Economic Zone without any need of special
authorization from the Bureau of Immigration and
Deportation. The Subic Bay Metropolitan Authority
referred to in Section 13 of this Act may also issue
working visas renewable every two (2) years to foreign
executives and other aliens possessing highly-technical
skills which no Filipino within the Subic Special Economic
Zone possesses, as certified by the Department of Labor
and Employment. The names of aliens granted permanent
residence status and working visas by the Subic Bay
Metropolitan Authority shall be reported to the Bureau of
Immigration and Deportation within thirty (30) days after
issuance thereof;
x x x (Emphasis supplied)
It is clear that under Section 12 of R.A. No. 7227 it is only
the Subic SEZ which was granted by Congress with tax

exemption, investment incentives and the like. There is no

express extension of the aforesaid benefits to other
SEZs still to be created at the time via presidential
proclamation.

Senator Angara: No, Mr. President, because during our

short caucus, Senator Laurel raised the point that if we
give this delegation to the President to establish other
economic zones, that may be an unwarranted delegation.

The deliberations of the Senate confirm the exclusivity to

Subic SEZ of the tax and investment privileges accorded it
under the law, as the following exchanges between our
lawmakers show during the second reading of the
precursor bill of R.A. No. 7227 with respect to the
investment policies that would govern Subic SEZ which
are now embodied in the aforesaid Section 12 thereof:

So we agreed that we will simply limit the definition of

powers and description of the zone to Subic, but that does
not exclude the possibility of creating other economic
zones within the baselands.

xxx
Senator Maceda: This is what I was talking about. We
get into problems here because all of these following
policies are centered around the concept of free port. And
in the main paragraph above, we have declared both
Clark and Subic as special economic zones, subject to
these policies which are, in effect, a free-port
arrangement.
Senator Angara: The Gentleman is absolutely correct,
Mr. President. So we must confine these policies only to
Subic.
May I withdraw then my amendment, and instead provide
that THE SPECIAL ECONOMIC ZONE OF SUBIC SHALL BE
ESTABLISHED IN ACCORDANCE WITH THE FOLLOWING
POLICIES. Subject to style, Mr. President.
Thus, it is very clear that these principles and policies are
applicable only to Subic as a free port.
Senator Paterno: Mr. President.
The President: Senator Paterno is recognized.
Senator Paterno: I take it that the amendment
suggested by Senator Angara would then prevent the
establishment of other special economic zones observing
these policies.

Senator Paterno: But if that amendment is followed, no

other special economic zone may be created under
authority of this particular bill. Is that correct, Mr.
President?
Senator Angara: Under this specific provision, yes, Mr.
President. This provision now will be confined only to
Subic.[38]
x x x (Underscoring supplied).
As gathered from the earlier-quoted Section 12 of R.A. No.
7227, the privileges given to Subic SEZ consist principally
of exemption from tariff or customs duties, national and
local taxes of business entities therein (paragraphs (b)
and (c)), free market and trade of specified goods or
properties (paragraph d), liberalized banking and finance
(paragraph f), and relaxed immigration rules for foreign
investors (paragraph g). Yet, apart from these,
Proclamation No. 420 also makes available to the John
Hay SEZ benefits existing in other laws such as the
privilege of export processing zone-based businesses of
importing capital equipment and raw materials free from
taxes, duties and other restrictions; [39] tax and duty
exemptions, tax holiday, tax credit, and other incentives
under the Omnibus Investments Code of 1987;[40] and the
applicability to the subject zone of rules governing foreign
investments in the Philippines. [41]
While the grant of economic incentives may be essential
to the creation and success of SEZs, free trade zones and
the like, the grant thereof to the John Hay SEZ cannot be
sustained. The incentives under R.A. No. 7227
are exclusive only to the Subic SEZ, hence, the extension

of the same to the John Hay SEZ finds no support therein.

Neither does the same grant of privileges to the John Hay
SEZ find support in the other laws specified under Section
3 of Proclamation No. 420, which laws were already extant
before the issuance of the proclamation or the enactment
of R.A. No. 7227.
More importantly, the nature of most of the assailed
privileges is one of tax exemption. It is the legislature,
unless limited by a provision of the state constitution, that
has full power to exempt any person or corporation or
class of property from taxation, its power to exempt being
as broad as its power to tax.[42] Other than Congress, the
Constitution may itself provide for specific tax
exemptions,[43] or local governments may pass ordinances
on exemption only from local taxes.[44]
The challenged grant of tax exemption would circumvent
the Constitutions imposition that a law granting any tax
exemption must have the concurrence of a majority of all
the members of Congress.[45] In the same vein, the other
kinds of privileges extended to the John Hay SEZ are by
tradition and usage for Congress to legislate upon.
Contrary to public respondents suggestions, the claimed
statutory exemption of the John Hay SEZ from taxation
should be manifest and unmistakable from the language
of the law on which it is based; it must be expressly
granted in a statute stated in a language too clear to be
mistaken.[46] Tax exemption cannot be implied as it must
be categorically and unmistakably expressed.[47]
If it were the intent of the legislature to grant to the John
Hay SEZ the same tax exemption and incentives given to
the Subic SEZ, it would have so expressly provided in the
R.A. No. 7227.
This Court no doubt can void an act or policy of the
political departments of the government on either of two
groundsinfringement of the Constitution or grave abuse of
discretion.[48]
This Court then declares that the grant by Proclamation
No. 420 of tax exemption and other privileges to the John

Hay SEZ is void for being violative of the Constitution.

This renders it unnecessary to still dwell on petitioners
claim that the same grant violates the equal protection
guarantee.
With respect to the final issue raised by petitioners that
Proclamation No. 420 is unconstitutional for being in
derogation of Baguio Citys local autonomy, objection is
specifically mounted against Section 2 thereof in which
BCDA is set up as the governing body of the John Hay
SEZ.[49]
Petitioners argue that there is no authority of the
President to subject the John Hay SEZ to the governance
of BCDA which has just oversight functions over SEZ; and
that to do so is to diminish the city governments power
over an area within its jurisdiction, hence, Proclamation
No. 420 unlawfully gives the President power of control
over the local government instead of just mere
supervision.
Petitioners arguments are bereft of merit. Under R.A. No.
7227, the BCDA is entrusted with, among other things, the
following purpose:[50]
xxx
(a) To own, hold and/or administer the military
reservations of John Hay Air Station, Wallace Air Station,
ODonnell Transmitter Station, San Miguel Naval
Communications Station, Mt. Sta. Rita Station (Hermosa,
Bataan) and those portions of Metro Manila Camps which
may be transferred to it by the President;
x x x (Underscoring supplied)
With such broad rights of ownership and administration
vested in BCDA over Camp John Hay, BCDA virtually has
control over it, subject to certain limitations provided for
by law. By designating BCDA as the governing agency of
the John Hay SEZ, the law merely emphasizes or
reiterates the statutory role or functions it has been
granted.

The unconstitutionality of the grant of tax immunity and

financial incentives as contained in the second sentence
of Section 3 of Proclamation No. 420 notwithstanding, the
entire assailed proclamation cannot be declared
unconstitutional, the other parts thereof not being
repugnant to law or the Constitution. The delineation and
declaration of a portion of the area covered by Camp John
Hay as a SEZ was well within the powers of the President
to do so by means of a proclamation. [51] The requisite prior
concurrence by the Baguio City government to such
proclamation appears to have been given in the form of a
duly enacted resolution by the sanggunian. The other
provisions of the proclamation had been proven to be
consistent with R.A. No. 7227.
Where part of a statute is void as contrary to the
Constitution, while another part is valid, the valid portion,
if separable from the invalid, may stand and be enforced.
[52]
This Court finds that the other provisions in
Proclamation No. 420 converting a delineated portion of
Camp John Hay into the John Hay SEZ are separable from
the invalid second sentence of Section 3 thereof, hence
they stand.
WHEREFORE, the second sentence of Section 3 of
Proclamation No. 420 is hereby declared NULL AND VOID
and is accordingly declared of no legal force and effect.
Public
respondents
are
hereby
enjoined
from
implementing the aforesaid void provision.
Proclamation No. 420, without the invalidated portion,
remains valid and effective.
SO ORDERED.

EN BANC
BRITISH AMERICAN TOBACCO, G.R. No. 163583
Petitioner,
JOSE ISIDRO N. CAMACHO,
in his capacity as Secretary of
the Department of Finance and
GUILLERMO L. PARAYNO, JR.,
in his capacity as Commissioner of
the Bureau of Internal Revenue,
Respondents.
PHILIP MORRIS PHILIPPINES
MANUFACTURING, INC.,
FORTUNE TOBACCO, CORP., Promulgated:

2003; and (4) Revenue Memorandum Order No. 62003.Petitioner argues that the said provisions are
violative of the equal protection and uniformity clauses of
the Constitution.
RA 8240, entitled An Act Amending Sections 138, 139,
140, and 142 of the NIRC, as Amended and For Other
Purposes, took effect on January 1, 1997. In the same
year, Congress passed RA 8424 or The Tax Reform Act of
1997, re-codifying the NIRC. Section 142 was renumbered
as Section 145 of the NIRC.
Paragraph (c) of Section 145 provides for four tiers of tax
rates based on the net retail price per pack of
cigarettes. To determine the applicable tax rates of
existing cigarette brands, a survey of the net retail prices
per pack of cigarettes was conducted as of October 1,
1996, the results of which were embodied in Annex D of
the NIRC as the duly registered, existing or active brands
of cigarettes.

MIGHTY CORPORATION, and

Paragraph (c) of Section 145, [1] states

JT INTERNATIONAL, S.A.,

SEC. 145. Cigars and cigarettes.

Respondents-in-Intervention. August 20, 2008

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

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

YNARES-SANTIAGO, J.:

(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 Thirteen pesos and forty-four centavos
(P13.44) per pack;

This petition for review assails the validity of: (1) Section
145 of the National Internal Revenue Code (NIRC), as
recodified by Republic Act (RA) 8424; (2) RA 9334, which
further amended Section 145 of the NIRC on January 1,
2005; (3) Revenue Regulations Nos. 1-97, 9-2003, and 22-

(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 (10.00) per pack,
the tax shall be Eight pesos and ninety-six centavos
(P8.96) per pack;

DECISION

(3) If the net retail price (excluding the excise tax and
value-added tax) is Five pesos (P5.00) but does
exceed Six pesos and fifty centavos (P6.50) per pack,
tax shall be Five pesos and sixty centavos (P5.60)
pack;

the
not
the
per

(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 and twelve centavos (P1.12) per
pack.
Variants of existing brands of cigarettes which are
introduced in the domestic market after the effectivity of
this Act shall be taxed under the highest classification of
any variant of that brand.
xxxx
New
brands shall
be
classified
their current net retail price.

according

to

or old brands shall be taxed based on their net retail

price as ofOctober 1, 1996.
To implement RA 8240, the Bureau of Internal Revenue
(BIR) issued Revenue Regulations No. 1-97,[2] which
classified the existing brands of cigarettes as those duly
registered or active brands prior to January 1, 1997. New
brands, or those registered after January 1, 1997, shall be
initially assessed at their suggested retail price until such
time that the appropriate survey to determine their
current net retail price is conducted. Pertinent portion of
the regulations reads
SECTION 2. Definition of Terms.
xxxx
3. Duly registered or existing brand of cigarettes shall
include duly registered, existing or active brands of
cigarettes, prior to January 1, 1997.
xxxx

For the above purpose, net retail price shall mean the
price at which the cigarette is sold on retail in 20 major
supermarkets in Metro Manila (for brands of cigarettes
marketed nationally), excluding the amount intended to
cover the applicable excise tax and the 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 major supermarkets in the
region excluding the amount intended to cover the
applicable excise tax and the value-added tax.

6. New Brands shall mean brands duly registered

after January 1, 1997 and shall include duly registered,
inactive brands of cigarette not sold in commercial
quantity before January 1, 1997.
SECTION 4. Classification and Manner of Taxation of
Existing Brands, New Brands and Variant of Existing
Brands.
xxxx

The classification of each brand of cigarettes based

on its average net retail price as of October 1,
1996, as set forth in Annex D of this Act, shall
remain in force until revised by Congress. (Emphasis
supplied)
As such, new brands of cigarettes shall be taxed
according to their current net retail price while existing

B. New Brand
New brands shall be classified according to their current
net retail price. In the meantime that the current net retail
price has not yet been established, the suggested net
retail price shall be used to determine the specific tax
classification. Thereafter, a survey shall be conducted in
20 major supermarkets or retail outlets in Metro Manila
(for brands of cigarette marketed nationally) or in five (5)

major supermarkets or retail outlets in the region (for

brands which are marketed only outside Metro Manila) at
which the cigarette is sold on retail in reams/cartons,
three (3) months after the initial removal of the new brand
to determine the actual net retail price excluding the
excise tax and value added tax which shall then be the
basis in determining the specific tax classification. In case
the current net retail price is higher than the suggested
net retail price, the former shall prevail. Any difference in
specific tax due shall be assessed and collected inclusive
of increments as provided for by the National Internal
Revenue Code, as amended.
In June 2001, petitioner British American Tobacco
introduced into the market Lucky Strike Filter, Lucky Strike
Lights and Lucky Strike Menthol Lights cigarettes, with a
suggested retail price of P9.90 per pack. [3] Pursuant to
Sec. 145 (c) quoted above, the Lucky Strike brands were
initially assessed the excise tax at P8.96 per pack.
On February 17, 2003, Revenue Regulations No. 92003,[4] amended Revenue Regulations No. 1-97 by
providing, among others, a periodic review every two
years or earlier of the current net retail price of new
brands and variants thereof for the purpose of
establishing and updating their tax classification, thus:
For the purpose of establishing or updating the tax
classification of new brands and variant(s) thereof, their
current net retail price shall be reviewed periodically
through the conduct of survey or any other appropriate
activity, as mentioned above, every two (2) years unless
earlier
ordered
by
the
Commissioner. However,
notwithstanding any increase in the current net retail
price, the tax classification of such new brands shall
remain in force until the same is altered or changed
through the issuance of an appropriate Revenue
Regulations.
Pursuant thereto, Revenue Memorandum Order No. 62003[5] was issued on March 11, 2003, prescribing the

guidelines and procedures in establishing current net

retail prices of new brands of cigarettes and alcohol
products.
Subsequently, Revenue
Regulations
No.
222003[6] was issued on August 8, 2003 to implement the
revised tax classification of certain new brands introduced
in the market after January 1, 1997, based on the survey
of their current net retail price. The survey revealed that
Lucky Strike Filter, Lucky Strike Lights, and Lucky Strike
Menthol Lights, are sold at the current net retail price of
P22.54, P22.61 and P21.23, per pack, respectively.
[7]
Respondent Commissioner of the Bureau of Internal
Revenue thus recommended the applicable tax rate of
P13.44 per pack inasmuch as Lucky Strikes average net
retail price is above P10.00 per pack.
Thus, on September 1, 2003, petitioner filed before the
Regional Trial Court (RTC) of Makati, Branch 61, a petition
for injunction with prayer for the issuance of a temporary
restraining order (TRO) and/or writ of preliminary
injunction, docketed as Civil Case No. 03-1032. Said
petition sought to enjoin the implementation of Section
145 of the NIRC, Revenue Regulations Nos. 1-97, 9-2003,
22-2003 and Revenue Memorandum Order No. 6-2003 on
the ground that they discriminate against new brands of
cigarettes, in violation of the equal protection and
uniformity provisions of the Constitution.
Respondent Commissioner of Internal Revenue filed an
Opposition[8] to the application for the issuance of a
TRO. On September 4, 2003, the trial court denied the
application for TRO, holding that the courts have no
authority to restrain the collection of taxes.[9] Meanwhile,
respondent Secretary of Finance filed a Motion to Dismiss,
[10]
contending that the petition is premature for lack of an
actual controversy or urgent necessity to justify judicial
intervention.
In an Order dated March 4, 2004, the trial court denied
the motion to dismiss and issued a writ of preliminary
injunction to enjoin the implementation of Revenue
Regulations Nos. 1-97, 9-2003, 22-2003 and Revenue
Memorandum Order No. 6-2003.[11] Respondents filed a

Motion for Reconsideration[12] and Supplemental Motion

for Reconsideration.[13] At the hearing on the said motions,
petitioner and respondent Commissioner of Internal
Revenue stipulated that the only issue in this case is the
constitutionality of the assailed law, order, and
regulations.[14]
On May 12, 2004, the trial court rendered a
decision[15] upholding the constitutionality of Section 145
of the NIRC, Revenue Regulations Nos. 1-97, 9-2003, 222003 and Revenue Memorandum Order No. 6-2003. The
trial court also lifted the writ of preliminary injunction. The
dispositive portion of the decision reads:
WHEREFORE, premises considered, the instant Petition is
hereby DISMISSED for lack of merit. The Writ of
Preliminary Injunction previously issued is hereby lifted
and dissolved.
SO ORDERED.[16]

(3) retained Annex D as tax base of those surveyed as of

October 1, 1996 including the classification of brands for
the same products which, although not set forth in said
Annex D, were registered on or before January 1, 1997
and were being commercially produced and marketed on
or after October 1, 1996, and which continue to be
commercially produced and marketed after the effectivity
of this Act. Said classification shall remain in force until
revised by Congress; and
(4) provided a legislative freeze on brands of cigarettes
introduced
between
the
period January
2,
1997[17] to December
31,
2003,
such
that
said
cigarettesshall remain in the classification under which
the BIR has determined them to belong as of December
31, 2003, until revised by Congress.
Pertinent portions, of RA 9334, provides:
SEC. 145. Cigars and Cigarettes.
xxxx

Petitioner brought the instant petition for review directly

with this Court on a pure question of law.
While the petition was pending, RA 9334 (An Act
Increasing The Excise Tax Rates Imposed on Alcohol And
Tobacco Products, Amending For The Purpose Sections
131, 141, 143, 144, 145 and 288 of the NIRC of 1997, As
Amended), took effect on January 1, 2005. The statute,
among others,

(C) Cigarettes Packed by Machine. There shall be levied,

assessed and collected on cigarettes packed by machine
a tax at the rates prescribed below:
(1) 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:
Effective on January 1, 2005, Two pesos (P2.00) per pack;

(1) increased the excise tax rates provided in paragraph

(c) of Section 145;
(2) mandated that new brands of cigarettes shall initially
be classified according to their suggested net retail price,
until such time that their correct tax bracket is finally
determined under a specified period and, after which,
their classification shall remain in force until revised by
Congress;

Effective on January 1, 2007, Two pesos and twenty-three

centavos (P2.23) per pack;
Effective on January 1, 2009, Two pesos and forty-seven
centavos (P2.47) per pack; and
Effective on January 1, 2011, Two pesos and seventy-two
centavos (P2.72) per pack.

(2) 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:
Effective on January 1, 2005, Six pesos and thirty-five
centavos (P6.35) per pack;
Effective on January 1, 2007, Six pesos and seventy-four
centavos (P6.74) per pack;
Effective on January 1, 2009, Seven pesos and fourteen
centavos (P7.14) per pack; and
Effective on January 1, 2011, Seven pesos and fiftysix centavos (P7.56) per pack.
(3) 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:
Effective on January 1, 2005, Ten pesos and thirty-five
centavos (10.35) per pack;
Effective on January 1, 2007, Ten pesos and eighty-eight
centavos (P10.88) per pack;
Effective on January 1, 2009, Eleven pesos and forty-three
centavos (P11.43) per pack; and
Effective on January 1, 2011, Twelve pesos (P12.00) per
pack.
(4) 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:
Effective on January 1, 2005, Twenty-five pesos (P25.00)
per pack;

Effective on January 1, 2007, Twenty-six pesos and six

centavos (P26.06) per pack;
Effective on January 1, 2009, Twenty-seven pesos and
sixteen centavos (P27.16) per pack; and
Effective on January 1, 2011, Twenty-eight pesos and
thirty centavos (P28.30) per pack.
xxxx
New brands, as defined in the immediately following
paragraph, shall initially be classified according to their
suggested net retail price.
New brands shall mean a brand registered after the date
of effectivity of R.A. No. 8240.
Suggested net retail price shall mean the net retail
price at which new brands, as defined above, of locally
manufactured or imported cigarettes are intended by the
manufacturer or importer to be sold on retail in major
supermarkets or retail outlets in Metro Manila for those
marketed nationwide, and in other regions, for those with
regional markets. At the end of three (3) months from the
product launch, the Bureau of Internal Revenue shall
validate the suggested net retail price of the new brand
against the net retail price as defined herein and
determine the correct tax bracket under which a
particular new brand of cigarette, as defined above, shall
be classified. After the end of eighteen (18) months from
such validation, the Bureau of Internal Revenue shall
revalidate the initially validated net retail price against
the net retail price as of the time of revalidation in order
to finally determine the correct tax bracket under which a
particular
new
brand
of
cigarettes
shall
be
classified; Provided
however,
That
brands
of
cigarettes introduced in the domestic market
between January 1, 1997 [should be January 2,
1997] and December 31, 2003 shall remain in the
classification under which the Bureau of Internal
Revenue has determined them to belong as of

December 31, 2003. Such classification of new

brands and brands introduced between January 1,
1997 and December 31, 2003 shall not be revised
except by an act of Congress.
Net retail price, as determined by the Bureau of Internal
Revenue through a price survey to be conducted by the
Bureau of Internal Revenue itself, or the National Statistics
Office when deputized for the purpose by the Bureau of
Internal Revenue, shall mean the price at which the
cigarette is sold in retail in at least twenty (20) major
supermarkets in Metro Manila (for brands of cigarettes
marketed nationally), excluding the amount intended to
cover the applicable excise tax and the 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 at least five (5) major
supermarkets in the region excluding the amount
intended to cover the applicable excise tax and valueadded tax.
The classification of each brand of cigarettes based
on its average net retail price as of October 1,
1996, as set forth in Annex D, including the
classification of brands for the same products
which, although not set forth in said Annex D, were
registered and were being commercially produced
and marketed on or after October 1, 1996, and
which continue to be commercially produced and
marketed after the effectivity of this Act, shall
remain in force until revised by Congress. (Emphasis
added)
Under RA 9334, the excise tax due on petitioners products
was increased to P25.00 per pack. In the implementation
thereof, respondent Commissioner assessed petitioners
importation of 911,000 packs of Lucky Strike cigarettes at
the increased tax rate of P25.00 per pack, rendering it
liable for taxes in the total sum of P22,775,000.00. [18]
Hence, petitioner filed a Motion to Admit Attached
Supplement[19] and a Supplement[20] to the petition for

review, assailing the constitutionality of RA 9334 insofar

as it retained Annex D and praying for a downward
classification of Lucky Strike products at the bracket
taxable at P8.96 per pack. Petitioner contended that the
continued use of Annex D as the tax base of existing
brands of cigarettes gives undue protection to said brands
which are still taxed based on their price as of October
1996 notwithstanding that they are now sold at the same
or even at a higher price than new brands like Lucky
Strike. Thus, old brands of cigarettes such as Marlboro
and Philip Morris which, like Lucky Strike, are sold at or
more than P22.00 per pack, are taxed at the rate of
P10.88 per pack, while Lucky Strike products are taxed at
P26.06 per pack.
In its Comment to the supplemental petition, respondents,
through the Office of the Solicitor General (OSG), argued
that the passage of RA 9334, specifically the provision
imposing a legislative freeze on the classification of
cigarettes introduced into the market between January 2,
1997 and December 31, 2003, rendered the instant
petition academic. The OSG claims that the provision in
Section 145, as amended by RA 9334, prohibiting the
reclassification of cigarettes introduced during said
period, cured the perceived defect of Section 145
considering that, like the cigarettes under Annex D,
petitioners brands and other brands introduced between
January 2, 1997 and December 31, 2003, shall remain in
the classification under which the BIR has placed them
and only Congress has the power to reclassify them.
On March
20,
2006,
Philip
Morris
Philippines
Manufacturing Incorporated filed a Motion for Leave to
Intervene with attached Comment-in-Intervention. [21] This
was followed by the Motions for Leave to Intervene of
Fortune
Tobacco
Corporation,[22] Mighty
[23]
Corporation,
and JT
International, S.A.,
with
their
respective Comments-in-Intervention. The Intervenors
claim that they are parties-in-interest who stand to be
affected by the ruling of the Court on the constitutionality
of Section 145 of the NIRC and its Annex D because they
are manufacturers of cigarette brands which are included

in the said Annex. Hence, their intervention is proper

since the protection of their interest cannot be addressed
in a separate proceeding.
According to the Intervenors, no inequality exists because
cigarettes classified by the BIR based on their net retail
price as of December 31, 2003 now enjoy the samestatus
quo provision that prevents the BIR from reclassifying
cigarettes included in Annex D. It added that the Court
has no power to pass upon the wisdom of the legislature
in retaining Annex D in RA 9334; and that the nullification
of said Annex would bring about tremendous loss of
revenue to the government, chaos in the collection of
taxes, illicit trade of cigarettes, and cause decline in
cigarette demand to the detriment of the farmers who
depend on the tobacco industry.
Intervenor Fortune Tobacco further contends that
petitioner
is
estopped
from
questioning
the
constitutionality of Section 145 and its implementing rules
and regulations because it entered into the cigarette
industry fully aware of the existing tax system and its
consequences. Petitioner imported cigarettes into the
country knowing that its suggested retail price, which will
be the initial basis of its tax classification, will be
confirmed and validated through a survey by the BIR to
determine the correct tax that would be levied on its
cigarettes.
Moreover, Fortune Tobacco claims that the challenge to
the validity of the BIR issuances should have been
brought by petitioner before the Court of Tax Appeals
(CTA) and not the RTC because it is the CTA which has
exclusive appellate jurisdiction over decisions of the BIR in
tax disputes.
On August 7, 2006, the OSG manifested that it interposes
no objection to the motions for intervention. [24] Therefore,
considering the substantial interest of the intervenors,
and in the higher interest of justice, the Court admits their
intervention.

Before going into the substantive issues of this case, we

must first address the matter of jurisdiction, in light of
Fortune Tobaccos contention that petitioner should have
brought its petition before the Court of Tax Appeals rather
than the regional trial court.
The jurisdiction of the Court of Tax Appeals is defined in
Republic Act No. 1125, as amended by Republic Act No.
9282. Section 7 thereof states, in pertinent part:
Sec. 7. Jurisdiction. The CTA shall exercise:
a. Exclusive appellate jurisdiction to review by appeal, as
herein provided:
1. Decisions of the Commissioner of Internal Revenue in
cases involving disputed assessments, refunds of internal
revenue taxes, fees or other charges, penalties in relation
thereto, or other matters arising under the National
Internal Revenue or other laws administered by the
Bureau of Internal Revenue;
2. Inaction by the Commissioner of Internal Revenue in
cases involving disputed assessments, refunds of internal
revenue taxes, fees or other charges, penalties in
relations thereto, or other matters arising under the
National Internal Revenue Code or other laws
administered by the Bureau of Internal Revenue, where
the National Internal Revenue Code provides a specific
period of action, in which case the inaction shall be
deemed a denial; xxx.[25]
While the above statute confers on the CTA jurisdiction to
resolve tax disputes in general, this does not include
cases where the constitutionality of a law or rule is
challenged. Where what is assailed is the validity or
constitutionality of a law, or a rule or regulation issued by
the administrative agency in the performance of its quasilegislative function, the regular courts have jurisdiction to
pass upon the same. The determination of whether a
specific rule or set of rules issued by an administrative

agency contravenes the law or the constitution is within

the jurisdiction of the regular courts. 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. This is within the scope of judicial
power, which includes the authority of the courts to
determine in an appropriate action the validity of the acts
of the political departments. Judicial power includes the
duty of the courts of justice to settle actual controversies
involving rights which are legally demandable and
enforceable, and to determine whether or not there has
been a grave abuse of discretion amounting to lack or
excess of jurisdiction on the part of any branch or
instrumentality of the Government.[26]
In Drilon v. Lim,[27] it was held:
We stress at the outset that the lower court had
jurisdiction to consider the constitutionality of Section
187, this authority being embraced in the general
definition of the judicial power to determine what are the
valid and binding laws by the criterion of their conformity
to the fundamental law. Specifically, B.P. 129 vests in the
regional trial courts jurisdiction over all civil cases in
which the subject of the litigation is incapable of
pecuniary estimation, even as the accused in a criminal
action has the right to question in his defense the
constitutionality of a law he is charged with violating and
of the proceedings taken against him, particularly as they
contravene the Bill of Rights. Moreover, Article X, Section
5(2), of the Constitution vests in the Supreme Court
appellate jurisdiction over final judgments and orders of
lower courts in all cases in which the constitutionality or
validity of any treaty, international or executive
agreement, law, presidential decree, proclamation, order,
instruction, ordinance, or regulation is in question.
The petition for injunction filed by petitioner before the
RTC is a direct attack on the constitutionality of Section

145(C) of the NIRC, as amended, and the validity of its

implementing rules and regulations. In fact, the RTC
limited the resolution of the subject case to the issue of
the constitutionality of the assailed provisions. The
determination of whether the assailed law and its
implementing rules and regulations contravene the
Constitution is within the jurisdiction of regular courts. 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.[28] Petitioner, therefore, properly filed
the subject case before the RTC.
We come now to the issue of whether petitioner is
estopped
from
assailing
the
authority
of
the
Commissioner of Internal Revenue. Fortune Tobacco raises
this objection by pointing out that when petitioner
requested the Commissioner for a ruling that its Lucky
Strike Soft Pack cigarettes was a new brand rather than a
variant of an existing brand, and thus subject to a lower
specific tax rate, petitioner executed an undertaking to
comply with the procedures under existing regulations for
the assessment of deficiency internal revenue taxes.
Fortune Tobacco argues that petitioner, after invoking the
authority of the Commissioner of Internal Revenue, cannot
later on turn around when the ruling is adverse to it.
Estoppel, an equitable principle rooted in natural justice,
prevents persons from going back on their own acts and
representations, to the prejudice of others who have
relied on them.[29] The principle is codified in Article 1431
of the Civil Code, which provides:
Through estoppel, an admission or representation is
rendered conclusive upon the person making it and
cannot be denied or disproved as against the person
relying thereon.
Estoppel can also be found in Rule 131, Section 2 (a) of
the Rules of Court, viz:

Sec. 2. Conclusive presumptions. The

instances of conclusive presumptions:

following

are

(a) Whenever a party has by his own declaration, act or

omission, intentionally and deliberately led another to
believe a particular thing true, and to act upon such
belief, he cannot, in any litigation arising out of such
declaration, act or omission be permitted to falsify it.
The elements of estoppel are: first, the actor who usually
must have knowledge, notice or suspicion of the true
facts, communicates something to another in a
misleading
way,
either
by
words,
conduct
or
silence; second, the other in fact relies, and relies
reasonably or justifiably, upon that communication; third,
the other would be harmed materially if the actor is later
permitted to assert any claim inconsistent with his earlier
conduct; and fourth, the actor knows, expects or foresees
that the other would act upon the information given or
that a reasonable person in the actor's position would
expect or foresee such action.[30]
In the early case of Kalalo v. Luz,[31] the elements of
estoppel, as related to the party to be estopped,
are: (1) conduct amounting to false representation or
concealment of material facts; or at least calculated to
convey the impression that the facts are other than, and
inconsistent with, those which the party subsequently
attempts to assert; (2) intent,or at least expectation that
this conduct shall be acted upon by, or at least influence,
the
other
party; and (3) knowledge,
actual
or
constructive, of the real facts.
We find that petitioner was not guilty of estoppel. When it
made the undertaking to comply with all issuances of the
BIR, which at that time it considered as valid, petitioner
did not commit any false misrepresentation or misleading
act. Indeed, petitioner cannot be faulted for initially
undertaking to comply with, and subjecting itself to the
operation of Section 145(C), and only later on filing the

subject case praying for the declaration of its

unconstitutionality when the circumstances change and
the law results in what it perceives to be unlawful
discrimination. The mere fact that a law has been relied
upon in the past and all that time has not been attacked
as unconstitutional is not a ground for considering
petitioner estopped from assailing its validity. For courts
will pass upon a constitutional question only when
presented before it in bona fide cases for determination,
and the fact that the question has not been raised before
is not a valid reason for refusing to allow it to be raised
later.[32]
Now to the substantive issues.
To place this case in its proper context, we deem it
necessary to first discuss how the assailed law operates in
order to identify, with precision, the specific provisions
which, according to petitioner, have created a grossly
discriminatory classification scheme between old and new
brands. The pertinent portions of RA 8240, as amended by
RA 9334, are reproduced below for ready reference:
SEC. 145. Cigars and Cigarettes.
xxxx
(C) Cigarettes Packed by Machine. There shall be levied,
assessed and collected on cigarettes packed by machine
a tax at the rates prescribed below:
(1) 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:
Effective on January 1, 2005, Two pesos (P2.00) per pack;
Effective on January 1, 2007, Two pesos and twenty-three
centavos (P2.23) per pack;
Effective on January 1, 2009, Two pesos and forty-seven
centavos (P2.47) per pack; and

Effective on January 1, 2011, Two pesos and seventy-two

centavos (P2.72) per pack.
(2) 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:

Effective on January 1, 2005, Twenty-five pesos (P25.00)

per pack;
Effective on January 1, 2007, Twenty-six pesos and six
centavos (P26.06) per pack;
Effective on January 1, 2009, Twenty-seven pesos and
sixteen centavos (P27.16) per pack; and

Effective on January 1, 2005, Six pesos and thirty-five

centavos (P6.35) per pack;

Effective on January 1, 2011, Twenty-eight pesos and

thirty centavos (P28.30) per pack.

Effective on January 1, 2007, Six pesos and seventy-four

centavos (P6.74) per pack;

xxxx

Effective on January 1, 2009, Seven pesos and fourteen

centavos (P7.14) per pack; and

New brands, as defined in the immediately following

paragraph, shall initially be classified according to their
suggested net retail price.

Effective on January 1, 2011, Seven pesos and fiftysix centavos (P7.56) per pack.

New brands shall mean a brand registered after the date

of effectivity of R.A. No. 8240.

(3) 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:

Suggested net retail price shall mean the net retail price
at which new brands, as defined above, of locally
manufactured or imported cigarettes are intended by the
manufacturer or importer to be sold on retail in major
supermarkets or retail outlets in Metro Manila for those
marketed nationwide, and in other regions, for those with
regional markets. At the end of three (3) months from the
product launch, the Bureau of Internal Revenue shall
validate the suggested net retail price of the new brand
against the net retail price as defined herein and
determine the correct tax bracket under which a
particular new brand of cigarette, as defined above, shall
be classified. After the end of eighteen (18) months from
such validation, the Bureau of Internal Revenue shall
revalidate the initially validated net retail price against
the net retail price as of the time of revalidation in order
to finally determine the correct tax bracket under which a
particular
new
brand
of
cigarettes
shall
be
classified; Provided however, That brands of cigarettes
introduced in the domestic market between January 1,
1997 [should be January 2, 1997] and December 31, 2003

Effective on January 1, 2005, Ten pesos and thirty-five

centavos (10.35) per pack;
Effective on January 1, 2007, Ten pesos and eighty-eight
centavos (P10.88) per pack;
Effective on January 1, 2009, Eleven pesos and forty-three
centavos (P11.43) per pack; and
Effective on January 1, 2011, Twelve pesos (P12.00) per
pack.
(4) 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:

shall remain in the classification under which the Bureau

of Internal Revenue has determined them to belong as of
December 31, 2003. Such classification of new brands
and
brands
introduced
between January
1,
1997 and December 31, 2003 shall not be revised except
by an act of Congress.
Net retail price, as determined by the Bureau of Internal
Revenue through a price survey to be conducted by the
Bureau of Internal Revenue itself, or the National Statistics
Office when deputized for the purpose by the Bureau of
Internal Revenue, shall mean the price at which the
cigarette is sold in retail in at least twenty (20) major
supermarkets in Metro Manila (for brands of cigarettes
marketed nationally), excluding the amount intended to
cover the applicable excise tax and the 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 at least five (5) major
supermarkets in the region excluding the amount
intended to cover the applicable excise tax and valueadded tax.
The classification of each brand of cigarettes based on its
average net retail price as of October 1, 1996, as set forth
in Annex D, including the classification of brands for the
same products which, although not set forth in said Annex
D, were registered and were being commercially produced
and marketed on or after October 1, 1996, and which
continue to be commercially produced and marketed after
the effectivity of this Act, shall remain in force until
revised by Congress.
As can be seen, the law creates a four-tiered system
which we may refer to as the low-priced, [33] mediumpriced,[34] high-priced,[35] and
premium-priced[36] tax
brackets. When a brand is introduced in the market, the
current net retail price is determined through the
aforequoted specified procedure. The current net retail
price is then used to classify under which tax bracket the
brand belongs in order to finally determine the
corresponding excise tax rate on a per pack basis. The

assailed feature of this law pertains to the mechanism

where, after a brand is classified based on its current net
retail price, the classification is frozen and only Congress
can thereafter reclassify the same. From a practical point
of view, Annex D is merely a by-product of the whole
mechanism and philosophy of the assailed law. That is,
the brands under Annex D were also classified based on
their current net retail price, the only difference being that
they were the first ones so classified since they were the
only brands surveyed as of October 1, 1996, or prior to
the effectivity of RA 8240 on January 1, 1997.[37]
Due to this legislative classification scheme, it
is possible that over time the net retail price of a
previously classified brand, whether it be a brand under
Annex D or a new brand classified after the effectivity of
RA 8240 on January 1, 1997, would increase (due to
inflation, increase of production costs, manufacturers
decision to increase its prices, etc.) to a point that its net
retail price pierces the tax bracket to which it was
previously classified.[38] Consequently, even if its present
day net retail price would make it fall under a higher tax
bracket, the previously classified brand would continue to
be subject to the excise tax rate under the lower tax
bracket by virtue of the legislative classification freeze.
Petitioner claims that this is what happened in 2004 to the
Marlboro and Philip Morris brands, which were
permanently classified under Annex D. As of October 1,
1996, Marlboro had net retail prices ranging from P6.78 to
P6.84 while Philip Morris had net retail prices ranging from
P7.39 to P7.48. Thus, pursuant to RA 8240,[39] Marlboro
and Philip Morris were classified under the high-priced tax
bracket and subjected to an excise tax rate of P8.96 per
pack. Petitioner then presented evidence showing that
after the lapse of about seven years or sometime in 2004,
Marlboros and Philip Morris net retail prices per pack both
increased to about P15.59.[40] This meant that they would
fall under the premium-priced tax bracket, with a higher
excise tax rate of P13.44 per pack,[41] had they been
classified based on their 2004 net retail prices. However,
due to the legislative classification freeze, they continued

to be classified under the high-priced tax bracket with a

lower excise tax rate. Petitioner thereafter deplores the
fact that its Lucky Strike Filter, Lucky Strike Lights, and
Lucky Strike Menthol Lights cigarettes, introduced in the
market sometime in 2001 and validated by a BIR survey
in 2003, were found to have net retail prices of P11.53,
P11.59 and P10.34,[42] respectively, which are lower than
those of Marlboro and Philip Morris. However, since
petitioners cigarettes were newly introduced brands in the
market, they were taxed based on their current net retail
prices and, thus, fall under the premium-priced tax
bracket with a higher excise tax rate of P13.44 per
pack. This unequal tax treatment between Marlboro and
Philip Morris, on the one hand, and Lucky Strike, on the
other, is the crux of petitioners contention that the
legislative classification freeze violates the equal
protection and uniformity of taxation clauses of the
Constitution.
It is apparent that, contrary to its assertions, petitioner is
not only questioning the undue favoritism accorded to
brands under Annex D, but the entire mechanism and
philosophy of the law which freezes the tax classification
of a cigarette brand based on its current net retail price.
Stated differently, the alleged discrimination arising from
the legislative classification freeze between the brands
under Annex D and petitioners newly introduced brands
arose only because the former were classified based on
their current net retail price as of October 1,
1996 and petitioners newly introduced brands were
classified based on their current net retail price as of
2003. Without this corresponding freezing of the
classification of petitioners newly introduced brands
based on their current net retail price, it would be
impossible to establish that a disparate tax treatment
occurred between the Annex D brands and petitioners
newly introduced brands.
This clarification is significant because, under these
circumstances, a declaration of unconstitutionality would
necessarily entail nullifying the whole mechanism of the
law and not just Annex D. Consequently, if the assailed

law is declared unconstitutional on equal protection

grounds, the entire method by which a brand of cigarette
is classified would have to be invalidated. As a result, no
method to classify brands under Annex D as well as new
brands would be left behind and the whole Section 145 of
the NIRC, as amended, would become inoperative. [43]
To simplify the succeeding discussions, we shall refer to
the whole mechanism and philosophy of the assailed law
which freezes the tax classification of a cigarette brand
based on its current net retail price and which, thus,
produced different classes of brands based on the time of
their introduction in the market (starting with the brands
in Annex D since they were the first brands so classified
as of October 1, 1996) as the classification freeze
provision.[44]
As thus formulated, the central issue is whether or not
the classification freeze provision violates the equal
protection and uniformity of taxation clauses of the
Constitution.
In Sison, Jr. v. Ancheta,[45] this Court, through Chief Justice
Fernando, explained the applicable standard in deciding
equal protection and uniformity of taxation challenges:
Now for equal protection. The applicable standard to
avoid the charge that there is a denial of this
constitutional mandate whether the assailed act is in the
exercise of the police power or the power of eminent
domain is to demonstrate "that the governmental act
assailed, far from being inspired by the attainment of the
common weal was prompted by the spirit of hostility, or at
the very least, discrimination that finds no support in
reason. It suffices then that the laws operate equally and
uniformly on all persons under similar circumstances or
that all persons must be treated in the same manner, the
conditions not being different, both in the privileges
conferred and the liabilities imposed. Favoritism and
undue preference cannot be allowed. For the principle is
that equal protection and security shall be given to every
person under circumstances, which if not identical are

analogous. If law be looks upon in terms of burden or

charges, those that fall within a class should be treated in
the same fashion, whatever restrictions cast on some in
the group equally binding on the rest." That same
formulation applies as well to taxation measures. The
equal protection clause is, of course, inspired by the noble
concept of approximating the ideal of the laws's benefits
being available to all and the affairs of men being
governed by that serene and impartial uniformity, which is
of the very essence of the idea of law. There is, however,
wisdom, as well as realism, in these words of Justice
Frankfurter: "The equality at which the 'equal protection'
clause aims is not a disembodied equality. The Fourteenth
Amendment enjoins 'the equal protection of the laws,' and
laws are not abstract propositions. They do not relate to
abstract units A, B and C, but are expressions of policy
arising out of specific difficulties, addressed to the
attainment of specific ends by the use of specific
remedies. The Constitution does not require things which
are different in fact or opinion to be treated in law as
though they were the same." Hence the constant
reiteration of the view that classification if rational
in character is allowable. As a matter of fact, in a
leading case of Lutz v. Araneta, this Court, through Justice
J.B.L. Reyes, went so far as to hold "at any rate, it is
inherent in the power to tax that a state be free to select
the subjects of taxation, and it has been repeatedly held
that 'inequalities which result from a singling out of one
particular class for taxation, or exemption infringe no
constitutional limitation.'"
Petitioner likewise invoked the kindred concept of
uniformity. According to the Constitution: "The rule of
taxation shall be uniform and equitable." This requirement
is met according to Justice Laurel in Philippine Trust
Company v. Yatco, decided in 1940, when the tax
"operates with the same force and effect in every place
where the subject may be found." He likewise added: "The
rule of uniformity does not call for perfect uniformity or
perfect equality, because this is hardly attainable." The
problem of classification did not present itself in that case.
It did not arise until nine years later, when the Supreme

Court held: "Equality and uniformity in taxation means

that all taxable articles or kinds of property of the same
class shall be taxed at the same rate. The taxing power
has the authority to make reasonable and natural
classifications for purposes of taxation, . . . As
clarified by Justice Tuason, where "the differentiation"
complained of "conforms to the practical dictates of
justice and equity" it "is not discriminatory within the
meaning of this clause and is therefore uniform." There is
quite a similarity then to the standard of equal protection
for all that is required is that the tax "applies equally to all
persons, firms and corporations placed in similar
situation."[46] (Emphasis supplied)
In consonance thereto, we have held that in our
jurisdiction, the standard and analysis of equal protection
challenges in the main have followed the rational
basis test, coupled with a deferential attitude to
legislative classifications and a reluctance to invalidate a
law unless there is a showing of a clear and unequivocal
breach of the Constitution.[47]Within the present context of
tax legislation on sin products which neither contains a
suspect classification nor impinges on a fundamental
right, the rational-basis test thus finds application. Under
this test, a legislative classification, to survive an equal
protection challenge, must be shown to rationally further
a legitimate state interest.[48] The classifications must be
reasonable and rest upon some ground of difference
having a fair and substantial relation to the object of the
legislation.[49] Since every law has in its favor the
presumption of constitutionality, the burden of proof is on
the one attacking the constitutionality of the law to prove
beyond reasonable doubt that the legislative classification
is
without
rational
basis.[50] The
presumption
of
constitutionality can be overcome only by the most
explicit demonstration that a classification is a hostile and
oppressive discrimination against particular persons and
classes, and that there is no conceivable basis which
might support it.[51]
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.[52]
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. [53] (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.
RA 8240 was the first of three parts in the Comprehensive
Tax Reform Package then being pushed by the Ramos
Administration. It was enacted with the following
objectives stated in the Sponsorship Speech of Senator
Juan Ponce Enrile (Senator Enrile), viz:
First, to evolve a tax structure which will promote fair
competition among the players in the industries
concerned and generate buoyant and stable revenue for
the government.

Second, to ensure that the tax burden is equitably

distributed not only amongst the industries affected but
equally amongst the various levels of our society that are
involved in various markets that are going to be affected
by the excise tax on distilled spirits, fermented liquor,
cigars and cigarettes.
In the case of firms engaged in the industries producing
the products that we are about to tax, this means relating
the tax burden to their market share, not only in terms of
quantity, Mr. President, but in terms of value.
In case of consumers, this will mean evolving a multitiered rate structure so that low-priced products are
subject to lower tax rates and higher-priced products are
subject to higher tax rates.
Third, 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. [54]
In the initial stages of the crafting of the assailed law, the
Department of Finance (DOF) recommended to Congress
a shift from the then existing ad valorem taxation system
to a specific taxation system with respect to sin products,
including cigarettes. The DOF noted that the ad
valorem taxation system was a source of massive tax
leakages because the taxpayer was able to evade paying
the correct amount of taxes through the undervaluation of
the price of cigarettes using various marketing arms and
dummy corporations. In order to address this problem, the
DOF proposed a specific taxation system where the
cigarettes would be taxed based on volume or on a per
pack basis which was believed to be less susceptible to
price manipulation. The reason was that the BIR would
only need to monitor the sales volume of cigarettes, from
which it could easily compute the corresponding tax
liability of cigarette manufacturers. Thus, the DOF
suggested the use of a three-tiered system which
operates in substantially the same manner as the fourtiered system under RA 8240 as earlier discussed. The

proposal of the DOF was embodied in House Bill (H.B.) No.

6060, the pertinent portions of which states
SEC. 142. Cigars and cigarettes.
(c) Cigarettes packed by machine. There shall be levied,
assessed and collected on cigarettes packed by machine
a tax at the rates prescribed below:
(1) If the manufacturers or importers wholesale price (net
of excise tax and value-added tax) per pack exceeds four
pesos and twenty centavos (P4.20), the tax shall be seven
pesos and fifty centavos (P7.50);
(2) If the manufacturers or importers wholesale price (net
of excise tax and value-added tax) per pack exceeds three
pesos and ninety centavos (P3.90) but does not exceed
four pesos and twenty centavos (P4.20), the tax shall be
five pesos and fifty centavos (P5.50): provided, that after
two (2) years from the effectivity of this Act, cigarettes
otherwise subject to tax under this subparagraph shall be
taxed under subparagraph (1) above.
(3) If the manufacturers or importers wholesale price (net
of excise tax and value-added tax) per pack does not
exceeds three pesos and ninety centavos (P3.90), the tax
rate shall be one peso (P1.00).
Variants of existing brands and new brands of cigarettes
packed by machine to be introduced in the domestic
market after the effectivity of this Act, shall be taxed
under paragraph (c)(1) hereof.
The rates of specific tax on cigars and cigarettes
under paragraphs (a), (b), and (c) hereof, including
the price levels for purposes of classifying
cigarettes packed by machine, shall be revised
upward two (2) years after the effectivity of this
Act and every two years thereafter by the
Commissioner of Internal Revenue, subject to the
approval of the Secretary of Finance, taking into
account the movement of the consumer price index

for cigars and cigarettes as established by the

National Statistics Office: provided, that the
increase in taxes and/or price levels shall be equal
to the present change in such consumer price index
for the two-year period: provided, further, that the
President, upon the recommendation of the
Secretary of Finance, may suspend or defer the
adjustment in price levels and tax rates when the
interest of the national economy and general
welfare so require, such as the need to obviate
unemployment,
and
economic
and
social
dislocation: provided, finally, that the revised price
levels and tax rates authorized herein shall in all
cases be rounded off to the nearest centavo and
shall be in force and effect on the date of
publication thereof in a newspaper of general
circulation. x x x (Emphasis supplied)
What is of particular interest with respect to the proposal
of the DOF is that it contained a provision for the periodic
adjustment of the excise tax rates and tax brackets, and a
corresponding periodic resurvey and reclassification of
cigarette brands based on the increase in the consumer
price index as determined by the Commissioner of
Internal Revenue subject to certain guidelines. The
evident intent was to prevent inflation from eroding the
value of the excise taxes that would be collected from
cigarettes over time by adjusting the tax rate and tax
brackets based on the increase in the consumer price
index. Further, under this proposal, old brands as well as
new brands introduced thereafter would be subjected to a
resurvey and reclassification based on their respective
values at the end of every two years in order to align
them with the adjustment of the excise tax rate and tax
brackets due to the movement in the consumer price
index.[55]
Of course, we now know that the DOF proposal, insofar as
the periodic adjustment of tax rates and tax brackets, and
the periodic resurvey and reclassification of cigarette
brands are concerned, did not gain approval from
Congress. The House and Senate pushed through with

their own versions of the excise tax system on beers and

cigarettes both denominated as H.B. No. 7198. For
convenience, we shall refer to the bill deliberated upon by
the House as the House Version and that of the Senate as
the Senate Version.
The Houses Committee on Ways and Means, then chaired
by Congressman Exequiel B. Javier (Congressman Javier),
roundly rejected the DOF proposal. Instead, in its
Committee Report submitted to the plenary, it proposed a
different excise tax system which used a specific tax as a
basic tax with an ad valorem comparator. Further, it
deleted the proposal to have a periodic adjustment of tax
rates and the tax brackets as well as periodic resurvey
and reclassification of cigarette brands, to wit:
The rigidity of the specific tax system calls for the need
for frequent congressional intervention to adjust the tax
rates to inflation and to keep pace with the expanding
needs of government for more revenues. The DOF admits
this flaw inherent in the tax system it proposed. Hence, to
obviate the need for remedial legislation, the DOF is
asking Congress to grant to the Commissioner the power
to revise, one, the specific tax rates: and two, the price
levels of beer and cigarettes. What the DOF is asking, Mr.
Speaker, is for Congress to delegate to the Commissioner
of Internal Revenue the power to fix the tax rates and
classify the subjects of taxation based on their price levels
for purposes of fixing the tax rates. While we sympathize
with the predicament of the DOF, it is not for Congress to
abdicate such power. The power sought to be delegated
to be exercised by the Commissioner of Internal Revenue
is a legislative power vested by the Constitution in
Congress pursuant to Section 1, Article VI of the
Constitution. Where the power is vested, there it must
remain in Congress, a body of representatives elected by
the people. Congress may not delegate such power, much
less abdicate it.
xxxx
Moreover, the grant of such power, if at all constitutionally
permissible, to the Commissioner of Internal Revenue is

fraught with ethical implications. The debates on how

much revenue will be raised, how much money will be
taken from the pockets of taxpayers, will inexorably shift
from the democratic Halls of Congress to the secret and
non-transparent corridors of unelected agencies of
government, the Department of Finance and the Bureau
of Internal Revenue, which are not accountable to our
people. We cannot countenance the shift for ethical
reasons, lest we be accused of betraying the trust
reposed on this Chamber by the people. x x x
A final point on this proposal, Mr. Speaker, is the exercise
of the taxing power of the Commissioner of Internal
Revenue which will be triggered by inflation rates based
on the consumer price index. Simply stated, Mr. Speaker,
the specific tax rates will be fixed by the Commissioner
depending on the price levels of beers and cigarettes as
determined by the consumers price index. This is a novel
idea, if not necessarily weird in the field of taxation. What
if the brewer or the cigarette manufacturer sells at a price
below the consumers price index? Will it be taxed on the
basis of the consumers price index which is over and
above its wholesale or retail price as the case may be?
This is a weird form of exaction where the tax is based not
on what the brewer or manufacturer actually realized but
on an imaginary wholesale or retail price. This amounts to
a taxation based on presumptive price levels and renders
the specific tax a presumptive tax. We hope, the DOF and
the BIR will also honor a presumptive tax payment.
Moreover, specific tax rates based on price levels tied to
consumers price index as proposed by the DOF engenders
anti-trust concerns. The proposal if enacted into law will
serve as a barrier to the entry of new players in the beer
and cigarette industries which are presently dominated by
shared monopolies. A new player in these industries will
be denied business flexibility to fix its price levels to
promote its product and penetrate the market as the price
levels are dictated by the consumer price index. The
proposed tax regime, Mr. Speaker, will merely enhance
the stranglehold of the oligopolies in the beer and
cigarette industries, thus, reversing the governments

policy of dismantling monopolies and combinations in

restraint of trade.[56]
For its part, the Senates Committee on Ways and Means,
then chaired by Senator Juan Ponce Enrile (Senator
Enrile), developed its own version of the excise tax
system on cigarettes. The Senate Version consisted of a
four-tiered system and, interestingly enough, contained a
periodic excise tax rate and tax bracket adjustment as
well as a periodic resurvey and reclassification of brands
provision (periodic adjustment and reclassification
provision, for brevity) to be conducted by the DOF in
coordination with the BIR and the National Statistics Office
based on the increase in the consumer price index similar
to the one proposed by the DOF, viz:
SEC. 4 Section 142 of the National Internal Revenue Code,
as amended, is hereby further amended to read as
follows:
SEC. 142. Cigars and cigarettes.

(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
this Act shall be taxed under the highest classification of
any variant of that brand.
xxx
The rates of specific tax on cigars and cigarettes
under subparagraph (a), (b) and (c) hereof,
including the net retail prices for purposes of
classification, shall be adjusted on the sixth of
January three years after the effectivity of this Act
and every three years thereafter. The adjustment
shall be in accordance with the inflation rate
measured by the average increase in the consumer
price index over the three-year period. The
adjusted tax rates and net price levels shall be in
force on the eighth of January.

xxxx
(c) Cigarettes packed by machine. There shall be levied,
assessed and collected on cigarettes packed by machine
a tax at the rates prescribed below:
(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) 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) up to Six pesos and
fifty centavos (P6.50) per pack, the tax shall be Five pesos
(P5.00) per pack;

Within the period hereinabove mentioned, the

Secretary of Finance shall direct the conduct of a
survey of retail prices of each brand of cigarettes
in coordination with the Bureau of Internal Revenue
and the National Statistics Office.
For purposes of this Section, net retail price shall mean
the price at which the cigarette is sold on retail in 20
major supermarkets in Metro Manila (for brands of
cigarettes marketed nationally), excluding the amount
intended to cover the applicable excise tax and the valueadded 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 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 in the
initial year of implementation of this Act shall be

based on its average net retail price as of October

1, 1996. The said classification by brand shall
remain in force until January 7, 2000.
New brands shall be classified according to their current
net retail price.[57] (Emphasis supplied)
During the period of interpellations, the late Senator Raul
S. Roco (Senator Roco) expressed doubts as to the legality
and wisdom of putting a periodic adjustment and
reclassification provision:
Senator Enrile: This will be the first time that a tax burden
will be allowed to be automatically adjusted upwards
based on a system of indexing tied up with the
Consumers Price Index (CPI). Although I must add that we
have adopted a similar system in adjusting the personal
tax exemption from income tax of our individual
taxpayers.
Senator Roco: They are not exactly the same, Mr.
President. But even then, we do note that this the first
time we are trying to put an automatic adjustment. My
concern is, why do we propose now this automatic
adjustment? What is the reason that impels the
committee? Maybe we can be enlightened and maybe we
shall embrace it forthwith. But what is the reason?
Senator Enrile: Mr. President, we will recall that in the
House of Representatives, it has adopted a tax proposal
on these products based on a specific tax as a basic tax
with an ad valorem comparator. The Committee on Ways
and Means of the Senate has not seen it fit to adopt this
system, but it recognized the possibility that there may be
an occasion where the price movement in the country
might unwarrantedly move upwards, in which case, if we
peg the government to a specific tax rate of P6.30, P9.30
and P12.30 for beer, since we are talking of beer, [58] the
government might lose in the process.
In order to consider the interest of the government in this,
Mr. President, and in order to obviate the possibility that
some of these products categorized under the different

tiers with different specific tax rates from moving upwards

and piercing their own tiers and thereby expose
themselves to an incremental tax of higher magnitude, it
was felt that we should adopt a system where, in spite of
any escalation in the price of these products in the future,
the tax rates could be adjusted upwards so that none of
these products would leave their own tier. That was the
basic principle under which we crafted this portion of the
tax proposal.
Senator Roco: Mr. President, we certainly share the
judgment of the distinguished gentleman as regards the
comparator provision in the House of Representatives and
we appreciate the reasons given. But we are under the
impression that the House also, aside from the
comparator, has an adjustment clause that is fixed. It has
fixed rates for the adjustment. So that one of the basic
differences between the Senate proposed version now
and the House version is that, the House of
Representatives has manifested its will and judgment as
regards the tax to which we will adjust, whereas the
Senate version relegates fundamentally that judgment to
the Department of Finance.
Senator Enrile: That is correct, Mr. President, because we
felt that in imposing a fixed adjustment, we might be
fixing an amount that is either too high or too low. We
cannot foresee the economic trends in this country over a
period of two years, three years, let alone ten years. So
we felt that a mechanism ought to be adopted in order to
serve the interest of the government, the interest of the
producers, and the interest of the consuming public.
Senator Roco: This is where, Mr. President, my policy
difficulties start. Under the Constitution I think it is Article
VI, Section 24, and it was the distinguished chairman of
the Committee on Ways and Means who made this
Chamber very conscious of this provision revenue
measures and tariff measures shall originate exclusively
from the House of Representatives.

The reason for this, Mr. President, is, there is a long

history why the House of Representatives must originate
judgments on tax. The House members represent specific
districts. They represent specific constituencies, and the
whole history of parliamentarism, the whole history of
Congress as an institution is founded on the proposition
that the direct representatives of the people must speak
about taxes.
Mr. President, while the Senate can concur and can
introduce amendments, the proposed change here is
radical. This is the policy difficulty that I wish to clarify
with the gentleman because the judgment call now on the
amount of tax to be imposed is not coming from
Congress. It is shifted to the Department of Finance. True,
the Secretary of Finance may have been the best finance
officer two years ago and now the best finance officer
in Asia, but that does not make him qualified to replace
the judgment call of the House of Representatives. That is
my first difficulty.
Senator Enrile: Mr. President, precisely the law, in effect,
authorizes this rate beforehand. The computation of the
rate is the only thing that was left to the Department of
Finance as a tax implementor of Congress. This is not
unusual because we have already, as I said, adopted a
system similar to this. If we adjust the personal exemption
of an individual taxpayer, we are in effect adjusting the
applicable tax rate to him.
Senator Roco: But the point I was trying to demonstrate,
Mr. President, is that we depart precisely from the
mandate of the Constitution that judgment on revenue
must emanate from Congress. Here, it is shifted to the
Department of Finance for no visible or patent reason
insofar as I could understand. The only difference is, who
will make the judgment? Should it be Congress?
Senator Enrile: Mr. President, forgive me for answering
sooner than I should. My understanding of the
Constitution is that all revenue measures must emanate
from the House. That is all the Constitution says.

Now, it does not say that the judgment call must belong
to the House. The judgment call can belong both to the
House and to the Senate. We can change whatever
proposal the House did. Precisely, we are now crafting a
measure, and we are saying that this is the rate subject to
an adjustment which we also provide. We are not giving
any unusual power to the Secretary of Finance because
we tell him, This is the formula that you must adopt in
arriving at the adjustment so that you do not have to
come back to us.[59]
Apart from his doubts as to the legality of the delegation
of taxing power to the DOF and BIR, Senator Roco also
voiced out his concern about the possible abuse and
corruption that will arise from the periodic adjustment and
reclassification provision. Continuing
Senator Roco: Mr. President, if that is the argument, that
the distinguished gentleman has a different legal
interpretation, we will then now examine the choice.
Because his legal interpretation is different from mine,
then the issues becomes: Is it more advantageous
that this judgment be exercised by the House?
Should we not concur or modify in terms of the
exercise by the House of its power or are we better
off giving this judgment call to the Department of
Finance?
Let me now submit, Mr. President, that in so doing,
it is more advantageous to fix the rate so that even
if we modify the rates identified by Congress, it is
better and less susceptible to abuse.
For instance, Mr. President, would the gentlemen wish to
demonstrate to us how this will be done? On page 8, lines
5 to 9, there is a provision here as to when the Secretary
of Finance shall direct the conduct of survey of retail
prices of each brand of fermented liquor in coordination
with the Bureau of Internal Revenue and the National
Statistics Office.

These offices are not exactly noted, Mr. President, for

having been sanctified by the Holy Spirit in their noble
intentions. x x x[60] (Emphasis supplied)
Pressing this point, Senator Roco continued his query:
Senator Roco: x x x [On page 8, lines 5 to 9] it says that
during the two-year period, the Secretary of Finance shall
direct the conduct of the survey. How? When? Which retail
prices and what brand shall he consider? When he
coordinates with the Bureau of Internal Revenue, what is
the Bureau of Internal Revenue supposed to be doing?
What is the National Statistics Office supposed to be
doing, and under what guides and standards?
May the gentleman wish to demonstrate how this will be
done? My point, Mr. President, is, by giving the
Secretary of Finance, the BIR and the National
Statistics Office discretion over a two-year period
will invite corruption and arbitrariness, which is
more dangerous than letting the House of
Representatives and this Chamber set the
adjustment rate. Why not set the adjustment rate? Why
should Congress not exercise that judgment now? x x x
Senator Enrile: x x x
Senator Roco: x x x We respectfully submit that the
Chairman consider choosing the judgment of this
Chamber and the House of Representatives over a
delegated judgment of the Department of Finance.
Again, it is not to say that I do not trust the Department of
Finance. It has won awards, and I also trust the
undersecretary. But that is beside the point. Tomorrow,
they may not be there.[61](Emphasis supplied)
This point was
senators. There was
which system one
classification or the

further dissected by the two

a genuine difference of opinion as to
with a fixed excise tax rate and
other with a periodic adjustment of

excise tax rate and reclassification was less susceptible to

abuse, as the following exchanges show:
Senator Enrile: Mr. President, considering the sensitivity of
these products from the viewpoint of exerted pressures
because of the understandable impact of this measure on
the pockets of the major players producing these
products, the committee felt that perhaps to lessen such
pressures, it is best that we now establish a norm where
the tax will be adjusted without incurring too much
political controversy as has happened in the case of this
proposal.
Senator Roco: But that is exactly the same reason we say
we must rely upon Congress because Congress, if it is
subjected to pressure, at least balances off because of
political factors.
When the Secretary of Finance is now subjected to
pressure, are we saying that the Secretary of Finance and
the Department of Finance is better-suited to withstand
the pressure? Or are we saying Let the Finance Secretary
decide whom to yield?
I am saying that the temptation and the pressure on the
Secretary of Finance is more dangerous and more
corruption-friendly than ascertaining for ourselves now a
fixed rate of increase for a fixed period.
Senator Enrile: Mr. President, perhaps the gentleman may
not agree with this representation, but in my humble
opinion, this formulation is less susceptible to pressure
because there is a definite point of reference which is the
consumer price index, and that consumer price index is
not going to be used only for this purpose. The CPI is used
for a national purpose, and there is less possibility of
tinkering with it.[62]
Further, Senator Roco, like Congressman Javier, expressed
the view that the periodic adjustment and reclassification
provision
would
create
an
anti-competitive
atmosphere. Again, Senators Roco and Enrile had genuine
divergence of opinions on this matter, to wit:

Senator Roco: x x x On the marketing level, an adjustment

clause may, in fact, be disadvantageous to both
companies, whether it is the Lucio Tan companies or the
San Miguel companies. If we have to adjust our marketing
position every two years based on the adjustment clause,
the established company may survive, but the new ones
will have tremendous difficulty. Therefore, this provision
tends to indicate an anticompetitive bias.

2. It is corruption-friendly in the sense that it shifts the

discretion from the House of Representatives and this
Chamber to the Secretary of Finance, no matter how
saintly he may be.

It is good for San Miguel and the Lucio Tan companies, but
the new companies assuming there may be new
companies and we want to encourage them because of
the old point of liberalization will be at a disadvantage
under this situation. If this observation will find receptivity
in the policy consideration of the distinguished
Gentleman, maybe we can also further, later on, seek
amendments to this automatic adjustment clause in some
manner.

After these lengthy exchanges, it appears that the views

of Senator Enrile were sustained by the Senate Body
because the Senate Version was passed on Third Reading
without substantially altering the periodic adjustment and
reclassification provision.

Senator Enrile: Mr. President, I cannot foresee any anticompetitiveness of this provision with respect to a new
entrant, because a new entrant will not just come in
without studying the market. He is a lousy businessman if
he will just come in without studying the market. If he
comes in, he will determine at what retail price level he
will market his product, and he will be coming under any
of the tiers depending upon his net retail price. Therefore,
I do not see how this particular provision will affect a new
entrant.
Senator Roco: Be that as it may, Mr. President, we
obviously will not resort to debate until this evening, and
we will have to look for other ways of resolving the policy
options.
Let me just close that particular area of my interpellation,
by summarizing the points we were hoping could be
clarified.
1. That the automatic adjustment clause is at best
questionable in law.

3. There is, although the judgment call of the gentleman

disagrees to our view, an anticompetitive situation that is
geared at[63]

It was actually at the Bicameral Conference Committee

level where the Senate Version underwent major
changes. The Senate Panel prevailed upon the House
Panel to abandon the basic excise tax rate and ad
valorem comparator as the means to determine the
applicable excise tax rate. Thus, the Senates four-tiered
system was retained with minor adjustments as to the
excise tax rate per tier. However, the House Panel
prevailed upon the Senate Panel to delete the power of
the DOF and BIR to periodically adjust the excise tax rate
and tax brackets, and periodically resurvey and reclassify
the cigarette brands based on the increase in the
consumer price index.
In lieu thereof, the classification of existing brands based
on their average net retail price as of October 1, 1996 was
frozen and a fixed across-the-board 12% increase in the
excise tax rate of each tier after three years from the
effectivity of the Act was put in place. There is a dearth of
discussion in the deliberations as to the applicability of
the freezing mechanism to new brands after their
classification is determined based on their current net
retail price. But a plain reading of the text of RA 8240,
even before its amendment by RA 9334, as well as the
previously discussed deliberations would readily lead to
the conclusion that the intent of Congress was to likewise

apply the freezing mechanism to new brands. Precisely,

Congress rejected the proposal to allow the DOF and BIR
to periodically adjust the excise tax rate and tax brackets
as well as to periodically resurvey and reclassify
cigarettes brands which would have encompassed
old and new brands alike. Thus, it would be absurd for us
to conclude that Congress intended to allow the periodic
reclassification of new brands by the BIR after their
classification is determined based on their current net
retail price. We shall return to this point when we tackle
the second issue.
In explaining the changes made at the Bicameral
Conference Committee level, Senator Enrile, in his report
to the Senate plenary, noted that the fixing of the excise
tax rates was done to avoid confusion.[64] Congressman
Javier, for his part, reported to the House plenary the
reasons for fixing the excise tax rate and freezing the
classification, thus:
Finally, this twin feature, Mr. Speaker, fixed specific tax
rates and frozen classification, rejects the Senate version
which seeks to abdicate the power of Congress to tax by
pegging the rates as well as the classification of sin
products to consumer price index which practically
vests in the Secretary of Finance the power to fix
the rates and to classify the products for tax
purposes.[65] (Emphasis supplied)
Congressman Javier later added that the frozen
classification was intended to give stability to the industry
as the BIR would be prevented from tinkering with the
classification since it would remain unchanged despite the
increase in the net retail prices of the previously classified
brands.[66] This would also assure the industry players that
there would be no new impositions as long as the law is
unchanged.[67]
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.
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.[68] 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.[69] 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. [70] In
the case at bar, these administrative concerns in the
measurement and collection of excise taxes on sin
products are readily apparent as afore-discussed.
Aside from the major concern regarding the elimination of
potential areas for abuse and corruption from the tax
administration
of
sin
products,
the
legislative
deliberations also show that the classification freeze
provision was intended to generate buoyant and stable
revenues
for
government. With
the
frozen
tax
classifications, the revenue inflow would remain stable
and the government would be able to predict with a

greater degree of certainty the amount of taxes that a

cigarette manufacturer would pay given the trend in its
sales volume over time. The reason for this is that the
previously classified cigarette brands would be prevented
from moving either upward or downward their tax
brackets despite the changes in their net retail prices in
the future and, as a result, the amount of taxes due from
them would remain predictable. The classification freeze
provision would, thus, aid in the revenue planning of the
government.[71]
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.
Going now to the contention of petitioner that
the classification freeze provision unduly favors older
brands over newer brands, we must first contextualize the
basis of this claim. As previously discussed, the evidence
presented by the petitioner merely showed that in 2004,
Marlboro and Philip Morris, on the one hand, and Lucky
Strike, on the other, would have been taxed at the same
rate had the classification freeze provision been not in
place. But due to the operation of the classification freeze
provision, Lucky Strike was taxed higher. From here,
petitioner generalizes that this differential tax treatment
arising from the classification freeze provision adversely
impacts the fairness of the playing field in the industry,
particularly, between older and newer brands. Thus, it is
virtually impossible for new brands to enter the market.
Petitioner did not, however, clearly demonstrate the exact
extent of such impact. It has not been shown that the net
retail prices of other older brands previously classified
under this classification system have already pierced their
tax brackets, and, if so, how this has affected the overall
competition in the market. Further, it does not necessarily

follow that newer brands cannot compete against older

brands because price is not the only factor in the market
as there are other factors like consumer preference, brand
loyalty, etc. In other words, even if the newer brands are
priced higher due to the differential tax treatment, it does
not mean that they cannot compete in the market
especially since cigarettes contain addictive ingredients
so that a consumer may be willing to pay a higher price
for a particular brand solely due to its unique
formulation. It may also be noted that in 2003, the BIR
surveyed 29 new brands[72] that were introduced in the
market after the effectivity of RA 8240 on January 1, 1997,
thus negating the sweeping generalization of petitioner
that the classification freeze provision has become an
insurmountable barrier to the entry of new brands. Verily,
where there is a claim of breach of the due process and
equal protection clauses, 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.[73]
Be that as it may, petitioners evidence does suggest that,
at least in 2004, Philip Morris and Marlboro, older brands,
would have been taxed at the same rate as Lucky Strike, a
newer brand, due to certain conditions (i.e., the increase
of the older brands net retail prices beyond the tax
bracket to which they were previously classified after the
lapse of some time) were it not for the classification
freeze provision. It may be conceded that this has
adversely affected, to a certain extent, the ability of
petitioner to competitively price its newer brands vis--vis
the subject older brands. Thus, to a limited extent, the
assailed law seems to derogate one of its avowed
objectives, i.e. promoting fair competition among the
players in the industry. Yet, will this occurrence, by itself,
render the assailed law unconstitutional on equal
protection grounds?
We answer in the negative.

Whether Congress acted improvidently in derogating, to a

limited extent, the states interest in promoting fair
competition among the players in the industry, while
pursuing other state interests regarding 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 through the classification freeze
provision, and whether the questioned provision is the
best means to achieve these state interests, necessarily
go into the wisdom of the assailed law which we cannot
inquire into, much less overrule. The classification freeze
provision has not been shown to be precipitated by a
veiled attempt, or hostile attitude on the part of Congress
to unduly favor older brands over newer brands. On the
contrary, we must reasonably assume, owing to the
respect due a co-equal branch of government and as
revealed by the Congressional deliberations, that the
enactment of the questioned provision was impelled by an
earnest desire to improve the efficiency and effectivity of
the tax administration of sin products. For as long as the
legislative classification is rationally related to furthering
some legitimate state interest, as here, the rational-basis
test is satisfied and the constitutional challenge is
perfunctorily defeated.
We do not sit in judgment as a supra-legislature to decide,
after a law is passed by Congress, which state interest is
superior over another, or which method is better suited to
achieve one, some or all of the states interests, or what
these interests should be in the first place. This policydetermining power, by constitutional fiat, belongs to
Congress as it is its function to determine and balance
these interests or choose which ones to pursue. Time and
again we have ruled that the judiciary does not settle
policy issues. The Court can only declare what the law is
and not what the law should be. Under our system of
government, policy issues are within the domain of the
political branches of government and of the people
themselves as the repository of all state power. [74] Thus,
the legislative classification under the classification freeze
provision, after having been shown to be rationally related

to achieve certain legitimate state interests and done in

good faith, must, perforce, end our inquiry.
Concededly, the finding that the assailed law seems to
derogate, to a limited extent, one of its avowed objectives
(i.e. promoting fair competition among the players in the
industry) would suggest that, by Congresss own
standards, the current excise tax system on sin products
is imperfect. But, certainly, we cannot declare a statute
unconstitutional merely because it can be improved or
that it does not tend to achieve all of its stated objectives.
[75]
This is especially true for tax legislation which
simultaneously addresses and impacts multiple state
interests.[76] Absent a clear showing of breach of
constitutional limitations, Congress, owing to its vast
experience and expertise in the field of taxation, must be
given sufficient leeway to formulate and experiment with
different tax systems to address the complex issues and
problems related to tax administration. Whatever
imperfections that may occur, the same should be
addressed to the democratic process to refine and evolve
a taxation system which ideally will achieve most, if not
all, of the states objectives.
In fine, petitioner may have valid reasons to disagree with
the policy decision of Congress and the method by which
the latter sought to achieve the same. But its remedy is
with Congress and not this Court. As succinctly articulated
in Vance v. Bradley:[77]
The Constitution presumes that, absent some reason to
infer antipathy, even improvident decisions will eventually
be rectified by the democratic process, and that judicial
intervention is generally unwarranted no matter how
unwisely we may think a political branch has acted. Thus,
we will not overturn such a statute unless the varying
treatment of different groups or persons is so unrelated to
the achievement of any combination of legitimate
purposes that we can only conclude that the legislature's
actions were irrational.[78]
We now tackle the second issue.

Petitioner asserts that Revenue Regulations No. 1-97, as

amended by Revenue Regulations No. 9-2003, Revenue
Regulations No. 22-2003 and Revenue Memorandum
Order No. 6-2003, are invalid insofar as they empower the
BIR to reclassify or update the classification of new brands
of cigarettes based on their current net retail prices every
two years or earlier. It claims that RA 8240, even prior to
its amendment by RA 9334, did not authorize the BIR to
conduct said periodic resurvey and reclassification.
The questioned provisions are found in the following
sections of the assailed issuances:
(1)
Section 4(B)(e)(c), 2nd paragraph of Revenue
Regulations No. 1-97, as amended by Section 2 of
Revenue Regulations 9-2003, viz:
For the purpose of establishing or updating the tax
classification of new brands and variant(s) thereof, their
current net retail price shall be reviewed periodically
through the conduct of survey or any other appropriate
activity, as mentioned above, every two (2) years unless
earlier
ordered
by
the
Commissioner. However,
notwithstanding any increase in the current net retail
price, the tax classification of such new brands shall
remain in force until the same is altered or changed
through the issuance of an appropriate Revenue
Regulations.
(2)
Sections II(1)(b), II(4)(b), II(6), II(7), III (Large
Tax Payers Assistance Division II) II(b) of Revenue
Memorandum Order No. 6-2003, insofar as pertinent to
cigarettes packed by machine, viz:
II. POLICIES AND GUIDELINES
1. The conduct of survey covered by this Order, for
purposes of determining the current retail prices of new
brands of cigarettes and alcohol products introduced in

the market on or after January 1, 1997, shall be

undertaken in the following instances:
xxxx
b. For reclassification of new brands of said excisable
products that were introduced in the market after January
1, 1997.
xxxx
4. The determination of the current retail prices of new
brands of the aforesaid excisable products shall be
initiated as follows:
xxxx
b. After the lapse of the prescribed two-year period or as
the Commissioner may otherwise direct, the appropriate
tax reclassification of these brands based on the current
net retail prices thereof shall be determined by a survey
to be conducted upon a written directive by the
Commissioner.

Regional Director for regional consolidation. The

consolidated regional survey, together with the
accomplished survey forms shall be transmitted to the
Chief, LTAD II for national consolidation within three (3)
days from date of actual receipt from the survey teams.
The LTAD II shall be responsible for the evaluation and
analysis of the submitted survey forms and the
preparation
of
the
recommendation
for
the
updating/revision of the tax classification of each brand of
cigarettes
and
alcohol
products.
The
said
recommendation, duly validated by the ACIR, LTS, shall be
submitted to the Commissioner for final review within ten
(10) days from the date of actual receipt of complete
reports from all the surveying Offices.
7. Upon final review by the Commissioner of the revised
tax classification of the different new brands of cigarettes
and alcohol products, the appropriate revenue regulations
shall be prepared and submitted for approval by the
Secretary of Finance.
xxxx
III. PROCEDURES

For this purpose, a memorandum order to the Assistant

Commissioner, Large Taxpayers Service, Heads, Excise
Tax Areas, and Regional Directors of all Revenue Regions,
except Revenue Region Nos. 4, 5, 6, 7, 8 and 9, shall be
issued by the Commissioner for the submission of the list
of major supermarkets/retail outlets where the above
excisable products are being sold, as well as the list of
selected revenue officers who shall be designated to
conduct the said activity(ies).
xxxx
6. The results of the survey conducted in Revenue Region
Nos. 4 to 9 shall be submitted directly to the Chief, LT
Assistance Division II (LTAD II), National Office for
consolidation. On the other hand, the results of the survey
conducted in Revenue Regions other than Revenue Region
Nos. 4 to 9, shall be submitted to the Office of the

xxxx
Large Taxpayers Assistance Division II
xxxx
1. Perform the following preparatory procedures on the
identification
of
brands
to
be
surveyed,
supermarkets/retail outlets where the survey shall be
conducted, and the personnel selected to conduct the
survey.
xxxx
b. On the tax reclassification of new brands

i. Submit a master list of registered brands covered by the

survey pursuant to the provisions of Item II.2 of this Order
containing the complete description of each brand,
existing net retail price and the corresponding tax rate
thereof.
ii. Submit to the ACIR, LTS, a list of major
supermarkets/retail
outlets
within
the
territorial
jurisdiction of the concerned revenue regions where the
survey will be conducted to be used as basis in the
issuance of Mission Orders. Ensure that the minimum
number of establishments to be surveyed, as prescribed
under existing revenue laws and regulations, is complied
with. In addition, the names and designations of revenue
officers selected to conduct the survey shall be clearly
indicated opposite the names of the establishments to be
surveyed.
There is merit to the contention.
In order to implement RA 8240 following its effectivity on
January 1, 1997, the BIR issued Revenue Regulations No.
1-97, dated December 13, 1996, which mandates a onetime classification only.[79] Upon their launch, new brands
shall be initially taxed based on their suggested net retail
price. Thereafter, a survey shall be conducted within three
(3) months to determine their current net retail prices
and, thus, fix their official tax classifications. However, the
BIR made a turnaround by issuing Revenue Regulations
No. 9-2003, dated February 17, 2003, which partly
amended Revenue Regulations No. 1-97, by authorizing
the BIR to periodically reclassify new brands (i.e., every
two years or earlier) based on their current net retail
prices. Thereafter, the BIR issued Revenue Memorandum
Order No. 6-2003, dated March 11, 2003, prescribing the
guidelines on the implementation of Revenue Regulations
No. 9-2003. This was patent error on the part of the BIR
for being contrary to the plain text and legislative intent
of RA 8240.
It is clear that the afore-quoted portions of Revenue
Regulations No. 1-97, as amended by Section 2 of

Revenue Regulations 9-2003, and Revenue Memorandum

Order No. 6-2003 unjustifiably emasculate the operation
of Section 145 of the NIRC because they authorize the
Commissioner of Internal Revenue to update the tax
classification of new brands every two years or earlier
subject only to its issuance of the appropriate Revenue
Regulations, when nowhere in Section 145 is such
authority granted to the Bureau. Unless expressly granted
to the BIR, the power to reclassify cigarette brands
remains a prerogative of the legislature which cannot be
usurped by the former.
More importantly, as previously discussed, the clear
legislative intent was for new brands to benefit from the
same freezing mechanism accorded to Annex D brands. To
reiterate, in enacting RA 8240, Congress categorically
rejected the DOF proposal and Senate Version which
would have empowered the DOF and BIR to periodically
adjust the excise tax rate and tax brackets, and to
periodically resurvey and reclassify cigarette brands. (This
resurvey and reclassification would have naturally
encompassed both old and new brands.) It would thus, be
absurd for us to conclude that Congress intended to allow
the periodic reclassification of new brands by the BIR after
their classification is determined based on their current
net retail price while limiting the freezing of the
classification to Annex D brands. Incidentally, Senator
Ralph G. Recto expressed the following views during the
deliberations on RA 9334, which later amended RA 8240:
Senator Recto: Because, like I said, when Congress agreed
to adopt a specific tax system [under R.A. 8240], when
Congress did not index the brackets, and Congress did not
index the rates but only provided for a one rate increase
in the year 2000, we shifted from ad valorem which was
based on value to a system of specific which is based on
volume. Congress then, in effect, determined the
classification based on the prices at that particular period
of time and classified these products accordingly.
Of course, Congress then decided on what will happen to
the new brands or variants of existing brands. To favor

government, a variant would be classified as the highest

rate of tax for that particular brand. In case of a new
brand, Mr. President, then the BIR should classify
them. But I do not think it was the intention of
Congress then to give the BIR the authority to
reclassify them every so often. I do not think it was
the intention of Congress to allow the BIR to
classify a new brand every two years, for example,
because it will be arbitrary for the BIR to do so. x x
x[80] (Emphasis supplied)
For these reasons, the amendments introduced by RA
9334 to RA 8240, insofar as the freezing mechanism is
concerned, must be seen merely as underscoring the
legislative intent already in place then, i.e. new brands as
being covered by the freezing mechanism after their
classification based on their current net retail prices.
Unfortunately for petitioner, this result will not cause a
downward reclassification of Lucky Strike. It will be
recalled that petitioner introduced Lucky Strike in June
2001.However, as admitted by petitioner itself, the BIR
did not conduct the required market survey within three
months from product launch. As a result, Lucky Strike was
never classified based on its actual current net retail
price. Petitioner failed to timely seek redress to compel
the BIR to conduct the requisite market survey in order to
fix the tax classification of Lucky Strike. In the meantime,
Lucky Strike was taxed based on its suggested net retail
price of P9.90 per pack, which is within the high-priced
tax bracket. It was only after the lapse of two years or in
2003 that the BIR conducted a market survey which was
the first time that Lucky Strikes actual current net retail
price was surveyed and found to be from P10.34
to P11.53 per pack, which is within the premium-priced
tax bracket. The case of petitioner falls under a situation
where there was no reclassification based on its current
net retail price which would have been invalid as
previously explained. Thus, we cannot grant petitioners
prayer for a downward reclassification of Lucky Strike
because it was never reclassified by the BIR based on
its actual current net retail price.

It should be noted though that on August 8, 2003, the BIR

issued Revenue Regulations No. 22-2003 which
implemented the revised tax classifications of new brands
based on their current net retail prices through the market
survey conducted pursuant to Revenue Regulations No. 92003. Annex A of Revenue Regulations No. 22-2003 lists
the result of the market survey and the corresponding
recommended tax classification of the new brands therein
aside from Lucky Strike. However, whether these other
brands were illegally reclassified based on their actual
current net retail prices by the BIR must be determined on
a case-to-case basis because it is possible that these
brands were classified based on their actual current net
retail price for the first time in the year 2003 just like
Lucky Strike. Thus, we shall not make any pronouncement
as to the validity of the tax classifications of the other
brands listed therein.
Finally, it must be noted that RA 9334 introduced changes
in the manner by which the current net retail price of a
new brand is determined and how its classification is
permanently fixed, to wit:
New brands, as defined in the immediately following
paragraph, shall initially be classified according to their
suggested net retail price.
New brands shall mean a brand registered after the date
of effectivity of R.A. No. 8240 [on January 1, 1997].
Suggested net retail price shall mean the net retail price
at which new brands, as defined above, of locally
manufactured or imported cigarettes are intended by the
manufacture or importer to be sold on retail in major
supermarkets or retail outlets in Metro Manila for those
marketed nationwide, and in other regions, for those with
regional markets. At the end of three (3) months from
the product launch, the Bureau of Internal Revenue
shall validate the suggested net retail price of the
new brand against the net retail price as defined
herein and determine the correct tax bracket under

which a particular new brand of cigarette, as

defined above, shall be classified. After the end of
eighteen (18) months from such validation, the
Bureau of Internal Revenue shall revalidate the
initially validated net retail price against the net
retail price as of the time of revalidation in order to
finally determine the correct tax bracket under
which a particular new brand of cigarettes shall be
classified; Provided however, That brands of cigarettes
introduced in the domestic market between January 1,
1997 and December 31, 2003 shall remain in the
classification under which the Bureau of Internal Revenue
has determined them to belong as of December 31,
2003. Such classification of new brands and brands
introduced between January 1, 1997 and December
31, 2003 shall not be revised except by an act of
Congress. (Emphasis supplied)
Thus, Revenue Regulations No. 9-2003 and Revenue
Memorandum Order No. 6-2003 should be deemed
modified by the above provisions from the date of
effectivity of RA 9334 on January 1, 2005.
In sum, Section 4(B)(e)(c), 2nd paragraph of Revenue
Regulations No. 1-97, as amended by Section 2 of
Revenue Regulations 9-2003, and Sections II(1)(b), II(4)
(b), II(6), II(7), III (Large Tax Payers Assistance Division
II) II(b) of Revenue Memorandum Order No. 6-2003, 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. Further, these provisions are deemed modified
upon the effectivity of RA 9334 on January 1, 2005 insofar
as the manner of determining the permanent
classification of new brands is concerned.
We now tackle the last issue.
Petitioner contends that RA 8240, as amended by RA
9334, and its implementing rules and regulations violate
the General Agreement on Tariffs and Trade (GATT) of

1947, as amended, specifically, Paragraph 2, Article III,

Part II:
2. The products of the territory of any contracting party
imported into the territory of any other contracting party
shall not be subject, directly or indirectly, to internal taxes
or other internal charges of any kind in excess of those
applied, directly or indirectly, to like domestic products.
Moreover, no contracting party shall otherwise apply
internal taxes or other internal charges to imported or
domestic products in a manner contrary to the principles
set forth in paragraph 1.
It claims that it is the duty of this Court to correct, in favor
of the GATT, whatever inconsistency exists between the
assailed law and the GATT in order to prevent triggering
the international dispute settlement mechanism under the
GATT-WTO Agreement.
We disagree.
The classification freeze provision uniformly applies to all
newly introduced brands in the market, whether imported
or locally manufactured. It does not purport to single out
imported cigarettes in order to unduly favor locally
produced ones. Further, petitioners evidence was
anchored on the alleged unequal tax treatment between
old and new brands which involves a different frame of
reference vis--vis local and imported products. Petitioner
has, therefore, failed to clearly prove its case, both
factually and legally, within the parameters of the GATT.
At any rate, even assuming arguendo that petitioner was
able
to
prove
that
the classification
freeze
provision violates the GATT, the outcome would still be
the same. The GATT is a treaty duly ratified by the
Philippine Senate and under Article VII, Section 21 [81] of
the Constitution, it merely acquired the status of a
statute.[82] Applying the basic principles of statutory
construction in case of irreconcilable conflict between
statutes, RA 8240, as amended by RA 9334, would prevail
over the GATT either as a later enactment by Congress or

as a special law dealing with the taxation of sin

products. Thus, in Abbas v. Commission on Elections,
[83]
we had occasion to explain:

61,
in
Civil
Case
No.
03-1032,
is AFFIRMEDwith MODIFICATION. As
modified,
this
Court declares that:

Petitioners premise their arguments on the assumption

that the Tripoli Agreement is part of the law of the land,
being a binding international agreement. The Solicitor
General asserts that the Tripoli Agreement is neither a
binding treaty, not having been entered into by the
Republic of the Philippines with a sovereign state and
ratified according to the provisions of the 1973 or 1987
Constitutions, nor a binding international agreement.

(1) Section 145 of the NIRC, as amended by Republic Act

No. 9334, is CONSTITUTIONAL; and that

We find it neither necessary nor determinative of the case

to rule on the nature of the Tripoli Agreement and its
binding effect on the Philippine Government whether
under public international or internal Philippine law. In the
first place, it is now the Constitution itself that provides
for the creation of an autonomous region in Muslim
Mindanao. The standard for any inquiry into the validity of
R.A. No. 6734 would therefore be what is so provided in
the Constitution. Thus, any conflict between the
provisions of R.A. No. 6734 and the provisions of the
Tripoli Agreement will not have the effect of enjoining the
implementation of the Organic Act. Assuming for the
sake of argument that the Tripoli Agreement is a
binding treaty or international agreement, it would
then constitute part of the law of the land. But as
internal law it would not be superior to R.A. No.
6734, an enactment of the Congress of the
Philippines, rather it would be in the same class as
the latter [SALONGA, PUBLIC INTERNATIONAL LAW 320
(4th ed., 1974), citing Head Money Cases, 112 U.S. 580
(1884) and Foster v. Nelson, 2 Pet. 253 (1829)]. Thus, if
at all, R.A. No. 6734 would be amendatory of
the Tripoli Agreement, being a subsequent law. Only
a determination by this Court that R.A. No. 6734
contravenes the Constitution would result in the granting
of the reliefs sought. (Emphasis supplied)
WHEREFORE, the petition is PARTIALLY GRANTED and
the decision of the Regional Trial Court of Makati, Branch

(2) Section
4(B)(e)(c),
2nd paragraph
of
Revenue
Regulations No. 1-97, as amended by Section 2 of
Revenue Regulations 9-2003, and Sections II(1)(b), II(4)
(b), II(6), II(7), III (Large Tax Payers Assistance Division
II) II(b) of Revenue Memorandum Order No. 6-2003,
insofar as pertinent to cigarettes packed by machine,
are INVALID insofar as they grant the BIR the power to
reclassify or update the classification of new brands every
two years or earlier.
SO ORDERED.

G.R. No. L-14519

July 26, 1960

REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,

vs.
LUIS G. ABLAZA, defendant-appellee.
LABRADOR, J.:
Appeal from a judgment of the Court of First Instance of
Manila, Hon. Carmelino G. Alvendia, presiding, dismissing
an action instituted by the Government to recover income
taxes from the defendant-appellee corresponding to the
years 1945, 1946, 1947 and 1948.
The record discloses that on October 3, 1951, the
Collector of Internal Revenue assessed income taxes for
the years 1945, 1946, 1947 and 1948 on the income tax
returns of defendant-appellee Luis G. Ablaza. The
assessments total P5,254.70 (Exhibit "I"). On October 16,
1951, the accountants for Ablaza requested a
reinvestigation of Ablaza's tax liability, on the ground that
(1) the assessment is based on third-party information
and (3) neither the taxpayer nor his accountants were
permitted to appear in person (Exh. "J"). The petition for
reinvestigation was granted in a letter of the Collector of
Internal Revenue, dated October 17, 1951. On October 30,
1951, the accountants for Ablaza again sent another
letter to the Collector of Internal Revenue submitting a
copy of their own computation (Exh. "L"). On October 23,
1952, said accountants again submitted a supplemental
memorandum (Exh. "M"). On March 10, 1954, the
accountants for Ablaza sent a letter to the examiner of
accounts and collections of the Bureau of Internal
Revenue, stating:
In this connection, we wish to state that this case is
presently under reinvestigation as per our request dated
October 16, 1951, and your letter to us dated October 17,
1951, and that said tax liability being only a tentative
assessment, we are not as yet advised of the results of
the requested reinvestigation.

In view thereof, we wish to request, in fairness to the

taxpayer concerned, that we be furnished a copy of the
detailed computation of the alleged tax liability as soon as
the reinvestigation is terminated to enable us to prove the
veracity of the taxpayer's side of the case, and if it is
found out that said assessment is proper and in order, we
assure you of our assistance in the speedy disposition of
this case. (Exh. "P")
On February 11, 1957, after the reinvestigation, the
Collector of Internal Revenue made a final assessment of
the income taxes of Ablaza, fixing said income taxes for
the years already mentioned at P2,066.56 (Exh. "Q").
Notice of the said assessment was sent (Exhs. "V", "W"
and "X") and upon receipt thereof the accountants of
Ablaza sent a letter to the Collector of Internal Revenue,
dated May 8, 1957, protesting the assessments, on the
ground that the income taxes are no longer collectible for
the reason that they have already prescribed. As the
Collector did not agree to the alleged claim of
prescription, action was instituted by him in the Court of
First Instance to recover the amount assessed. The Court
of First Instance upheld the contention of Ablaza that the
action to collect the said income taxes had prescribed.
Against this decision the case was brought here on
appeal, where it is claimed by the Government that the
prescriptive period has not fully run at the time of the
assessment, in view especially of the letter of the
accountants of Ablaza, dated March 10, 1954, pertinent
provisions of which are quoted above.
It is of course true on October 14, 1951, Ablaza's
accountants
requested
a
reinvestigation
of
the
assessment of the income taxes against him, the period of
prescription of action to collect the taxes was suspended.
(Sec. 333, C. A. No. 466.) The provision of law on
prescription was adopted in our statute books upon
recommendation of the tax commissioner of the
Philippines which declares:
Under the former law, the right of the Government to
collect the tax does not prescribe. However, in fairness to

the taxpayer, the Government should be estopped from

collecting the tax where it failed to make the necessary
investigation and assessment within 5 years after the
filing of the return and where it failed to collect the tax
within 5 years from the date of assessment thereof. just
as the government is interested in the stability of its
collection, so also are the taxpayers entitled to an
assurance that they will not be subjected to further
investigation for tax purposes after the expiration of a
reasonable period of time. (Vol. II, Report of the Tax
Commission of the Philippines, pp. 321-322)
The law prescribing a limitation of actions for the
collection of the income tax is beneficial both to the
Government and to its citizens; to the Government
because tax officers would be obliged to act promptly in
the making of assessment, and to citizens because after
the lapse of the period of prescription citizens would have
a feeling of security against unscrupulous tax agents who
will always find an excuse to inspect the books of
taxpayers, not to determine the latter's real liability, but
to take advantage of every opportunity to molest
peaceful, law-abiding citizens. Without such legal defense
taxpayers would furthermore be under obligation to
always keep their books and keep them open for
inspection subject to harassment by unscrupulous tax
agents. The law on prescription being a remedial measure
should be interpreted in a way conducive to bringing
about the beneficient purpose of affording protection to
the taxpayer within the contemplation of the Commission
which recommend the approval of the law.
The question in the case at bar boils down to the
interpretation of Exhibit "P", dated March 10, 1954,
quoted above. If said letter be interpreted as a request for
further investigation or a new investigation, different and
distinct from the investigation demanded or prayed for in
Ablaza's first letter, Exhibit "L", then the period of
prescription would continue to be suspended thereby. but
if the letter in question does not ask for another
investigation, the result would be just the opposite. In our
opinion the letter in question, Exhibit "P", does not ask for

another investigation. Its first paragraph quoted above

shows that the reinvestigation then being conducted was
by virtue of its request of October 16, 1951. All that the
letter asks is that the taxpayer be furnished a copy of the
computation. The request may be explained in this
manner: As the reinvestigation was allowed on October 1,
1951 and on October 16, 1951, the taxpayer supposed or
expected that at the time, March, 1954 the
reinvestigation was about to be finished and he wanted a
copy of the re-assessment in order to be prepared to
admit or contest it. Nowhere does the letter imply a
demand or request for a ready requested and, therefore,
the said letter may not be interpreted to authorize or
justify the continuance of the suspension of the period of
limitations.
We find the appeal without merit and we hereby affirm
the judgment of the lower court dismissing the action.
Without costs.
Paras, C. J., Bengzon, Montemayor, Bautista Angelo,
Concepcion, Reyes, J. B. L., Endencia, Barrera, and
Gutierrez David, JJ., concur.

[G.R. No. 148191. November 25, 2003]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.
SOLIDBANK CORPORATION, respondent.
DECISION
PANGANIBAN, J.:
Under the Tax Code, the earnings of banks from passive
income are subject to a twenty percent final withholding
tax (20% FWT). This tax is withheld at source and is thus
not actually and physically received by the banks,
because it is paid directly to the government by the
entities from which the banks derived the income. Apart
from the 20% FWT, banks are also subject to a five
percent gross receipts tax (5% GRT) which is imposed by
the Tax Code on their gross receipts, including the passive
income.
Since the 20% FWT is constructively received by the
banks and forms part of their gross receipts or earnings, it
follows that it is subject to the 5% GRT. After all, the
amount withheld is paid to the government on their
behalf, in satisfaction of their withholding taxes. That they
do not actually receive the amount does not alter the fact
that it is remitted for their benefit in satisfaction of their
tax obligations.
Stated otherwise, the fact is that if there were no
withholding tax system in place in this country, this 20
percent portion of the passive income of banks would
actually be paid to the banks and then remitted by them
to the government in payment of their income tax. The
institution of the withholding tax system does not alter
the fact that the 20 percent portion of their passive
income constitutes part of their actual earnings, except
that it is paid directly to the government on their behalf in
satisfaction of the 20 percent final income tax due on
their passive incomes.

Before us is a Petition for Review[1] under Rule 45 of the

Rules of Court, seeking to annul the July 18, 2000
Decision[2] and the May 8, 2001 Resolution[3] of the
Court of Appeals[4] (CA) in CA-GR SP No. 54599. The
decretal portion of the assailed Decision reads as follows:
WHEREFORE, we AFFIRM in toto the assailed decision and
resolution of the Court of Tax Appeals.[5]
The challenged Resolution denied petitioners Motion for
Reconsideration.
The Facts
Quoting petitioner, the CA[6] summarized the facts of this
case as follows:
For the calendar year 1995, [respondent] seasonably filed
its Quarterly Percentage Tax Returns reflecting gross
receipts (pertaining to 5% [Gross Receipts Tax] rate) in the
total amount of P1,474,691,693.44 with corresponding
gross
receipts
tax
payments
in
the
sum
of
P73,734,584.60, broken down as follows:
Period Covered Gross Receipts Gross Receipts Tax
January to March 1994 P 188,406,061.95 P 9,420,303.10
April to June 1994 370,913,832.70 18,545,691.63
July to September 1994 481,501,838.98 24,075,091.95
October
to
December
1994
433,869,959.81
21,693,497.98
Total P 1,474,691,693.44 P 73,734,584.60
[Respondent] alleges that the total gross receipts in the
amount of P1,474,691,693.44 included the sum of
P350,807,875.15 representing gross receipts from passive
income which was already subjected to 20% final
withholding tax.

The Case
On January 30, 1996, [the Court of Tax Appeals] rendered
a decision in CTA Case No. 4720 entitled Asian Bank

Corporation vs. Commissioner of Internal Revenue[,]

wherein it was held that the 20% final withholding tax on
[a] banks interest income should not form part of its
taxable gross receipts for purposes of computing the
gross receipts tax.
On June 19, 1997, on the strength of the aforementioned
decision, [respondent] filed with the Bureau of Internal
Revenue [BIR] a letter-request for the refund or issuance
of [a] tax credit certificate in the aggregate amount of
P3,508,078.75, representing allegedly overpaid gross
receipts tax for the year 1995, computed as follows:
Gross Receipts Subjected to the Final Tax
Derived from Passive [Income] P 350,807,875.15
Multiply by Final Tax rate 20%
20% Final Tax Withheld at Source P 70,161,575.03
Multiply by [Gross Receipts Tax] rate 5%
Overpaid [Gross Receipts Tax] P 3,508,078.75

receipts for purposes of computing the [gross receipts

tax].[7]
Ruling of the CA
The CA held that the 20% FWT on a banks interest income
did not form part of the taxable gross receipts in
computing the 5% GRT, because the FWT was not actually
received by the bank but was directly remitted to the
government. The appellate court curtly said that while the
Tax Code does not specifically state any exemption, x x x
the statute must receive a sensible construction such as
will give effect to the legislative intention, and so as to
avoid an unjust or absurd conclusion.[8]
Hence, this appeal.[9]
Issue
Petitioner raises this lone issue for our consideration:

Without waiting for an action from the [petitioner],

[respondent] on the same day filed [a] petition for review
[with the Court of Tax Appeals] in order to toll the running
of the two-year prescriptive period to judicially claim for
the refund of [any] overpaid internal revenue tax[,]
pursuant to Section 230 [now 229] of the Tax Code [also
National Internal Revenue Code] x x x.

Whether or not the 20% final withholding tax on [a] banks

interest income forms part of the taxable gross receipts in
computing the 5% gross receipts tax.[10]
The Courts Ruling
The Petition is meritorious.

xxxxxxxxx
After trial on the merits, the [Court of Tax Appeals], on
August 6, 1999, rendered its decision ordering x x x
petitioner to refund in favor of x x x respondent the
reduced amount of P1,555,749.65 as overpaid [gross
receipts tax] for the year 1995. The legal issue x x x was
resolved by the [Court of Tax Appeals], with Hon. Amancio
Q. Saga dissenting, on the strength of its earlier
pronouncement in x x x Asian Bank Corporation vs.
Commissioner of Internal Revenue x x x, wherein it was
held that the 20% [final withholding tax] on [a] banks
interest income should not form part of its taxable gross

Sole Issue:
Whether the 20% FWT Forms Part
of the Taxable Gross Receipts
Petitioner claims that although the 20% FWT on
respondents interest income was not actually received by
respondent because it was remitted directly to the
government, the fact that the amount redounded to the
banks benefit makes it part of the taxable gross receipts
in computing the 5% GRT. Respondent, on the other hand,
maintains that the CA correctly ruled otherwise.

We agree with petitioner. In fact, the same issue has been

raised recently in China Banking Corporation v. CA,[11]
where this Court held that the amount of interest income
withheld in payment of the 20% FWT forms part of gross
receipts in computing for the GRT on banks.
The FWT and the GRT:
Two Different Taxes
The 5% GRT is imposed by Section 119[12] of the Tax
Code,[13] which provides:
SEC. 119. Tax on banks and non-bank financial
intermediaries. There shall be collected a tax on gross
receipts derived from sources within the Philippines by all
banks and non-bank
financial
intermediaries in
accordance with the following schedule:
(a) On interest, commissions and discounts from lending
activities as well as income from financial leasing, on the
basis of remaining maturities of instruments from which
such receipts are derived.
Short-term maturity not in excess of two (2) years5%
Medium-term maturity over two (2) years
but not exceeding four (4) years....3%
Long-term maturity:
(i) Over four (4) years but not exceeding
seven (7) years1%
(ii) Over seven (7) years..0%
(b) On dividends...0%
(c) On royalties, rentals of property, real or personal,
profits from exchange and all other items treated as gross
income
under
Section
28[14]
of
this
Code....................................................................5%
Provided, however, That in case the maturity period
referred to in paragraph (a) is shortened thru
pretermination, then the maturity period shall be
reckoned to end as of the date of pretermination for
purposes of classifying the transaction as short, medium

or long term and the correct rate of tax shall be applied

accordingly.
Nothing in this Code shall preclude the Commissioner
from imposing the same tax herein provided on persons
performing similar banking activities.
The 5% GRT[15] is included under Title V. Other
Percentage Taxes of the Tax Code and is not subject to
withholding.
The
banks
and
non-bank
financial
intermediaries liable therefor shall, under Section 125(a)
(1),[16] file quarterly returns on the amount of gross
receipts and pay the taxes due thereon within twenty (20)
[17] days after the end of each taxable quarter.
The 20% FWT,[18] on the other hand, falls under Section
24(e)(1)[19] of Title II. Tax on Income. It is a tax on
passive income, deducted and withheld at source by the
payor-corporation and/or person as withholding agent
pursuant to Section 50,[20] and paid in the same manner
and subject to the same conditions as provided for in
Section 51.[21]
A perusal of these provisions clearly shows that two types
of taxes are involved in the present controversy: (1) the
GRT, which is a percentage tax; and (2) the FWT, which is
an income tax. As a bank, petitioner is covered by both
taxes.
A percentage tax is a national tax measured by a certain
percentage of the gross selling price or gross value in
money of goods sold, bartered or imported; or of the
gross receipts or earnings derived by any person engaged
in the sale of services.[22] It is not subject to withholding.
An income tax, on the other hand, is a national tax
imposed on the net or the gross income realized in a
taxable year.[23] It is subject to withholding.
In a withholding tax system, the payee is the taxpayer,
the person on whom the tax is imposed; the payor, a
separate entity, acts as no more than an agent of the

government for the collection of the tax in order to ensure

its payment. Obviously, this amount that is used to settle
the tax liability is deemed sourced from the proceeds
constitutive of the tax base.[24] These proceeds are
either actual or constructive. Both parties herein agree
that there is no actual receipt by the bank of the amount
withheld. What needs to be determined is if there is
constructive receipt thereof. Since the payee -- not the
payor -- is the real taxpayer, the rule on constructive
receipt can be easily rationalized, if not made clearly
manifest.[25]
Constructive Receipt
Versus Actual Receipt
Applying Section 7 of Revenue Regulations (RR) No. 1784,[26] petitioner contends that there is constructive
receipt of the interest on deposits and yield on deposit
substitutes.[27] Respondent, however, claims that even if
there is, it is Section 4(e) of RR 12-80[28] that
nevertheless governs the situation.
Section 7 of RR 17-84 states:
SEC. 7. Nature and Treatment of Interest on Deposits and
Yield on Deposit Substitutes.
(a) The interest earned on Philippine Currency bank
deposits and yield from deposit substitutes subjected to
the withholding taxes in accordance with these
regulations need not be included in the gross income in
computing the depositors/investors income tax liability in
accordance with the provision of Section 29(b),[29] (c)[30]
and (d) of the National Internal Revenue Code, as
amended.
(b) Only interest paid or accrued on bank deposits, or
yield from deposit substitutes declared for purposes of
imposing the withholding taxes in accordance with these
regulations shall be allowed as interest expense
deductible for purposes of computing taxable net income
of the payor.

(c) If the recipient of the above-mentioned items of

income are financial institutions, the same shall be
included as part of the tax base upon which the gross
receipt[s] tax is imposed.
Section 4(e) of RR 12-80, on the other hand, states that
the tax rates to be imposed on the gross receipts of
banks, non-bank financial intermediaries, financing
companies, and other non-bank financial intermediaries
not performing quasi-banking activities shall be based on
all items of income actually received. This provision reads:
SEC. 4. x x x x x x x x x
(e) Gross receipts tax on banks, non-bank financial
intermediaries, financing companies, and other non-bank
financial intermediaries not performing quasi-banking
activities. The rates of tax to be imposed on the gross
receipts of such financial institutions shall be based on all
items of income actually received. Mere accrual shall not
be considered, but once payment is received on such
accrual or in cases of prepayment, then the amount
actually received shall be included in the tax base of such
financial institutions, as provided hereunder x x x.
Respondent argues that the above-quoted provision is
plain and clear: since there is no actual receipt, the FWT is
not to be included in the tax base for computing the GRT.
There is supposedly no pecuniary benefit or advantage
accruing to the bank from the FWT, because the income is
subjected to a tax burden immediately upon receipt
through the withholding process. Moreover, the earlier RR
12-80 covered matters not falling under the later RR 1784.[31]
We are not persuaded.
By analogy, we apply to the receipt of income the rules on
actual and constructive possession provided in Articles
531 and 532 of our Civil Code.

Under Article 531:[32]

Possession is acquired by the material occupation of a
thing or the exercise of a right, or by the fact that it is
subject to the action of our will, or by the proper acts and
legal formalities established for acquiring such right.
Article 532 states:
Possession may be acquired by the same person who is to
enjoy it, by his legal representative, by his agent, or by
any person without any power whatever; but in the last
case, the possession shall not be considered as acquired
until the person in whose name the act of possession was
executed has ratified the same, without prejudice to the
juridical consequences of negotiorum gestio in a proper
case.[33]
The last means of acquiring possession under Article 531
refers to juridical acts -- the acquisition of possession by
sufficient title to which the law gives the force of acts of
possession.[34] Respondent argues that only items of
income actually received should be included in its gross
receipts. It claims that since the amount had already been
withheld at source, it did not have actual receipt thereof.
We clarify. Article 531 of the Civil Code clearly provides
that the acquisition of the right of possession is through
the proper acts and legal formalities established therefor.
The withholding process is one such act. There may not
be actual receipt of the income withheld; however, as
provided for in Article 532, possession by any person
without any power whatsoever shall be considered as
acquired when ratified by the person in whose name the
act of possession is executed.
In our withholding tax system, possession is acquired by
the payor as the withholding agent of the government,
because the taxpayer ratifies the very act of possession
for the government. There is thus constructive receipt.
The processes of bookkeeping and accounting for interest
on deposits and yield on deposit substitutes that are

subjected to FWT are indeed -- for legal purposes -tantamount to delivery, receipt or remittance.[35]
Besides, respondent itself admits that its income is
subjected to a tax burden immediately upon receipt,
although it claims that it derives no pecuniary benefit or
advantage through the withholding process. There being
constructive receipt of such income -- part of which is
withheld -- RR 17-84 applies, and that income is included
as part of the tax base upon which the GRT is imposed.
RR 12-80 Superseded by RR 17-84
We now come to the effect of the revenue regulations on
interest income constructively received.
In general, rules and regulations issued by administrative
or executive officers pursuant to the procedure or
authority conferred by law upon the administrative
agency have the force and effect, or partake of the
nature, of a statute.[36] The reason is that statutes
express the policies, purposes, objectives, remedies and
sanctions intended by the legislature in general terms.
The details and manner of carrying them out are
oftentimes left to the administrative agency entrusted
with their enforcement.
In the present case, it is the finance secretary who
promulgates
the
revenue
regulations,
upon
recommendation of the BIR commissioner. These
regulations are the consequences of a delegated power to
issue legal provisions that have the effect of law.[37]
A revenue regulation is binding on the courts as long as
the procedure fixed for its promulgation is followed. Even
if the courts may not be in agreement with its stated
policy or innate wisdom, it is nonetheless valid, provided
that its scope is within the statutory authority or standard
granted by the legislature.[38] Specifically, the regulation
must (1) be germane to the object and purpose of the
law;[39] (2) not contradict, but conform to, the standards
the law prescribes;[40] and (3) be issued for the sole

purpose of carrying into effect the general provisions of

our tax laws.[41]
In the present case, there is no question about the
regularity in the performance of official duty. What needs
to be determined is whether RR 12-80 has been repealed
by RR 17-84.
A repeal may be express or implied. It is express when
there is a declaration in a regulation -- usually in its
repealing clause -- that another regulation, identified by
its number or title, is repealed. All others are implied
repeals.[42] An example of the latter is a general
provision that predicates the intended repeal on a
substantial conflict between the existing and the prior
regulations.[43]
As stated in Section 11 of RR 17-84, all regulations, rules,
orders or portions thereof that are inconsistent with the
provisions of the said RR are thereby repealed. This
declaration proceeds on the premise that RR 17-84 clearly
reveals such an intention on the part of the Department of
Finance. Otherwise, later RRs are to be construed as a
continuation of, and not a substitute for, earlier RRs; and
will continue to speak, so far as the subject matter is the
same, from the time of the first promulgation.[44]
There are two well-settled categories of implied repeals:
(1) in case the provisions are in irreconcilable conflict, the
later regulation, to the extent of the conflict, constitutes
an implied repeal of an earlier one; and (2) if the later
regulation covers the whole subject of an earlier one and
is clearly intended as a substitute, it will similarly operate
as a repeal of the earlier one.[45] There is no implied
repeal of an earlier RR by the mere fact that its subject
matter is related to a later RR, which may simply be a
cumulation or continuation of the earlier one.[46]
Where a part of an earlier regulation embracing the same
subject as a later one may not be enforced without
nullifying the pertinent provision of the latter, the earlier
regulation is deemed impliedly amended or modified to

the extent of the repugnancy.[47] The unaffected

provisions or portions of the earlier regulation remain in
force, while its omitted portions are deemed repealed.[48]
An exception therein that is amended by its subsequent
elimination shall now cease to be so and instead be
included within the scope of the general rule.[49]
Section 4(e) of the earlier RR 12-80 provides that only
items of income actually received shall be included in the
tax base for computing the GRT, but Section 7(c) of the
later RR 17-84 makes no such distinction and provides
that all interests earned shall be included. The exception
having been eliminated, the clear intent is that the later
RR 17-84 includes the exception within the scope of the
general rule.
Repeals by implication are not favored and will not be
indulged, unless it is manifest that the administrative
agency intended them. As a regulation is presumed to
have been made with deliberation and full knowledge of
all existing rules on the subject, it may reasonably be
concluded that its promulgation was not intended to
interfere with or abrogate any earlier rule relating to the
same subject, unless it is either repugnant to or fully
inclusive of the subject matter of an earlier one, or unless
the reason for the earlier one is beyond peradventure
removed.[50] Every effort must be exerted to make all
regulations stand -- and a later rule will not operate as a
repeal of an earlier one, if by any reasonable construction,
the two can be reconciled.[51]
RR 12-80 imposes the GRT only on all items of income
actually received, as opposed to their mere accrual, while
RR 17-84 includes all interest income in computing the
GRT. RR 12-80 is superseded by the later rule, because
Section 4(e) thereof is not restated in RR 17-84. Clearly
therefore, as petitioner correctly states, this particular
provision was impliedly repealed when the later
regulations took effect.[52]
Reconciling the Two Regulations

Granting that the two regulations can be reconciled,

respondents reliance on Section 4(e) of RR 12-80 is
misplaced and deceptive. The accrual referred to therein
should not be equated with the determination of the
amount to be used as tax base in computing the GRT.
Such accrual merely refers to an accounting method that
recognizes income as earned although not received, and
expenses as incurred although not yet paid.
Accrual should not be confused with the concept of
constructive possession or receipt as earlier discussed.
Petitioner correctly points out that income that is merely
accrued -- earned, but not yet received -- does not form
part of the taxable gross receipts; income that has been
received, albeit constructively, does.[53]
The word actually, used confusingly in Section 4(e), will
be clearer if removed entirely. Besides, if actually is that
important, accrual should have been eliminated for being
a mere surplusage. The inclusion of accrual stresses the
fact that Section 4(e) does not distinguish between actual
and constructive receipt. It merely focuses on the method
of accounting known as the accrual system.
Under this system, income is accrued or earned in the
year in which the taxpayers right thereto becomes fixed
and definite, even though it may not be actually received
until a later year; while a deduction for a liability is to be
accrued or incurred and taken when the liability becomes
fixed and certain, even though it may not be actually paid
until later.[54]
Under any system of accounting, no duty or liability to
pay an income tax upon a transaction arises until the
taxable year in which the event constituting the condition
precedent occurs.[55] The liability to pay a tax may thus
arise at a certain time and the tax paid within another
given time.[56]
In reconciling these two regulations, the earlier one
includes in the tax base for GRT all income, whether
actually or constructively received, while the later one

includes specifically interest income. In computing the

income tax liability, the only exception cited in the later
regulations is the exclusion from gross income of interest
income, which is already subjected to withholding. This
exception, however, refers to a different tax altogether. To
extend mischievously such exception to the GRT will
certainly lead to results not contemplated by the
legislators and the administrative body promulgating the
regulations.
Manila Jockey Club
Inapplicable
In Commissioner of Internal Revenue v. Manila Jockey
Club,[57] we held that the term gross receipts shall not
include money which, although delivered, has been
especially earmarked by law or regulation for some
person other than the taxpayer.[58]
To begin, we have to nuance the definition of gross
receipts[59] to determine what it is exactly. In this regard,
we note that US cases have persuasive effect in our
jurisdiction, because Philippine income tax law is
patterned after its US counterpart.[60]
[G]ross receipts with respect to any period means the
sum of: (a) The total amount received or accrued during
such period from the sale, exchange, or other disposition
of x x x other property of a kind which would properly be
included in the inventory of the taxpayer if on hand at the
close of the taxable year, or property held by the taxpayer
primarily for sale to customers in the ordinary course of
its trade or business, and (b) The gross income,
attributable to a trade or business, regularly carried on by
the taxpayer, received or accrued during such period x x
x.[61]
x x x [B]y gross earnings from operations x x x was
intended all operations xxx including incidental,
subordinate, and subsidiary operations, as well as
principal operations.[62]

When we speak of the gross earnings of a person or

corporation, we mean the entire earnings or receipts of
such person or corporation from the business or
operations to which we refer.[63]
From these cases, gross receipts[64] refer to the total, as
opposed to the net, income.[65] These are therefore the
total receipts before any deduction[66] for the expenses
of
management.[67]
Websters
New
International
Dictionary, in fact, defines gross as whole or entire.
Statutes taxing the gross receipts, earnings, or income of
particular corporations are found in many jurisdictions.
[68] 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.[69]
Moreover, we have emphasized that the BIR has
consistently ruled that gross receipts does not admit of
any deduction.[70] Following the principle of legislative
approval by reenactment,[71] this interpretation has been
adopted by the legislature throughout the various
reenactments of then Section 119 of the Tax Code.[72]
Given that a tax is imposed upon total receipts and not
upon net earnings,[73] shall the income withheld be
included in the tax base upon which such tax is imposed?
In other words, shall interest income constructively
received still be included in the tax base for computing
the GRT?
We rule in the affirmative.
Manila Jockey Club does not apply to this case.
Earmarking is not the same as withholding. Amounts
earmarked do not form part of gross receipts, because,
although delivered or received, these are by law or
regulation reserved for some person other than the
taxpayer. On the contrary, amounts withheld form part of
gross receipts, because these are in constructive
possession and not subject to any reservation, the

withholding agent being merely a conduit in the collection

process.
The Manila Jockey Club had to deliver to the Board on
Races, horse owners and jockeys amounts that never
became the property of the race track.[74] Unlike these
amounts, the interest income that had been withheld for
the government became property of the financial
institutions upon constructive possession thereof.
Possession was indeed acquired, since it was ratified by
the financial institutions in whose name the act of
possession had been executed. The money indeed
belonged to the taxpayers; merely holding it in trust was
not enough.[75]
The government subsequently becomes the owner of the
money when the financial institutions pay the FWT to
extinguish their obligation to the government. As this
Court has held before, this is the consideration for the
transfer of ownership of the FWT from these institutions to
the government.[76] It is ownership that determines
whether interest income forms part of taxable gross
receipts.[77] Being originally owned by these financial
institutions as part of their interest income, the FWT
should form part of their taxable gross receipts.
Besides, these amounts withheld are in payment of an
income tax liability, which is different from a percentage
tax liability. Commissioner of Internal Revenue v. Tours
Specialists, Inc. aptly held thus:[78]
x x x [G]ross receipts subject to tax under the Tax Code do
not include monies or receipts entrusted to the taxpayer
which do not belong to them and do not redound to the
taxpayers benefit; and it is not necessary that there must
be a law or regulation which would exempt such monies
and receipts within the meaning of gross receipts under
the Tax Code.[79]
In the construction and interpretation of tax statutes and
of statutes in general, the primary consideration is to
ascertain and give effect to the intention of the

legislature.[80] We ought to impute to the lawmaking

body the intent to obey the constitutional mandate, as
long as its enactments fairly admit of such construction.
[81] In fact, x x x no tax can be levied without express
authority of law, but the statutes are to receive a
reasonable construction with a view to carrying out their
purpose and intent.[82]
Looking again into Sections 24(e)(1) and 119 of the Tax
Code, we find that the first imposes an income tax; the
second, a percentage tax. The legislature clearly intended
two different taxes. The FWT is a tax on passive income,
while the GRT is on business.[83] The withholding of one
is not equivalent to the payment of the other.
Non-Exemption of FWT from GRT:
Neither Unjust nor Absurd
Taxing the people and their property is essential to the
very existence of government. Certainly, one of the
highest attributes of sovereignty is the power of taxation,
[84] which may legitimately be exercised on the objects
to which it is applicable to the utmost extent as the
government may choose.[85] Being an incident of
sovereignty, such power is coextensive with that to which
it is an incident.[86] The interest on deposits and yield on
deposit substitutes of financial institutions, on the one
hand, and their business as such, on the other, are the
two objects over which the State has chosen to extend its
sovereign power. Those not so chosen are, upon the
soundest principles, exempt from taxation.[87]
While courts will not enlarge by construction the
governments power of taxation,[88] neither will they
place upon tax laws so loose a construction as to permit
evasions, merely on the basis of fanciful and insubstantial
distinctions.[89] When the legislature imposes a tax on
income and another on business, the imposition must be
respected. The Tax Code should be so construed, if need
be, as to avoid empty declarations or possibilities of crafty
tax evasion schemes. We have consistently ruled thus:

x x x [I]t is upon taxation that the [g]overnment chiefly

relies to obtain the means to carry on its operations, and
it is of the utmost importance that the modes adopted to
enforce the collection of the taxes levied should be
summary and interfered with as little as possible. x x x.
[90]
Any delay in the proceedings of the officers, upon whom
the duty is devolved of collecting the taxes, may derange
the operations of government, and thereby cause serious
detriment to the public.[91]
No government could exist if all litigants were permitted
to delay the collection of its taxes.[92]
A taxing act will be construed, and the intent and
meaning of the legislature ascertained, from its language.
[93] Its clarity and implied intent must exist to uphold the
taxes as against a taxpayer in whose favor doubts will be
resolved.[94] No such doubts exist with respect to the Tax
Code, because the income and percentage taxes we have
cited earlier have been imposed in clear and express
language for that purpose.[95]
This Court has steadfastly adhered to the doctrine that its
first and fundamental duty is the application of the law
according to its express terms -- construction and
interpretation being called for only when such literal
application is impossible or inadequate without them.[96]
In Quijano v. Development Bank of the Philippines,[97] we
stressed as follows:
No process of interpretation or construction need be
resorted to where a provision of law peremptorily calls for
application. [98]
A literal application of any part of a statute is to be
rejected if it will operate unjustly, lead to absurd results,
or contradict the evident meaning of the statute taken as
a whole.[99] Unlike the CA, we find that the literal
application of the aforesaid sections of the Tax Code and
its implementing regulations does not operate unjustly or

contradict the evident meaning of the statute taken as a

whole. Neither does it lead to absurd results. Indeed, our
courts are not to give words meanings that would lead to
absurd or unreasonable consequences.[100] We have
repeatedly held thus:
x x x [S]tatutes should receive a sensible construction,
such as will give effect to the legislative intention and so
as to avoid an unjust or an absurd conclusion.[101]
While it is true that the contemporaneous construction
placed upon a statute by executive officers whose duty is
to enforce it should be given great weight by the courts,
still if such construction is so erroneous, x x x the same
must be declared as null and void.[102]
It does not even matter that the CTA, like in China
Banking Corporation,[103] relied erroneously on Manila
Jockey Club. Under our tax system, the CTA acts as a
highly specialized body specifically created for the
purpose of reviewing tax cases.[104] Because of its
recognized expertise, its findings of fact will ordinarily not
be reviewed, absent any showing of gross error or abuse
on its part.[105] Such findings are binding on the Court
and, absent strong reasons for us to delve into facts, only
questions of law are open for determination.[106]

State cannot strip itself of this highest attribute of

sovereignty -- its most essential power of taxation -- by
vague or ambiguous language. Since tax refunds are in
the nature of tax exemptions, these are deemed to be in
derogation of sovereign authority and to be construed
strictissimi juris against the person or entity claiming the
exemption.[111]
No less than our 1987 Constitution provides for the
mechanism for granting tax exemptions.[112] They
certainly cannot be granted by implication or mere
administrative regulation. Thus, when an exemption is
claimed, it must indubitably be shown to exist, for every
presumption is against it,[113] and a well-founded doubt
is fatal to the claim.[114] In the instant case, respondent
has not been able to satisfactorily show that its FWT on
interest income is exempt from the GRT. Like China
Banking Corporation, its argument creates a tax
exemption where none exists.[115]
No exemptions are normally allowed when a GRT is
imposed. It is precisely designed to maintain simplicity in
the tax collection effort of the government and to assure
its steady source of revenue even during an economic
slump.[116]
No Double Taxation

Respondent claims that it is entitled to a refund on the

basis of excess GRT payments. We disagree.
Tax refunds are in the nature of tax exemptions.[107]
Such exemptions are strictly construed against the
taxpayer, being highly disfavored[108] and almost said to
be odious to the law. Hence, those who claim to be
exempt from the payment of a particular tax must do so
under clear and unmistakable terms found in the statute.
They must be able to point to some positive provision, not
merely a vague implication,[109] of the law creating that
right.[110]
The right of taxation will not be surrendered, except in
words too plain to be mistaken. The reason is that the

We have repeatedly said that the two taxes, subject of

this litigation, are different from each other. The basis of
their imposition may be the same, but their natures are
different, thus leading us to a final point. Is there double
taxation?
The Court finds none.
Double taxation means taxing the same property twice
when it should be taxed only once; that is, x x x taxing
the same person twice by the same jurisdiction for the
same thing.[117] It is obnoxious when the taxpayer is
taxed twice, when it should be but once.[118] Otherwise
described as direct duplicate taxation,[119] the two taxes

must be imposed on the same subject matter, for the

same purpose, by the same taxing authority, within the
same jurisdiction, during the same taxing period; and
they must be of the same kind or character.[120]
First, the taxes herein are imposed on two different
subject matters. The subject matter of the FWT is the
passive income generated in the form of interest on
deposits and yield on deposit substitutes, while the
subject matter of the GRT is the privilege of engaging in
the business of banking.
A tax based on receipts is a tax on business rather than
on the property; hence, it is an excise[121] rather than a
property tax.[122] It is not an income tax, unlike the FWT.
In fact, we have already held that one can be taxed for
engaging in business and further taxed differently for the
income derived therefrom.[123] Akin to our ruling in
Velilla v. Posadas,[124] these two taxes are entirely
distinct and are assessed under different provisions.
Second, although both taxes are national in scope
because they are imposed by the same taxing authority -the national government under the Tax Code -- and
operate within the same Philippine jurisdiction for the
same purpose of raising revenues, the taxing periods they
affect are different. The FWT is deducted and withheld as
soon as the income is earned, and is paid after every
calendar quarter in which it is earned. On the other hand,
the GRT is neither deducted nor withheld, but is paid only
after every taxable quarter in which it is earned.
Third, these two taxes are of different kinds or characters.
The FWT is an income tax subject to withholding, while
the GRT is a percentage tax not subject to withholding.
In short, there is no double taxation, because there is no
taxing twice, by the same taxing authority, within the
same jurisdiction, for the same purpose, in different
taxing periods, some of the property in the territory.[125]
Subjecting interest income to a 20% FWT and including it

in the computation of the 5% GRT is clearly not double

taxation.
WHEREFORE, the Petition is GRANTED. The assailed
Decision and Resolution of the Court of Appeals are
hereby REVERSED and SET ASIDE. No costs.
SO ORDERED.

G.R. No. L-16619

June 29, 1963

COMPAIA GENERAL DE TABACOS DE FILIPINAS, plaintiffappellee,

vs.
CITY OF MANILA, ET AL., defendants-appellants.
Ponce Enrile, Siguion Reyna, Montecillo and Belo for
plaintiff-appellee.
City Fiscal Hermogenes Concepcion, Jr. and Assistant City
Fiscal M. T. Reyes for defendants-appellants.
DIZON, J.:
Appeal from the decision of the Court of First Instance of
Manila ordering the City Treasurer of Manila to refund the
sum of P15,280.00 to Compania General de Tabacos de
Filipinas.
Appellee Compania General de Tabacos de Filipinas
hereinafter referred to simply as Tabacalera filed this
action in the Court of First Instance of Manila to recover
from appellants, City of Manila and its Treasurer,
Marcelino Sarmiento also hereinafter referred to as the
City the sum of P15,280.00 allegedly overpaid by it as
taxes on its wholesale and retail sales of liquor for the
period from the third quarter of 1954 to the second
quarter of 1957, inclusive, under Ordinances Nos. 3634,
3301, and 3816.
Tabacalera, as a duly licensed first class wholesale and
retail liquor dealer paid the City the fixed license fees
prescribed by Ordinance No. 3358 for the years 1954 to
1957, inclusive, and, as a wholesale and retail dealer of
general merchandise, it also paid the sales taxes required
by Ordinances Nos. 3634, 3301, and 3816.1wph1.t
In its sworn statements of wholesale, retail, and grocery
sales of general merchandise from the third quarter of
1954 to the second quarter of 1957, inclusive, Tabacalera
included its liquor sales of the same period, and it is not
denied that of the taxes it paid on all its sales of general

merchandise, the sum of P15,280.00 subject to the action

represents the tax corresponding to the liquor sales
aforesaid.
Tabacalera's action for refund is based on the theory that,
in connection with its liquor sales, it should pay the
license fees prescribed by Ordinance No. 3358 but not the
municipal sales taxes imposed by Ordinances Nos. 3634,
3301, and 3816; and since it already paid the license fees
aforesaid, the sales taxes paid by it amounting to the
sum of P15,208.00 under the three ordinances
mentioned heretofore is an overpayment made by
mistake, and therefore refundable.
The City, on the other hand, contends that, for the permit
issued to it granting proper authority to "conduct or
engage in the sale of alcoholic beverages, or liquors"
Tabacalera is subject to pay the license fees prescribed by
Ordinance No. 3358, aside from the sales taxes imposed
by Ordinances Nos. 3634, 3301, and 3816; that, even
assuming that Tabacalera is not subject to the payment of
the sales taxes prescribed by the said three ordinances as
regards its liquor sales, it is not entitled to the refund
demanded for the following reasons:.
(a) The said amount was paid by the plaintiff voluntarily
and without protest;
(b) If at all the alleged overpayment was made by
mistake, such mistake was one of law and arose from the
plaintiff's neglect of duty; .
(c) The said amount had been added by the plaintiff to the
selling price of the liquor sold by it and passed to the
consumers; and
(d) The said amount had been already expended by the
defendant City for public improvements and essential
services of the City government, the benefits of which are
enjoyed, and being enjoyed by the plaintiff.

It is admitted that as liquor dealer, Tabacalera paid

annually the wholesale and retail liquor license fees under
Ordinance No. 3358. In 1954, City Ordinance No. 3634,
amending City Ordinance No. 3420, and City Ordinance
No. 3816, amending City Ordinance No. 3301 were
passed. By reason thereof, the City Treasurer issued the
regulations marked Exhibit A, according to which, the
term "general merchandise as used in said ordinances,
includes all articles referred to in Chapter 1, Sections 123
to 148 of the National Internal Revenue Code. Of these,
Sections 133-135 included liquor among the taxable
articles. Pursuant to said regulations, Tabacalera included
its sales of liquor in its sworn quarterly declaration
submitted to the City Treasurer beginning from the third
quarter of 1954 to the second quarter of 1957, with a
total value of P722,501.09 and correspondingly paid a
wholesaler's tax amounting to P13,688.00 and a retailer's
tax amounting to P1,520.00, or a total of P15,208.00
the amount sought to be recovered.

purposes of regulation, while the latter is imposed under

the taxing power for the purpose of raising revenues
(MacQuillin, Municipal Corporations, Vol. 9, 3rd Edition, p.
26).

It appears that in the year 1954, the City, through its

treasurer, addressed a letter to Messrs. Sycip, Gorres,
Velayo and Co., an accounting firm, expressing the view
that liquor dealers paying the annual wholesale and retail
fixed tax under City Ordinance No. 3358 are not subject to
the wholesale and retail dealers' taxes prescribed by City
Ordinances Nos. 3634, 3301, and 3816. Upon learning of
said opinion, appellee stopped including its sales of liquor
in its quarterly sworn declarations submitted in
accordance with the aforesaid City Ordinances Nos. 3634,
3301, and 3816, and on December 3, 1957, it addressed a
letter to the City Treasurer demanding refund of the
alleged overpayment. As the claim was disallowed, the
present action was instituted.

On the other hand, it is clear that Ordinances Nos. 3634,

3301, and 3816 impose taxes on the sales of general
merchandise, wholesale or retail, and are revenue
measures enacted by the Municipal Board of Manila by
virtue of its power to tax dealers for the sale of such
merchandise. (Section 10 [o], Republic Act No. 409, as
amended.).

The term "tax" applies generally speaking to all

kinds of exactions which become public funds. The term is
often loosely used to include levies for revenue as well as
levies for regulatory purposes. Thus license fees are
commonly called taxes. Legally speaking, however,
license fee is a legal concept quite distinct from tax; the
former is imposed in the exercise of police power for

Ordinance No. 3358 is clearly one that prescribes

municipal license fees for the privilege to engage in the
business of selling liquor or alcoholic beverages, having
been enacted by the Municipal Board of Manila pursuant
to its charter power to fix license fees on, and regulate,
the sale of intoxicating liquors, whether imported or
locally manufactured. (Section 18 [p], Republic Act 409,
as amended). The license fees imposed by it are
essentially for purposes of regulation, and are justified,
considering that the sale of intoxicating liquor is,
potentially at least, harmful to public health and morals,
and must be subject to supervision or regulation by the
state and by cities and municipalities authorized to act in
the premises. (MacQuillin, supra, p. 445.)

Under Ordinance No. 3634 the word "merchandise" as

employed therein clearly includes liquor. Aside from this,
we have held in City of Manila vs. Inter-Island Gas Service,
Inc., G.R. No. L-8799, August 31, 1956, that the word
"merchandise" refers to all subjects of commerce and
traffic; whatever is usually bought and sold in trade or
market; goods or wares bought and sold for gain;
commodities or goods to trade; and commercial
commodities in general.
That Tabacalera is being subjected to double taxation is
more apparent than real. As already stated what is
collected under Ordinance No. 3358 is a license fee for
the privilege of engaging in the sale of liquor, a calling in

which it is obvious not anyone or anybody may

freely engage, considering that the sale of liquor
indiscriminately may endanger public health and morals.
On the other hand, what the three ordinances mentioned
heretofore impose is a tax for revenue purposes based on
the sales made of the same article or merchandise. It is
already settled in this connection that both a license fee
and a tax may be imposed on the same business or
occupation, or for selling the same article, this not being
in violation of the rule against double taxation (Bentley
Gray Dry Goods Co. vs. City of Tampa, 137 Fla. 641, 188
So. 758; MacQuillin, Municipal Corporations, Vol. 9, 3rd
Edition, p. 83). This is precisely the case with the
ordinances involved in the case at bar.
Appellee's contention that the City is repudiating its
previous view expressed by its Treasurer in a letter
addressed to Messrs. Sycip, Gorres, Velayo & Co. in 1954
that a liquor dealer who pays the annual license fee
under Ordinance No. 3358 is exempted from the
wholesalers and retailers taxes under the other three
ordinances mentioned heretofore is of no consequence.
The government is not bound by the errors or mistakes
committed by its officers, specially on matters of law.
Having arrived at the above conclusion, we deem it
unnecessary to consider the other legal points raised by
the City.
WHEREFORE, the decision appealed from is reversed, with
the result that this case should be, as it is hereby
dismissed, with costs.

G.R. No. L-24756

October 31, 1968

CITY OF BAGUIO, plaintiff-appellee,

vs.
FORTUNATO DE LEON, defendant-appellant.
The City Attorney for plaintiff-appellee.
Fortunato de Leon for and in his own behalf as defendantappellant.
FERNANDO, J.:
In this appeal, a lower court decision upholding the
validity of an ordinance1 of the City of Baguio imposing a
license fee on any person, firm, entity or corporation
doing business in the City of Baguio is assailed by
defendant-appellant Fortunato de Leon. He was held liable
as a real estate dealer with a property therein worth more
than P10,000, but not in excess of P50,000, and therefore
obligated to pay under such ordinance the P50 annual
fee. That is the principal question. In addition, there has
been a firm and unyielding insistence by defendantappellant of the lack of jurisdiction of the City Court of
Baguio, where the suit originated, a complaint having
been filed against him by the City Attorney of Baguio for
his failure to pay the amount of P300 as license fee
covering the period from the first quarter of 1958 to the
fourth quarter of 1962, allegedly, inspite of repeated
demands. Nor was defendant-appellant agreeable to such
a suit being instituted by the City Treasurer without the
consent of the Mayor, which for him was indispensable.
The lower court was of a different mind.
In its decision of December 19, 1964, it declared the
above ordinance as amended, valid and subsisting, and
held defendant-appellant liable for the fees therein
prescribed as a real estate dealer. Hence, this appeal.
Assume the validity of such ordinance, and there would be
no question about the liability of defendant-appellant for
the above license fee, it being shown in the partial
stipulation of facts, that he was "engaged in the rental of
his property in Baguio" deriving income therefrom during

the period covered by the first quarter of 1958 to the

fourth quarter of 1962.
The source of authority for the challenged ordinance is
supplied by Republic Act No. 329, amending the city
charter of Baguio2 empowering it to fix the license fee
and regulate "businesses, trades and occupations as may
be established or practiced in the City."
Unless it can be shown then that such a grant of authority
is not broad enough to justify the enactment of the
ordinance now assailed, the decision appealed from must
be affirmed. The task confronting defendant-appellant,
therefore, was far from easy. Why he failed is
understandable, considering that even a cursory reading
of the above amendment readily discloses that the
enactment of the ordinance in question finds support in
the power thus conferred.
Nor is the question raised by him as to the validity thereof
novel in character. In Medina v. City of Baguio,3 the effect
of the amendatory section insofar as it would expand the
previous power vested by the city charter was clarified in
these terms: "Appellants apparently have in mind section
2553, paragraph (c) of the Revised Administrative Code,
which empowers the City of Baguio merely to impose a
license fee for the purpose of rating the business that
may be established in the city. The power as thus
conferred is indeed limited, as it does not include the
power to levy a tax. But on July 15, 1948, Republic Act No.
329 was enacted amending the charter of said city and
adding to its power to license the power to tax and to
regulate. And it is precisely having in view this
amendment that Ordinance No. 99 was approved in order
to increase the revenues of the city. In our opinion, the
amendment above adverted to empowers the city council
not only to impose a license fee but also to levy a tax for
purposes of revenue, more so when in amending section
2553 (b), the phrase 'as provided by law' has been
removed by section 2 of Republic Act No. 329. The city
council of Baguio, therefore, has now the power to tax, to
license and to regulate provided that the subjects affected

be one of those included in the charter. In this sense, the

ordinance under consideration cannot be considered ultra
vires whether its purpose be to levy a tax or impose a
license fee. The terminology used is of no consequence."

money claim" and therefore "within the original

jurisdiction of the Justice of the Peace Court where it was
filed, considering the amount involved." Such is likewise
the situation here.

It would be an undue and unwarranted emasculation of

the above power thus granted if defendant-appellant were
to be sustained in his contention that no such statutory
authority for the enactment of the challenged ordinance
could be discerned from the language used in the
amendatory act. That is about all that needs to be said in
upholding the lower court, considering that the City of
Baguio was not devoid of authority in enacting this
particular ordinance. As mentioned at the outset,
however, defendant-appellant likewise alleged procedural
missteps and asserted that the challenged ordinance
suffered from certain constitutional infirmities. To such
points raised by him, we shall now turn.

Moreover, in City of Manila v. Bugsuk Lumber Co.,5 a suit

to collect from a defendant this license fee corresponding
to the years 1951 and 1952 was filed with the Municipal
Court of Manila, in view of the amount involved. The
thought that the municipal court lacked jurisdiction
apparently was not even in the minds of the parties and
did not receive any consideration by this Court.

1.
Defendant-appellant makes much of the alleged
lack of jurisdiction of the City Court of Baguio in the suit
for the collection of the real estate dealer's fee from him
in the amount of P300. He contended before the lower
court, and it is his contention now, that while the amount
of P300 sought was within the jurisdiction of the City
Court of Baguio where this action originated, since the
principal issue was the legality and constitutionality of the
challenged ordinance, it is not such City Court but the
Court of First Instance that has original jurisdiction.
There is here a misapprehension of the Judiciary Act. The
City Court has jurisdiction. Only recently, on September 7,
1968 to be exact, we rejected a contention similar in
character in Nemenzo v. Sabillano.4 The plaintiff in that
case filed a claim for the payment of his salary before the
Justice of the Peace Court of Pagadian, Zamboanga del
Sur. The question of jurisdiction was raised; the defendant
Mayor asserted that what was in issue was the
enforcement of the decision of the Commission of Civil
Service; the Justice of the Peace Court was thus without
jurisdiction to try the case. The above plea was curtly
dismissed by Us, as what was involved was "an ordinary

Evidently, the fear is entertained by defendant-appellant

that whenever a constitutional question is raised, it is the
Court of First Instance that should have original
jurisdiction on the matter. It does not admit of doubt,
however, that what confers jurisdiction is the amount set
forth in the complaint. Here, the sum sought to be
recovered was clearly within the jurisdiction of the City
Court of Baguio.
Nor could it be plausibly maintained that the validity of
such ordinance being open to question as a defense
against its enforcement from one adversely affected, the
matter should be elevated to the Court of First Instance.
For the City Court could rely on the presumption of the
validity of such ordinance,6 and the mere fact, however,
that in the answer to such a complaint a constitutional
question was raised did not suffice to oust the City Court
of its jurisdiction. The suit remains one for collection, the
lack of validity being only a defense to such an attempt at
recovery. Since the City Court is possessed of judicial
power and it is likewise axiomatic that the judicial power
embraces the ascertainment of facts and the application
of the law, the Constitution as the highest law
superseding any statute or ordinance in conflict therewith,
it cannot be said that a City Court is bereft of competence
to proceed on the matter. In the exercise of such delicate
power, however, the admonition of Cooley on inferior
tribunals is well worth remembering. Thus: "It must be
evident to any one that the power to declare a legislative

enactment void is one which the judge, conscious of the

fallibility of the human judgment, will shrink from
exercising in any case where he can conscientiously and
with due regard to duty and official oath decline the
responsibility."7 While it remains undoubted that such a
power to pass on the validity of an ordinance alleged to
infringe certain constitutional rights of a litigant exists,
still it should be exercised with due care and
circumspection, considering not only the presumption of
validity but also the relatively modest rank of a city court
in the judicial hierarchy.

At any rate, it has been expressly affirmed by us that such

an "argument against double taxation may not be invoked
where one tax is imposed by the state and the other is
imposed by the city ..., it being widely recognized that
there is nothing inherently obnoxious in the requirement
that license fees or taxes be exacted with respect to the
same occupation, calling or activity by both the state and
the political subdivisions thereof."11

2.
To repeat the challenged ordinance cannot be
considered ultra vires as there is more than ample
statutory
authority
for
the
enactment
thereof.
Nonetheless, its validity on constitutional grounds is
challenged because of the allegation that it imposed
double taxation, which is repugnant to the due process
clause, and that it violated the requirement of uniformity.
We do not view the matter thus.

Now, as to the claim that there was a violation of the rule

of uniformity established by the constitution. According to
the challenged ordinance, a real estate dealer who leases
property worth P50,000 or above must pay an annual fee
of P100. If the property is worth P10,000 but not over
P50,000, then he pays P50 and P24 if the value is less
than P10,000. On its face, therefore, the above ordinance
cannot be assailed as violative of the constitutional
requirement of uniformity. In Philippine Trust Company v.
Yatco,12 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."

As to why double taxation is not violative of due process,

Justice Holmes made clear in this language: "The
objection to the taxation as double may be laid down on
one side. ... The 14th Amendment [the due process
clause] no more forbids double taxation than it does
doubling the amount of a tax, short of confiscation or
proceedings unconstitutional on other grounds."8With
that decision rendered at a time when American
sovereignty in the Philippines was recognized, it
possesses more than just a persuasive effect. To some, it
delivered the coup de grace to the bogey of double
taxation as a constitutional bar to the exercise of the
taxing power. It would seem though that in the United
States, as with us, its ghost as noted by an eminent critic,
still stalks the juridical state. In a 1947 decision,
however,9 we quoted with approval this excerpt from a
leading American decision:10 "Where, as here, Congress
has clearly expressed its intention, the statute must be
sustained even though double taxation results."

The above would clearly indicate how lacking in merit is

this argument based on double taxation.

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.13 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 Fuente14 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, 15 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 case16 that "inequalities which result
from a singling out of one particular class for taxation or
exemption infringe no constitutional limitation."17
It is thus apparent from the above that in much the same
way that the plea of double taxation is unavailing, the
allegation that there was a violation of the principle of
uniformity is inherently lacking in persuasiveness. There is
no need to pass upon the other allegations to assail the
validity of the above ordinance, it being maintained that
the license fees therein imposed "is excessive,
unreasonable and oppressive" and that there is a failure
to observe the mandate of equal protection. A reading of
the ordinance will readily disclose their inherent lack of
plausibility.
3.
That would dispose of all the errors assigned,
except the last two, which would predicate a grievance on
the complaint having been started by the City Treasurer
rather than the City Mayor of Baguio. These alleged
errors, as was the case with the others assigned, lack
merit.
In much the same way that an act of a department head
of the national government, performed within the limits of
his authority, is presumptively the act of the President
unless reprobated or disapproved,18 similarly the act of
the City Treasurer, whose position is roughly analogous,
may be assumed to carry the seal of approval of the City
Mayor unless repudiated or set aside. This should be the
case considering that such city official is called upon to
see to it that revenues due the City are collected. When
administrative steps are futile and unavailing, given the
stubbornness and obduracy of a taxpayer, convinced in
good faith that no tax was due, judicial remedy may be
resorted to by him. It would be a reflection on the state of

the law if such fidelity to duty would be met by

condemnation rather than commendation.
So, much for the analytical approach. The conclusion thus
reached has a reinforcement that comes to it from the
functional and pragmatic test. If a city treasurer has to
await the nod from the city mayor before a municipal
ordinance is enforced, then opportunity exists for
favoritism and undue discrimination to come into play.
Whatever valid reason may exist as to why one taxpayer
is to be accorded a treatment denied another, the
suspicion is unavoidable that such a manifestation of
official favor could have been induced by unnamed but
not unknown consideration. It would not be going too far
to assert that even defendant-appellant would find no
satisfaction in such a sad state of affairs. The more
desirable legal doctrine therefore, on the assumption that
a choice exists, is one that would do away with such
temptation on the part of both taxpayer and public official
alike.
WHEREFORE, the lower court decision of December 19,
1964, is hereby affirmed. Costs against defendantappellant.

SECOND DIVISION
G.R. No. 179115 : September 26, 2012
ASIA
INTERNATIONAL
AUCTIONEERS,
INC.,
Petitioner,
v.
COMMISSIONER
OF
INTERNAL
REVENUE, Respondent.
RESOLUTION
PERLAS-BERNABE, J.:
Before the Court is a Petition for Review seeking to
reverse and set aside the Decision dated August 3, 2007
of the Court of Tax Appeals (CTA) En Banc, 1rll and the
Resolutions dated November 20, 20062rll and
February 22, 20073rll of the CTA First Division
dismissing Asia International Auctioneers, Inc.s (AIA)
appeal due to its alleged failure to timely protest the
Commissioner of Internal Revenues (CIR) tax assessment.
The Factual Antecedents
AIA is a duly organized corporation operating within the
Subic Special Economic Zone. It is engaged in the
importation of used motor vehicles and heavy equipment
which it sells to the public through auction.4rll
On August 25, 2004, AIA received from the CIR a Formal
Letter of Demand, dated July 9, 2004, containing an
assessment for deficiency value added tax (VAT) and
excise tax in the amounts of P 102,535,520.00 and P
4,334,715.00, respectively, or a total amount of P
106,870,235.00, inclusive of penalties and interest, for
auction sales conducted on February 5, 6, 7, and 8,
2004.5rll
AIA claimed that it filed a protest letter dated August 29,
2004 through registered mail on August 30, 2004.6rll
It also submitted additional supporting documents on
September 24, 2004 and November 22, 2004.7rll

The CIR failed to act on the protest, prompting AIA to file a

petition for review before the CTA on June 20,
2005,8rll to which the CIR filed its Answer on July 26,
2005.9rll
On March 8, 2006, the CIR filed a motion to
dismiss10rll on the ground of lack of jurisdiction citing
the alleged failure of AIA to timely file its protest which
thereby rendered the assessment final and executory. The
CIR denied receipt of the protest letter dated August 29,
2004 claiming that it only received the protest letter
dated September 24, 2004 on September 27, 2004, three
days after the lapse of the 30-day period prescribed in
Section 22811rll of the Tax Code.12rll
In opposition to the CIRs motion to dismiss, AIA submitted
the following evidence to prove the filing and the receipt
of the protest letter dated August 29, 2004: (1) the
protest letter dated August 29, 2004 with attached
Registry Receipt No. 3824;13rll (2) a Certification
dated November 15, 2005 issued by Wilfredo R. De
Guzman, Postman III, of the Philippine Postal Corporation
of Olongapo City, stating that Registered Letter No. 3824
dated August 30, 2004 , addressed to the CIR, was
dispatched under Bill No. 45 Page 1 Line 11 on September
1, 2004 from Olongapo City to Quezon City;14rll (3) a
Certification dated July 5, 2006 issued by Acting
Postmaster, Josefina M. Hora, of the Philippine Postal
Corporation-NCR, stating that Registered Letter No. 3824
was delivered to the BIR Records Section and was duly
received by the authorized personnel on September 8,
2004;15rll and (4) a certified photocopy of the Receipt
of Important Communication Delivered issued by the BIR
Chief of Records Division, Felisa U. Arrojado, showing that
Registered Letter No. 3824 was received by the
BIR.16rll AIA also presented Josefina M. Hora and
Felisa U. Arrojado as witnesses to testify on the due
execution and the contents of the foregoing documents.
Ruling of the Court of Tax Appeals

After hearing both parties, the CTA First Division rendered

the first assailed Resolution dated November 20, 2006
granting the CIRs motion to dismiss. Citing Republic v.
Court of Appeals,17rll it ruled that "while a mailed
letter is deemed received by the addressee in the course
of the mail, still, this is merely a disputable presumption,
subject to controversion, and a direct denial of the receipt
thereof shifts the burden upon the party favored by the
presumption to prove that the mailed letter indeed was
received by the addressee."18rll
The CTA First Division faulted AIA for failing to present the
registry return card of the subject protest letter. Moreover,
it noted that the text of the protest letter refers to a
Formal Demand Letter dated June 9, 2004 and not the
subject Formal Demand Letter dated July 9, 2004.
Furthermore, it rejected AIAs argument that the
September 24, 2004 letter merely served as a cover letter
to the submission of its supporting documents pointing
out that there was no mention therein of a prior separate
protest letter.19rll
AIAs motion for reconsideration was subsequently denied
by the CTA First Division in its second assailed Resolution
dated February 22, 2007. On appeal, the CTA En Banc in
its Decision dated August 3, 2007 affirmed the ruling of
the CTA First Division holding that AIAs evidence was not
sufficient to prove receipt by the CIR of the protest letter
dated August 24, 2004.
Hence, the instant petition.
Issue Before the Court
Both parties discussed the legal bases for AIAs tax
liability, unmindful of the fact that this case stemmed
from the CTAs dismissal of AIAs petition for review for
failure to file a timely protest, without passing upon the
substantive merits of the case.
Relevantly, on January 30, 2008, AIA filed a Manifestation
and Motion with Leave of the Honorable Court to Defer or

Suspend Further Proceedings20rll on the ground that

it availed of the Tax Amnesty Program under Republic Act
948021rll (RA 9480), otherwise known as the Tax
Amnesty Act of 2007. On February 13, 2008, it submitted
to the Court a Certification of Qualification22rll issued
by the BIR on February 5, 2008 stating that AIA "has
availed and is qualified for Tax Amnesty for the Taxable
Year 2005 and Prior Years" pursuant to RA 9480.
With AIAs availment of the Tax Amnesty Program under
RA 9480, the Court is tasked to first determine its effects
on the instant petition.
Ruling of the Court
A tax amnesty is a general pardon or the intentional
overlooking by the State of its authority to impose
penalties on persons otherwise guilty of violating a tax
law. It partakes of an absolute waiver by the government
of its right to collect what is due it and to give tax evaders
who wish to relent a chance to start with a clean
slate.23rll
A tax amnesty, much like a tax exemption, is never
favored or presumed in law. The grant of a tax amnesty,
similar to a tax exemption, must be construed strictly
against the taxpayer and liberally in favor of the taxing
authority.24rll
In 2007, RA 9480 took effect granting a tax amnesty to
qualified taxpayers for all national internal revenue taxes
for the taxable year 2005 and prior years, with or without
assessments duly issued therefor, that have remained
unpaid as of December 31, 2005.25rll
The Tax Amnesty Program under RA 9480 may be availed
of by any person except those who are disqualified under
Section 8 thereof, to wit:chanroblesvirtuallawlibrary
Section 8. Exceptions. The tax amnesty provided in
Section 5 hereof shall not extend to the following persons
or cases existing as of the effectivity of this Act:

(a) Withholding agents with respect to their withholding

tax liabilities;
(b) Those with pending cases falling under the jurisdiction
of the Presidential Commission on Good Government;
(c) Those with pending cases involving unexplained or
unlawfully acquired wealth or under the Anti-Graft and
Corrupt Practices Act;
(d) Those with pending cases filed in court involving
violation of the Anti-Money Laundering Law;
(e) Those with pending criminal cases for tax evasion and
other criminal offenses under Chapter II of Title X of the
National Internal Revenue Code of 1997, as amended, and
the felonies of frauds, illegal exactions and transactions,
and malversation of public funds and property under
Chapters III and IV of Title VII of the Revised Penal Code;
and
(f) Tax cases subject of final and executory judgment by
the courts.(Emphasis supplied)
The CIR contends that AIA is disqualified under Section
8(a) of RA 9480 from availing itself of the Tax Amnesty
Program because it is "deemed" a withholding agent for
the deficiency taxes. This argument is untenable.
The CIR did not assess AIA as a withholding agent that
failed to withhold or remit the deficiency VAT and excise
tax to the BIR under relevant provisions of the Tax Code.
Hence, the argument that AIA is "deemed" a withholding
agent for these deficiency taxes is fallacious.
Indirect taxes, like VAT and excise tax, are different from
withholding taxes. To distinguish, in indirect taxes, the
incidence of taxation falls on one person but the burden
thereof can be shifted or passed on to another person,
such as when the tax is imposed upon goods before
reaching the consumer who ultimately pays for it.26rll

On the other hand, in case of withholding taxes, the

incidence and burden of taxation fall on the same entity,
the statutory taxpayer. The burden of taxation is not
shifted to the withholding agent who merely collects, by
withholding, the tax due from income payments to
entities arising from certain transactions27and remits the
same to the government. Due to this difference, the
deficiency VAT and excise tax cannot be "deemed" as
withholding taxes merely because they constitute indirect
taxes. Moreover, records support the conclusion that AIA
was assessed not as a withholding agent but, as the one
directly liable for the said deficiency taxes.28rll
The CIR also argues that AIA, being an accredited
investor/taxpayer situated at the Subic Special Economic
Zone, should have availed of the tax amnesty granted
under RA 939929rll and not under RA 9480. This is
also untenable.
RA 9399 was passed prior to the passage of RA 9480. RA
9399 does not preclude taxpayers within its coverage
from availing of other tax amnesty programs available or
enacted in futuro like RA 9480. More so, RA 9480 does not
exclude from its coverage taxpayers operating within
special economic zones. As long as it is within the bounds
of the law, a taxpayer has the liberty to choose which tax
amnesty program it wants to avail.
Lastly, the Court takes judicial notice of the "Certification
of Qualification"30rll issued by Eduardo A. Baluyut,
BIR Revenue District Officer, stating that AlA "has availed
and is qualified for Tax Amnesty for the Taxable Year 2005
and Prior Years" pursuant to RA 9480. In the absence of
sufficient evidence proving that the certification was
issued in excess of authority, the presumption that it was
issued in the regular performance of the revenue district
officer's official duty stands.31rll
WHEREFORE, the petition is DENIED for being MOOT and
ACADEMIC in view of Asia International Auctioneers, Inc.'s
(AlA) availment of the Tax Amnesty Program under RA

9480. Accordingly, the outstanding deficiency taxes of AlA

are deemed fully settled.rllbrr
SO ORDERED.

G.R. No. 168584

October 15, 2007

REPUBLIC OF THE PHILIPPINES, represented by THE

HONORABLE SECRETARY OF FINANCE, THE HONORABLE
COMMISSIONER OF BUREAU OF INTERNAL REVENUE, THE
HONORABLE COMMISSIONER OF CUSTOMS, and THE
COLLECTOR OF CUSTOMS OF THE PORT OF SUBIC,
petitioners,
vs.
HON. RAMON S. CAGUIOA, Presiding Judge, Branch 74,
RTC, Third Judicial Region, Olongapo City, INDIGO
DISTRIBUTION CORP., herein represented by ARIEL G.
CONSOLACION, W STAR TRADING AND WAREHOUSING
CORP., herein represented by HIERYN R. ECLARINAL,
FREEDOM BRANDS PHILS., CORP., herein represented by
ANA LISA RAMAT, BRANDED WAREHOUSE, INC., herein
represented by MARY AILEEN S. GOZUN, ALTASIA INC.,
herein represented by ALAN HARROW, TAINAN TRADE
(TAIWAN), INC., herein represented by ELENA RANULLO,
SUBIC PARK N SHOP, herein represented by NORMA
MANGALINO DIZON, TRADING GATEWAYS INTERNATIONAL
PHILS., herein represented by MA. CHARINA FE C.
RODOLFO, DUTY FREE SUPERSTORE (DFS), herein
represented by RAJESH R. SADHWANI, CHJIMES TRADING
INC., herein represented by ANGELO MARK M. PICARDAL,
PREMIER FREEPORT, INC., herein represented by ROMMEL
P. GABALDON, FUTURE TRADE SUBIC FREEPORT, INC.,
herein represented by WILLIE S. VERIDIANO, GRAND
COMTRADE INTERNATIONAL CORP., herein represented by
JULIUS MOLINDA, and FIRST PLATINUM INTERNATIONAL,
INC., herein represented by ISIDRO M. MUOZ,
respondents.
DECISION
CARPIO MORALES, J.:
Petitioners seek via petition for certiorari and prohibition
to annul (1) the May 4, 2005 Order1 issued by public
respondent Judge Ramon S. Caguioa of the Regional Trial
Court (RTC), Branch 74, Olongapo City, granting private
respondents application for the issuance of a writ of

preliminary injunction and (2) the Writ of Preliminary

Injunction2 that was issued pursuant to such Order, which
stayed the implementation of Republic Act (R.A.) No.
9334, AN ACT INCREASING THE EXCISE TAX RATES
IMPOSED ON ALCOHOL AND TOBACCO PRODUCTS,
AMENDING FOR THE PURPOSE SECTIONS 131, 141, 142,
143, 144, 145 AND 288 OF THE NATIONAL INTERNAL
REVENUE CODE OF 1997, AS AMENDED.
Petitioners likewise seek to enjoin, restrain and inhibit
public respondent from enforcing the impugned issuances
and from further proceeding with the trial of Civil Case No.
102-0-05.
The relevant facts are as follows:
In 1992, Congress enacted Republic Act (R.A) No. 72273
or the Bases Conversion and Development Act of 1992
which, among other things, created the Subic Special
Economic and Freeport Zone (SBF4) and the Subic Bay
Metropolitan Authority (SBMA).
R.A. No. 7227 envisioned the SBF to be developed into a
"self-sustaining, industrial, commercial, financial and
investment center to generate employment opportunities
in and around the zone and to attract and promote
productive foreign investments."5 In line with this vision,
Section 12 of the law provided:
(b) The Subic Special Economic Zone shall be operated
and managed as a separate customs territory ensuring
free flow or movement of goods and capital within, into
and exported out of the Subic Special Economic Zone, as
well as provide incentives such as tax and duty-free
importations of raw materials, capital and equipment.
However, exportation or removal of goods from the
territory of the Subic Special Economic Zone to the other
parts of the Philippine territory shall be subject to customs
duties and taxes under the Customs and Tariff Code and
other relevant tax laws of the Philippines;

(c) The provisions of existing laws, rules and regulations

to the contrary notwithstanding, no taxes, local and
national, shall be imposed within the Subic Special
Economic Zone. In lieu of paying taxes, three percent
(3%) of the gross income earned by all businesses and
enterprises within the Subic Special Economic Zone shall
be remitted to the National Government, one percent
(1%) each to the local government units affected by the
declaration of the zone in proportion to their population
area, and other factors. In addition, there is hereby
established a development fund of one percent (1%) of
the gross income earned by all businesses and
enterprises within the Subic Special Economic Zone to be
utilized for the development of municipalities outside the
City of Olongapo and the Municipality of Subic, and other
municipalities contiguous to be base areas.

the Subic Special Economic Zone. They shall have

freedom of ingress and egress to and from the Subic
Special Economic Zone without any need of special
authorization from the Bureau of Immigration and
Deportation. The Subic Bay Metropolitan Authority
referred to in Section 13 of this Act may also issue
working visas renewal every two (2) years to foreign
executives and other aliens possessing highly-technical
skills which no Filipino within the Subic Special Economic
Zone possesses, as certified by the Department of Labor
and Employment. The names of aliens granted permanent
residence status and working visas by the Subic Bay
Metropolitan Authority shall be reported to the Bureau of
Immigration and Deportation within thirty (30) days after
issuance thereof;
x x x x. (Emphasis supplied)

In case of conflict between national and local laws with

respect to tax exemption privileges in the Subic Special
Economic Zone, the same shall be resolved in favor of the
latter;
(d) No exchange control policy shall be applied and free
markets for foreign exchange, gold, securities and future
shall be allowed and maintained in the Subic Special
Economic Zone;
(e) The Central Bank, through the Monetary Board, shall
supervise and regulate the operations of banks and other
financial institutions within the Subic Special Economic
Zone;
(f) Banking and finance shall be liberalized with the
establishment of foreign currency depository units of local
commercial banks and offshore banking units of foreign
banks with minimum Central Bank regulation;
(g) Any investor within the Subic Special Economic Zone
whose continuing investment shall not be less than Two
hundred fifty thousand dollars ($250,000), his/her spouse
and dependent children under twenty-one (21) years of
age, shall be granted permanent resident status within

Pursuant to the law, private respondents Indigo

Distribution Corporation, W Star Trading and Warehousing
Corporation, Freedom Brands Philippines Corporation,
Branded Warehouse, Inc., Altasia, Inc., Tainan Trade
(Taiwan) Inc., Subic Park N Shop, Incorporated, Trading
Gateways International Philipines, Inc., Duty Free
Superstore (DFS) Inc., Chijmes Trading, Inc., Premier
Freeport, Inc., Future Trade Subic Freeport, Inc., Grand
Comtrade Intl., Corp., and First Platinum International,
Inc., which are all domestic corporations doing business at
the SBF, applied for and were granted Certificates of
Registration and Tax Exemption6 by the SBMA.
These certificates allowed them to engage in the business
either of trading, retailing or wholesaling, import and
export, warehousing, distribution and/or transshipment of
general merchandise, including alcohol and tobacco
products, and uniformly granted them tax exemptions for
such importations as contained in the following provision
of their respective Certificates:
ARTICLE IV. The Company shall be entitled to tax and
duty-free importation of raw materials, capital equipment,
and household and personal items for use solely within

the Subic Bay Freeport Zone pursuant to Sections 12(b)

and 12(c) of the Act and Sections 43, 45, 46 and 49 of the
Implementing Rules. All importations by the Company are
exempt from inspection by the Societe Generale de
Surveillance
if
such
importations
are
delivered
immediately to and for use solely within the Subic Bay
Freeport Zone. (Emphasis supplied)
Congress subsequently passed R.A. No. 9334, however,
effective on January 1, 2005,7 Section 6 of which
provides:
Sec. 6. Section 131 of the National Internal Revenue Code
of 1977, as amended, is hereby amended to read as
follows:

and wines brought directly into the duly chartered or

legislated freeports of the Subic Economic Freeport Zone,
created under Republic Act No. 7227; x x x and such other
freeports as may hereafter be established or created by
law: Provided, further, That importations of cigars and
cigarettes, distilled spirits, fermented liquors and wines
made directly by a government-owned and operated dutyfree shop, like the Duty Free Philippines (DFP), shall be
exempted from all applicable duties only: x x x Provided,
finally, That the removal and transfer of tax and duty-free
goods, products, machinery, equipment and other similar
articles other than cigars and cigarettes, distilled spirits,
fermented liquors and wines, from one Freeport to
another Freeport, shall not be deemed an introduction
into the Philippine customs territory. x x x. (Emphasis and
underscoring supplied)

Sec. 131. Payment of Excise Taxes on Imported Articles.

(A) Persons Liable. Excise taxes on imported articles
shall be paid by the owner or importer to the Customs
Officers, conformably with the regulations of the
Department of Finance and before the release of such
articles from the customshouse or by the person who is
found in possession of articles which are exempt from
excise taxes other than those legally entitled to
exemption.
In the case of tax-free articles brought or imported into
the Philippines by persons, entities or agencies exempt
from tax which are subsequently sold, transferred or
exchanged in the Philippines to non-exempt persons or
entities, the purchasers or recipients shall be considered
the importers thereof, and shall be liable for the duty and
internal revenue tax due on such importation.
The provision of any special or general law to the contrary
notwithstanding, the importation of cigars and cigarettes,
distilled spirits, fermented liquors and wines into the
Philippines, even if destined for tax and duty free shops,
shall be subject to all applicable taxes, duties, charges,
including excise taxes due thereon. This shall apply to
cigars and cigarettes, distilled spirits, fermented liquors

On the basis of Section 6 of R.A. No. 9334, SBMA issued

on January 10, 2005 a Memorandum8 declaring that
effective January 1, 2005, all importations of cigars,
cigarettes, distilled spirits, fermented liquors and wines
into the SBF, including those intended to be transshipped
to other free ports in the Philippines, shall be treated as
ordinary importations subject to all applicable taxes,
duties and charges, including excise taxes.
Meanwhile, on February 3, 2005, former Bureau of
Internal Revenue (BIR) Commissioner Guillermo L.
Parayno, Jr. requested then Customs Commissioner
George M. Jereos to immediately collect the excise tax
due on imported alcohol and tobacco products brought to
the Duty Free Philippines (DFP) and Freeport zones.9
Accordingly, the Collector of Customs of the port of Subic
directed the SBMA Administrator to require payment of all
appropriate duties and taxes on all importations of cigars
and cigarettes, distilled spirits, fermented liquors and
wines; and for all transactions involving the said items to
be covered from then on by a consumption entry and no
longer by a warehousing entry.10

On February 7, 2005, SBMA issued a Memorandum11

directing the departments concerned to require
locators/importers in the SBF to pay the corresponding
duties and taxes on their importations of cigars,
cigarettes, liquors and wines before said items are cleared
and released from the freeport. However, certain SBF
locators which were "exclusively engaged in the
transshipment of
cigarette
products for foreign
destinations" were allowed by the SBMA to process their
import documents subject to their submission of an
Undertaking with the Bureau of Customs.12
On February 15, 2005, private respondents wrote the
offices of respondent Collector of Customs and the SBMA
Administrator requesting for a reconsideration of the
directives on the imposition of duties and taxes,
particularly excise taxes, on their shipments of cigars,
cigarettes, wines and liquors.13 Despite these letters,
however, they were not allowed to file any warehousing
entry for their shipments.
Thus, private respondent enterprises, through their
representatives, brought before the RTC of Olongapo City
a special civil action for declaratory relief14 to have
certain provisions of R.A. No. 9334 declared as
unconstitutional, which case was docketed as Civil Case
No. 102-0-05.
In the main, private respondents submitted that (1) R.A.
No. 9334 should not be interpreted as altering, modifying
or amending the provisions of R.A. No. 7227 because
repeals by implication are not favored; (2) a general law
like R.A. No. 9334 cannot amend R.A. No. 7727, which is a
special law; and (3) the assailed law violates the one billone subject rule embodied in Section 26(1), Article VI15 of
the Constitution as well as the constitutional proscription
against the impairment of the obligation of contracts.16
Alleging that great and irreparable loss and injury would
befall them as a consequence of the imposition of taxes
on alcohol and tobacco products brought into the SBF,
private respondents prayed for the issuance of a writ of

preliminary injunction and/or Temporary Restraining Order

(TRO) and preliminary mandatory injunction to enjoin the
directives of herein petitioners.
Petitioners duly opposed the private respondents prayer
for the issuance of a writ of preliminary injunction and/or
TRO, arguing that (1) tax exemptions are not presumed
and even when granted, are strictly construed against the
grantee; (2) an increase in business expense is not the
injury contemplated by law, it being a case of damnum
absque injuria; and (3) the drawback mechanism
established in the law clearly negates the possibility of
the feared injury.17
Petitioners moreover pointed out that courts are enjoined
from issuing a writ of injunction and/or TRO on the
grounds of an alleged nullity of a law, ordinance or
administrative regulation or circular or in a manner that
would effectively dispose of the main case. Taxes, they
stressed, are the lifeblood of the government and their
prompt and certain availability is an imperious need. They
maintained that greater injury would be inflicted on the
public should the writ be granted.
On May 4, 2005, the court a quo granted private
respondents application for the issuance of a writ of
preliminary injunction, after it found that the essential
requisites for the issuance of a preliminary injunction were
present.
As investors duly licensed to operate inside the SBF, the
trial court declared that private respondents were entitled
to enjoy the benefits of tax incentives under R.A. No.
7227, particularly the exemption from local and national
taxes under Section 12(c); the aforecited provision of R.A.
No. 7227, coupled with private respondents Certificates
of Registration and Tax Exemption from the SBMA, vested
in them a clear and unmistakable right or right in esse
that would be violated should R.A. No. 9334 be
implemented; and the invasion of such right is substantial
and material as private respondents would be compelled

to pay more than what they should by way of taxes to the

national government.

implementation of a statute that

preliminarily to be unconstitutional.

The trial court thereafter ruled that the prima facie

presumption of validity of R.A. No. 9334 had been
overcome by private respondents, it holding that as a
partial amendment of the National Internal Revenue Code
(NIRC) of 1997,18 as amended, R.A. No. 9334 is a general
law that could not prevail over a special statute like R.A.
No. 7227 notwithstanding the fact that the assailed law is
of later effectivity.

Additionally, the trial court pointed out that private

respondents taxes have not yet been assessed, as they
have not filed consumption entries on all their imported
tobacco and alcohol products, hence, their duty to pay the
corresponding excise taxes and the concomitant right of
the government to collect the same have not yet
materialized.

The trial court went on to hold that the repealing provision

of Section 10 of R.A. No. 9334 does not expressly mention
the repeal of R. A. No. 7227, hence, its repeal can only be
an implied repeal, which is not favored; and since R.A. No.
9334 imposes new tax burdens, whatever doubts arising
therefrom should be resolved against the taxing authority
and in favor of the taxpayer.
The trial court furthermore held that R.A. No. 9334
violates the terms and conditions of private respondents
subsisting contracts with SBMA, which are embodied in
their Certificates of Registration and Exemptions in
contravention of the constitutional guarantee against the
impairment of contractual obligations; that greater
damage would be inflicted on private respondents if the
writ of injunction is not issued as compared to the injury
that the government and the general public would suffer
from its issuance; and that the damage that private
respondents are bound to suffer once the assailed statute
is implemented including the loss of confidence of their
foreign principals, loss of business opportunity and
unrealized income, and the danger of closing down their
businesses due to uncertainty of continued viability
cannot be measured accurately by any standard.
With regard to the rule that injunction is improper to
restrain the collection of taxes under Section 21819 of the
NIRC, the trial court held that what is sought to be
enjoined is not per se the collection of taxes, but the

has

been

found

On May 11, 2005, the trial court issued a Writ of

Preliminary Injunction directing petitioners and the SBMA
Administrator as well as all persons assisting or acting for
and in their behalf "1) to allow the operations of [private
respondents] in accordance with R.A. No. 7227; 2) to allow
[them] to file warehousing entries instead of consumption
entries as regards their importation of tobacco and
alcohol products; and 3) to cease and desist from
implementing the pertinent provisions of R.A. No. 9334 by
not compelling [private respondents] to immediately pay
duties and taxes on said alcohol and tobacco products as
a condition to their removal from the port area for transfer
to the warehouses of [private respondents]."20
The injunction bond was approved at One Million pesos
(P1,000,000).21
Without moving for reconsideration, petitioners have
come directly to this Court to question the May 4, 2005
Order and the Writ of Preliminary Injunction which, they
submit, were issued by public respondent with grave
abuse of discretion amounting to lack or excess of
jurisdiction.
In particular, petitioners contend that public respondent
peremptorily and unjustly issued the injunctive writ
despite the absence of the legal requisites for its
issuance, resulting in heavy government revenue
losses.22 They emphatically argue that since the tax
exemption previously enjoyed by private respondents has
clearly been withdrawn by R.A. No. 9334, private

respondents do not have any right in esse nor can they

invoke legal injury to stymie the enforcement of R.A. No.
9334.

SEC. 3. Grounds for issuance of preliminary injunction. A

preliminary injunction may be granted when it is
established.

Furthermore, petitioners maintain that in issuing the

injunctive writ, public respondent showed manifest bias
and prejudice and prejudged the merits of the case in
utter disregard of the caveat issued by this Court in
Searth Commodities Corporation, et al. v. Court of
Appeals23 and Vera v. Arca.24

(a) That the applicant is entitled to the relief demanded,

and the whole or part of such relief consists in restraining
the commission or continuance of the act or acts
complained of, or in requiring the performance of an act
or acts, either for a limited period or perpetually;

Regarding the P1 million injunction bond fixed by public

respondent, petitioners argue that the same is grossly
disproportionate to the damages that have been and
continue to be sustained by the Republic.
In their Reply25 to private respondents Comment,
petitioners additionally plead public respondents bias and
partiality in allowing the motions for intervention of a
number of corporations26 without notice to them and in
disregard of their present pending petition for certiorari
and prohibition before this Court. The injunction bond filed
by private respondent Indigo Distribution Corporation,
they stress, is not even sufficient to cover all the original
private respondents, much less, intervenor-corporations.
The petition is partly meritorious.
At the outset, it bears emphasis that only questions
relating to the propriety of the issuance of the May 4,
2005 Order and the Writ of Preliminary Injunction are
properly within the scope of the present petition and shall
be so addressed in order to determine if public
respondent committed grave abuse of discretion. The
arguments raised by private respondents which pertain to
the constitutionality of R.A. No. 9334 subject matter of the
case pending litigation before the trial court have no
bearing in resolving the present petition.
Section 3 of Rule 58 of the Revised Rules of Court
provides:

(b) That the commission, continuance or non-performance

of the act or acts complained of during the litigation
would probably work injustice to the applicant; or
(c) That a party, court, agency or a person is doing,
threatening, or is attempting to do, or is procuring or
suffering to be done, some act or acts probably in
violation of the rights of the applicant respecting the
subject of the action or proceeding, and tending to render
the judgment ineffectual.
For a writ of preliminary injunction to issue, the plaintiff
must be able to establish that (1) there is a clear and
unmistakable right to be protected, (2) the invasion of the
right sought to be protected is material and substantial,
and (3) there is an urgent and paramount necessity for
the writ to prevent serious damage.27
Conversely, failure to establish either the existence of a
clear and positive right which should be judicially
protected through the writ of injunction, or of the acts or
attempts to commit any act which endangers or tends to
endanger the existence of said right, or of the urgent
need to prevent serious damage, is a sufficient ground for
denying the preliminary injunction.28
It is beyond cavil that R.A. No. 7227 granted private
respondents exemption from local and national taxes,
including excise taxes, on their importations of general
merchandise, for which reason they enjoyed tax-exempt
status until the effectivity of R.A. No. 9334.

By subsequently enacting R.A. No. 9334, however,

Congress expressed its intention to withdraw private
respondents
tax
exemption
privilege
on
their
importations of cigars, cigarettes, distilled spirits,
fermented liquors and wines. Juxtaposed to show this
intention are the respective provisions of Section 131 of
the NIRC before and after its amendment by R.A. No.
9334:
x x x x.
Sec. 131 of NIRC before R.A. No. 9334
Sec. 131, as amended by R.A. No. 9334
Sec. 131. Payment of Excise Taxes on Imported Articles.
(A) Persons Liable. Excise taxes on imported articles
shall be paid by the owner or importer to the Customs
Officers, conformably with the regulations of the
Department of Finance and before the release of such
articles from the customs house or by the person who is
found in possession of articles which are exempt from
excise taxes other than those legally entitled to
exemption.
In the case of tax-free articles brought or imported into
the Philippines by persons, entities or agencies exempt
from tax which are subsequently sold, transferred or
exchanged in the Philippines to non-exempt persons or
entities, the purchasers or recipients shall be considered
the importers thereof, and shall be liable for the duty and
internal revenue tax due on such importation.
The provision of any special or general law to the contrary
notwithstanding, the importation of cigars and cigarettes,
distilled spirits, fermented liquors and wines into the
Philippines, even if destined for tax and duty free shops,
shall be subject to all applicable taxes, duties, charges,
including excise taxes due thereon. Provided, however,
That this shall not apply to cigars and cigarettes,
fermented spirits and wines brought directly into the duly

chartered or legislated freeports of the Subic Economic

Freeport Zone, created under Republic Act No. 7227; the
Cagayan Special Economic Zone and Freeport, created
under Republic Act No. 7922; and the Zamboanga City
Special Economic Zone, created under Republic Act No.
7903, and are not transshipped to any other port in the
Philippines: Provided, further, That importations of cigars
and cigarettes, distilled spirits, fermented liquors and
wines made directly by a government-owned and
operated duty-free shop, like the Duty Free Philippines
(DFP), shall be exempted from all applicable duties,
charges, including excise tax due thereon; Provided still
further, That such articles directly imported by a
government-owned and operated duty-free shop, like the
Duty-Free Philippines, shall be labeled "tax and duty-free"
and "not for resale": Provided, still further, That if such
articles brought into the duly chartered or legislated
freeports under Republic Acts Nos. 7227, 7922 and 7903
are subsequently introduced into the Philippine customs
territory, then such articles shall, upon such introduction,
be deemed imported into the Philippines and shall be
subject to all imposts and excise taxes provided herein
and other statutes: Provided, finally, That the removal and
transfer of tax and duty-free goods, products, machinery,
equipment and other similar articles, from one freeport to
another freeport, shall not be deemed an introduction into
the Philippine customs territory.
x x x x.
Sec. 131. Payment of Excise Taxes on Imported Articles.
(A) Persons Liable. Excise taxes on imported articles
shall be paid by the owner or importer to the Customs
Officers, conformably with the regulations of the
Department of Finance and before the release of such
articles from the customs house or by the person who is
found in possession of articles which are exempt from
excise taxes other than those legally entitled to
exemption.

In the case of tax-free articles brought or imported into

the Philippines by persons, entities or agencies exempt
from tax which are subsequently sold, transferred or
exchanged in the Philippines to non-exempt persons or
entities, the purchasers or recipients shall be considered
the importers thereof, and shall be liable for the duty and
internal revenue tax due on such importation.
The provision of any special or general law to the contrary
notwithstanding, the importation of cigars and cigarettes,
distilled spirits, fermented liquors and wines into the
Philippines, even if destined for tax and duty free shops,
shall be subject to all applicable taxes, duties, charges,
including excise taxes due thereon. This shall apply to
cigars and cigarettes, distilled spirits, fermented liquors
and wines brought directly into the duly chartered or
legislated freeports of the Subic Economic Freeport Zone,
created under Republic Act No. 7227; the Cagayan Special
Economic Zone and Freeport, created under Republic Act
No. 7922; and the Zamboanga City Special Economic
Zone, created under Republic Act No. 7903, and such
other freeports as may hereafter be established or
created by law: Provided, further, That importations of
cigars and cigarettes, distilled spirits, fermented liquors
and wines made directly by a government-owned and
operated duty-free shop, like the Duty Free Philippines
(DFP), shall be exempted from all applicable duties only:
Provided still further, That such articles directly imported
by a government-owned and operated duty-free shop, like
the Duty-Free Philippines, shall be labeled "tax and dutyfree" and "not for resale": Provided, finally, That the
removal and transfer of tax and duty-free goods,
products, machinery, equipment and other similar articles
other than cigars and cigarettes, distilled spirits,
fermented liquors and wines, from one Freeport to
another Freeport, shall not be deemed an introduction
into the Philippine customs territory.
x x x x.
(Emphasis and underscoring supplied)

To note, the old Section 131 of the NIRC expressly

provided that all taxes, duties, charges, including excise
taxes shall not apply to importations of cigars, cigarettes,
fermented spirits and wines brought directly into the duly
chartered or legislated freeports of the SBF.
On the other hand, Section 131, as amended by R.A. No.
9334, now provides that such taxes, duties and charges,
including excise taxes, shall apply to importation of cigars
and cigarettes, distilled spirits, fermented liquors and
wines into the SBF.
Without necessarily passing upon the validity of the
withdrawal of the tax exemption privileges of private
respondents, it behooves this Court to state certain basic
principles and observations that should throw light on the
propriety of the issuance of the writ of preliminary
injunction in this case.
First. Every presumption must be indulged in favor of the
constitutionality of a statute.29 The burden of proving the
unconstitutionality of a law rests on the party assailing
the law.30 In passing upon the validity of an act of a coequal and coordinate branch of the government, courts
must ever be mindful of the time-honored principle that a
statute is presumed to be valid.
Second. There is no vested right in a tax exemption, more
so when the latest expression of legislative intent renders
its continuance doubtful. Being a mere statutory
privilege,31 a tax exemption may be modified or
withdrawn at will by the granting authority.32
To state otherwise is to limit the taxing power of the State,
which is unlimited, plenary, comprehensive and supreme.
The power to impose taxes is one so unlimited in force
and so searching in extent, it is subject only to restrictions
which rest on the discretion of the authority exercising
it.33
Third. As a general rule, tax exemptions are construed
strictissimi juris against the taxpayer and liberally in favor

of the taxing authority.34 The burden of proof rests upon

the party claiming exemption to prove that it is in fact
covered by the exemption so claimed.35 In case of doubt,
non-exemption is favored.36
Fourth. A tax exemption cannot be grounded upon the
continued existence of a statute which precludes its
change or repeal.37 Flowing from the basic precept of
constitutional law that no law is irrepealable, Congress, in
the legitimate exercise of its lawmaking powers, can
enact a law withdrawing a tax exemption just as
efficaciously as it may grant the same under Section 28(4)
of Article VI38 of the Constitution. There is no gainsaying
therefore that Congress can amend Section 131 of the
NIRC in a manner it sees fit, as it did when it passed R.A.
No. 9334.
Fifth. The rights granted under the Certificates of
Registration and Tax Exemption of private respondents are
not absolute and unconditional as to constitute rights in
esse those clearly founded on or granted by law or is
enforceable as a matter of law.39
These certificates granting private respondents a "permit
to operate" their respective businesses are in the nature
of licenses, which the bulk of jurisprudence considers as
neither a property nor a property right.40 The licensee
takes his license subject to such conditions as the grantor
sees fit to impose, including its revocation at pleasure.41
A license can thus be revoked at any time since it does
not confer an absolute right.42
While the tax exemption contained in the Certificates of
Registration of private respondents may have been part of
the inducement for carrying on their businesses in the
SBF, this exemption, nevertheless, is far from being
contractual in nature in the sense that the nonimpairment clause of the Constitution can rightly be
invoked.43
Sixth. Whatever right may have been acquired on the
basis of the Certificates of Registration and Tax Exemption

must yield to the States valid exercise of police power.44

It is well to remember that taxes may be made the
implement of the police power.45
It is not difficult to recognize that public welfare and
necessity underlie the enactment of R.A. No. 9334. As
petitioners point out, the now assailed provision was
passed to curb the pernicious practice of some
unscrupulous business enterprises inside the SBF of using
their tax exemption privileges for smuggling purposes.
Smuggling in whatever form is bad enough; it is worse
when the same is allegedly perpetrated, condoned or
facilitated by enterprises hiding behind the cloak of their
tax exemption privileges.
Seventh. As a rule, courts should avoid issuing a writ of
preliminary injunction which would in effect dispose of the
main case without trial.46 This rule is intended to
preclude a prejudgment of the main case and a reversal
of the rule on the burden of proof since by issuing the
injunctive writ, the court would assume the proposition
that petitioners are inceptively duty bound to prove.47
Eighth. A court may issue a writ of preliminary injunction
only when the petitioner assailing a statute has made out
a case of unconstitutionality or invalidity strong enough,
in the mind of the judge, to overcome the presumption of
validity, in addition to a showing of a clear legal right to
the remedy sought.48
Thus, it is not enough that petitioners make out a case of
unconstitutionality or invalidity to overcome the prima
facie presumption of validity of a statute; they must also
be able to show a clear legal right that ought to be
protected by the court. The issuance of the writ is
therefore not proper when the complainants right is
doubtful or disputed.49
Ninth. The feared injurious effects of the imposition of
duties, charges and taxes on imported cigars, cigarettes,
distilled spirits, fermented liquors and wines on private
respondents businesses cannot possibly outweigh the

dire consequences that the non-collection of taxes, not to

mention the unabated smuggling inside the SBF, would
wreak on the government. Whatever damage would befall
private respondents must perforce take a back seat to the
pressing need to curb smuggling and raise revenues for
governmental functions.
All told, while the grant or denial of an injunction
generally rests on the sound discretion of the lower court,
this Court may and should intervene in a clear case of
abuse.50
One such case of grave abuse obtained in this case when
public respondent issued his Order of May 4, 2005 and the
Writ of Preliminary Injunction on May 11, 200551 despite
the absence of a clear and unquestioned legal right of
private respondents.
In holding that the presumption of constitutionality and
validity of R.A. No. 9334 was overcome by private
respondents for the reasons public respondent cited in his
May 4, 2005 Order, he disregarded the fact that as a
condition sine qua non to the issuance of a writ of
preliminary injunction, private respondents needed also to
show a clear legal right that ought to be protected. That
requirement is not satisfied in this case.
To stress, the possibility of irreparable damage without
proof of an actual existing right would not justify an
injunctive relief.52
Besides, private respondents are not altogether lacking an
appropriate relief under the law. As petitioners point out in
their Petition53 before this Court, private respondents
may avail themselves of a tax refund or tax credit should
R.A. No. 9334 be finally declared invalid.
Indeed, Sections 20454 and 22955 of the NIRC provide for
the recovery of erroneously or illegally collected taxes
which would be the nature of the excise taxes paid by
private respondents should Section 6 of R.A. No. 9334 be
declared unconstitutional or invalid.

It may not be amiss to add that private respondents can

also opt not to import, or to import less of, those items
which no longer enjoy tax exemption under R.A. No. 9334
to avoid the payment of taxes thereon.
The Court finds that public respondent had also ventured
into the delicate area which courts are cautioned from
taking when deciding applications for the issuance of the
writ of preliminary injunction. Having ruled preliminarily
against the prima facie validity of R.A. No. 9334, he
assumed in effect the proposition that private
respondents in their petition for declaratory relief were
duty bound to prove, thereby shifting to petitioners the
burden of proving that R.A. No. 9334 is not
unconstitutional or invalid.
In the same vein, the Court finds public respondent to
have overstepped his discretion when he arbitrarily fixed
the injunction bond of the SBF enterprises at only
P1million.
The alleged sparseness of the testimony of Indigo
Corporations representative56 on the injury to be
suffered by private respondents may be excused because
evidence for a preliminary injunction need not be
conclusive or complete. Nonetheless, considering the
number of private respondent enterprises and the volume
of their businesses, the injunction bond is undoubtedly
not sufficient to answer for the damages that the
government was bound to suffer as a consequence of the
suspension of the implementation of the assailed
provisions of R.A. No. 9334.
Rule 58, Section 4(b) provides that a bond is executed in
favor of the party enjoined to answer for all damages
which it may sustain by reason of the injunction. The
purpose of the injunction bond is to protect the defendant
against loss or damage by reason of the injunction in case
the court finally decides that the plaintiff was not entitled
to it, and the bond is usually conditioned accordingly.57

Recalling this Courts pronouncements in Olalia v. Hizon58

that:
x x x [T]here is no power the exercise of which is more
delicate, which requires greater caution, deliberation and
sound discretion, or more dangerous in a doubtful case,
than the issuance of an injunction. It is the strong arm of
equity that should never be extended unless to cases of
great injury, where courts of law cannot afford an
adequate or commensurate remedy in damages.
Every court should remember that an injunction is a
limitation upon the freedom of action of the defendant
and should not be granted lightly or precipitately. It should
be granted only when the court is fully satisfied that the
law permits it and the emergency demands it,
it cannot be overemphasized that any injunction that
restrains the collection of taxes, which is the inevitable
result of the suspension of the implementation of the
assailed Section 6 of R.A. No. 9334, is a limitation upon
the right of the government to its lifeline and wherewithal.
The power to tax emanates from necessity; without taxes,
government cannot fulfill its mandate of promoting the
general welfare and well-being of the people.59 That the
enforcement of tax laws and the collection of taxes are of
paramount importance for the sustenance of government
has been repeatedly observed. Taxes being the lifeblood
of the government that should be collected without
unnecessary hindrance,60 every precaution must be
taken not to unduly suppress it.
Whether this Court must issue the writ of prohibition,
suffice it to stress that being possessed of the power to
act on the petition for declaratory relief, public
respondent can proceed to determine the merits of the
main case. To halt the proceedings at this point may be
acting too prematurely and would not be in keeping with
the policy that courts must decide controversies on the
merits.

Moreover, lacking the requisite proof of public

respondents alleged partiality, this Court has no ground
to prohibit him from proceeding with the case for
declaratory relief. For these reasons, prohibition does not
lie.
WHEREFORE, the Petition is PARTLY GRANTED. The writ of
certiorari to nullify and set aside the Order of May 4, 2005
as well as the Writ of Preliminary Injunction issued by
respondent Judge Caguioa on May 11, 2005 is GRANTED.
The assailed Order and Writ of Preliminary Injunction are
hereby declared NULL AND VOID and accordingly SET
ASIDE. The writ of prohibition prayed for is, however,
DENIED.
SO ORDERED.

FILINVEST DEVELOPMENT CORPORATION,

Petitioner,
- versus COMMISSIONER OF INTERNAL REVENUE and COURT
OF TAX APPEALS,
Respondents.
G.R. No. 146941
August 9, 2007
x-----------------------------------------------------------------------------------x
DECISION
NACHURA, J.:
Before us is a Petition for Review on Certiorari under Rule
45 of the Revised Rules of Civil Procedure filed by Filinvest
Development Corporation (Filinvest) assailing the
Decision[1] of the Court of Appeals (CA), dated August 18,
2000, and its Resolution[2] dated January 25, 2001 in CAG.R. SP No. 56800.
The case stems from the claim for refund, or in the
alternative, the issuance of a tax credit certificate (TCC),
filed by petitioner Filinvest with respondent Commissioner
of Internal Revenue (CIR) in the amount of P4,178,134.00
representing excess creditable withholding taxes for
taxable years 1994, 1995, and 1996.[3]
When the CIR had not resolved petitioners claim for
refund and the two-year prescriptive period was about to
lapse, the latter filed a Petition for Review[4] with the
Court of Tax Appeals. In the petition before the CTA,
docketed as CTA Case No. 5603, petitioner prayed for
refund, or in the alternative, the issuance of a TCC, in the
amount of P3,173,868.00. The amount of P1,004,236.00
representing excess/unutilized creditable withholding
taxes for 1994 was no longer included as it was already
barred by the two-year prescriptive period.
On August 13, 1999, the CTA rendered a Decision[5]
dismissing the petition for review for insufficiency of
evidence because petitioner failed to present in evidence

its 1997 income tax return. The CTA held that since
petitioner indicated in its 1996 Income Tax Return that it
has opted to carry over any excess income tax paid to the
following year, there was no way for the court to
determine with particular certainty if petitioner Filinvest
indeed applied or credited the refundable amount to its
1997 tax liability, if there were any.
Petitioner filed a motion for reconsideration, which was
denied on December 23, 1999.[6]
Subsequently, petitioner filed a Petition for Review[7]
before the CA on January 21, 2000. The CA dismissed the
petition on the ground of failure to attach the proof of
authority of Efren M. Reyes, who executed the certification
of non-forum shopping, to sign for the corporation.[8] On
motion for reconsideration, the CA set aside the January
26, 2000 Resolution and reinstated the case.[9]
On August 18, 2000, the CA issued the assailed
Decision[10] denying Filinvests petition for review, thus:
Petitioner fails to discharge the burden of being entitled to
the tax refund sought for considering that evidence on
hand shows that although petitioner was able to comply
with the requirements which a taxpayer must have to
comply before a claim for a refund would be sustained,
yet, it has failed to present vital documents (sic), its
Income Tax Return for the year 1997, which would show
whether or not petitioner has applied or credited the
refundable amount sought for in its 1997 liability, if there
be any, since per its 1996 Income Tax Return, it readily
revealed that petitioner opted to carry over the excess
income tax paid to the succeeding year and it is only from
petitioners Income Tax Return for the year 1997 that this
fact can be determined with certainty and the nonpresentation of this vital document proved fatal to the
petitioners cause of action.
xxxx

WHEREFORE, FOREGOING PREMISES CONSIDERED, the

petition is hereby DENIED for lack of merit. The assailed
Decision dated August 13, 1999 of the Court of Tax
Appeals is affirmed. Costs against petitioner.

claim. Likewise, respondent maintains that the CA did not

err in relying on CTA cases because the latter is an
authority on matters of taxation and therefore its
resolutions carry great weight.[15]

SO ORDERED.

The main issue for our resolution is whether petitioner is

entitled to the tax refund or tax credit it seeks.

Petitioner filed a motion for reconsideration, which the CA

denied in the assailed Resolution[11] dated January 25,
2001.

We rule in the affirmative.

Petitioner filed a petition for review before this Court but

the same was denied on April 18, 2001 for failure to show
that the appellate court committed reversible error, and
for failure to comply with the requirements of Section 4,
Rule 7 of the 1997 Rules of Civil Procedure in the
execution of the verification.[12] Petitioner filed a motion
for reconsideration, which the Court granted on April 3,
2002.[13] Hence, this petition for review.
In this petition for review, petitioner Filinvest alleges that
the CA erred in (1) denying its claim for tax refund on the
sole ground that it failed to present in evidence its Annual
Income Tax Return for Corporations for 1997 despite
holding that it had complied with all the requirements to
sustain a claim for tax refund; (2) relying on CTA cases
cited in its Decision as jurisprudential basis to support its
ruling; (3) not ruling that Section 34, Rule 132 of the
Revised Rules of Court, being a procedural rule, should be
liberally construed in order that substantial justice due
petitioner shall have been served; and (4) not ruling that,
petitioner having proved that it paid excess taxes for
taxable years 1995 and 1996, has shifted the burden of
evidence to respondent CIR to show the factual basis to
deny petitioners claim.[14]
On the other hand, respondent CIR argues that in claims
for tax refund, the burden of proof of refundability rests
with claimant, and considering the rules on formal offer of
evidence, the CA did not err in ruling against petitioner
due to its failure to present evidence vital to sustain its

It is settled that the factual findings of the CTA, as

affirmed by the Court of Appeals, are entitled to the
highest respect[16] and will not be disturbed on appeal
unless it is shown that the lower courts committed gross
error in the appreciation of facts.[17]
In the case at bench, the CA erred in ruling that petitioner
failed to discharge the burden of proving that it is entitled
to the refund because of the latters failure to attach its
1997 Income Tax Return.
The appellate court itself acknowledges that petitioner
had complied with the requirements to sustain a claim for
tax refund or credit.[18] Yet it held that petitioner fail[ed]
to discharge the burden of being entitled to the tax refund
sought for considering the evidence on hand shows that x
x x it has failed to present [a] vital document[], its Income
Tax Return for the year 1997 x x x.[19]
Both the CTA and the CA, citing the case of F. Jacinto
Group, Inc. v. CIR[20] and Citibank N.A. v. Court of
Appeals, et al.,[21] determined the requisites to sustain a
claim for refund, thus:
(1)
That the claim for refund was filed within two
years as prescribed under Section 230 of the National
Internal Revenue Code;
(2)
That the income upon which the taxes were
withheld were included in the return of the recipient; and

(3)
That the fact of withholding is established by
a copy of a statement duly issued by the payor
(withholding agent) to the payee showing the amount
paid and the amount of tax withheld therefrom.[22]
In the proceedings before the CTA, petitioner presented in
evidence its letter of claim for refund before the BIR to
show that it was made within the two-year reglementary
period;[23] its Income Tax Returns for the years 1995 and
1996 to prove its total creditable withholding tax and the
fact that the amounts were declared as part of its gross
income;[24] and several certificates of income tax
withheld at source corresponding to the period of claim to
prove the total amount of the taxes erroneously withheld.
[25] More importantly, petitioner attached its 1997
Income Tax Return to its Motion for Reconsideration,
making the same part of the records of the case. The CTA
cannot simply ignore this document.
Thus, we hold that petitioner has complied with all
requirements to prove its claim for tax refund. The
therefore, erred in denying the petition for review of
CTAs denial of petitioners claim for tax refund on
ground that it failed to present its 1997 Income
Return.

the
CA,
the
the
Tax

The CAs reliance on Rule 132, Section 34[26] of the Rules

on Evidence is misplaced. This provision must be taken in
the light of Republic Act No. 1125, as amended, the law
creating the CTA, which provides that proceedings therein
shall not be governed strictly by technical rules of
evidence.[27] Moreover, this Court has held time and
again that technicalities should not be used to defeat
substantive rights, especially those that have been
established as a matter of fact.
The CA, likewise, erred in relying on CTA decisions as
jurisprudential basis for its decision. As this Court has held
in the past:

[B]y tradition and in our system of judicial administration

this Court has the last word on what the law is, and that
its decisions applying or interpreting the laws or the
Constitution form part of the legal system of the country,
all other courts should take their bearings from the
decisions of this Court, ever mindful of what this Court
said fifty-seven years ago in People vs. Vera that [a]
becoming modesty of inferior courts demands conscious
realization of the position that they occupy in the
interrelation and operation of the integrated judicial
system of the nation.[28]
The principle of stare decisis et non quieta movere, as
embodied in Article 8 of the Civil Code of the Philippines,
[29] enjoins adherence to judicial precedents. It requires
our courts to follow a rule already established in a final
decision of the Supreme Court. That decision becomes a
judicial precedent to be followed in subsequent cases by
all courts in the land. [30]
This is not the first time this issue has come before this
Court. The case of BPI-Family Savings Bank v. Court of
Appeals,[31] involves factual antecedents similar to the
present case.
BPI Family Bank involves a claim for tax refund
representing therein petitioner's taxes withheld for the
year 1989. In petitioners 1989 Income Tax Return,
petitioner had a total refundable amount of P297,492.00
inclusive of the P112,491.00 being claimed as tax refund.
However, petitioner declared in the same 1989 Income
Tax Return that the said total refundable amount will be
applied as tax credit to the succeeding taxable year. On
October 11, 1990, petitioner filed a written claim for
refund in the amount of P112,491.00 before the CIR
alleging that it did not apply the 1989 refundable amount
to its 1990 Annual Income Tax Return or other tax
liabilities due to alleged business losses it incurred for the
same year. Without waiting for the CIR to act on the claim
for refund, petitioner filed a petition for review with the
CTA, seeking the refund of P112,491.00.

The CTA dismissed the petition on the ground that

petitioner failed to present as evidence its Corporate
Annual Income Tax Return for 1990 to establish the fact
that petitioner had not yet credited the refundable
amount. Petitioner filed a motion for reconsideration.
However, the same was denied on May 6, 1994. The CA
affirmed the CTA decision, ruling that it was incumbent
upon petitioner to show proof that it had not credited the
amount of P297,492.00 to its 1990 Annual Income Tax
Return as it had previously declared in its 1989 Income
Tax Return that the amount would be applied as a tax
credit in 1990. Petitioner having failed to submit such
requirement, the CA said there is no basis to grant the
claim for refund, because tax refunds are in the nature of
tax exemptions and are regarded as in derogation of
sovereign authority to be construed strictissimi juris
against the person or entity claiming the exemption. In
other words, the burden of proof rests upon the taxpayer,
according to the CA.
In reversing the CA and ruling that petitioner was entitled
to the refund, this Court held:
More important, a copy of the Final Adjustment Return for
1990
was
attached
to
petitioner's
Motion
for
Reconsideration filed before the CTA. A final adjustment
return shows whether a corporation incurred a loss or
gained a profit during the taxable year. In this case, that
Return
clearly
showed
that
petitioner
incurred
P52,480,173 as net loss in 1990. Clearly, it could not have
applied the amount in dispute as a tax credit. Again, the
BIR did not controvert the veracity of the said return. It
did not even file an opposition to petitioner's Motion and
the 1990 Final Adjustment Return attached thereto. In
denying the Motion for Reconsideration, however, the CTA
ignored the said Return. In the same vein, the CA did not
pass upon that significant document.
True, strict procedural rules generally frown upon the
submission of the Return after the trial. The law creating
the Court of Tax Appeals, however, specifically provides

that proceedings before it shall not be governed strictly

by the technical rules of evidence. The paramount
consideration remains the ascertainment of truth. Verily,
the quest for orderly presentation of issues is not an
absolute. It should not bar courts from considering
undisputed facts to arrive at a just determination of a
controversy.
In the present case, the Return attached to the Motion for
Reconsideration clearly showed that petitioner suffered a
net loss in 1990. Contrary to the holding of the CA and the
CTA, petitioner could not have applied the amount as a
tax credit. In failing to consider the said Return, as well as
the other documentary evidence presented during the
trial, the appellate court committed a reversible error.
It should be stressed that the rationale of the rules of
procedure is to secure a just determination of every
action. They are tools designed to facilitate the
attainment of justice. But there can be no just
determination of the present action if we ignore, on
grounds of strict technicality, the Return submitted before
the CTA and even before this Court. To repeat, the
undisputed fact is that petitioner suffered a net loss in
1990; accordingly, it incurred no tax liability to which the
tax credit could be applied. Consequently, there is no
reason for the BIR and this Court to withhold the tax
refund which rightfully belongs to the petitioner.[32]
We find the foregoing disquisition applicable to the
present case.
As in the BPI Family Bank case, herein petitioners claim
for refund is anchored on the following provisions of the
National Internal Revenue Code (NIRC) then in effect:
SEC. 69. Final Adjustment Return. Every corporation liable
to tax under Section 24 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 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.
SEC. 230. Recovery of tax erroneously or illegally
collected. No suit or proceeding shall be maintained in
any court for the recovery of any national internal
revenue tax hereafter alleged to have been erroneously or
illegally assessed or collected, or of any penalty claimed
to have been collected without authority or of any sum
alleged to have been excessive or in any manner
wrongfully collected, until a claim for refund or credit has
been duly filed with the Commissioner; but such suit or
proceeding may be maintained, whether or not such tax,
penalty, or sum has been paid under protest or duress.
In any case, no such suit or proceeding shall be begun
after the expiration of two years from the date of payment
of the tax or penalty regardless of any supervening cause
that may arise after payment: Provided, however, That
the Commissioner may, even without a written claim
therefor, refund or credit any tax, where on the face of the
return upon which payment was made, such payment
appears clearly to have been erroneously paid. (Emphasis
supplied)
On the other hand, Revenue Regulation No. 12-94, Section
10 provides for the requirements to claim for tax credit or
refund, to wit:
Section 10. Claim for Tax Credit or Refund.

(a) Claims for Tax Credit or Refund of income tax deducted

and withheld on income payments shall be given due
course only when it is shown on the return that the
income payment received has been declared as part of
the gross income and the fact of withholding is
established by a copy of the Withholding Tax Statement
duly issued by the payor to the payee showing the
amount paid and the amount of tax withheld therefrom.
(b) Excess Credits. A taxpayer's excess expanded
withholding tax credits for the taxable quarter/taxable
year shall automatically be allowed as a credit for
purposes of filing his income tax return for the taxable
quarter/taxable year immediately succeeding the taxable
quarter/taxable year in which the aforesaid excess credit
arose, provided, however, he submits with his income tax
return a copy of his income tax return for the aforesaid
previous taxable period showing the amount of his
aforementioned excess withholding tax credits.
If the taxpayer, in lieu of the aforesaid automatic
application of his excess credit, wants a cash refund or a
tax credit certificate for use in payment of his other
national internal tax liabilities, he shall make a written
request therefor. Upon filing of his request, the taxpayer's
income tax return showing the excess expanded
withholding tax credits shall be examined. The excess
expanded withholding tax, if any, shall be determined and
refunded/credited
to
the
taxpayer-applicant.
The
refund/credit shall be made within a period of sixty (60)
days from date of the taxpayer's request provided,
however, that the taxpayer-applicant submitted for audit
all his pertinent accounting records and that the aforesaid
records established the veracity of his claim for a
refund/credit of his excess expanded withholding tax
credits. (Emphasis supplied)
It is true that herein petitioner has the burden of proving
that it is entitled to refund. However, we have already
held that once the claimant has submitted all the required

documents, it is the function of the BIR to assess these

documents with purposeful dispatch.[33]

of tax collection to be at the sole control and discretion of

the taxpayer.[35]

In proving the inclusion of the income payments which

formed the basis of the withholding taxes and the fact of
withholding, this Court has held that:

In the case of San Carlos Milling Co., Inc. v. CIR,[36] the

Court struck down therein petitioners attempt to
unilaterally declare as tax credit its excess estimated
quarterly income taxes from the previous year. The Court
explained, thus:

[D]etailed proof of the truthfulness of each and every item

in the income tax return is not required. That function is
lodged in the Commissioner of Internal Revenue by the
NIRC which requires the Commissioner to assess internal
revenue taxes within three years after the last day
prescribed by law for the filing of the return. x x x The
grant of a refund is founded on the assumption that the
tax return is valid; that is, the facts stated therein are true
and correct. In fact, even without petitioner's tax claim,
the Commissioner can proceed to examine the books,
records of the petitioner-bank, or any data which may be
relevant or material in accordance with Section 16 of the
present NIRC.[34]
It is worth noting that under Section 230 of the NIRC and
Section 10 of Revenue Regulation No. 12-84, the CIR is
given the power to grant a tax credit or refund even
without a written claim therefor, if the former determines
from the face of the return that payment had clearly been
erroneously made. Evidently, the CIRs function is not
merely to receive the claims for refund but it is also given
the positive duty to determine the veracity of such claim.
In another case, the Court held that 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

The respondent Court held that the choice of a corporate

taxpayer for an automatic tax credit does not ipso facto
confer on it the right to immediately avail of the same.
Respondent court went on to emphasize the need for an
investigation to ascertain the correctness of the corporate
returns and the amount sought to be credited. We agree.
It is difficult to see by what process of ratiocination
petitioner insists on the literal interpretation of the word
automatic. Such literal interpretation has been discussed
and precluded by the respondent court in its decision of
23 December 1991 where, as aforestated, it ruled that
once a taxpayer opts for either a refund or the automatic
tax credit scheme, and signified his option in accordance
with the regulation, this does not ipso facto confer on him
the right to avail of the same immediately. An
investigation, as a matter of procedure, is necessary to
enable the Commissioner to determine the correctness of
the petitioner's returns, and the tax amount to be
credited.
Prior approval by the Commissioner of Internal Revenue of
the tax credit under then section 86 (now section 69) of
the Tax Code would appear to be the most reasonable
interpretation to be given to said section. An opportunity
must be given the internal revenue branch of the
government to investigate and confirm the veracity of the
claims of the taxpayer. The absolute freedom that
petitioner seeks to automatically credit tax payments
against tax liabilities for a succeeding taxable year, can
easily give rise to confusion and abuse, depriving the
government of authority and control over the manner by
which the taxpayers credit and offset their tax liabilities,

not to mention the resultant loss of revenue to the

government under such a scheme.

alternative, issue a Tax Credit Certificate to petitioner

Filinvest Development Corporation in the amount of
P3,173,868.00.

Hence we do not agree with respondents contention that

the actual carry-over of the excess withholding tax to the
next quarter virtually negates a refund of the excess since
it is considered to have been automatically applied to any
income of that period. However, even assuming that
petitioner had the power to automatically apply its excess
withholding taxes to subsequent payments, the fact
remains that, in this particular case, it could not have
done so given its business losses.

SO ORDERED.

We must also point out that, simply by exercising the CIRs

power to examine and verify petitioners claim for tax
exemption as granted by law, respondent CIR could have
easily verified petitioners claim by presenting the latters
1997 Income Tax Return, the original of which it has in its
files. However, records show that in the proceedings
before the CTA, respondent CIR failed to comment on
petitioners formal offer of evidence,[37] waived its right to
present its own evidence,[38] and failed to file its
memorandum.[39] Neither did it file an opposition to
petitioners motion to reconsider the CTA decision to which
the 1997 Income Tax Return was appended.
That no one shall unjustly enrich oneself at the expense of
another is a long-standing principle prevailing in our legal
system. This applies not only to individuals but to the
State as well. In the field of taxation where the State
exacts strict compliance upon its citizens, the State must
likewise deal with taxpayers with fairness and honesty.
The harsh power of taxation must be tempered with
evenhandedness. Hence, under the principle of solutio
indebiti,[40] the Government has to restore to petitioner
the sums representing erroneous payments of taxes.
WHEREFORE, premises considered, the petition is
GRANTED. The CA decision and the CTA decision are
REVERSED and SET ASIDE. Respondent Commissioner of
Internal Revenue is ORDERED to refund, or in the

G.R. No. L-30264

March 12, 1929

MANILA RAILROAD COMPANY, plaintiff-appellee,

vs.
INSULAR COLLECTOR OF CUSTOMS, defendantappellant.
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
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.

COMMISSIONER OF CUSTOMS and

COLLECTOR OF THE PORT OF SUBIC,
Petitioners,

the

DISTRICT

- versus -

HYPERMIX FEEDS CORPORATION,

Respondent.
G.R. No. 179579
Present:
CARPIO, J., Chairperson,
BRION,
PEREZ,
SERENO, and
REYES, JJ.
Promulgated:
February 1, 2012
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ---------x

On 7 November 2003, petitioner Commissioner of

Customs issued CMO 27-2003. Under the Memorandum,
for tariff purposes, wheat was classified according to the
following: (1) importer or consignee; (2) country of origin;
and (3) port of discharge.[5] The regulation provided an
exclusive list of corporations, ports of discharge,
commodity descriptions and countries of origin.
Depending on these factors, wheat would be classified
either as food grade or feed grade. The corresponding
tariff for food grade wheat was 3%, for feed grade, 7%.
CMO 27-2003 further provided for the proper procedure
for protest or Valuation and Classification Review
Committee (VCRC) cases. Under this procedure, the
release of the articles that were the subject of protest
required the importer to post a cash bond to cover the
tariff differential.[6]
A month after the issuance of CMO 27-2003, on 19
December 2003, respondent filed a Petition for
Declaratory Relief[7] with the Regional Trial Court (RTC) of
Las Pias City. It anticipated the implementation of the
regulation on its imported and perishable Chinese milling
wheat in transit from China.[8] Respondent contended
that CMO 27-2003 was issued without following the
mandate of the Revised Administrative Code on public
participation, prior notice, and publication or registration
with the University of the Philippines Law Center.

DECISION
SERENO, J.:
Before us is a Petition for Review under Rule 45,[1]
assailing the Decision[2] and the Resolution[3] of the
Court of Appeals (CA), which nullified the Customs
Memorandum Order (CMO) No. 27-2003[4] on the tariff
classification of wheat issued by petitioner Commissioner
of Customs.
The antecedent facts are as follows:

Respondent also alleged that the regulation summarily

adjudged it to be a feed grade supplier without the
benefit of prior assessment and examination; thus,
despite having imported food grade wheat, it would be
subjected to the 7% tariff upon the arrival of the
shipment, forcing them to pay 133% more than was
proper.
Furthermore, respondent claimed that the equal
protection clause of the Constitution was violated when
the regulation treated non-flour millers differently from
flour millers for no reason at all.

Lastly, respondent asserted that the retroactive

application of the regulation was confiscatory in nature.
On 19 January 2004, the RTC issued a Temporary
Restraining Order (TRO) effective for twenty (20) days
from notice.[9]
Petitioners thereafter filed a Motion to Dismiss.[10] They
alleged that: (1) the RTC did not have jurisdiction over the
subject matter of the case, because respondent was
asking for a judicial determination of the classification of
wheat; (2) an action for declaratory relief was improper;
(3) CMO 27-2003 was an internal administrative rule and
not legislative in nature; and (4) the claims of respondent
were speculative and premature, because the Bureau of
Customs (BOC) had yet to examine respondents products.
They likewise opposed the application for a writ of
preliminary injunction on the ground that they had not
inflicted any injury through the issuance of the regulation;
and that the action would be contrary to the rule that
administrative issuances are assumed valid until declared
otherwise.
On 28 February 2005, the parties agreed that the matters
raised in the application for preliminary injunction and the
Motion to Dismiss would just be resolved together in the
main case. Thus, on 10 March 2005, the RTC rendered its
Decision[11] without having to resolve the application for
preliminary injunction and the Motion to Dismiss.
The trial court ruled in favor of respondent, to wit:
WHEREFORE, in view of the foregoing, the Petition is
GRANTED and the subject Customs Memorandum Order
27-2003 is declared INVALID and OF NO FORCE AND
EFFECT. Respondents Commissioner of Customs, the
District Collector of Subic or anyone acting in their behalf
are to immediately cease and desist from enforcing the
said Customs Memorandum Order 27-2003.

The RTC held that it had jurisdiction over the subject

matter, given that the issue raised by respondent
concerned the quasi-legislative powers of petitioners. It
likewise stated that a petition for declaratory relief was
the proper remedy, and that respondent was the proper
party to file it. The court considered that respondent was
a regular importer, and that the latter would be subjected
to the application of the regulation in future transactions.
With regard to the validity of the regulation, the trial court
found that petitioners had not followed the basic
requirements of hearing and publication in the issuance of
CMO 27-2003. It likewise held that petitioners had
substituted the quasi-judicial determination of the
commodity by a quasi-legislative predetermination.[13]
The lower court pointed out that a classification based on
importers and ports of discharge were violative of the due
process rights of respondent.
Dissatisfied with the Decision of the lower court,
petitioners appealed to the CA, raising the same
allegations in defense of CMO 27-2003.[14] The appellate
court, however, dismissed the appeal. It held that, since
the regulation affected substantial rights of petitioners
and other importers, petitioners should have observed the
requirements of notice, hearing and publication.
Hence, this Petition.
Petitioners raise the following issues for the consideration
of this Court:
I.
THE COURT OF APPEALS DECIDED A QUESTION OF
SUBSTANCE WHICH IS NOT IN ACCORD WITH THE LAW
AND PREVAILING JURISPRUDENCE.
II.
THE COURT OF APPEALS GRAVELY ERRED IN
DECLARING THAT THE TRIAL COURT HAS JURISDICTION
OVER THE CASE.

SO ORDERED.[12]
The Petition has no merit.

We shall first discuss the propriety of an action for

declaratory relief.

or not there has been a grave abuse of discretion

amounting to lack or excess of jurisdiction on the part of
any branch or instrumentality of the Government.
(Emphasis supplied)

Rule 63, Section 1 provides:

Who may file petition. Any person interested under a
deed, will, contract or other written instrument, or whose
rights are affected by a statute, executive order or
regulation, ordinance, or any other governmental
regulation may, before breach or violation thereof, bring
an action in the appropriate Regional Trial Court to
determine any question of construction or validity arising,
and for a declaration of his rights or duties, thereunder.
The requirements of an action for declaratory relief are as
follows: (1) there must be a justiciable controversy; (2)
the controversy must be between persons whose interests
are adverse; (3) the party seeking declaratory relief must
have a legal interest in the controversy; and (4) the issue
involved must be ripe for judicial determination.[15] We
find that the Petition filed by respondent before the lower
court meets these requirements.
First, the subject of the controversy is the constitutionality
of CMO 27-2003 issued by petitioner Commissioner of
Customs. In Smart Communications v. NTC,[16] we held:
The determination of whether a specific rule or set of
rules issued by an administrative agency contravenes the
law or the constitution is within the jurisdiction of the
regular courts. 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. This is within the scope
of judicial power, which includes the authority of the
courts to determine in an appropriate action the validity
of the acts of the political departments. Judicial power
includes the duty of the courts of justice to settle actual
controversies involving
rights which
are
legally
demandable and enforceable, and to determine whether

Meanwhile, in Misamis Oriental Association of Coco

Traders, Inc. v. Department of Finance Secretary,[17] we
said:
xxx [A] legislative rule is in the nature of subordinate
legislation, designed to implement a primary legislation
by providing the details thereof. xxx
In addition such rule must be published. On the other
hand, interpretative rules are designed to provide
guidelines to the law which the administrative agency is
in charge of enforcing.
Accordingly, in considering a legislative rule a court is free
to make three inquiries: (i) whether the rule is within the
delegated authority of the administrative agency; (ii)
whether it is reasonable; and (iii) whether it was issued
pursuant to proper procedure. But the court is not free to
substitute its judgment as to the desirability or wisdom of
the rule for the legislative body, by its delegation of
administrative judgment, has committed those questions
to administrative judgments and not to judicial
judgments. In the case of an interpretative rule, the
inquiry is not into the validity but into the correctness or
propriety of the rule. As a matter of power a court, when
confronted with an interpretative rule, is free to (i) give
the force of law to the rule; (ii) go to the opposite extreme
and substitute its judgment; or (iii) give some
intermediate degree of authoritative weight to the
interpretative rule. (Emphasis supplied)
Second, the controversy is between two parties that have
adverse interests. Petitioners are summarily imposing a
tariff rate that respondent is refusing to pay.
Third, it is clear that respondent has a legal and
substantive interest in the implementation of CMO 272003. Respondent has adequately shown that, as a

regular importer of wheat, on 14 August 2003, it has

actually made shipments of wheat from China to Subic.
The shipment was set to arrive in December 2003. Upon
its arrival, it would be subjected to the conditions of CMO
27-2003. The regulation calls for the imposition of
different tariff rates, depending on the factors
enumerated therein. Thus, respondent alleged that it
would be made to pay the 7% tariff applied to feed grade
wheat, instead of the 3% tariff on food grade wheat. In
addition, respondent would have to go through the
procedure under CMO 27-2003, which would undoubtedly
toll its time and resources. The lower court correctly
pointed out as follows:
xxx As noted above, the fact that petitioner is precisely
into the business of importing wheat, each and every
importation will be subjected to constant disputes which
will result into (sic) delays in the delivery, setting aside of
funds as cash bond required in the CMO as well as the
resulting expenses thereof. It is easy to see that business
uncertainty will be a constant occurrence for petitioner.
That the sums involved are not minimal is shown by the
discussions during the hearings conducted as well as in
the pleadings filed. It may be that the petitioner can later
on get a refund but such has been foreclosed because the
Collector of Customs and the Commissioner of Customs
are bound by their own CMO. Petitioner cannot get its
refund with the said agency. We believe and so find that
Petitioner has presented such a stake in the outcome of
this controversy as to vest it with standing to file this
petition.[18] (Emphasis supplied)
Finally, the issue raised by respondent is ripe for judicial
determination, because litigation is inevitable[19] for the
simple and uncontroverted reason that respondent is not
included in the enumeration of flour millers classified as
food grade wheat importers. Thus, as the trial court
stated, it would have to file a protest case each time it
imports food grade wheat and be subjected to the 7%
tariff.

It is therefore clear that a petition for declaratory relief is

the right remedy given the circumstances of the case.
Considering that the questioned regulation would affect
the substantive rights of respondent as explained above,
it therefore follows that petitioners should have applied
the pertinent provisions of Book VII, Chapter 2 of the
Revised Administrative Code, to wit:
Section 3. Filing. (1) Every agency shall file with the
University of the Philippines Law Center three (3) certified
copies of every rule adopted by it. Rules in force on the
date of effectivity of this Code which are not filed within
three (3) months from that date shall not thereafter be
the bases of any sanction against any party of persons.
xxx xxx xxx
Section 9. Public Participation. - (1) If not otherwise
required by law, an agency shall, as far as practicable,
publish or circulate notices of proposed rules and afford
interested parties the opportunity to submit their views
prior to the adoption of any rule.
(2) In the fixing of rates, no rule or final order shall be
valid unless the proposed rates shall have been published
in a newspaper of general circulation at least two (2)
weeks before the first hearing thereon.
(3) In case of opposition, the rules on contested cases
shall be observed.
When an administrative rule is merely interpretative in
nature, its applicability needs nothing further than its bare
issuance, for it gives no real consequence more than what
the law itself has already prescribed. When, on the other
hand, the administrative rule goes beyond merely
providing for the means that can facilitate or render least
cumbersome the implementation of the law but
substantially increases the burden of those governed, it
behooves the agency to accord at least to those directly
affected a chance to be heard, and thereafter to be duly
informed, before that new issuance is given the force and
effect of law.[20]

Likewise, in Taada v. Tuvera,[21] we held:

The clear object of the above-quoted provision is to give
the general public adequate notice of the various laws
which are to regulate their actions and conduct as
citizens. Without such notice and publication, there would
be no basis for the application of the maxim ignorantia
legis non excusat. It would be the height of injustice to
punish or otherwise burden a citizen for the transgression
of a law of which he had no notice whatsoever, not even a
constructive one.
Perhaps at no time since the establishment of the
Philippine Republic has the publication of laws taken so
vital significance that at this time when the people have
bestowed upon the President a power heretofore enjoyed
solely by the legislature. While the people are kept
abreast by the mass media of the debates and
deliberations in the Batasan Pambansa and for the
diligent ones, ready access to the legislative records no
such publicity accompanies the law-making process of the
President. Thus, without publication, the people have no
means of knowing what presidential decrees have actually
been promulgated, much less a definite way of informing
themselves of the specific contents and texts of such
decrees. (Emphasis supplied)
Because petitioners failed to follow the requirements
enumerated by the Revised Administrative Code, the
assailed regulation must be struck down.
Going now to the content of CMO 27-3003, we likewise
hold that it is unconstitutional for being violative of the
equal protection clause of the Constitution.
The equal protection clause means that no person or class
of persons shall be deprived of the same protection of
laws enjoyed by other persons or other classes in the
same place in like circumstances. Thus, the guarantee of
the equal protection of laws is not violated if there is a
reasonable classification. For a classification to be

reasonable, it must be shown that (1) it rests on

substantial distinctions; (2) it is germane to the purpose
of the law; (3) it is not limited to existing conditions only;
and (4) it applies equally to all members of the same
class.[22]
Unfortunately, CMO 27-2003 does not meet these
requirements. We do not see how the quality of wheat is
affected by who imports it, where it is discharged, or
which country it came from.
Thus, on the one hand, even if other millers excluded from
CMO 27-2003 have imported food grade wheat, the
product would still be declared as feed grade wheat, a
classification subjecting them to 7% tariff. On the other
hand, even if the importers listed under CMO 27-2003
have imported feed grade wheat, they would only be
made to pay 3% tariff, thus depriving the state of the
taxes due. The regulation, therefore, does not become
disadvantageous to respondent only, but even to the
state.
It is also not clear how the regulation intends to monitor
more closely wheat importations and thus prevent their
misclassification. A careful study of CMO 27-2003 shows
that it not only fails to achieve this end, but results in the
opposite. The application of the regulation forecloses the
possibility that other corporations that are excluded from
the list import food grade wheat; at the same time, it
creates an assumption that those who meet the criteria
do not import feed grade wheat. In the first case,
importers are unnecessarily burdened to prove the
classification of their wheat imports; while in the second,
the state carries that burden.
Petitioner Commissioner of Customs also went beyond his
powers when the regulation limited the customs officers
duties mandated by Section 1403 of the Tariff and
Customs Law, as amended. The law provides:
Section 1403. Duties of Customs Officer Tasked to
Examine, Classify, and Appraise Imported Articles. The

customs officer tasked to examine, classify, and appraise

imported articles shall determine whether the packages
designated for examination and their contents are in
accordance with the declaration in the entry, invoice and
other pertinent documents and shall make return in such
a manner as to indicate whether the articles have been
truly and correctly declared in the entry as regard their
quantity, measurement, weight, and tariff classification
and not imported contrary to law. He shall submit samples
to the laboratory for analysis when feasible to do so and
when such analysis is necessary for the proper
classification, appraisal, and/or admission into the
Philippines of imported articles.
Likewise, the customs officer shall determine the unit of
quantity in which they are usually bought and sold, and
appraise the imported articles in accordance with Section
201 of this Code.
Failure on the part of the customs officer to comply with
his duties shall subject him to the penalties prescribed
under Section 3604 of this Code.
The provision mandates that the customs officer must
first assess and determine the classification of the
imported article before tariff may be imposed.
Unfortunately, CMO 23-2007 has already classified the
article even before the customs officer had the chance to
examine it. In effect, petitioner Commissioner of Customs
diminished the powers granted by the Tariff and Customs
Code with regard to wheat importation when it no longer
required the customs officers prior examination and
assessment of the proper classification of the wheat.
It is well-settled that rules and regulations, which are the
product of a delegated power to create new and
additional legal provisions that have the effect of law,
should be within the scope of the statutory authority
granted by the legislature to the administrative agency. It
is required that the regulation be germane to the objects
and purposes of the law; and that it be not in

contradiction to, but in conformity with, the standards

prescribed by law.[23]
In summary, petitioners violated respondents right to due
process in the issuance of CMO 27-2003 when they failed
to observe the requirements under the Revised
Administrative
Code.
Petitioners
likewise
violated
respondents right to equal protection of laws when they
provided for an unreasonable classification in the
application
of
the
regulation.
Finally,
petitioner
Commissioner of Customs went beyond his powers of
delegated authority when the regulation limited the
powers of the customs officer to examine and assess
imported articles.
WHEREFORE, in view of the foregoing, the Petition is
DENIED.
SO ORDERED.

G.R. No. L-29987 October 22, 1975

MANILA ELECTRIC COMPANY, petitioner,
vs.
MISAEL P. VERA, in his capacity as Commissioner of
Internal Revenue, respondent.
G.R. No. L-23847 October 22, 1975
MANILA ELECTRIC COMPANY, petitioner,
vs.
BENJAMIN. TABIOS, as Commissioner of Internal
Revenue, respondent.
Salcedo, Del Rosario, Bito, Misa and Lozada for
petitioner.

Revenue on its claim, it appealed to the Court of Tax

Appeals by filing a petition for review on February 25,
1964 (CTA Case No. 1495). On November 28, 1968, the
Court of Tax Appeals denied MERALCO claim, forthwith,
the case was elevated to the Court on appeal (L-29987).
Again in 1963, MERALCO imported certain quantities of
copper wires, transformers and insulators also to be used
in its business and again a compensating tax of P6,587.00
on said purchases was collected. Its claim for refund of
the amount having been denied by the Commissioner of
Internal Revenue on January 23, 1964, MERALCO riled
with the Court of Tax Appeals CTA Case No. 1493. On
September 23, 1964 the Court of Tax Appeals decided
against petitioner, and the latter filed with this Court the
corresponding Petition for Review of said decision
docketed herein as G.R. No. L-23847.

Office of the Solicitor General for respondents.

MUOZ PALMA, J.:
Manila Electric Company, petitioner in these two cases,
poses a single before Us: is Manila Electric Company
(MERALCO for short) exempt from payment of a
compensating tax on poles, wires, transformers, and
insulators imported by it for use in the operation of its
electric light, heat, and power system? MERALCO answers
the query in the affirmative while the Commissioner of
Internal Revenue asserts the contrary.
MERALCO is the holder of a franchise to construct,
maintain, and operate an electric light, heat, and power
system in the City of Manila and its suburbs. 1
In 1962, MERALCO imported and received from abroad on
various dates copper wires, transformers, and insulators
for use in the operation of its business on which, the
Collector of Customs, as Deputy of Commissioner of
Internal Revenue, levied and collected a compensating
tax amounting to a total of P62,335.00. A claim for refund
of said amount was presented by MERALCO and because
no action was taken by the Commissioner of Internal

Inasmuch as the two appeals raise the same issue, they

are consolidated in this Decision.
The law under which the Commissioner of Internal
Revenue, respondent in these two cases, assessed and
collected the corresponding compensating taxes in 1962
and 1963 was found in Section 190 of the National
Internal Revenue Code(Commonwealth Act No. 466, as
amended) the pertinent provision of which read at the
time as follows:
Sec. 190.
Compensating Tax. All persons residing or
doing business in the Philippines, who purchase or receive
from without the Philippines any commodities, goods,
wares, or merchandise, excepting those subject to specific
taxes under Title IV of this Code, shall pay on the total
value thereof at the time they are received by such
persons,
including
freight,
postage,
insurance,
commission and all similar charges, a compensating tax
equivalent to the percentage taxes imposed under this
Title on original transactions effected by merchants,
importers, or manufacturers, such tax to be paid before
the withdrawal or removal of said commodities, goods,

wares, or merchandise from the customhouse or the post

office: ... 2
In deciding against petitioner, the Court of Tax Appeals
held that following the ruling of the Supreme Court in the
case of Panay Electric Co. vs. Collector of Internal
Revenue, G.R. No. L-6753, July 30, 1955, Manila Gas Corp.
vs. Collector of Internal Revenue, G.R. No. L-11784,
October 24, 1958, and Borja vs. Collector of Internal
Revenue, G.R. No. L-12134, November 30,1961, MERALCO
is not exempt from paying the compensating tax provided
for in Section 190 of the National Internal Revenue Code,
the purpose of which is to "place casual importers, who
are not merchants on equal putting with established
merchants who pay sales tax on articles imported by
them." The court further stated that MERALCO's claim for
exemption from the payment of the compensating tax is
not clear or expressed, contrary to the cardinal rule in
taxation that "exemptions from taxation are highly
disfavored in law, and he who claims exemption must be
able to justify his claim by the clearest grant of organic or
statute law. (pp. 10-11, L-23847, rollo)
Petitioner, on the other hand, bases its claim for
exemption from the compensating tax on poles, wires,
transformers and insulators purchased by it from abroad
on paragraph 9 of its franchise which We quote from its
brief:
PARAGRAPH 9.
The grantee shall be liable to pay the
same taxes upon its real estate, buildings, plant (not
including poles, wires, transformers, and insulators),
machinery, and personal property as other persons are or
may be hereafter by law to pay. Inconsideration of Part
Two of the franchise herein granted, to wit, the right to
build and maintain in the City of Manila and its suburbs a
plant for the conveying and furnishing of electric current
for light, heat, and power, and to charge for the same, the
grantee shall pay to the City of Manila a five per centum
of the gross earnings received form its business under this
franchise in the City and its suburbs: PROVIDED, That two
and one-half per centum of the gross earnings received

from the business of the line to Malabon shall be paid to

the Province of Rizal. Said percentage shall be due and
payable at the times stated in paragraph nineteen of Part
One hereof, and after an audit, like that provided in
paragraph twenty of Part One hereof, and shall be in lieu
of all taxes and assessments of whatsoever nature, and
by whatsoever authority upon the privileges, earnings,
income, franchise, and poles, wires, transformers, and
insulators of the grantee, from which taxes and
assessments the grantee is hereby expressly exempted.
(Petitioner's brief, p. 4, G.R. No. L-29987; see also pp. 3-4,
petitioner's brief, L-23847)
Petitioner argues that the abovequoted provision in plain
and unambiguous terms makes two references to the
exemption of the articles in question from all taxes except
the franchise tax. Thus, after prescribing in the opening
sentence that "the grantee shall be liable to pay the said
taxes upon its real estate buildings, plant (not including
poles, wires, transformers and insulators), machinery and
personal property as other persons are or may be
hereinafter required by law to pay," par. 9, specifically
provides that the percentage tax payable by petitioner as
fixed therein "shall be in lieu of all taxes and assessments
of whatsoever nature, and by whatsoever authority upon
the privileges, earnings, income, franchise, and poles,
wires, transformers and insulators of the grantee from
which taxes and assessments the grantee is hereby
expressly exempted." Petitioner further states that while
par. 9 does not specifically mention the compensating tax
for the obvious reason that petitioner's original franchise
was an earlier enactment, the words "in lieu of all taxes
and assessments of whatsoever nature and by
whatsoever authority" are broad and sweeping enough to
include the compensating tax. (p. 5, petitioner's brief, L29987; pp, 4-5, ibid, L-23847)
Petitioner also contends that the ruling of this Court in the
cases of Panay Electric Co., Manila Gas Corporation, and
Borja (supra) are not applicable to its situation.
We find no merit in petitioner's cause.

1.
One who claims to be exempt from the payment of
a particular tax must do so under clear and unmistakable
terms found in the statute. Tax exemptions are strictly
construed against the taxpayer, they being highly
disfavored and may almost be said "to be odious to the
law." He who claims an exemption must be able to print to
some positive provision of law creating the right; it cannot
be allowed to exist upon a mere vague implication or
inference. 3 The right of taxation will not beheld to have
been surrendered unless the intention to surrender is
manifested by words too plain to be mistaken (Ohio Life
Insurance & Trust Co. vs. Debolt, 60 Howard, 416), for the
state cannot strip itself of the most essential power of
taxation by doubtful words; it cannot, by ambiguous
language, be deprived of this highest attribute of
sovereignty (Erie Railway Co. vs. Commonwealth of
Pennsylvania, 21 Wallace 492, 499). So, when exemption
is claimed, it must be shown indubitably to exist, for every
presumption is against it, and a well-founded doubt is
fatal to the claim (Farrington vs. Tennessee & County of
Shelby, 95 U.S. 679, 686). 4
2.
Petitioner's submission that its right to exemption is
supported by the "plain and unambiguous" term of
paragraph 9 of its franchise is positively without basis.
First, the Court cannot overlook the tax court's finding
that, and We quote:
At the outset it should be noted that the franchise by the
Municipal Board of the City of Manila to Mr. Charles M.
Swift and later assumed and taken over by petitioner (see
Rep. Act No. 150, CTA rec. p. 84), is a municipal franchise
and not a legal franchise. While it is true that Section 1 of
Act No. 484 of the Philippine Commission of 1902
authorizes the Municipal Board of the City of Manila to
grant a franchise to the person making the most favorable
bid for the construction and maintenance of an electric
street railway and the construction, maintenance, and
operation of an electric light, heat, and power system in
Manila and its suburbs, Section 2 of the same Act

authorize the said Municipal Board to make necessary

amendments to be fixed by the terms of the successful
bid; otherwise, the form of the franchise to be granted
shall be in the words and figures appearing in Act No. 484
of the Philippine Commission, which includes Par. 9. Part
Two, thereof, supra.
This Court is not aware whether or not the tax exemption
provisions contained in Par. 9, Part Two of Act No. 484 of
the Philippine Commission of 1902 was incorporated in
the municipal franchise granted to Mr. Charles M. Swift by
the Municipal Board of the City of Manila and later
assumed and taken over by petitioner because no
admissible copy of Ordinance No. 44 of the said Board
was ever presented in evidence by the herein petitioner.
Neither is this Court aware of any amendment to the
terms of this franchise granted by the aforesaid Municipal
Board to the successful bidder in the absence of
Ordinance No. 44 and the amendment thereto, if any. In
the circumstances, we are at a Las to interpret and apply
the tax exemption provisions relied upon by petitioner.
(pp. 11-13, rollo, L-29987)
Second, and this is the controlling reason for the denial of
petitioner's claim in these cases, We do not see in
paragraph 9 of its petitioner's franchise, on the
assumption that it does exist as worded, what may be
considered as "plain and unambiguous terms" declaring
petitioner MERALCO exempt from paying a compensating
tax on its imports of poles, wires, transformers, and
insulators. What MERALCO really wants Us to do, but
which We cannot under the principles enumerated earlier,
is to infer and imply that there is such an exemption from
the following phrase: "... the grantee shall pay to the City
of Manila five per centum of the gross earnings received
from its business ... and shall be in lieu of all taxes and
assessments of whatsoever nature, and by whatsoever
authority upon the privileges, earnings, income, franchise,
and poles, wires, transformers, and insulators of the
grantee, from which taxes and assessments the grantee is
hereby expressly exempted."

Note that what the above provision exempts petitioner

from, is the payment of property, tax on its poles, wires,
transformers, and insulators; it does not exempt it from
payment of taxes like the one in question which, by mere
necessity or consequence alone, fall upon property. The
first sentence of paragraph 9 of petitioner's franchise
expressly states that the grantee like any other taxpayer
shall pay taxes upon its real estate, buildings, plant (not
including
poles,
wires,
transformers,
and
insulators),machinery, and personal property. These are
direct taxes imposed upon the thing or property itself.
Thus, while the grantee is to pay tax on its plant, its poles,
wires, transformers, and insulators as forming part of the
plant or installation(significantly the enumeration is in
parenthesis and follows the word "plant") are exempt and
as such are not to be included in the assessment of the
property tax to be paid.
The ending clause of paragraph 9 providing in effect that
the percentage tax imposed upon petitioner shall be in
lieu of "all taxes and assessments of what and by
whatsoever authority" cannot be said to have granted it
exemption from payment of compensating tax. The
phrase "all taxes and assessments of whatsoever nature
and by whatsoever authority" is not so broad and
sweeping, as petitioner would have Us think, as to include
the tax in question because there is an immediately
succeeding phrase which limits the scope of exemption to
taxes and assessments "upon the privileges earnings,
income, franchise, and poles, wires, transformers, and
insulators of the grantee." The last clause of paragraph 9
merely reaffirms, with regards to poles, wires,
transformers, and insulators, what has been expressed in
the that first sentence of the same paragraph namely,
exemption of petitioner from payment of property tax. It is
a principle of statutory construction that general terms
may be restricted by specific words, with the result that
the general language will be limited by the specific
language which indicates the statute's object and
purpose. (Statutory Construction by Crawford, 1940 ed. p.
324-325)

3.
It is a well-settled rule or principle in taxation that a
compensating tax is not a property tax but is an excise
tax. 5 Generally stated, an excise tax is one that is
imposed on the performance of an act, the engaging in an
occupation, or the enjoyment of a privilege. 6 A tax upon
property because of its ownership its a direct tax, whereas
one levied upon property because of its use is an excise
duty. (Manufacturer's Trust Co. vs. United States, Ct. Cl.,
32 F. Supp. 289, 296) Thus, where a tax which is not on
the property as such, is upon certain kinds of property,
having reference to their origin and their intended use,
that is an excise tax. (State v. Wynne, 133 S.W. 2d 951,
956,957, 133 Tex. 622)
The compensating tax being imposed upon petitioner
herein, MERALCO, is an impost on its use of imported
articles and is not in the nature of a direct tax on the
articles themselves, the latter tax falling within the
exemption. Thus, in International Business Machine Corp.
vs. Collector of Internal Revenue, 1956, 98 Phil. Reports
595, 593, which involved the collection of a compensating
tax from the plaintiff-petitioner on business machines
imported by it, this Court stated in unequivocal terms that
"it is not the act of importation that is taxed under section
190, but the use of imported goods not subjected to sales
tax" because "the compensating tax was expressly
designed as a substitute to make up or compensate for
the revenue lost to the government through the
avoidance of sales taxes by means of direct purchases
abroad. ..."
It is true that upon the collection of a compensating tax
on petitioner's poles, wires, transformers, and insulators
purchased from abroad, the tax falls on the goods
themselves; this fact leads petitioner to claim that what is
being imposed upon it is a property tax. But petitioner
loses sight of the principle that "every excise necessarily
must finally fall upon and be paid by property, and so may
be indirectly a tax upon property; but if it is really
imposed upon the performance of an act, the enjoyment
of a privilege, or the engaging in an occupation, it will be
considered an excise." (51 Am. Jur. 1d, Taxation, Sec. 34,

emphasis supplied) And so, to reiterate, what is being

taxed here is the use of goods purchased from out of the
country, and the imposition is in the nature of an excise
tax.
4.
There is no valid reason for Us not to apply to
petitioner the ruling of the Court in Panay Electric Co. and
Borja, supra, for MERALCO is similarly situated.
Panay Electric Co. sought exemption from payment of a
compensating tax on equipments purchased abroad for
use in its electric plant. A provision in its franchise reads:
Sec 8. ... Said percentage shall be due and payable
quarterly and shall be lieu of all taxes of any kind levied,
established, or collected by any authority whatsoever,
now or in the future, on its poles, wires, insulators,
switches, transformers and other structures, installations,
conductors, and accessories, placed in and over the public
streets, avenues, roads, thoroughfares, squares, bridges,
and other places on its franchise, from which taxes the
grantee is hereby expressly exempted. (113 Phil. 570)
This Court rejected the exemption sought by Panay
Electric and held that the cited provision in its franchise
exempts from taxation those rights and privileges which
are not enjoyed by the public in general but only by the
grantee of a franchise, but do not include the common
right or privileges of every citizen to make purchases
anywhere; and that we must bear in mind the purpose for
the imposition of compensating tax which as explained in
the report of the Tax Commission is as follows:
The purpose of this proposal is to place persons
purchasing goods from dealers doing business in the
Philippines on an equal footing, for tax purposes, with
those who purchase goods directly from without the
Philippines. Under the present tax law, the former bear
the burden of the local sales tax because it is shifted to
them as part of the selling price demanded by the local
merchants, while the latter do not. The proposed tax will
do away with this inequality and render justice to

merchants and firms of all nationalities who are in

legitimate business here, paying taxes and giving
employment to a large number of people. (113 Phil. 571)
In Borja, petitioner Consuelo P. Borja, a grantee of a
legislative franchise, also claimed to be free from paying
the compensating tax imposed on the materials and
equipment such as wires, insulators, transformers,
conductors, etc. imported from Japan, on the basis of Sec.
10 of Act No. 3636 (Model Electric Light and Power
Franchise Act) which has been incorporated by reference
in franchise under Act No. 3810. Section 10 provides:
The grantee shall pay the same taxes as are now or may
"hereafter be required by law from other individuals, copartnerships, private, public or quasi-public associations,
corporations, or joint-stock companies, on his (its) real
estate, buildings, plants, machinery; and other personal
property, except property section. In consideration of the
franchise and rights hereby granted, the grantee shall pay
into the municipal treasury of the (of each) municipality in
which it is supplying electric current to the public under
this franchise, a tax equal to two per centum of the gross
earnings from electric current sold or supplied under this
franchise in said (each) municipality. Said tax shall be due
and payable quarterly and shall be in lieu of any and all
taxes of any kind, nature or description levied,
established, or collected by any authority whatsoever,
municipal, provincial or insular, now or in the future, on its
poles, wires, insulators, switches; transformers and
structures, installations, conductors, and accessories,
placed in and over and under all public property, including
public streets and highways, provincial roads, bridges and
public squares, and on its franchise, rights, privileges,
receipts, revenues and profits, from which taxes the
grantee is hereby expressly exempted. (113 Phil. 569570)
The Court applying the ruling in Panay Electric denied the
exemption with the added statement that

Considering, therefore, the fact that section 190 of the Tax

Code is a sort of an equalizer, to place casual importers,
who are not merchants on equal footing with established
merchants who pay sales tax on articles imported by
them ... We may conclude that it was not the intention of
the law to exempt the payment of compensating tax on
the personal properties in question. The principle and
legal
philosophy
underlying
the
imposition
of
compensating tax, as enunciated in the above case
(referring to Borja), are fundamentally correct, and no
plausible reason is advanced for their non-application to
the case at bar. (p. 572, ibid.)
Petitioner claims that there exists a difference between
paragraph 9 of its franchise and the corresponding
provisions of the franchise of Panay Electric and Borja in
that in the latter, unlike in the former, there is no
statement that the grantee is exempt from "all taxes of
whatsoever nature and whatsoever authority." In addition,
petitioner points out, the franchise of Panay Electric and
Borja contains a qualifying phrase, to wit: "placed in and
over the public streets, avenues, roads, thoroughfares,
etc."
A comparison of the pertinent provisions mentioned by
petitioner and which are quoted in the preceding pages
reveals no substantial or fundamental distinction as to
remove petitioner MERALCO from the ambit of the Panay
Electric and Borja ruling. There may be differences in the
phraseology used, but the intent to exempt the grantee
from the payment only of property tax on its poles, wires,
transformers, and insulators is evidently common to the
three; withal, in all the franchises in question there is no
specific mention of exemption of the grantee from the
payment of compensating tax.
Petitioner disputes, however, the applicability of the stare
decisis principle to its case claiming that this Court should
not blindly follow the doctrine of Panay Electric and Borja,
and that in Philippine Trust Co. et al. vs. Mitchell, 59 Phil.
30, 36, the Court had occasion to state: ,the rule of stare
decisis is entitled to respect. Stability in the law,

particularly in the business field, is desirable. But

idolatrous reverence for precedent, simply as precedent,
no longer rules. More important than anything else is that
the court should be right." (pp. 18-19, petitioner's brief, L29987)
But what possible ground can there be for deviating from
the decisions of this Court in these two cases? A doctrine
buttressed by the law, reason, and logic is not to be
simply brushed aside to suit the convenience of a
particular party or interest or to avoid hardship to one. As
We view this legal problem, no justification can be found
for giving petitioner herein preferential treatment by
reading into its franchise an exemption from a particular
kind of tax which is not there. If it had been the legislative
intent to exempt MERALCO from paying a tax on the use
of imported equipments, the legislative body could have
easily done so by expanding the provision of paragraph 9
and adding to the exemption such words as
"compensating tax" or "purchases from abroad for use in
its business," and the like. We cannot ignore the principle
that express mention in a statute of one exemption
precludes reading others into it. (Hoard vs. Sears,
Roebuck & Co., 122 Conn. 185, 193, 188 A. 269)
On this point, the Government correctly argues that the
provision in petitioner's franchise that the payment of the
percentage tax on the gross earnings shall be "in lieu of
all taxes and assessments of whatsoever nature, and
whatsoever authority" is not to be given a literal meaning
as to preclude the imposition of the compensating tax in
this particular case, and cites for its authority the Opinion
of the Supreme Court of Connecticut rendered in
Connecticut Light & Power Co., et al. vs. Walsh, 1948,
which involved the construction of a statute imposing a
sales and use tax, and which inter alia held:
The broad statement that the tax upon the gross earning
of telephone companies shall be "in lieu of all other
taxation" upon them is not necessarily to be given a literal
meaning. "In construing the act it is our duty to seek the
real intent of the legislature, even though by so doing we

may limit the literal meaning of the broad language

used." Greenwich Trust Co. v. Tyson, 129 Conn. 211, 222,
27 A. 2d 166, 172. It is not reasonable to assume that the
General Assembly intended by the provisions we have
quoted that the tax on gross earnings should take the
place of taxes of a kind not then anywhere imposed and
entire outside its knowledge. ... ." (57 A.R., 2d S, pp. 129,
133-134, emphasis supplied)
In 1902 when Act 484 of the Philippine Commission was
enacted, "compensating tax' was certainly not generally
known or in use, hence, to paraphrase the abovementioned Connecticut decision, the Court cannot assume
that the Philippine Commission in providing that the gross
earnings taxes imposed on the grantee of the electric
light franchise shall be in lieu of all taxes and
assessments, meant to include impositions in the nature
of a compensating tax which came into use in this country
only upon the enactment of Commonwealth Act 466 in
1939.
5.
One last argument of petitioner to support its cause
is that just as a new and necessary industry was held to
be exempt from paying a compensating tax on its imports
under the tax exemption provision of Republic Act 901, so
should MERALCO be exempt from such a tax under the
general clause in its franchise, to wit: "... in lieu of all
taxes and assessments of whatsoever nature and
whatsoever authority upon poles, wires, etc."
We agree with the court below that there can be no
analogy between MERALCO and what is considered as a
new and necessary industry under Republic Act 35 now
superseded by Republic Act 901.
The rationale of Republic Act 901 is "to encourage the
establishment or exploitation of new and necessary
industries to promote the economic growth of the
country," and because "an entrepreneur engaging in a
new and necessary industry faces uncertainty and
assumes a risk bigger than one engaging in a venture
already known and developed ... the law grants him tax

exemption to lighten onerous financial burdens and

reduce losses." (Marcelo Steel Corporation vs. Collector of
Internal Revenue, 109 Phil. 921, 926) This intendment of
the legislature in enacting Republic Act 901 is not the
motivation behind the tax exemption clause found in
petitioner MERALCO's franchise; consequently, there can
be no analogy between the two.
IN VIEW OF THE FOREGOING, We find no merit in these
Petitions for Review and We hereby AFFIRM the decision of
the Court of Tax Appeals in these two cases, with costs
against petitioner in both instances.
So Ordered.
Castro (Actg. C.J.), Teehankee, Aquino and Martin, JJ.,
concur.
Makasiar, J., took no part.

QUEZON CITY and THE CITY G.R. No. 166408

TREASURER OF QUEZON CITY,
Petitioners,
Present:
YNARES-SANTIAGO, J.,
Chairperson,
- versus - AUSTRIA-MARTINEZ,
CHICO-NAZARIO,
NACHURA, and
REYES, JJ.
ABS-CBN BROADCASTING Promulgated:
CORPORATION,
Respondent. October 6, 2008
x-------------------------------------------------x
DECISION
REYES, R.T., J.:
CLAIMS for tax exemption must be based on language in
law too plain to be mistaken. It cannot be made out of
inference or implication.
The principle is relevant in this petition for review on
certiorari of the Decision[1] of the Court of Appeals (CA)
and that[2] of the Regional Trial Court (RTC) ordering the
refund and declaring invalid the imposition and collection
of local franchise tax by the City Treasurer of Quezon City
on ABS-CBN Broadcasting Corporation (ABS-CBN).
The Facts
Petitioner City Government of Quezon City is a local
government unit duly organized and existing by virtue of
Republic Act (R.A.) No. 537, otherwise known as the
Revised Charter of Quezon City. Petitioner City Treasurer

of Quezon City is primarily responsible for the imposition

and collection of taxes within the territorial jurisdiction of
Quezon City.
Under Section 31, Article 13 of the Quezon City Revenue
Code of 1993,[3] a franchise tax was imposed on
businesses operating within its jurisdiction. The provision
states:
Section 31. Imposition of Tax. Any provision of special
laws or grant of tax exemption to the contrary
notwithstanding, any person, corporation, partnership or
association enjoying a franchise whether issued by the
national government or local government and, doing
business in Quezon City, shall pay a franchise tax at the
rate of ten percent (10%) of one percent (1%) for 19931994, twenty percent (20%) of one percent (1%) for 1995,
and thirty percent (30%) of one percent (1%) for 1996 and
the succeeding years thereafter, of gross receipts and
sales derived from the operation of the business in
Quezon City during the preceding calendar year.
On May 3, 1995, ABS-CBN was granted the franchise to
install and operate radio and television broadcasting
stations in the Philippines under R.A. No. 7966.[4] Section
8 of R.A. No. 7966 provides the tax liabilities of ABS-CBN
which reads:
Section 8. Tax Provisions. The grantee, its successors or
assigns, shall be liable to pay the same taxes on their real
estate, buildings and personal property, exclusive of this
franchise, as other persons or corporations are now
hereafter may be required by law to pay. In addition
thereto, the grantee, its successors or assigns, shall pay a
franchise tax equivalent to three percent (3%) of all gross
receipts of the radio/television business transacted under
this franchise by the grantee, its successors or assigns,
and the said percentage tax shall be in lieu of all taxes on
this franchise or earnings thereof; Provided that the
grantee, its successors or assigns shall continue to be
liable for income taxes under Title II of the National
Internal Revenue Code pursuant to Section 2 of Executive

No. 72 unless the latter enactment is amended or

repealed, in which case the amendment or repeal shall be
applicable thereto. (Emphasis added)
ABS-CBN had been paying local franchise tax imposed by
Quezon City. However, in view of the above provision in
R.A. No. 9766 that it shall pay a franchise tax x x x in lieu
of all taxes, the corporation developed the opinion that it
is not liable to pay the local franchise tax imposed by
Quezon City. Consequently, ABS-CBN paid under protest
the local franchise tax imposed by Quezon City on the
dates, in the amounts and under the official receipts as
follows:
O.R. No. Date Amount Paid
2464274 07-18-95 P 1,489,977.28
2484651 10-20-95 1,489,977.28
2536134 1-22-96 2,880,975.65
8354906 1-23-97 8,621,470.83
0048756 1-23-97 2,731,135.81
0067352 4-03-97 2,731,135.81
Total P19,944,672.66[5]
On January 29, 1997, ABS-CBN filed a written claim for
refund for local franchise tax paid to Quezon City for 1996
and for the first quarter of 1997 in the total amount of
Fourteen Million Two Hundred Thirty-Three Thousand Five
Hundred
Eighty-Two
and
29/100
centavos
(P14,233,582.29) broken down as follows:
O.R. No Date Amount Paid
2536134 1-22-96 P 2,880,975.65
8354906 1-23-97 8,621,470.83
0048756 1-23-97 2,731,135.81
Total P14,233,582.29[6]
In a letter dated March 3, 1997 to the Quezon City
Treasurer, ABS-CBN reiterated its claim for refund of local
franchise taxes paid.

On June 25, 1997, for failure to obtain any response from

the Quezon City Treasurer, ABS-CBN filed a complaint
before the RTC in Quezon City seeking the declaration of
nullity of the imposition of local franchise tax by the City
Government of Quezon City for being unconstitutional. It
likewise prayed for the refund of local franchise tax in the
amount of Nineteen Million Nine Hundred Forty-Four
Thousand Six Hundred Seventy-Two and 66/100 centavos
(P19,944,672.66) broken down as follows:
O.R. No. Date Amount Paid
2464274 7-18-95 P 1,489,977.28
2484651 10-20-95 1,489,977.28
2536134 1-22-96 2,880,975.65
8354906 1-23-97 8,621,470.83
0048756 1-23-97 2,731,135.81
0067352 4-03-97 2,731,135.81
Total P19,944,672.66[7]
Quezon City argued that the in lieu of all taxes provision
in R.A. No. 9766 could not have been intended to prevail
over a constitutional mandate which ensures the viability
and self-sufficiency of local government units. Further,
that taxes collectible by and payable to the local
government were distinct from taxes collectible by and
payable to the national government, considering that the
Constitution specifically declared that the taxes imposed
by local government units shall accrue exclusively to the
local governments. Lastly, the City contended that the
exemption claimed by ABS-CBN under R.A. No. 7966 was
withdrawn by Congress when the Local Government Code
(LGC) was passed.[8] Section 193 of the LGC provides:
Section 193. Withdrawal of Tax Exemption Privileges.
Unless otherwise provided in this Code, tax exemptions or
incentives granted to, or presently enjoyed by all persons,
whether natural or juridical, including government-owned
or -controlled corporations, except local water districts,
cooperatives duly registered under R.A. 6938, non-stock
and non-profit hospitals and educational institutions, are
hereby withdrawn upon the effectivity of this Code.
(Emphasis added)

On August 13, 1997, ABS-CBN filed a supplemental

complaint adding to its claim for refund the local franchise
tax paid for the third quarter of 1997 in the amount of Two
Million Seven Hundred Thirty-One Thousand One Hundred
Thirty-Five and 81/100 centavos (P2,731,135.81) and of
other amounts of local franchise tax as may have been
and will be paid by ABS-CBN until the resolution of the
case.
Quezon City insisted that the claim for refund must fail
because of the absence of a prior written claim for it.
RTC and CA Dispositions
On January 20, 1999, the RTC rendered judgment
declaring as invalid the imposition on and collection from
ABS-CBN of local franchise tax paid pursuant to Quezon
City Ordinance No. SP-91, S-93, after the enactment of
R.A. No. 7966, and ordered the refund of all payments
made. The dispositive portion of the RTC decision reads:
WHEREFORE, judgment is hereby rendered declaring the
imposition on and collection from plaintiff ABS-CBN
BROADCASTING CORPORATION of local franchise taxes
pursuant to Quezon City Ordinance No. SP-91, S-93 after
the enactment of Republic Act No. 7966 to be invalid, and,
accordingly, the Court hereby orders the defendants to
refund all its payments made after the effectivity of its
legislative franchise on May 3, 1995.
SO ORDERED.[9]
In its decision, the RTC ruled that the in lieu of all taxes
provision contained in Section 8 of R.A. No. 7966
absolutely excused ABS-CBN from the payment of local
franchise tax imposed under Quezon City Ordinance No.
SP-91, S-93. The intent of the legislature to excuse ABSCBN from payment of local franchise tax could be
discerned from the usage of the in lieu of all taxes
provision and from the absence of any qualification except
income taxes. Had Congress intended to exclude taxes

imposed from the exemption, it would have expressly

mentioned so in a fashion similar to the proviso on income
taxes.
The RTC also based its ruling on the 1990 case of Province
of Misamis Oriental v. Cagayan Electric Power and Light
Company, Inc. (CEPALCO).[10] In said case, the exemption
of respondent electric company CEPALCO from payment
of provincial franchise tax was upheld on the ground that
the franchise of CEPALCO was a special law, while the
Local Tax Code, on which the provincial ordinance
imposing the local franchise tax was based, was a general
law. Further, it was held that whenever there is a conflict
between two laws, one special and particular and the
other general, the special law must be taken as intended
to constitute an exception to the general act.
The RTC noted that the legislative franchise of ABS-CBN
was granted years after the effectivity of the LGC. Thus, it
was unavoidable to conclude that Section 8 of R.A. No.
7966 was an exception since the legislature ought to be
presumed to have enacted it with the knowledge and
awareness of the existence and prior enactment of
Section 137[11] of the LGC.
In addition, the RTC, again citing the case of Province of
Misamis Oriental v. Cagayan Electric Power and Light
Company, Inc. (CEPALCO),[12] ruled that the imposition of
the local franchise tax was an impairment of ABS-CBNs
contract with the government. The imposition of another
franchise on the corporation by the local authority would
constitute an impairment of the formers charter, which is
in the nature of a private contract between it and the
government.
As to the amounts to be refunded, the RTC rejected
Quezon Citys position that a written claim for refund
pursuant to Section 196 of the LGC was a condition sine
qua non before filing the case in court. The RTC ruled that
although Fourteen Million Two Hundred Thirty-Three
Thousand Five Hundred Eighty-Two and 29/100 centavos
(P14,233,582.29) was the only amount stated in the letter

to the Quezon City Treasurer claiming refund, ABS-CBN

should nonetheless be also refunded of all payments
made after the effectivity of R.A. No. 7966. The inaction of
the City Treasurer on the claim for refund of ABS-CBN
legally rendered any further claims for refund on the part
of plaintiff absurd and futile in relation to the succeeding
payments.
The City of Quezon and its Treasurer filed a motion for
reconsideration which was subsequently denied by the
RTC. Thus, appeal was made to the CA. On September 1,
2004, the CA dismissed the petition of Quezon City and its
Treasurer. According to the appellate court, the issues
raised were purely legal questions cognizable only by the
Supreme Court. The CA ratiocinated:
For another, the issues which appellants submit for this
Courts consideration are more of legal query necessitating
a legal opinion rather than a call for adjudication on the
matter in dispute.
xxxx
The first issue has earlier been categorized in Province of
Misamis Oriental v. Cagayan Electric and Power Co., Inc.
to be a legal one. There is no more argument to this.
The next issue although it may need the reexamination of
the pertinent provisions of the local franchise and the
legislative franchise given to appellee, also needs no
evaluation of facts. It suffices that there may be a conflict
which may need to be reconciled, without regard to the
factual backdrop of the case.
The last issue deals with a legal question, because
whether or not there is a prior written claim for refund is
no longer in dispute. Rather, the question revolves on
whether the said requirement may be dispensed with,
which obviously is not a factual issue.[13]
On September 23, 2004, petitioner moved for
reconsideration. The motion was, however, denied by the

CA in its Resolution dated December 16, 2004. Hence, the

present recourse.
Issues
Petitioner submits the following issues for resolution:
I.
Whether or not the phrase in lieu of all taxes indicated in
the franchise of the respondent appellee (Section 8 of RA
7966) serves to exempt it from the payment of the local
franchise tax imposed by the petitioners-appellants.
II.
Whether or not the petitioners-appellants raised factual
and legal issues before the Honorable Court of Appeals.
[14]
Our Ruling
The second issue, being procedural in nature, shall be
dealt with immediately. But there are other resultant
issues linked to the first.
I. The dismissal by the CA of petitioners appeal is in order
because it raised purely legal issues, namely:
1) Whether appellee, whose franchise expressly provides
that its payment of franchise tax shall be in lieu of all
taxes in this franchise or earnings thereof, is absolutely
excused from paying the franchise tax imposed by
appellants;
2) Whether appellants imposition of local franchise tax is
a violation of appellees legislative franchise; and
3) Whether one can do away with the requirement on
prior written claim for refund.[15]
Obviously, these are purely legal questions, cognizable by
this Court, to the exclusion of all other courts. There is a

question of law when the doubt or difference arises as to

what the law is pertaining to a certain state of facts.[16]
Section 2, Rule 50 of the Rules of Court provides that an
appeal taken to the CA under Rule 41 raising only
questions of law is erroneous and shall be dismissed,
issues of pure law not being within its jurisdiction.[17]
Consequently, the dismissal by the CA of petitioners
appeal was in order.
In the recent case of Sevilleno v. Carilo,[18] this Court
ruled that the dismissal of the appeal of petitioner was
valid, considering the issues raised there were pure
questions of law, viz.:
Petitioners interposed an appeal to the Court of Appeals
but it was dismissed for being the wrong mode of appeal.
The appellate court held that since the issue being raised
is whether the RTC has jurisdiction over the subject
matter of the case, which is a question of law, the appeal
should have been elevated to the Supreme Court under
Rule 45 of the 1997 Rules of Civil Procedure, as amended.
Section 2, Rule 41 of the same Rules which governs
appeals from judgments and final orders of the RTC to the
Court of Appeals, provides:
SEC. 2. Modes of appeal.
(a) Ordinary appeal. The appeal to the Court of Appeals in
cases decided by the Regional Trial Court in the exercise
of its original jurisdiction shall be taken by
filing a notice of appeal with the court which rendered the
judgment or final order appealed from and serving a copy
thereof upon the adverse party. No record on appeal shall
be required except in special proceedings and other cases
of multiple or separate appeals where the law or these
Rules so require. In such cases, the record on appeal shall
be filed and served in like manner.
(b) Petition for review. The appeal to the Court of Appeals
in cases decided by the Regional Trial Court in the
exercise of its appellate jurisdiction shall be by petition for
review in accordance with Rule 42.

(c) Appeal by certiorari. In all cases where only questions

of law are raised or involved, the appeal shall be to the
Supreme Court by petition for review on certiorari in
accordance with Rule 45.
In Macawili Gold Mining and Development Co., Inc. v.
Court of Appeals, we summarized the rule on appeals as
follows:
(1) In all cases decided by the RTC in the exercise of its
original jurisdiction, appeal may be made to the Court of
Appeals by mere notice of appeal where the appellant
raises questions of fact or mixed questions of fact and
law;
(2) In all cases decided by the RTC in the exercise of its
original jurisdiction where the appellant raises only
questions of law, the appeal must be taken to the
Supreme Court on a petition for review on certiorari under
Rule 45;
(3) All appeals from judgments rendered by the RTC in the
exercise of its appellate jurisdiction, regardless of whether
the appellant raises questions of fact, questions of law, or
mixed questions of fact and law, shall be brought to the
Court of Appeals by filing a petition for review under Rule
42.
It is not disputed that the issue brought by petitioners to
the Court of Appeals involves the jurisdiction of the RTC
over the subject matter of the case. We have a long
standing rule that a courts jurisdiction over the subject
matter of an action is conferred only by the Constitution
or by statute. Otherwise put, jurisdiction of a court over
the subject matter of the action is a matter of law.
Consequently, issues which deal with the jurisdiction of a
court over the subject matter of a case are pure questions
of law. As petitioners appeal solely involves a question of
law, they should have directly taken their appeal to this
Court by filing a petition for review on certiorari under
Rule 45, not an ordinary appeal with the Court of Appeals

under Rule 41. Clearly, the appellate court did not err in
holding that petitioners pursued the wrong mode of
appeal.

Indeed, the Court of Appeals did not err in dismissing

petitioners appeal. Section 2, Rule 50 of the same Rules
provides that an appeal from the RTC to the Court of
Appeals raising only questions of law shall be dismissed;
and that an appeal erroneously taken to the Court of
Appeals shall be dismissed outright, x x x.[19] (Emphasis
added)
However, to serve the demands of substantial justice and
equity, the Court opts to relax procedural rules and rule
upon on the merits of the case. In Ong Lim Sing Jr. v. FEB
Leasing and Finance Corporation,[20] this Court stated:
Courts have the prerogative to relax procedural rules of
even the most mandatory character, mindful of the duty
to reconcile both the need to speedily put an end to
litigation and the parties right to due process. In
numerous cases, this Court has allowed liberal
construction of the rules when to do so would serve the
demands of substantial justice and equity. In Aguam v.
Court of Appeals, the Court explained:
The court has the discretion to dismiss or not to dismiss
an appellants appeal. It is a power conferred on the court,
not a duty. The discretion must be a sound one, to be
exercised in accordance with the tenets of justice and fair
play, having in mind the circumstances obtaining in each
case. Technicalities, however, must be avoided. The law
abhors technicalities that impede the cause of justice. The
courts primary duty is to render or dispense justice. A
litigation is not a game of technicalities. Lawsuits unlike
duels are not to be won by a rapiers thrust. Technicality,
when it deserts its proper office as an aid to justice and
becomes its great hindrance and chief enemy, deserves
scant consideration from courts. Litigations must be

decided on their merits and not on technicality. Every

party litigant must be afforded the amplest opportunity
for the proper and just determination of his cause, free
from the unacceptable plea of technicalities. Thus,
dismissal of appeals purely on technical grounds is
frowned upon where the policy of the court is to
encourage hearings of appeals on their merits and the
rules of procedure ought not to be applied in a very rigid,
technical sense; rules of procedure are used only to help
secure, not override substantial justice. It is a far better
and more prudent course of action for the court to excuse
a technical lapse and afford the parties a review of the
case on appeal to attain the ends of justice rather than
dispose of the case on technicality and cause a grave
injustice to the parties, giving a false impression of
speedy disposal of cases while actually resulting in more
delay, if not a miscarriage of justice.[21]
II. The in lieu of all taxes provision in its franchise does not
exempt ABS-CBN from payment of local franchise tax.
A. The present controversy essentially boils down to a
dispute between the inherent taxing power of Congress
and the delegated authority to tax of local governments
under the 1987 Constitution and effected under the LGC
of 1991.
The power of the local government of Quezon City to
impose franchise tax is based on Section 151 in relation to
Section 137 of the LGC, to wit:
Section 137. Franchise Tax. Notwithstanding any
exemption granted by any law or other special law, the
province may impose a tax on businesses enjoying a
franchise, at the rate not exceeding fifty percent (50%) of
one percent (1%) of the gross annual receipts for the
preceding calendar year based on the incoming receipt, or
realized within its territorial jurisdiction. x x x
xxxx

Section 151. Scope of Taxing Powers. Except as otherwise

provided in this Code, the city may levy the taxes, fees
and charges which the province or municipality may
impose: Provided, however, That the taxes, fees and
charges levied and collected by highly urbanized and
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. (Emphasis supplied)
Such taxing power by the local government, however, is
limited in the sense that Congress can enact legislation
granting exemptions. This principle was upheld in City
Government of Quezon City, et al. v. Bayan
Telecommunications, Inc.[22] Said this Court:

This thus raises the question of whether or not the Citys

Revenue Code pursuant to which the city treasurer of
Quezon City levied real property taxes against Bayantels
real properties located within the City effectively withdrew
the tax exemption enjoyed by Bayantel under its
franchise, as amended.
Bayantel answers the poser in the negative arguing that
once again it is only liable to pay the same taxes, as any
other persons or corporations on all its real or personal
properties, exclusive of its franchise.
Bayantels posture is well-taken. While the system of local
government taxation has changed with the onset of the
1987 Constitution, the power of local government units to
tax is still limited. As we explained in Mactan Cebu
International Airport Authority:
The power to tax is primarily vested in the Congress;
however, in our jurisdiction, it may be exercised by local
legislative bodies, no longer merely be virtue of a valid
delegation as before, but pursuant to direct authority

conferred by Section 5, Article X of the Constitution.

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. x x x
Clearly then, while a new slant on the subject of local
taxation now prevails in the sense that the former
doctrine of local government units delegated power to tax
had been effectively modified with Article X, Section 5 of
the 1987 Constitution now in place, the basic doctrine on
local taxation remains essentially the same. For as the
Court stressed in Mactan, the power to tax is [still]
primarily vested in the Congress.
This new perspective is best articulated by Fr. Joaquin G.
Bernas, S.J., himself a Commissioner of the 1986
Constitutional Commission which crafted the 1987
Constitution, thus:
What is the effect of Section 5 on the fiscal position of
municipal corporations? Section 5 does not change the
doctrine that municipal corporations do not possess
inherent powers of taxation. What it does is to confer
municipal corporations a general power to levy taxes and
otherwise create sources of revenue. They no longer have
to wait for a statutory grant of these powers. The power of
the legislative authority relative to the fiscal powers of
local governments has been reduced to the authority to
impose limitations on municipal powers. Moreover, these
limitations must be consistent with the basic policy of
local autonomy. The important legal effect of Section 5 is
thus to reverse the principle that doubts are resolved
against
municipal
corporations.
Henceforth,
in
interpreting statutory provisions on municipal fiscal
powers, doubts will be resolved in favor of municipal
corporations. It is understood, however, that taxes
imposed by local government must be for a public
purpose, uniform within a locality, must not be
confiscatory, and must be within the jurisdiction of the
local unit to pass.

In net effect, the controversy presently before the Court

involves, at bottom, a clash between the inherent taxing
power of the legislature, which necessarily includes the
power to exempt, and the local governments delegated
power to tax under the aegis of the 1987 Constitution.
Now to go back to the Quezon City Revenue Code which
imposed real estate taxes on all real properties within the
citys territory and removed exemptions theretofore
previously granted to, or presently enjoyed by all persons,
whether natural or juridical [x x x] there can really be no
dispute that the power of the Quezon City Government to
tax is limited by Section 232 of the LGC which expressly
provides that a province or city or municipality within the
Metropolitan Manila Area may levy an annual ad valorem
tax on real property such as land, building, machinery,
and other improvement not hereinafter specifically
exempted. Under this law, the Legislature highlighted its
power to thereafter exempt certain realties from the
taxing power of local government units. An interpretation
denying Congress such power to exempt would reduce
the phrase not hereinafter specifically exempted as a pure
jargon, without meaning whatsoever. Needless to state,
such absurd situation is unacceptable.
For sure, in Philippine Long Distance Telephone Company,
Inc. (PLDT) vs. City of Davao, this Court has upheld the
power of Congress to grant exemptions over the power of
local government units to impose taxes. There, the Court
wrote:
Indeed, the grant of taxing powers to local government
units under the Constitution and the LGC does not affect
the power of Congress to grant exemptions to certain
persons, pursuant to a declared national policy. The legal
effect of the constitutional grant to local governments
simply means that in interpreting statutory provisions on
municipal taxing powers, doubts must be resolved in favor
of municipal corporations.[23] (Emphasis supplied)
In the case under review, the Philippine Congress enacted
R.A. No. 7966 on March 30, 1995, subsequent to the

effectivity of the LGC on January 1, 1992. Under it, ABSCBN was granted the franchise to install and operate
radio and television broadcasting stations in the
Philippines. Likewise, Section 8 imposed on ABS-CBN the
duty of paying 3% franchise tax. It bears stressing,
however, that payment of the percentage franchise tax
shall be in lieu of all taxes on the said franchise.[24]
Congress has the inherent power to tax, which includes
the power to grant tax exemptions. On the other hand,
the power of Quezon City to tax is prescribed by Section
151 in relation to Section 137 of the LGC which expressly
provides that notwithstanding any exemption granted by
any law or other special law, the City may impose a
franchise tax. It must be noted that Section 137 of the
LGC does not prohibit grant of future exemptions. As
earlier discussed, this Court in City Government of Quezon
City v. Bayan Telecommunications, Inc.[25] sustained the
power of Congress to grant tax exemptions over and
above the power of the local governments delegated
power to tax.
B. The more pertinent issue now to consider is whether or
not by passing R.A. No. 7966, which contains the in lieu of
all taxes provision, Congress intended to exempt ABS-CBN
from local franchise tax.
Petitioners argue that the in lieu of all taxes provision in
ABS-CBNs franchise does not expressly exempt it from
payment of local franchise tax. They contend that a tax
exemption cannot be created by mere implication and
that one who claims tax exemptions must be able to
justify his claim by clearest grant of organic law or
statute.
Taxes are what civilized people pay for civilized society.
They are the lifeblood of the nation. Thus, statutes
granting tax exemptions are construed stricissimi juris
against the taxpayer and liberally in favor of the taxing
authority. A claim of tax exemption must be clearly shown
and based on language in law too plain to be mistaken.
Otherwise stated, taxation is the rule, exemption is the

exception.[26] The burden of proof rests upon the party

claiming the exemption to prove that it is in fact covered
by the exemption so claimed.[27]
The basis for the rule on strict construction to statutory
provisions granting tax exemptions or deductions is to
minimize differential treatment and foster impartiality,
fairness and equality of treatment among taxpayers.[28]
He who claims an exemption from his share of common
burden must justify his claim that the legislature intended
to exempt him by unmistakable terms. For exemptions
from taxation are not favored in law, nor are they
presumed. They must be expressed in the clearest and
most unambiguous language and not left to mere
implications. It has been held that exemptions are never
presumed, the burden is on the claimant to establish
clearly his right to exemption and cannot be made out of
inference or implications but must be laid beyond
reasonable doubt. In other words, since taxation is the
rule and exemption the exception, the intention to make
an exemption ought to be expressed in clear and
unambiguous terms.[29]
Section 8 of R.A. No. 7966 imposes on ABS-CBN a
franchise tax equivalent to three (3) percent of all gross
receipts of the radio/television business transacted under
the franchise and the franchise tax shall be in lieu of all
taxes on the franchise or earnings thereof.
The in lieu of all taxes provision in the franchise of ABSCBN does not expressly provide what kind of taxes ABSCBN is exempted from. It is not clear whether the
exemption would include both local, whether municipal,
city or provincial, and national tax. What is clear is that
ABS-CBN shall be liable to pay three (3) percent franchise
tax and income taxes under Title II of the NIRC. But
whether the in lieu of all taxes provision would include
exemption from local tax is not unequivocal.
As adverted to earlier, the right to exemption from local
franchise tax must be clearly established and cannot be
made out of inference or implications but must be laid

beyond reasonable doubt. Verily, the uncertainty in the in

lieu of all taxes provision should be construed against
ABS-CBN. ABS-CBN has the burden to prove that it is in
fact covered by the exemption so claimed. ABS-CBN
miserably failed in this regard.
ABS-CBN cites the cases Carcar Electric & Ice Plant v.
Collector of Internal Revenue,[30] Manila Railroad v.
Rafferty,[31] Philippine Railway Co. v. Collector of Internal
Revenue,[32] and Visayan Electric Co. v. David[33] to
support its claim that that the in lieu of all taxes clause
includes exemption from all taxes.
However, a review of the foregoing case law reveals that
the grantees respective franchises expressly exempt them
from municipal and provincial taxes. Said the Court in
Manila Railroad v. Rafferty:[34]
On the 7th day of July 1906, by an Act of the Philippine
Legislature, a special charter was granted to the Manila
Railroad Company. Subsection 12 of Section 1 of said Act
(No. 1510) provides that:
In consideration of the premises and of the granting of
this concession or franchise, there shall be paid by the
grantee to the Philippine Government, annually, for the
period of thirty (30) years from the date hereof, an
amount equal to one-half (1/2) of one per cent of the
gross earnings of the grantee in respect of the lines
covered hereby for the preceding year; after said period
of thirty (30) years, and for the fifty (50) years thereafter,
the amount so to be paid annually shall be an amount
equal to one and one-half (1) per cent of such gross
earnings for the preceding year; and after such period of
eighty (80) years, the percentage and amount so to be
paid annually by the grantee shall be fixed by the
Philippine Government.
Such annual payments, when promptly and fully made by
the grantee, shall be in lieu of all taxes of every name and
nature municipal, provincial or central upon its capital
stock, franchises, right of way, earnings, and all other

property owned or operated by the grantee under this

concession or franchise.[35] (Underscoring supplied)
In the case under review, ABS-CBNs franchise did not
embody an exemption similar to those in Carcar, Manila
Railroad, Philippine Railway, and Visayan Electric. Too, the
franchise failed to specify the taxing authority from whose
jurisdiction the taxing power is withheld, whether
municipal, provincial, or national. In fine, since ABS-CBN
failed to justify its claim for exemption from local
franchise tax, by a grant expressed in terms too plain to
be mistaken its claim for exemption for local franchise tax
must fail.
C. The in lieu of all taxes clause in the franchise of ABSCBN has become functus officio with the abolition of the
franchise tax on broadcasting companies with yearly
gross receipts exceeding Ten Million Pesos.
In its decision dated January 20, 1999, the RTC held that
pursuant to the in lieu of all taxes provision contained in
Section 8 of R.A. No. 7966, ABS-CBN is exempt from the
payment of the local franchise tax. The RTC further
pronounced that ABS-CBN shall instead be liable to pay a
franchise tax of 3% of all gross receipts in lieu of all other
taxes.
On this score, the RTC ruling is flawed. In keeping with the
laws that have been passed since the grant of ABS-CBNs
franchise, the corporation should now be subject to VAT,
instead of the 3% franchise tax.

At the time of the enactment of its franchise on May 3,

1995, ABS-CBN was subject to 3% franchise tax under
Section 117(b) of the 1977 National Internal Revenue
Code (NIRC), as amended, viz.:
SECTION 117. Tax on franchises. Any provision of general
or special laws to the contrary notwithstanding, there
shall be levied, assessed and collected in respect to all

franchise, upon the gross receipts from the business

covered by the law granting the franchise, a tax in
accordance with the schedule prescribed hereunder:
(a) On electric utilities, city gas, and water supplies Two
(2%) percent
(b) On telephone and/or telegraph systems, radio and/or
broadcasting stations Three (3%) percent
(c) On other franchises Five (5%) percent. (Emphasis
supplied)
On January 1, 1996, R.A. No. 7716, otherwise known as
the Expanded Value Added Tax Law,[36] took effect and
subjected to VAT those services rendered by radio and/or
broadcasting stations. Section 3 of R.A. No. 7716 provides:
Section 3. Section 102 of the National Internal Revenue
Code, as amended is hereby further amended to read as
follows:
SEC. 102. Value-added tax on sale of services and use or
lease of properties. (a) Rate and base of tax. There shall
be levied, assessed and collected, as value-added tax
equivalent to 10% of gross receipts derived from the sale
or exchange of services, including the use or lease of
properties.
The phrase sale or exchange of services means the
performance of all kinds of services in the Philippines, for
others for a fee, remuneration or consideration, including
those performed or rendered by construction and service
contractors; x x x services of franchise grantees of
telephone
and
telegraph,
radio
and
television
broadcasting and all other franchise grantees except
those under Section 117 of this Code; x x x (Emphasis
supplied)
Notably, under the same law, telephone and/or telegraph
systems, broadcasting stations and other franchise
grantees were omitted from the list of entities subject to
franchise tax. The impression was that these entities were
subject to 10% VAT but not to franchise tax. Only the

franchise tax on electric, gas and water utilities remained.

Section 12 of R.A. No. 7716 provides:

tax due thereon: Provided, further, That once the option is

exercised, it shall not be revoked. (Emphasis supplied)

Section 12. Section 117 of the National Internal Revenue

Code, as amended, is hereby further amended to read as
follows:

On the other hand, radio and/or television companies with

yearly gross receipts exceeding P10,000,000.00 were
subject to 10% VAT, pursuant to Section 102 of the NIRC.

SEC. 117. Tax on Franchises. Any provision of general or

special law to the contrary notwithstanding there shall be
levied, assessed and collected in respect to all franchises
on electric, gas and water utilities a tax of two percent
(2%) on the gross receipts derived from the business
covered by the law granting the franchise. (Emphasis
added)

On January 1, 1998, R.A. No. 8424[39] was passed

confirming the 10% VAT liability of radio and/or television
companies with yearly gross receipts exceeding
P10,000,000.00.

Subsequently, R.A. No. 8241[37] took effect on January 1,

1997[38] containing more amendments to the NIRC. Radio
and/or television companies whose annual gross receipts
do not exceed P10,000,000.00 were granted the option to
choose between paying 3% national franchise tax or 10%
VAT. Section 9 of R.A. No. 8241 provides:
SECTION 9. Section 12 of Republic Act No. 7716 is hereby
amended to read as follows:
Sec. 12. Section 117 of the National Internal Revenue
Code, as amended, is hereby further amended to read as
follows:
Sec. 117. Tax on franchise. Any provision of general or
special law to the contrary, notwithstanding, there shall
be levied, assessed and collected in respect to all
franchises on radio and/or television broadcasting
companies whose annual gross receipts of the preceding
year does not exceed Ten million pesos (P10,000,000.00),
subject to Section 107(d) of this Code, a tax of three
percent (3%) and on electric, gas and water utilities, a tax
of two percent (2%) on the gross receipts derived from
the business covered by the law granting the franchise:
Provided, however, That radio and television broadcasting
companies referred to in this section, shall have an option
to be registered as a value-added tax payer and pay the

R.A. No. 9337 was subsequently enacted and became

effective on July 1, 2005. The said law further amended
the NIRC by increasing the rate of VAT to 12%. The
effectivity of the imposition of the 12% VAT was later
moved from January 1, 2006 to February 1, 2006.
In consonance with the above survey of pertinent laws on
the matter, ABS-CBN is subject to the payment of VAT. It
does not have the option to choose between the payment
of franchise tax or VAT since it is a broadcasting company
with yearly gross receipts exceeding Ten Million Pesos
(P10,000,000.00).
VAT is a percentage tax imposed on any person whether
or not a franchise grantee, who in the course of trade or
business, sells, barters, exchanges, leases, goods or
properties, renders services. It is also levied on every
importation of goods whether or not in the course of trade
or business. The tax base of the VAT is limited only to the
value added to such goods, properties, or services by the
seller, transferor or lessor. Further, the VAT is an indirect
tax and can be passed on to the buyer.

The franchise tax, on the other hand, is a percentage tax

imposed only on franchise holders. It is imposed under
Section 119 of the Tax Code and is a direct liability of the
franchise grantee.

The clause in lieu of all taxes does not pertain to VAT or

any other tax. It cannot apply when what is paid is a tax
other than a franchise tax. Since the franchise tax on the
broadcasting companies with yearly gross receipts
exceeding ten million pesos has been abolished, the in
lieu of all taxes clause has now become functus officio,
rendered inoperative.
In sum, ABS-CBNs claims for exemption must fail on twin
grounds. First, the in lieu of all taxes clause in its franchise
failed to specify the taxes the company is sought to be
exempted from. Neither did it particularize the jurisdiction
from which the taxing power is withheld. Second, the
clause has become functus officio because as the law now
stands, ABS-CBN is no longer subject to a franchise tax. It
is now liable for VAT.
WHEREFORE, the petition is GRANTED and the appealed
Decision REVERSED AND SET ASIDE. The petition in the
trial court for refund of local franchise tax is DISMISSED.

[G.R. No. 112024. January 28, 1999]

PHILIPPINE BANK OF COMMUNICATIONS, petitioner, vs.
COMMISSIONER OF INTERNAL REVENUE, COURT OF TAX
APPEALS and COURT OF APPEALS, respondents.
DECISION
QUISUMBING, J.:
This petition for review assails the Resolution[1] of the
Court of Appeals dated September 22, 1993, affirming the
Decision[2] and Resolution[3] of the Court of Tax Appeals
which denied the claims of the petitioner for tax refund
and tax credits, and disposing as follows:
IN VIEW OF ALL THE FOREGOING, the instant petition for
review is DENIED due course. The Decision of the Court of
Tax Appeals dated May 20, 1993 and its resolution dated
July 20, 1993, are hereby AFFIRMED in toto.
SO ORDERED.[4]
The Court of Tax Appeals earlier ruled as follows:
WHEREFORE, petitioners claim for refund/tax credit of
overpaid income tax for 1985 in the amount of
P5,299,749.95 is hereby denied for having been filed
beyond the reglementary period. The 1986 claim for
refund amounting to P234,077.69 is likewise denied since
petitioner has opted and in all likelihood automatically
credited the same to the succeeding year. The petition for
review is dismissed for lack of merit.
SO ORDERED.[5]
The facts on record show the antecedent circumstances
pertinent to this case.
Petitioner, Philippine Bank of Communications (PBCom), a
commercial banking corporation duly organized under
Philippine laws, filed its quarterly income tax returns for
the first and second quarters of 1985, reported profits,
and paid the total income tax of P5,016,954.00. The taxes

due were settled by applying PBComs tax credit memos

and accordingly, the Bureau of Internal Revenue (BIR)
issued Tax Debit Memo Nos. 0746-85 and 0747-85 for
P3,401,701.00 and P1, 615,253.00, respectively.
Subsequently, however, PBCom suffered losses so that
when it filed its Annual Income Tax Returns for the yearended December 31, 1985, it declared a net loss of
P25,317,228.00, thereby showing no income tax liability.
For the succeeding year, ending December 31, 1986, the
petitioner likewise reported a net loss of P14,129,602.00,
and thus declared no tax payable for the year.
But during these two years, PBCom earned rental income
from leased properties. The lessees withheld and remitted
to the BIR withholding creditable taxes of P282,795.50 in
1985 and P234,077.69 in 1986.
On
August
7,
1987,
petitioner
requested
the
Commissioner of Internal Revenue, among others, for a
tax credit of P5,016,954.00 representing the overpayment
of taxes in the first and second quarters of 1985.
Thereafter, on July 25, 1988, petitioner filed a claim for
refund of creditable taxes withheld by their lessees from
property rentals in 1985 for P282,795.50 and in 1986 for
P234,077.69.
Pending the investigation of the respondent Commissioner
of Internal Revenue, petitioner instituted a Petition for
Review on November 18, 1988 before the Court of Tax
Appeals (CTA). The petition was docketed as CTA Case No.
4309 entitled: Philippine Bank of Communications vs.
Commissioner of Internal Revenue.
The losses petitioner incurred as per the summary of
petitioners claims for refund and tax credit for 1985 and
1986, filed before the Court of Tax Appeals, are as follows:

1985

1986
Net Income (Loss)
(P25,317,228.00)
(P14,129,602.00)
Tax Due
NIL
NIL
Quarterly tax

on the ground that it was filed beyond the two-year

reglementary period provided for by law. The petitioners
claim for refund in 1986 amounting to P234,077.69 was
likewise denied on the assumption that it was
automatically credited by PBCom against its tax payment
in the succeeding year.
On June 22, 1993, petitioner filed a Motion for
Reconsideration of the CTAs decision but the same was
denied due course for lack of merit.[6]
Thereafter, PBCom filed a petition for review of said
decision and resolution of the CTA with the Court of
Appeals. However on September 22, 1993, the Court of
Appeals affirmed in toto the CTAs resolution dated July 20,
1993. Hence this petition now before us.
The issues raised by the petitioner are:

Payments Made
5,016,954.00
--Tax Withheld at Source
282,795.50

I. Whether taxpayer PBCom -- which relied in good faith

on the formal assurances of BIR in RMC No. 7-85 and did
not immediately file with the CTA a petition for review
asking for the refund/tax credit of its 1985-86 excess
quarterly income tax payments -- can be prejudiced by
the subsequent BIR rejection, applied retroactively, of its
assurances in RMC No. 7-85 that the prescriptive period
for the refund/tax credit of excess quarterly income tax
payments is not two years but ten (10).[7]

234,077.69
Excess Tax Payments
P5,299,749.50* ==============
P234,077.69 ==============
*CTAs decision reflects PBComs 1985 tax claim as
P5,299,749.95. A forty-five centavo difference was noted.
On May 20, 1993, the CTA rendered a decision which, as
stated on the outset, denied the request of petitioner for a
tax refund or credit in the sum amount of P5,299,749.95,

II. Whether the Court of Appeals seriously erred in

affirming the CTA decision which denied PBComs claim for
the refund of P234,077.69 income tax overpaid in 1986 on
the mere speculation, without proof, that there were taxes
due in 1987 and that PBCom availed of tax-crediting that
year.[8]
Simply stated, the main question is: Whether or not the
Court of Appeals erred in denying the plea for tax refund
or tax credits on the ground of prescription, despite
petitioners reliance on RMC No. 7-85, changing the
prescriptive period of two years to ten years?

Petitioner argues that its claims for refund and tax credits
are not yet barred by prescription relying on the
applicability of Revenue Memorandum Circular No. 7-85
issued on April 1, 1985. The circular states that overpaid
income taxes are not covered by the two-year prescriptive
period under the tax Code and that taxpayers may claim
refund or tax credits for the excess quarterly income tax
with the BIR within ten (10) years under Article 1144 of
the Civil Code. The pertinent portions of the circular
reads:
REVENUE MEMORANDUM CIRCULAR NO. 7-85
SUBJECT: PROCESSING OF REFUND OR TAX CREDIT OF
EXCESS CORPORATE INCOME TAX RESULTING FROM THE
FILING OF THE FINAL ADJUSTMENT RETURN
TO: All Internal Revenue Officers and Others Concerned
Sections 85 and 86 of the National Internal Revenue Code
provide:
xxxxxxxxx
The foregoing provisions are implemented by Section 7 of
Revenue Regulations Nos. 10-77 which provide:
xxxxxxxxx
It has been observed, however, that because of the
excess tax payments, corporations file claims for recovery
of overpaid income tax with the Court of Tax Appeals
within the two-year period from the date of payment, in
accordance with Sections 292 and 295 of the National
Internal Revenue Code. It is obvious that the filing of the
case in court is to preserve the judicial right of the
corporation to claim the refund or tax credit.
It should be noted, however, that this is not a case of
erroneously or illegally paid tax under the provisions of
Sections 292 and 295 of the Tax Code.

In the above provision of the Regulations the corporation

may request for the refund of the overpaid income tax or
claim for automatic tax credit. To insure prompt action on
corporate annual income tax returns showing refundable
amounts arising from overpaid quarterly income taxes,
this Office has promulgated Revenue Memorandum Order
No. 32-76 dated June 11, 1976, containing the procedure
in processing said returns. Under these procedures, the
returns are merely pre-audited which consist mainly of
checking mathematical accuracy of the figures of the
return. After which, the refund or tax credit is granted,
and, this procedure was adopted to facilitate immediate
action on cases like this.
In this regard, therefore, there is no need to file petitions
for review in the Court of Tax Appeals in order to preserve
the right to claim refund or tax credit within the two-year
period. As already stated, actions hereon by the Bureau
are immediate after only a cursory pre-audit of the
income tax returns. Moreover, a taxpayer may recover
from the Bureau of Internal Revenue excess income tax
paid under the provisions of Section 86 of the Tax Code
within 10 years from the date of payment considering that
it is an obligation created by law (Article 1144 of the Civil
Code).[9] (Emphasis supplied.)
Petitioner argues that the government is barred from
asserting a position contrary to its declared circular if it
would result to injustice to taxpayers. Citing ABS-CBN
Broadcasting Corporation vs. Court of Tax Appeals[10]
petitioner claims that rulings or circulars promulgated by
the Commissioner of Internal Revenue have no retroactive
effect if it would be prejudicial to taxpayers. In ABS-CBN
case, the Court held that the government is precluded
from adopting a position inconsistent with one previously
taken where injustice would result therefrom or where
there has been a misrepresentation to the taxpayer.
Petitioner contends that Sec. 246 of the National Internal
Revenue Code explicitly provides for this rule as follows:

Sec. 246. Non-retroactivity of rulings-- Any revocation,

modification or reversal of any of the rules and
regulations promulgated in accordance with the preceding
section or any of the rulings or circulars promulgated by
the Commissioner shall not be given retroactive
application if the revocation, modification, or reversal will
be prejudicial to the taxpayers except in the following
cases:
a) where the taxpayer deliberately misstates or omits
material facts from his return or in any document required
of him by the Bureau of Internal Revenue;
b) where the facts subsequently gathered by the Bureau
of Internal Revenue are materially different from the facts
on which the ruling is based;
c) where the taxpayer acted in bad faith.
Respondent Commissioner of Internal Revenue, through
the Solicitor General, argues that the two-year
prescriptive period for filing tax cases in court concerning
income tax payments of Corporations is reckoned from
the date of filing the Final Adjusted Income Tax Return,
which is generally done on April 15 following the close of
the
calendar
year.
As
precedents,
respondent
Commissioner cited cases which adhered to this principle,
to wit: ACCRA Investments Corp. vs. Court of Appeals, et
al.,[11] and Commissioner of Internal Revenue vs. TMX
Sales, Inc., et al..[12] Respondent Commissioner also
states that since the Final Adjusted Income Tax Return of
the petitioner for the taxable year 1985 was supposed to
be filed on April 15, 1986, the latter had only until April
15, 1988 to seek relief from the court. Further, respondent
Commissioner stresses that when the petitioner filed the
case before the CTA on November 18, 1988, the same
was filed beyond the time fixed by law, and such failure is
fatal to petitioners cause of action.
After a careful study of the records and applicable
jurisprudence on the matter, we find that, contrary to the
petitioners contention, the relaxation of revenue

regulations by RMC 7-85 is not warranted as it disregards

the two-year prescriptive period set by law.
Basic is the principle that taxes are the lifeblood of the
nation. The primary purpose is to generate funds for the
State to finance the needs of the citizenry and to advance
the common weal.[13] Due process of law under the
Constitution does not require judicial proceedings in tax
cases. This must necessarily be so because it is upon
taxation that the government chiefly relies to obtain the
means to carry on its operations and it is of utmost
importance that the modes adopted to enforce the
collection of taxes levied should be summary and
interfered with as little as possible.[14]
From the same perspective, claims for refund or tax credit
should be exercised within the time fixed by law because
the BIR being an administrative body enforced to collect
taxes, its functions should not be unduly delayed or
hampered by incidental matters.
Section 230 of the National Internal Revenue Code (NIRC)
of 1977 (now Sec. 229, NIRC of 1997) provides for the
prescriptive period for filing a court proceeding for the
recovery of tax erroneously or illegally collected, viz.:
Sec. 230. Recovery of tax erroneously or illegally
collected. -- No suit or proceeding shall be maintained in
any court for the recovery of any national internal
revenue tax hereafter alleged to have been erroneously or
illegally assessed or collected, or of any penalty claimed
to have been collected without authority, or of any sum
alleged to have been excessive or in any manner
wrongfully collected, until a claim for refund or credit has
been duly filed with the Commissioner; but such suit or
proceeding may be maintained, whether or not such tax,
penalty, or sum has been paid under protest or duress.
In any case, no such suit or proceeding shall be begun
after the expiration of two years from the date of payment
of the tax or penalty regardless of any supervening cause
that may arise after payment; Provided however, That the

Commissioner may, even without a written claim therefor,

refund or credit any tax, where on the face of the return
upon which payment was made, such payment appears
clearly to have been erroneously paid. (Italics supplied)
The rule states that the taxpayer may file a claim for
refund or credit with the Commissioner of Internal
Revenue, within two (2) years after payment of tax,
before any suit in CTA is commenced. The two-year
prescriptive period provided, should be computed from
the time of filing the Adjustment Return and final payment
of the tax for the year.
In Commissioner of Internal Revenue vs. Philippine
American Life Insurance Co.,[15] this Court explained the
application of Sec. 230 of 1977 NIRC, as follows:
Clearly, the prescriptive period of two years should
commence to run only from the time that the refund is
ascertained, which can only be determined after a final
adjustment return is accomplished. In the present case,
this date is April 16, 1984, and two years from this date
would be April 16, 1986. x x x As we have earlier said in
the TMX Sales case, Sections 68,[16] 69,[17] and 70[18]
on Quarterly Corporate Income Tax Payment and Section
321 should be considered in conjunction with it.[19]
When the Acting Commissioner of Internal Revenue issued
RMC 7-85, changing the prescriptive period of two years
to ten years on claims of excess quarterly income tax
payments, such circular created a clear inconsistency with
the provision of Sec. 230 of 1977 NIRC. In so doing, the
BIR did not simply interpret the law; rather it legislated
guidelines contrary to the statute passed by Congress.
It bears repeating that Revenue memorandum-circulars
are considered administrative rulings (in the sense of
more specific and less general interpretations of tax laws)
which are issued from time to time by the Commissioner
of Internal Revenue. It is widely accepted that the
interpretation placed upon a statute by the executive
officers, whose duty is to enforce it, is entitled to great

respect by the courts. Nevertheless, such interpretation is

not conclusive and will be ignored if judicially found to be
erroneous.[20] Thus, courts will not countenance
administrative issuances that override, instead of
remaining consistent and in harmony with, the law they
seek to apply and implement.[21]
In the case of People vs. Lim,[22] it was held that rules
and regulations issued by administrative officials to
implement a law cannot go beyond the terms and
provisions of the latter.
Appellant contends that Section 2 of FAO No. 37-1 is void
because it is not only inconsistent with but is contrary to
the provisions and spirit of Act. No. 4003 as amended,
because whereas the prohibition prescribed in said
Fisheries Act was for any single period of time not
exceeding five years duration, FAO No. 37-1 fixed no
period, that is to say, it establishes an absolute ban for all
time. This discrepancy between Act No. 4003 and FAO No.
37-1 was probably due to an oversight on the part of
Secretary of Agriculture and Natural Resources. Of course,
in case of discrepancy, the basic Act prevails, for the
reason that the regulation or rule issued to implement a
law cannot go beyond the terms and provisions of the
latter. x x x In this connection, the attention of the
technical men in the offices of Department Heads who
draft rules and regulation is called to the importance and
necessity of closely following the terms and provisions of
the law which they intended to implement, this to avoid
any possible misunderstanding or confusion as in the
present case.[23]
Further, fundamental is the rule that the State cannot be
put in estoppel by the mistakes or errors of its officials or
agents.[24] As pointed out by the respondent courts, the
nullification of RMC No. 7-85 issued by the Acting
Commissioner of Internal Revenue is an administrative
interpretation which is not in harmony with Sec. 230 of
1977 NIRC, for being contrary to the express provision of
a statute. Hence, his interpretation could not be given
weight for to do so would, in effect, amend the statute.

As aptly stated by respondent Court of Appeals:

It is likewise argued that the Commissioner of Internal
Revenue, after promulgating RMC No. 7-85, is estopped
by the principle of non-retroactivity of BIR rulings. Again
We do not agree. The Memorandum Circular, stating that
a taxpayer may recover the excess income tax paid within
10 years from date of payment because this is an
obligation created by law, was issued by the Acting
Commissioner of Internal Revenue. On the other hand, the
decision, stating that the taxpayer should still file a claim
for a refund or tax credit and the corresponding petition
for review within the two-year prescription period, and
that the lengthening of the period of limitation on refund
from two to ten years would be adverse to public policy
and run counter to the positive mandate of Sec. 230,
NIRC, - was the ruling and judicial interpretation of the
Court of Tax Appeals. Estoppel has no application in the
case at bar because it was not the Commissioner of
Internal Revenue who denied petitioners claim of refund
or tax credit. Rather, it was the Court of Tax Appeals who
denied (albeit correctly) the claim and in effect, ruled that
the RMC No. 7-85 issued by the Commissioner of Internal
Revenue is an administrative interpretation which is out of
harmony with or contrary to the express provision of a
statute (specifically Sec. 230, NIRC), hence, cannot be
given weight for to do so would in effect amend the
statute.[25]

case because the nullity of RMC No. 7-85 was declared by

respondent courts and not by the Commissioner of
Internal Revenue. Lastly, it must be noted that, as
repeatedly held by this Court, a claim for refund is in the
nature of a claim for exemption and should be construed
in strictissimi juris against the taxpayer.[28]
On the second issue, the petitioner alleges that the Court
of Appeals seriously erred in affirming CTAs decision
denying its claim for refund of P 234,077.69 (tax overpaid
in 1986), based on mere speculation, without proof, that
PBCom availed of the automatic tax credit in 1987.
Sec. 69 of the 1977 NIRC[29] (now Sec. 76 of the 1997
NIRC) provides that any excess of the total quarterly
payments over the actual income tax computed in the
adjustment or final corporate income tax return, shall
either (a) be refunded to the corporation, or (b) may be
credited against the estimated quarterly income tax
liabilities for the quarters of the succeeding taxable year.
The corporation must signify in its annual corporate
adjustment return (by marking the option box provided in
the BIR form) its intention, whether to request for a refund
or claim for an automatic tax credit for the succeeding
taxable year. To ease the administration of tax collection,
these remedies are in the alternative, and the choice of
one precludes the other.
As stated by respondent Court of Appeals:

Article 8 of the Civil Code[26] recognizes judicial

decisions, applying or interpreting statutes as part of the
legal system of the country. But administrative decisions
do not enjoy that level of recognition. A memorandumcircular of a bureau head could not operate to vest a
taxpayer with a shield against judicial action. For there
are no vested rights to speak of respecting a wrong
construction of the law by the administrative officials and
such wrong interpretation could not place the
Government in estoppel to correct or overrule the same.
[27] Moreover, the non-retroactivity of rulings by the
Commissioner of Internal Revenue is not applicable in this

Finally, as to the claimed refund of income tax over-paid

in 1986 - the Court of Tax Appeals, after examining the
adjusted final corporate annual income tax return for
taxable year 1986, found out that petitioner opted to
apply for automatic tax credit. This was the basis used
(vis-avis the fact that the 1987 annual corporate tax
return was not offered by the petitioner as evidence) by
the CTA in concluding that petitioner had indeed availed
of and applied the automatic tax credit to the succeeding
year, hence it can no longer ask for refund, as to [sic] the
two remedies of refund and tax credit are alternative.[30]

That the petitioner opted for an automatic tax credit in

accordance with Sec. 69 of the 1977 NIRC, as specified in
its 1986 Final Adjusted Income Tax Return, is a finding of
fact which we must respect. Moreover, the 1987 annual
corporate tax return of the petitioner was not offered as
evidence to controvert said fact. Thus, we are bound by
the findings of fact by respondent courts, there being no
showing of gross error or abuse on their part to disturb
our reliance thereon.[31]
WHEREFORE, the petition is hereby DENIED. The decision
of the Court of Appeals appealed from is AFFIRMED, with
COSTS against the petitioner.
SO ORDERED.

[G.R. No. 147188. September 14, 2004]

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.
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 VinzonsChato 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.

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 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 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:

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)

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
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
CIBELES INSURANCE CORPORATION.

II. THE COURT OF APPEALS ERRED IN NOT DISREGARDING

THE SEPARATE CORPORATE PERSONALITY OF CIBELES
INSURANCE CORPORATION.
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.
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?
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.
Is this a case of tax evasion
or tax avoidance?
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]
Tax evasion connotes the integration of three factors: (1)
the end to be achieved, i.e., the payment of less than that
known by the taxpayer to be legally due, or the nonpayment 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.
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:
Petitioner, however, claims there was a change of
structure of the proceeds of sale. Admitted one hundred
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
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 .
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.
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 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.
Is respondent Estate liable
for the 1989 deficiency

income tax of Cibeles

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, since its
obligation arose from Todas contractual undertaking, as
contained in the Deed of Sale of Shares of Stock.

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.
Costs against respondent.
SO ORDERED.
Quisumbing, Ynares-Santiago, Carpio, and Azcuna, JJ.,
concur.