[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 year-
ended 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.

1
 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
Payments Made 5,016,954.00 ---
Tax Withheld at Source 282,795.50 234,077.69
Excess Tax Payments P5,299,749.50*============== P234,077.69==============

*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, 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:

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]

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?

2
 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

3
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

4
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

5
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]

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 memorandum-circular 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 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:

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

6
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.

7
G.R. No. 127685 July 23, 1998

BLAS F. OPLE, petitioner,

vs.

RUBEN D. TORRES, ALEXANDER AGUIRRE, HECTOR VILLANUEVA, CIELITO HABITO, ROBERT

BARBERS, CARMENCITA REODICA, CESAR SARINO, RENATO VALENCIA, TOMAS P. AFRICA, HEAD
OF THE NATIONAL COMPUTER CENTER and CHAIRMAN OF THE COMMISSION ON
AUDIT, respondents.

PUNO, J.:

The petition at bar is a commendable effort on the part of Senator Blas F. Ople to prevent the shrinking of the right to
privacy, which the revered Mr. Justice Brandeis considered as "the most comprehensive of rights and the right most valued
by civilized men." 1 Petitioner Ople prays that we invalidate Administrative Order No. 308 entitled "Adoption of a
National Computerized Identification Reference System" on two important constitutional grounds, viz: one, it is a
usurpation of the power of Congress to legislate, and two, it impermissibly intrudes on our citizenry's protected
zone of privacy. We grant the petition for the rights sought to be vindicated by the petitioner need stronger barriers
against further erosion.

A.O. No. 308 was issued by President Fidel V. Ramos On December 12, 1996 and reads as follows:

ADOPTION OF A NATIONAL COMPUTERIZED

IDENTIFICATION REFERENCE SYSTEM

WHEREAS, there is a need to provide Filipino citizens and foreign residents with the facility
to conveniently transact business with basic service and social security providers and other
government instrumentalities;

WHEREAS, this will require a computerized system to properly and efficiently identify
persons seeking basic services on social security and reduce, if not totally eradicate fraudulent
transactions and misrepresentations;

WHEREAS, a concerted and collaborative effort among the various basic services and social
security providing agencies and other government intrumentalities is required to achieve such
a system;

NOW, THEREFORE, I, FIDEL V. RAMOS, President of the Republic of the Philippines, by

virtue of the powers vested in me by law, do hereby direct the following:

8
Sec. 1. Establishment of a National Compoterized Identification Reference System. A
decentralized Identification Reference System among the key basic services and social security
providers is hereby established.

Sec. 2. Inter-Agency Coordinating Committee. An Inter-Agency Coordinating Committee

(IACC) to draw-up the implementing guidelines and oversee the implementation of the System
is hereby created, chaired by the Executive Secretary, with the following as members:

Head, Presidential Management Staff

Secretary, National Economic Development Authority

Secretary, Department of the Interior and Local Government

Secretary, Department of Health

Administrator, Government Service Insurance System,

Administrator, Social Security System,

Administrator, National Statistics Office

Managing Director, National Computer Center.

Sec. 3. Secretariat. The National Computer Center (NCC) is hereby designated as secretariat to
the IACC and as such shall provide administrative and technical support to the IACC.

Sec. 4. Linkage Among Agencies. The Population Reference Number (PRN) generated by the
NSO shall serve as the common reference number to establish a linkage among concerned
agencies. The IACC Secretariat shall coordinate with the different Social Security and Services
Agencies to establish the standards in the use of Biometrics Technology and in computer
application designs of their respective systems.

Sec. 5. Conduct of Information Dissemination Campaign. The Office of the Press Secretary, in
coordination with the National Statistics Office, the GSIS and SSS as lead agencies and other
concerned agencies shall undertake a massive tri-media information dissemination campaign
to educate and raise public awareness on the importance and use of the PRN and the Social
Security Identification Reference.

Sec. 6. Funding. The funds necessary for the implementation of the system shall be sourced
from the respective budgets of the concerned agencies.

9
 Sec. 7. Submission of Regular Reports. The NSO, GSIS and SSS shall submit regular reports to
the Office of the President through the IACC, on the status of implementation of this
undertaking.

Sec. 8. Effectivity. This Administrative Order shall take effect immediately.

DONE in the City of Manila, this 12th day of December in the year of Our Lord, Nineteen
Hundred and Ninety-Six.

(SGD.) FIDEL V. RAMOS

A.O. No. 308 was published in four newspapers of general circulation on January 22, 1997 and January 23, 1997.
On January 24, 1997, petitioner filed the instant petition against respondents, then Executive Secretary Ruben
Torres and the heads of the government agencies, who as members of the Inter-Agency Coordinating Committee,
are charged with the implementation of A.O. No. 308. On April 8, 1997, we issued a temporary restraining order
enjoining its implementation.

Petitioner contends:

A. THE ESTABLISNMENT OF A NATIONAL COMPUTERIZED IDENTIFICATION

REFERENCE SYSTEM REQUIRES A LEGISLATIVE ACT. THE ISSUANCE OF A.O. NO.
308 BY THE PRESIDENT OF THE REPUBLIC OF THE PHILIPPINES IS, THEREFORE,
AN UNCONSTITUTIONAL USURPATION OF THE LEGISLATIVE POWERS OF THE
CONGRESS OF THE REPUBLIC OF THE PHILIPPINES.

B. THE APPROPRIATION OF PUBLIC FUNDS BY THE PRESIDENT FOR THE

IMPLEMENTATION OF A.O. NO. 308 IS AN UNCONSTITUTIONAL USURPATION OF
THE EXCLUSIVE RIGHT OF CONGRESS TO APPROPRIATE PUBLIC FUNDS FOR
EXPENDITURE.

C. THE IMPLEMENTATION OF A.O. NO. 308 INSIDIOUSLY LAYS THE

GROUNDWORK FOR A SYSTEM WHICH WILL VIOLATE THE BILL OF RIGHTS
ENSHRINED IN THE CONSTITUTION. 2

Respondents counter-argue:

A. THE INSTANT PETITION IS NOT A JUSTICIABLE CASE AS WOULD WARRANT A

JUDICIAL REVIEW;

B. A.O. NO. 308 [1996] WAS ISSUED WITHIN THE EXECUTIVE AND
ADMINISTRATIVE POWERS OF THE PRESIDENT WITHOUT ENCROACHING ON
THE LEGISLATIVE POWERS OF CONGRESS;

10
 C. THE FUNDS NECESSARY FOR THE IMPLEMENTATION OF THE
IDENTIFICATION REFERENCE SYSTEM MAY BE SOURCED FROM THE BUDGETS
OF THE CONCERNED AGENCIES;

D. A.O. NO. 308 [1996] PROTECTS AN INDIVIDUAL'S INTEREST IN PRIVACY. 3

We now resolve.

As is usual in constitutional litigation, respondents raise the threshold issues relating to the standing to sue of the
petitioner and the justiciability of the case at bar. More specifically, respondents aver that petitioner has no legal
interest to uphold and that the implementing rules of A.O. No. 308 have yet to be promulgated.

These submissions do not deserve our sympathetic ear. Petitioner Ople is a distinguished member of our Senate. As
a Senator, petitioner is possessed of the requisite standing to bring suit raising the issue that the issuance of A.O.
No. 308 is a usurpation of legislative power. 4 As taxpayer and member of the Government Service Insurance
System (GSIS), petitioner can also impugn the legality of the misalignment of public funds and the misuse of GSIS
funds to implement A.O. No. 308. 5

The ripeness for adjudication of the Petition at bar is not affected by the fact that the implementing rules of A.O.
No. 308 have yet to be promulgated. Petitioner Ople assails A.O. No. 308 as invalid per se and as infirmed on its
face. His action is not premature for the rules yet to be promulgated cannot cure its fatal defects. Moreover, the
respondents themselves have started the implementation of A.O. No. 308 without waiting for the rules. As early as
January 19, 1997, respondent Social Security System (SSS) caused the publication of a notice to bid for the
manufacture of the National Identification (ID) card. 6 Respondent Executive Secretary Torres has publicly
announced that representatives from the GSIS and the SSS have completed the guidelines for the national
identification system. 7 All signals from the respondents show their unswerving will to implement A.O. No. 308 and
we need not wait for the formality of the rules to pass judgment on its constitutionality. In this light, the dissenters
insistence that we tighten the rule on standing is not a commendable stance as its result would be to throttle an
important constitutional principle and a fundamental right.

II

We now come to the core issues. Petitioner claims that A.O. No. 308 is not a mere administrative order but a law
and hence, beyond the power of the President to issue. He alleges that A.O. No. 308 establishes a system of
identification that is all-encompassing in scope, affects the life and liberty of every Filipino citizen and foreign
resident, and more particularly, violates their right to privacy.

Petitioner's sedulous concern for the Executive not to trespass on the lawmaking domain of Congress is
understandable. The blurring of the demarcation line between the power of the Legislature to make laws and the
power of the Executive to execute laws will disturb their delicate balance of power and cannot be allowed. Hence,
the exercise by one branch of government of power belonging to another will be given a stricter scrutiny by this
Court.

11
The line that delineates Legislative and Executive power is not indistinct. Legislative power is "the authority, under
the Constitution, to make laws, and to alter and repeal them." 8 The Constitution, as the will of the people in their
original, sovereign and unlimited capacity, has vested this power in the Congress of the Philippines. 9 The grant of
legislative power to Congress is broad, general and comprehensive. 10 The legislative body possesses plenary power
for all purposes of civil government. 11 Any power, deemed to be legislative by usage and tradition, is necessarily
possessed by Congress, unless the Constitution has lodged it elsewhere. 12 In fine, except as limited by the
Constitution, either expressly or impliedly, legislative power embraces all subjects and extends to matters of general
concern or common interest. 13

While Congress is vested with the power to enact laws, the President executes the laws. 14 The executive power is
vested in the Presidents. 15 It is generally defined as the power to enforce and administer the laws. 16 It is the power
of carrying the laws into practical operation and enforcing their due observance. 17

As head of the Executive Department, the President is the Chief Executive. He represents the government as a
whole and sees to it that all laws are enforced by the officials and employees of his department. 18 He has control
over the executive department, bureaus and offices. This means that he has the authority to assume directly the
functions of the executive department, bureau and office or interfere with the discretion of its officials. 19 Corollary
to the power of control, the President also has the duty of supervising the enforcement of laws for the maintenance
of general peace and public order. Thus, he is granted administrative power over bureaus and offices under his
control to enable him to discharge his duties effectively. 20

Administrative power is concerned with the work of applying policies and enforcing orders as determined by
proper governmental organs. 21 It enables the President to fix a uniform standard of administrative efficiency and
check the official conduct of his agents. 22 To this end, he can issue administrative orders, rules and regulations.

Prescinding from these precepts, we hold that A.O. No. 308 involves a subject that is not appropriate to be covered
by an administrative order. An administrative order is:

Sec. 3. Administrative Orders. — Acts of the President which relate to particular aspects of
governmental operation in pursuance of his duties as administrative head shall be
promulgated in administrative orders. 23

An administrative order is an ordinance issued by the President which relates to specific aspects in the
administrative operation of government. It must be in harmony with the law and should be for the sole
purpose of implementing the law and carrying out the legislative policy. 24 We reject the argument that
A.O. No. 308 implements the legislative policy of the Administrative Code of 1987. The Code is a general
law and "incorporates in a unified document the major structural, functional and procedural principles
of governance." 25 and "embodies changes in administrative structure and procedures designed to serve
the
people." 26 The Code is divided into seven (7) Books: Book I deals with Sovereignty and General
Administration, Book II with the Distribution of Powers of the three branches of Government, Book III
on the Office of the President, Book IV on the Executive Branch, Book V on Constitutional Commissions,
Book VI on National Government Budgeting, and Book VII on Administrative Procedure. These Books
contain provisions on the organization, powers and general administration of the executive, legislative
and judicial branches of government, the organization and administration of departments, bureaus and
offices under the executive branch, the organization and functions of the Constitutional Commissions and
other constitutional bodies, the rules on the national government budget, as well as guideline for the
exercise by administrative agencies of quasi-legislative and quasi-judicial powers. The Code covers both

12
 the internal administration of government, i.e, internal organization, personnel and recruitment,
supervision and discipline, and the effects of the functions performed by administrative officials on
private individuals or parties outside government. 27

It cannot be simplistically argued that A.O. No. 308 merely implements the Administrative Code of 1987. It
establishes for the first time a National Computerized Identification Reference System. Such a System requires a
delicate adjustment of various contending state policies — the primacy of national security, the extent of privacy
interest against dossier-gathering by government, the choice of policies, etc. Indeed, the dissent of Mr. Justice
Mendoza states that the A.O. No. 308 involves the all-important freedom of thought. As said administrative order
redefines the parameters of some basic rights of our citizenry vis-a-vis the State as well as the line that separates the
administrative power of the President to make rules and the legislative power of Congress, it ought to be evident
that it deals with a subject that should be covered by law.

Nor is it correct to argue as the dissenters do that A.D. No. 308 is not a law because it confers no right, imposes no
duty, affords no proctection, and creates no office. Under A.O. No. 308, a citizen cannot transact business with
government agencies delivering basic services to the people without the contemplated identification card. No citizen
will refuse to get this identification card for no one can avoid dealing with government. It is thus clear as daylight
that without the ID, a citizen will have difficulty exercising his rights and enjoying his privileges. Given this reality,
the contention that A.O. No. 308 gives no right and imposes no duty cannot stand.

Again, with due respect, the dissenting opinions unduly expand the limits of administrative legislation and
consequently erodes the plenary power of Congress to make laws. This is contrary to the established approach
defining the traditional limits of administrative legislation. As well stated by Fisher: ". . . Many regulations
however, bear directly on the public. It is here that administrative legislation must he restricted in its scope and
application. Regulations are not supposed to be a substitute for the general policy-making that Congress enacts in
the form of a public law. Although administrative regulations are entitled to respect, the authority to prescribe rules
and regulations is not an independent source of power to make laws." 28

III

Assuming, arguendo, that A.O. No. 308 need not be the subject of a law, still it cannot pass constitutional muster as
an administrative legislation because facially it violates the right to privacy. The essence of privacy is the "right to
be let alone." 29 In the 1965 case of Griswold v. Connecticut, 30 the United States Supreme Court gave more
substance to the right of privacy when it ruled that the right has a constitutional foundation. It held that there is a
right of privacy which can be found within the penumbras of the First, Third, Fourth, Fifth and Ninth
Amendments, 31 viz:

Specific guarantees in the Bill of Rights have penumbras formed by emanations from these
guarantees that help give them life and substance . . . various guarantees create zones of
privacy. The right of association contained in the penumbra of the First Amendment is one, as
we have seen. The Third Amendment in its prohibition against the quartering of soldiers "in
any house" in time of peace without the consent of the owner is another facet of that privacy.
The Fourth Amendment explicitly affirms the ''right of the people to be secure in their
persons, houses and effects, against unreasonable searches and seizures." The Fifth
Amendment in its Self-Incrimination Clause enables the citizen to create a zone of privacy
which government may not force him to surrender to his detriment. The Ninth Amendment
provides: "The enumeration in the Constitution, of certain rights, shall not be construed to
deny or disparage others retained by the people."

13
 In the 1968 case of Morfe v. Mutuc, 32 we adopted the Griswold ruling that there is a constitutional right
to privacy. Speaking thru Mr. Justice, later Chief Justice, Enrique Fernando, we held:

xxx xxx xxx

The Griswold case invalidated a Connecticut statute which made the use of contraceptives a
criminal offence on the ground of its amounting to an unconstitutional invasion of the right of
privacy of married persons; rightfully it stressed "a relationship lying within the zone of
privacy created by several fundamental constitutional guarantees." It has wider implications
though. The constitutional right to privacy has come into its own.

So it is likewise in our jurisdiction. The right to privacy as such is accorded recognition

independently of its identification with liberty; in itself, it is fully deserving of constitutional
protection. The language of Prof. Emerson is particularly apt: "The concept of limited
government has always included the idea that governmental powers stop short of certain
intrusions into the personal life of the citizen. This is indeed one of the basic distinctions
between absolute and limited government. Ultimate and pervasive control of the individual, in
all aspects of his life, is the hallmark of the absolute state. In contrast, a system of limited
government safeguards a private sector, which belongs to the individual, firmly distinguishing
it from the public sector, which the state can control. Protection of this private sector —
protection, in other words, of the dignity and integrity of the individual — has become
increasingly important as modern society has developed. All the forces of a technological age
— industrialization, urbanization, and organization — operate to narrow the area of privacy
and facilitate intrusion into it. In modern terms, the capacity to maintain and support this
enclave of private life marks the difference between a democratic and a totalitarian society."

Indeed, if we extend our judicial gaze we will find that the right of privacy is recognized and enshrined in several
provisions of our Constitution. 33 It is expressly recognized in section 3 (1) of the Bill of Rights:

Sec. 3. (1) The privacy of communication and correspondence shall be inviolable except upon
lawful order of the court, or when public safety or order requires otherwise as prescribed by
law.

Other facets of the right to privacy are protectad in various provisions of the Bill of Rights, viz: 34

Sec. 1. No person shall be deprived of life, liberty, or property without due process of law, nor
shall any person be denied the equal protection of the laws.

Sec. 2. The right of the people to be secure in their persons, houses papers, and effects against
unreasonable searches and seizures of whatever nature and for any purpose shall be
inviolable, and no search warrant or warrant of arrest shall issue except upon probable cause
to be determined personally by the judge after examination under oath or affirmation of the
complainant and the witnesses he may produce, and particularly describing the place to be
searched and the persons or things to be seized.

xxx xxx xxx

14
 Sec. 6. The liberty of abode and of changing the same within the limits prescribed by law shall
not be impaired except upon lawful order of the court. Neither shall the right to travel be
impaired except in the interest of national security, public safety, or public health as may be
provided by law.

xxx xxx xxx

Sec. 8. The right of the people, including those employed in the public and private sectors, to
form unions, associations, or societies for purposes not contrary to law shall not be abridged.

Sec. 17. No person shall be compelled to be a witness against himself.

Zones of privacy are likewise recognized and protected in our laws. The Civil Code provides that "[e]very person
shall respect the dignity, personality, privacy and peace of mind of his neighbors and other persons" and punishes
as actionable torts several acts by a person of meddling and prying into the privacy of another. 35 It also holds a
public officer or employee or any private individual liable for damages for any violation of the rights and liberties of
another person, 36 and recognizes the privacy of letters and other private communications. 37 The Revised Penal
Code makes a crime the violation of secrets by an officer, 38the revelation of trade and industrial secrets, 39 and
trespass to dwelling. 40 Invasion of privacy is an offense in special laws like the Anti-Wiretapping Law, 41 the Secrecy
of Bank Deposits Act 42 and the Intellectual Property Code. 43 The Rules of Court on privileged communication
likewise recognize the privacy of certain information. 44

Unlike the dissenters, we prescind from the premise that the right to privacy is a fundamental right guaranteed by
the Constitution, hence, it is the burden of government to show that A.O. No. 308 is justified by some compelling
state interest and that it is narrowly drawn. A.O. No. 308 is predicated on two considerations: (1) the need to
provides our citizens and foreigners with the facility to conveniently transact business with basic service and social
security providers and other government instrumentalities and (2) the need to reduce, if not totally eradicate,
fraudulent transactions and misrepresentations by persons seeking basic services. It is debatable whether these
interests are compelling enough to warrant the issuance of A.O. No. 308. But what is not arguable is the broadness,
the vagueness, the overbreadth of A.O. No. 308 which if implemented will put our people's right to privacy in clear
and present danger.

The heart of A.O. No. 308 lies in its Section 4 which provides for a Population Reference Number (PRN) as a
"common reference number to establish a linkage among concerned agencies" through the use of "Biometrics
Technology" and "computer application designs."

Biometry or biometrics is "the science of the applicatin of statistical methods to biological facts; a mathematical
analysis of biological data." 45 The term "biometrics" has evolved into a broad category of technologies which
provide precise confirmation of an individual's identity through the use of the individual's own physiological and
behavioral characteristics. 46 A physiological characteristic is a relatively stable physical characteristic such as a
fingerprint, retinal scan, hand geometry or facial features. A behavioral characteristic is influenced by the
individual's personality and includes voice print, signature and keystroke. 47 Most biometric idenfication systems
use a card or personal identificatin number (PIN) for initial identification. The biometric measurement is used to
verify that the individual holding the card or entering the PIN is the legitimate owner of the card or PIN. 48

A most common form of biological encoding is finger-scanning where technology scans a fingertip and turns the
unique pattern therein into an individual number which is called a biocrypt. The biocrypt is stored in computer

15
data banks 49 and becomes a means of identifying an individual using a service. This technology requires one's
fingertip to be scanned every time service or access is provided. 50 Another method is the retinal scan. Retinal scan
technology employs optical technology to map the capillary pattern of the retina of the eye. This technology
produces a unique print similar to a finger print. 51 Another biometric method is known as the "artificial nose."
This device chemically analyzes the unique combination of substances excreted from the skin of people. 52 The latest
on the list of biometric achievements is the thermogram. Scientists have found that by taking pictures of a face using
infra-red cameras, a unique heat distribution pattern is seen. The different densities of bone, skin, fat and blood
vessels all contribute to the individual's personal "heat signature." 53

In the last few decades, technology has progressed at a galloping rate. Some science fictions are now science facts.
Today, biometrics is no longer limited to the use of fingerprint to identify an individual. It is a new science that uses
various technologies in encoding any and all biological characteristics of an individual for identification. It is
noteworthy that A.O. No. 308 does not state what specific biological characteristics and what particular biometrics
technology shall be used to identify people who will seek its coverage. Considering the banquest of options available
to the implementors of A.O. No. 308, the fear that it threatens the right to privacy of our people is not groundless.

A.O. No. 308 should also raise our antennas for a further look will show that it does not state whether encoding of
data is limited to biological information alone for identification purposes. In fact, the Solicitor General claims that
the adoption of the Identification Reference System will contribute to the "generation of population data for
development planning." 54 This is an admission that the PRN will not be used solely for identification but the
generation of other data with remote relation to the avowed purposes of A.O. No. 308. Clearly, the indefiniteness of
A.O. No. 308 can give the government the roving authority to store and retrieve information for a purpose other
than the identification of the individual through his PRN.

The potential for misuse of the data to be gathered under A.O. No. 308 cannot be undarplayed as the dissenters do.
Pursuant to said administrative order, an individual must present his PRN everytime he deals with a government
agency to avail of basic services and security. His transactions with the government agency will necessarily be
recorded — whether it be in the computer or in the documentary file of the agency. The individual's file may
include his transactions for loan availments, income tax returns, statement of assets and liabilities, reimbursements
for medication, hospitalization, etc. The more frequent the use of the PRN, the better the chance of building a huge
formidable informatin base through the electronic linkage of the files. 55 The data may be gathered for gainful and
useful government purposes; but the existence of this vast reservoir of personal information constitutes a covert
invitation to misuse, a temptation that may be too great for some of our authorities to resist. 56

We can even grant, arguendo, that the computer data file will be limited to the name, address and other basic
personal infomation about the individual. 57 Even that hospitable assumption will not save A.O. No. 308 from
constitutional infirmity for again said order does not tell us in clear and categorical terms how these information
gathered shall he handled. It does not provide who shall control and access the data, under what circumstances and
for what purpose. These factors are essential to safeguard the privacy and guaranty the integrity of the
information. 58 Well to note, the computer linkage gives other government agencies access to the information. Yet,
there are no controls to guard against leakage of information. When the access code of the control programs of the
particular computer system is broken, an intruder, without fear of sanction or penalty, can make use of the data for
whatever purpose, or worse, manipulate the data stored within the system. 59

It is plain and we hold that A.O. No. 308 falls short of assuring that personal information which will be gathered
about our people will only be processed for unequivocally specified purposes. 60 The lack of proper safeguards in
this regard of A.O. No. 308 may interfere with the individual's liberty of abode and travel by enabling authorities to
track down his movement; it may also enable unscrupulous persons to access confidential information and
circumvent the right against self-incrimination; it may pave the way for "fishing expeditions" by government

16
authorities and evade the right against unreasonable searches and seizures. 61 The possibilities of abuse and misuse
of the PRN, biometrics and computer technology are accentuated when we consider that the individual lacks control
over what can be read or placed on his ID, much less verify the correctness of the data encoded. 62 They threaten the
very abuses that the Bill of Rights seeks to prevent. 63

The ability of sophisticated data center to generate a comprehensive cradle-to-grave dossier on an individual and
transmit it over a national network is one of the most graphic threats of the computer revolution. 64 The computer is
capable of producing a comprehensive dossier on individuals out of information given at different times and for
varied purposes. 65 It can continue adding to the stored data and keeping the information up to date. Retrieval of
stored date is simple. When information of a privileged character finds its way into the computer, it can be
extracted together with other data on the subject. 66Once extracted, the information is putty in the hands of any
person. The end of privacy begins.

Though A.O. No. 308 is undoubtedly not narrowly drawn, the dissenting opinions would dismiss its danger to the
right to privacy as speculative and hypothetical. Again, we cannot countenance such a laidback posture. The Court
will not be true to its role as the ultimate guardian of the people's liberty if it would not immediately smother the
sparks that endanger their rights but would rather wait for the fire that could consume them.

We reject the argument of the Solicitor General that an individual has a reasonable expectation of privacy with
regard to the Natioal ID and the use of biometrics technology as it stands on quicksand. The reasonableness of a
person's expectation of privacy depends on a two-part test: (1) whether by his conduct, the individual has exhibited
an expectation of privacy; and (2) whether this expectation is one that society recognizes as reasonable. 67 The
factual circumstances of the case determines the reasonableness of the expectation. 68 However, other factors, such
as customs, physical surroundings and practices of a particular activity, may serve to create or diminish this
expectation. 69 The use of biometrics and computer technology in A.O. No. 308 does not assure the individual of a
reasonable expectation of privacy. 70 As technology advances, the level of reasonably expected privacy
decreases. 71 The measure of protection granted by the reasonable expectation diminishes as relevant technology
becomes more widely accepted. 72 The security of the computer data file depends not only on the physical
inaccessibility of the file but also on the advances in hardware and software computer technology. A.O. No. 308 is so
widely drawn that a minimum standard for a reasonable expectation of privacy, regardless of technology used,
cannot be inferred from its provisions.

The rules and regulations to be by the IACC cannot remedy this fatal defect. Rules and regulations merely
implement the policy of the law or order. On its face, A.O. No. gives the IACC virtually infettered discretion to
determine the metes and bounds of the ID System.

Nor do your present laws prvide adequate safeguards for a reasonable expectation of privacy. Commonwealth Act.
No. 591 penalizes the disclosure by any person of data furnished by the individual to the NSO with imprisonment
and fine. 73 Republic Act. No. 1161 prohibits public disclosure of SSS employment records and reports. 74 These
laws, however, apply to records and data with the NSO and the SSS. It is not clear whether they may be applied to
data with the other government agencies forming part of the National ID System. The need to clarify the penal
aspect of A.O. No. 308 is another reason why its enactment should be given to Congress.

Next, the Solicitor General urges us to validate A.O. No. 308's abridgment of the right of privacy by using the
rational relationship test. 75 He stressed that the purposes of A.O. No. 308 are: (1) to streamline and speed up the
implementation of basic government services, (2) eradicate fraud by avoiding duplication of services, and (3)
generate population data for development planning. He cocludes that these purposes justify the incursions into the
right to privacy for the means are rationally related to the end. 76

17
We are not impressed by the argument. In Morfe v. Mutuc, 77 we upheld the constitutionality of R.A. 3019, the Anti-
Graft and Corrupt Practices Act, as a valid police power measure. We declared that the law, in compelling a public
officer to make an annual report disclosing his assets and liabilities, his sources of income and expenses, did not
infringe on the individual's right to privacy. The law was enacted to promote morality in public administration by
curtailing and minimizing the opportunities for official corruption and maintaining a standard of honesty in the
public service. 78

The same circumstances do not obtain in the case at bar. For one, R.A. 3019 is a statute, not an administrative
order. Secondly, R.A. 3019 itself is sufficiently detailed. The law is clear on what practices were prohibited and
penalized, and it was narrowly drawn to avoid abuses. IN the case at bar, A.O. No. 308 may have been impelled by a
worthy purpose, but, it cannot pass constitutional scrutiny for it is not narrowly drawn. And we now hod that when
the integrity of a fundamental right is at stake, this court will give the challenged law, administrative order, rule or
regulation a stricter scrutiny. It will not do for the authorities to invoke the presumption of regularity in the
performance of official duties. Nor is it enough for the authorities to prove that their act is not irrational for a basic
right can be diminished, if not defeated, even when the government does not act irrationally. They must
satisfactorily show the presence of compelling state interests and that the law, rule or regulation is narrowly drawn
to preclude abuses. This approach is demanded by the 1987 Constitution whose entire matrix is designed to protect
human rights and to prevent authoritarianism. In case of doubt, the least we can do is to lean towards the stance
that will not put in danger the rights protected by the Constitutions.

The case of Whalen v. Roe 79 cited by the Solicitor General is also off-line. In Whalen, the United States Supreme
Court was presented with the question of whether the State of New York could keep a centralized computer record
of the names and addresses of all persons who obtained certain drugs pursuant to a doctor's prescription. The New
York State Controlled Substance Act of 1972 required physicians to identify parties obtaining prescription drugs
enumerated in the statute, i.e., drugs with a recognized medical use but with a potential for abuse, so that the names
and addresses of the patients can be recorded in a centralized computer file of the State Department of Health. The
plaintiffs, who were patients and doctors, claimed that some people might decline necessary medication because of
their fear that the computerized data may be readily available and open to public disclosure; and that once
disclosed, it may stigmatize them as drug addicts. 80 The plaintiffs alleged that the statute invaded a constitutionally
protected zone of privacy, i.e., the individual interest in avoiding disclosure of personal matters, and the interest in
independence in making certain kinds of important decisions. The U.S. Supreme Court held that while an
individual's interest in avoiding disclosuer of personal matter is an aspect of the right to privacy, the statute did not
pose a grievous threat to establish a constitutional violation. The Court found that the statute was necessary to aid
in the enforcement of laws designed to minimize the misuse of dangerous drugs. The patient-identification
requirement was a product of an orderly and rational legislative decision made upon recommmendation by a
specially appointed commission which held extensive hearings on the matter. Moreover, the statute was narrowly
drawn and contained numerous safeguards against indiscriminate disclosure. The statute laid down the procedure
and requirements for the gathering, storage and retrieval of the informatin. It ebumerated who were authorized to
access the data. It also prohibited public disclosure of the data by imposing penalties for its violation. In view of
these safeguards, the infringement of the patients' right to privacy was justified by a valid exercise of police power.
As we discussed above, A.O. No. 308 lacks these vital safeguards.

Even while we strike down A.O. No. 308, we spell out in neon that the Court is not per se agains the use of
computers to accumulate, store, process, retvieve and transmit data to improve our bureaucracy. Computers work
wonders to achieve the efficiency which both government and private industry seek. Many information system in
different countries make use of the computer to facilitate important social objective, such as better law enforcement,
faster delivery of public services, more efficient management of credit and insurance programs, improvement of
telecommunications and streamlining of financial activities. 81 Used wisely, data stored in the computer could help
good administration by making accurate and comprehensive information for those who have to frame policy and
make key decisions. 82 The benefits of the computer has revolutionized information technology. It developed the

18
internet, 83 introduced the concept of cyberspace 84 and the information superhighway where the individual, armed
only with his personal computer, may surf and search all kinds and classes of information from libraries and
databases connected to the net.

In no uncertain terms, we also underscore that the right to privacy does not bar all incursions into individual
privacy. The right is not intended to stifle scientific and technological advancements that enhance public service and
the common good. It merely requires that the law be narrowly focused 85 and a compelling interest justify such
intrusions. 86 Intrusions into the right must be accompanied by proper safeguards and well-defined standards to
prevent unconstitutional invasions. We reiterate that any law or order that invades individual privacy will be
subjected by this Court to strict scrutiny. The reason for this stance was laid down in Morfe v. Mutuc, to wit:

The concept of limited government has always included the idea that governmental powers
stop short of certain intrusions into the personal life of the citizen. This is indeed one of the
basic disctinctions between absolute and limited government. Ultimate and pervasive control
of the individual, in all aspects of his life, is the hallmark of the absolute state. In contrast, a
system of limited government safeguards a private sector, which belongs to the individual,
firmly distinguishing it from the public sector, which the state can control. Protection of this
private sector — protection, in other words, of the dignity and integrity of the individual —
has become increasingly important as modern society has developed. All the forces of a
technological age — industrialization, urbanization, and organization — operate to narrow the
area of privacy and facilitate intrusion into it. In modern terms, the capacity to maintain and
support this enclave of private life marks the difference between a democratic and a
totalitarian society. 87

IV

The right to privacy is one of the most threatened rights of man living in a mass society. The threats emanate from
various sources — governments, journalists, employers, social scientists, etc. 88 In th case at bar, the threat comes
from the executive branch of government which by issuing A.O. No. 308 pressures the people to surrender their
privacy by giving information about themselves on the pretext that it will facilitate delivery of basic services. Given
the record-keeping power of the computer, only the indifferent fail to perceive the danger that A.O. No. 308 gives
the government the power to compile a devastating dossier against unsuspecting citizens. It is timely to take note of
the well-worded warning of Kalvin, Jr., "the disturbing result could be that everyone will live burdened by an
unerasable record of his past and his limitations. In a way, the threat is that because of its record-keeping, the
society will have lost its benign capacity to forget." 89 Oblivious to this counsel, the dissents still say we should not be
too quick in labelling the right to privacy as a fundamental right. We close with the statement that the right to
privacy was not engraved in our Constitution for flattery.

IN VIEW WHEREOF, the petition is granted and Adminisrative Order No. 308 entitled "Adoption of a National
Computerized Identification Reference System" declared null and void for being unconstitutional.

SO ORDERED.

19
 [G.R. No. 125350. December 3, 2002]

HON. RTC JUDGES MERCEDES G. DADOLE (Executive Judge, Branch 28), ULRIC R. CAETE (Presiding Judge,
Branch 25), AGUSTINE R. VESTIL (Presiding Judge, Branch 56), HON. MTC JUDGES TEMISTOCLES
M. BOHOLST (Presiding Judge, Branch 1), VICENTE C. FANILAG (Judge Designate, Branch 2), and
WILFREDO A. DAGATAN (Presiding Judge, Branch 3), all of Mandaue City, petitioners,
vs. COMMISSION ON AUDIT, respondent.

DECISION

CORONA, J.:

Before us is a petition for certiorari under Rule 64 to annul the decision[1] and resolution[2], dated September 21, 1995
and May 28, 1996, respectively, of the respondent Commission on Audit (COA) affirming the notices of the Mandaue City
Auditor which diminished the monthly additional allowances received by the petitioner judges of the Regional Trial Court
(RTC) and Municipal Trial Court (MTC) stationed in Mandaue City.

The undisputed facts are as follows:

In 1986, the RTC and MTC judges of Mandaue City started receiving monthly allowances of P1,260 each through the
yearly appropriation ordinance enacted by the Sangguniang Panlungsod of the said city. In 1991, Mandaue City increased
the amount to P1,500 for each judge.

On March 15, 1994, the Department of Budget and Management (DBM) issued the disputed Local Budget Circular
No. 55 (LBC 55) which provided that:

xxx xxx xxx

2.3.2. In the light of the authority granted to the local government units under the Local Government Code to provide for
additional allowances and other benefits to national government officials and employees assigned in their locality, such
additional allowances in the form of honorarium at rates not exceeding P1,000.00 in provinces and cities and P700.00 in
municipalities may be granted subject to the following conditions:

a) That the grant is not mandatory on the part of the LGUs;

b) That all contractual and statutory obligations of the LGU including the implementation of R.A. 6758 shall have been
fully provided in the budget;

c) That the budgetary requirements/limitations under Section 324 and 325 of R.A. 7160 should be satisfied and/or
complied with; and

d) That the LGU has fully implemented the devolution of functions/personnel in accordance with R.A. 7160. [3] (italics
supplied)

xxx xxx xxx

20
 The said circular likewise provided for its immediate effectivity without need of publication:

5.0 EFFECTIVITY

This Circular shall take effect immediately.

Acting on the DBM directive, the Mandaue City Auditor issued notices of disallowance to herein petitioners, namely,
Honorable RTC Judges Mercedes G. Dadole, Ulric R. Caete, Agustin R. Vestil, Honorable MTC Judges Temistocles M.
Boholst, Vicente C. Fanilag and Wilfredo A. Dagatan, in excess of the amount authorized by LBC 55. Beginning October,
1994, the additional monthly allowances of the petitioner judges were reduced to P1,000 each. They were also asked to
reimburse the amount they received in excess of P1,000 from April to September, 1994.

The petitioner judges filed with the Office of the City Auditor a protest against the notices of disallowance. But the
City Auditor treated the protest as a motion for reconsideration and indorsed the same to the COA Regional Office No. 7. In
turn, the COA Regional Office referred the motion to the head office with a recommendation that the same be denied.

On September 21, 1995, respondent COA rendered a decision denying petitioners motion for reconsideration. The
COA held that:

The issue to be resolved in the instant appeal is whether or not the City Ordinance of Mandaue which provides a higher rate
of allowances to the appellant judges may prevail over that fixed by the DBM under Local Budget Circular No. 55 dated
March 15, 1994.

xxx xxx xxx

Applying the foregoing doctrine, appropriation ordinance of local government units is subject to the organizational,
budgetary and compensation policies of budgetary authorities (COA 5 th Ind., dated March 17, 1994 re: Province of
Antique; COA letter dated May 17, 1994 re: Request of Hon. Renato Leviste, Cong. 1 st Dist. Oriental Mindoro). In this
regard, attention is invited to Administrative Order No. 42 issued on March 3, 1993 by the President of the Philippines
clarifying the role of DBM in the compensation and classification of local government positions under RA No. 7160 vis-
avis the provisions of RA No. 6758 in view of the abolition of the JCLGPA. Section 1 of said Administrative Order
provides that:

Section 1. The Department of Budget and Management as the lead administrator of RA No. 6758 shall, through its
Compensation and Position Classification Bureau, continue to have the following responsibilities in connection with the
implementation of the Local Government Code of 1991:

a) Provide guidelines on the classification of local government positions and on the specific
rates of pay therefore;

b) Provide criteria and guidelines for the grant of all allowances and additional forms of
compensation to local government employees; xxx. (underscoring supplied)

To operationalize the aforecited presidential directive, DBM issued LBC No. 55, dated March 15, 1994, whose effectivity
clause provides that:

21
xxx xxx xxx

5.0 EFFECTIVITY

This Circular shall take effect immediately.

It is a well-settled rule that implementing rules and regulations promulgated by administrative or executive officer in
accordance with, and as authorized by law, has the force and effect of law or partake the nature of a statute (Victorias
Milling Co., Inc., vs. Social Security Commission, 114 Phil. 555, cited in Agpalos Statutory Construction, 2 nd Ed. P. 16;
Justice Cruzs Phil. Political Law, 1984 Ed., p. 103; Espanol vs. Phil Veterans Administration, 137 SCRA 314; Antique
Sawmills Inc. vs. Tayco, 17 SCRA 316).

xxx xxx xxx

There being no statutory basis to grant additional allowance to judges in excess of P1,000.00 chargeable against the local
government units where they are stationed, this Commission finds no substantial grounds or cogent reason to disturb the
decision of the City Auditor, Mandaue City, disallowing in audit the allowances in question. Accordingly, the above-
captioned appeal of the MTC and RTC Judges of Mandaue City, insofar as the same is not covered by Circular Letter No.
91-7, is hereby dismissed for lack of merit.

xxx xxx xxx[4]

On November 27, 1995, Executive Judge Mercedes Gozo-Dadole, for and in behalf of the petitioner judges, filed a
motion for reconsideration of the decision of the COA. In a resolution dated May 28, 1996, the COA denied the motion.

Hence, this petition for certiorari by the petitioner judges, submitting the following questions for resolution:

HAS THE CITY OF MANDAUE STATUTORY AND CONSTITUTIONAL BASIS TO PROVIDE ADDITIONAL
ALLOWANCES AND OTHER BENEFITS TO JUDGES STATIONED IN AND ASSIGNED TO THE CITY?

II

CAN AN ADMINISTRATIVE CIRCULAR OR GUIDELINE SUCH AS LOCAL BUDGET CIRCULAR NO. 55

RENDER INOPERATIVE THE POWER OF THE LEGISLATIVE BODY OF A CITY BY SETTING A LIMIT TO THE
EXTENT OF THE EXERCISE OF SUCH POWER?

III

HAS THE COMMISSION ON AUDIT CORRECTLY INTERPRETED LOCAL BUDGET CIRCULAR NO. 55 TO
INCLUDE MEMBERS OF THE JUDICIARY IN FIXING THE CEILING OF ADDITIONAL ALLOWANCES AND
BENEFITS TO BE PROVIDED TO JUDGES STATIONED IN AND ASSIGNED TO MANDAUE CITY BY THE CITY
GOVERNMENT AT P1,000.00 PER MONTH NOTWITHSTANDING THAT THEY HAVE BEEN RECEIVING
ALLOWANCES OF P1,500.00 MONTHLY FOR THE PAST FIVE YEARS?

22
 IV

IS LOCAL BUDGET CIRCULAR NO. 55 DATED MARCH 15, 1994 ISSUED BY THE DEPARTMENT OF BUDGET
AND MANAGEMENT VALID AND ENFORCEABLE CONSIDERING THAT IT WAS NOT DULY PUBLISHED IN
ACCODANCE WITH LAW?[5]

Petitioner judges argue that LBC 55 is void for infringing on the local autonomy of Mandaue City by dictating a
uniform amount that a local government unit can disburse as additional allowances to judges stationed therein. They maintain
that said circular is not supported by any law and therefore goes beyond the supervisory powers of the President. They further
allege that said circular is void for lack of publication.

On the other hand, the yearly appropriation ordinance providing for additional allowances to judges is allowed by
Section 458, par. (a)(1)[xi], of RA 7160, otherwise known as the Local Government Code of 1991, which provides that:

Sec. 458. Powers, Duties, Functions and Compensation. (a) The sangguniang panlungsod, as the legislative body of the
city, shall enact ordinances, approve resolutions and appropriate funds for the general welfare of the city and its inhabitants
pursuant to Section 16 of this Code and in the proper exercise of the corporate powers of the city as provided for under
Section 22 of this Code, and shall:

(1) Approve ordinances and pass resolutions necessary for an efficient and effective city government, and in this
connection, shall:

xxx xxx xxx

(xi) When the finances of the city government allow, provide for additional allowances and other benefits to judges,
prosecutors, public elementary and high school teachers, and other national government officials stationed in or assigned
to the city; (italics supplied)

Instead of filing a comment on behalf of respondent COA, the Solicitor General filed a manifestation supporting the
position of the petitioner judges. The Solicitor General argues that (1) DBM only enjoys the power to review and determine
whether the disbursements of funds were made in accordance with the ordinance passed by a local government unit while
(2) the COA has no more than auditorial visitation powers over local government units pursuant to Section 348 of RA 7160
which provides for the power to inspect at any time the financial accounts of local government units.

Moreover, the Solicitor General opines that the DBM and the respondent are only authorized under RA 7160 to
promulgate a Budget Operations Manual for local government units, to improve and systematize methods, techniques and
procedures employed in budget preparation, authorization, execution and accountability pursuant to Section 354 of RA 7160.
The Solicitor General points out that LBC 55 was not exercised under any of the aforementioned provisions.

Respondent COA, on the other hand, insists that the constitutional and statutory authority of a city government to
provide allowances to judges stationed therein is not absolute. Congress may set limitations on the exercise of autonomy. It
is for the President, through the DBM, to check whether these legislative limitations are being followed by the local
government units.

One such law imposing a limitation on a local government units autonomy is Section 458, par. (a) (1) [xi], of RA
7160, which authorizes the disbursement of additional allowances and other benefits to judges subject to the condition that
the finances of the city government should allow the same. Thus, DBM is merely enforcing the condition of the law when it
sets a uniform maximum amount for the additional allowances that a city government can release to judges stationed therein.

23
 Assuming arguendo that LBC 55 is void, respondent COA maintains that the provisions of the yearly approved
ordinance granting additional allowances to judges are still prohibited by the appropriation laws passed by Congress every
year. COA argues that Mandaue City gets the funds for the said additional allowances of judges from the Internal Revenue
Allotment (IRA). But the General Appropriations Acts of 1994 and 1995 do not mention the disbursement of additional
allowances to judges as one of the allowable uses of the IRA. Hence, the provisions of said ordinance granting additional
allowances, taken from the IRA, to herein petitioner judges are void for being contrary to law.

To resolve the instant petition, there are two issues that we must address: (1) whether LBC 55 of the DBM is void for
going beyond the supervisory powers of the President and for not having been published and (2) whether the yearly
appropriation ordinance enacted by the City of Mandaue that provides for additional allowances to judges contravenes the
annual appropriation laws enacted by Congress.

We rule in favor of the petitioner judges.

On the first issue, we declare LBC 55 to be null and void.

We recognize that, although our Constitution[6] guarantees autonomy to local government units, the exercise of local
autonomy remains subject to the power of control by Congress and the power of supervision by the President. Section 4 of
Article X of the 1987 Philippine Constitution provides that:

Sec. 4. The President of the Philippines shall exercise general supervision over local governments. x x x

In Pimentel vs. Aguirre[7], we defined the supervisory power of the President and distinguished it from the power of
control exercised by Congress. Thus:

This provision (Section 4 of Article X of the 1987 Philippine Constitution) has been interpreted to exclude the power of
control. In Mondano v. Silvosa,[i][5] the Court contrasted the President's power of supervision over local government
officials with that of his power of control over executive officials of the national government. It was emphasized that the
two terms -- supervision and control -- differed in meaning and extent. The Court distinguished them as follows:

"x x x In administrative law, supervision means overseeing or the power or authority of an officer to see that subordinate
officers perform their duties. If the latter fail or neglect to fulfill them, the former may take such action or step as
prescribed by law to make them perform their duties. Control, on the other hand, means the power of an officer to alter or
modify or nullify or set aside what a subordinate officer ha[s] done in the performance of his duties and to substitute the
judgment of the former for that of the latter."[ii][6]

In Taule v. Santos,[iii][7] we further stated that the Chief Executive wielded no more authority than that of checking whether
local governments or their officials were performing their duties as provided by the fundamental law and by statutes. He
cannot interfere with local governments, so long as they act within the scope of their authority. "Supervisory power, when
contrasted with control, is the power of mere oversight over an inferior body; it does not include any restraining authority
over such body,"[iv][8] we said.

In a more recent case, Drilon v. Lim,[v][9] the difference between control and supervision was further delineated. Officers in
control lay down the rules in the performance or accomplishment of an act. If these rules are not followed, they may, in
their discretion, order the act undone or redone by their subordinates or even decide to do it themselves. On the other hand,
supervision does not cover such authority.Supervising officials merely see to it that the rules are followed, but they
themselves do not lay down such rules, nor do they have the discretion to modify or replace them. If the rules are not
observed, they may order the work done or redone, but only to conform to such rules. They may not prescribe their own
manner of execution of the act. They have no discretion on this matter except to see to it that the rules are followed.

24
Under our present system of government, executive power is vested in the President.[vi][10] The members of the Cabinet and
other executive officials are merely alter egos. As such, they are subject to the power of control of the President, at whose
will and behest they can be removed from office; or their actions and decisions changed, suspended or reversed. [vii][11] In
contrast, the heads of political subdivisions are elected by the people. Their sovereign powers emanate from the electorate,
to whom they are directly accountable. By constitutional fiat, they are subject to the Presidents supervision only, not
control, so long as their acts are exercised within the sphere of their legitimate powers. By the same token, the President
may not withhold or alter any authority or power given them by the Constitution and the law.

Clearly then, the President can only interfere in the affairs and activities of a local government unit if he or she finds
that the latter has acted contrary to law. This is the scope of the Presidents supervisory powers over local government units.
Hence, the President or any of his or her alter egos cannot interfere in local affairs as long as the concerned local government
unit acts within the parameters of the law and the Constitution. Any directive therefore by the President or any of his or
her alter egos seeking to alter the wisdom of a law-conforming judgment on local affairs of a local government unit is a
patent nullity because it violates the principle of local autonomy and separation of powers of the executive and legislative
departments in governing municipal corporations.

Does LBC 55 go beyond the law it seeks to implement? Yes.

LBC 55 provides that the additional monthly allowances to be given by a local government unit should not
exceed P1,000 in provinces and cities and P700 in municipalities. Section 458, par. (a)(1)(xi), of RA 7160, the law that
supposedly serves as the legal basis of LBC 55, allows the grant of additional allowances to judges when the finances of the
city government allow. The said provision does not authorize setting a definite maximum limit to the additional allowances
granted to judges. Thus, we need not belabor the point that the finances of a city government may allow the grant of additional
allowances higher than P1,000 if the revenues of the said city government exceed its annual expenditures. Thus, to illustrate,
a city government with locally generated annual revenues of P40 million and expenditures of P35 million can afford to grant
additional allowances of more than P1,000 each to, say, ten judges inasmuch as the finances of the city can afford it.

Setting a uniform amount for the grant of additional allowances is an inappropriate way of enforcing the criterion
found in Section 458, par. (a)(1)(xi), of RA 7160. The DBM over-stepped its power of supervision over local government
units by imposing a prohibition that did not correspond with the law it sought to implement. In other words, the prohibitory
nature of the circular had no legal basis.

Furthermore, LBC 55 is void on account of its lack of publication, in violation of our ruling in Taada vs.
Tuvera[8] where we held that:

xxx. Administrative rules and regulations must also be published if their purpose is to enforce or implement existing law
pursuant to a valid delegation.

Interpretative regulations and those merely internal in nature, that is, regulating only the personnel of an administrative
agency and the public, need not be published. Neither is publication required of the so-called letters of instruction issued by
administrative superiors concerning the rules or guidelines to be followed by their subordinates in the performance of their
duties.

Respondent COA claims that publication is not required for LBC 55 inasmuch as it is merely an interpretative
regulation applicable to the personnel of an LGU. We disagree. In De Jesus vs. Commission on Audit[9] where we dealt with
the same issue, this Court declared void, for lack of publication, a DBM circular that disallowed payment of allowances and
other additional compensation to government officials and employees. In refuting respondent COAs argument that said
circular was merely an internal regulation, we ruled that:

25
On the need for publication of subject DBM-CCC No. 10, we rule in the affirmative. Following the doctrine enunciated
in Taada v. Tuvera, publication in the Official Gazette or in a newspaper of general circulation in the Philippines is
required since DBM-CCC No. 10 is in the nature of an administrative circular the purpose of which is to enforce or
implement an existing law. Stated differently, to be effective and enforceable, DBM-CCC No. 10 must go through the
requisite publication in the Official Gazette or in a newspaper of general circulation in the Philippines.

In the present case under scrutiny, it is decisively clear that DBM-CCC No. 10, which completely disallows payment of
allowances and other additional compensation to government officials and employees, starting November 1, 1989, is not a
mere interpretative or internal regulation. It is something more than that. And why not, when it tends to deprive
government workers of their allowance and additional compensation sorely needed to keep body and soul together. At the
very least, before the said circular under attack may be permitted to substantially reduce their income, the
government officials and employees concerned should be apprised and alerted by the publication of subject circular
in the Official Gazette or in a newspaper of general circulation in the Philippines to the end that they be given
amplest opportunity to voice out whatever opposition they may have, and to ventilate their stance on the matter.
This approach is more in keeping with democratic precepts and rudiments of fairness and transparency. (emphasis
supplied)

In Philippine International Trading Corporation vs. Commission on Audit[10], we again declared the same circular as
void, for lack of publication, despite the fact that it was re-issued and then submitted for publication. Emphasizing the
importance of publication to the effectivity of a regulation, we therein held that:

It has come to our knowledge that DBM-CCC No. 10 has been re-issued in its entirety and submitted for publication in the
Official Gazette per letter to the National Printing Office dated March 9, 1999. Would the subsequent publication thereof
cure the defect and retroact to the time that the above-mentioned items were disallowed in audit?

The answer is in the negative, precisely for the reason that publication is required as a condition precedent to the effectivity
of a law to inform the public of the contents of the law or rules and regulations before their rights and interests are affected
by the same. From the time the COA disallowed the expenses in audit up to the filing of herein petition the subject circular
remained in legal limbo due to its non-publication. As was stated in Taada v. Tuvera, prior publication of laws before they
become effective cannot be dispensed with, for the reason that it would deny the public knowledge of the laws that are
supposed to govern it.[11]

We now resolve the second issue of whether the yearly appropriation ordinance enacted by Mandaue City providing
for fixed allowances for judges contravenes any law and should therefore be struck down as null and void.

According to respondent COA, even if LBC 55 were void, the ordinances enacted by Mandaue City granting additional
allowances to the petitioner judges would still (be) bereft of legal basis for want of a lawful source of funds considering that
the IRA cannot be used for such purposes. Respondent COA showed that Mandaue Citys funds consisted of locally generated
revenues and the IRA. From 1989 to 1995, Mandaue Citys yearly expenditures exceeded its locally generated revenues, thus
resulting in a deficit. During all those years, it was the IRA that enabled Mandaue City to incur a surplus. Respondent avers
that Mandaue City used its IRA to pay for said additional allowances and this violated paragraph 2 of the Special Provisions,
page 1060, of RA 7845 (The General Appropriations Act of 1995) [12] and paragraph 3 of the Special Provision, page 1225,
of RA 7663 (The General Appropriations Act of 1994)[13] which specifically identified the objects of expenditure of the IRA.
Nowhere in said provisions of the two budgetary laws does it say that the IRA can be used for additional allowances of
judges. Respondent COA thus argues that the provisions in the ordinance providing for such disbursement are against the
law, considering that the grant of the subject allowances is not within the specified use allowed by the aforesaid yearly
appropriations acts.

We disagree.

26
 Respondent COA failed to prove that Mandaue City used the IRA to spend for the additional allowances of the judges.
There was no evidence submitted by COA showing the breakdown of the expenses of the city government and the funds
used for said expenses. All the COA presented were the amounts expended, the locally generated revenues, the deficit, the
surplus and the IRA received each year. Aside from these items, no data or figures were presented to show that Mandaue
City deducted the subject allowances from the IRA. In other words, just because Mandaue Citys locally generated revenues
were not enough to cover its expenditures, this did not mean that the additional allowances of petitioner judges were taken
from the IRA and not from the citys own revenues.

Moreover, the DBM neither conducted a formal review nor ordered a disapproval of Mandaue Citys appropriation
ordinances, in accordance with the procedure outlined by Sections 326 and 327 of RA 7160 which provide that:

Section 326. Review of Appropriation Ordinances of Provinces, Highly Urbanized Cities, Independent Component Cities,
and Municipalities within the Metropolitan Manila Area. The Department of Budget and Management shall review
ordinances authorizing the annual or supplemental appropriations of provinces, highly-urbanized cities, independent
component cities, and municipalities within the Metropolitan Manila Area in accordance with the immediately
succeeding Section.

Section 327. Review of Appropriation Ordinances of Component Cities and Municipalities.- The sangguninang
panlalawigan shall review the ordinance authorizing annual or supplemental appropriations of component cities and
municipalities in the same manner and within the same period prescribed for the review of other ordinances.

If within ninety (90) days from receipt of copies of such ordinance, the sangguniang panlalawigan takes no action
thereon, the same shall be deemed to have been reviewed in accordance with law and shall continue to be in full
force and effect. (emphasis supplied)

Within 90 days from receipt of the copies of the appropriation ordinance, the DBM should have taken positive action.
Otherwise, such ordinance was deemed to have been properly reviewed and deemed to have taken effect. Inasmuch as, in
the instant case, the DBM did not follow the appropriate procedure for reviewing the subject ordinance of Mandaue City and
allowed the 90-day period to lapse, it can no longer question the legality of the provisions in the said ordinance granting
additional allowances to judges stationed in the said city.

WHEREFORE, the petition is hereby GRANTED, and the assailed decision and resolution, dated September 21,
1995 and May 28, 1996, respectively, of the Commission on Audit are hereby set aside.

No costs.

SO ORDERED.

27
G.R. No. 77372 April 29, 1988

LUPO L. LUPANGCO, RAYMOND S. MANGKAL, NORMAN A. MESINA, ALEXANDER R. REGUYAL,

JOCELYN P. CATAPANG, ENRICO V. REGALADO, JEROME O. ARCEGA, ERNESTOC. BLAS, JR.,
ELPEDIO M. ALMAZAN, KARL CAESAR R. RIMANDO, petitioner,
vs.
COURT OF APPEALS and PROFESSIONAL REGULATION COMMISSION, respondent.

Balgos & Perez Law Offices for petitioners.

The Solicitor General for respondents.

GANCAYCO, J.:

Is the Regional Trial Court of the same category as the Professional Regulation Commission so that it cannot pass upon the
validity of the administrative acts of the latter? Can this Commission lawfully prohibit the examiness from attending
review classes, receiving handout materials, tips, or the like three (3) days before the date of the examination? Theses are
the issues presented to the court by this petition for certiorari to review the decision of the Court of Appeals promulagated
on January 13, 1987, in CA-G.R. SP No. 10598, * declaring null and void the other dated Ocober 21, 1986 issued by the
Regional Trial Court of Manila, Branch 32 in Civil Case No. 86-37950 entitled " Lupo L. Lupangco, et al. vs. Professional
Regulation Commission."

The records shows the following undisputed facts:

On or about October 6, 1986, herein respondent Professional Regulation Commission (PRC) issued Resolution No. 105 as
parts of its "Additional Instructions to Examiness," to all those applying for admission to take the licensure examinations in
accountancy. The resolution embodied the following pertinent provisions:

No examinee shall attend any review class, briefing, conference or the like conducted by, or shall
receive any hand-out, review material, or any tip from any school, college or university, or any
review center or the like or any reviewer, lecturer, instructor official or employee of any of the
aforementioned or similars institutions during the three days immediately proceeding every
examination day including examination day.

Any examinee violating this instruction shall be subject to the sanctions prescribed by Sec. 8, Art. III
of the Rules and Regulations of the Commission. 1

On October 16, 1986, herein petitioners, all reviewees preparing to take the licensure examinations in accountancy
schedule on October 25 and November 2 of the same year, filed on their own behalf of all others similarly situated like
them, with the Regional Trial Court of Manila, Branch XXXII, a complaint for injuction with a prayer with the issuance of
a writ of a preliminary injunction against respondent PRC to restrain the latter from enforcing the above-mentioned
resolution and to declare the same unconstitution.

28
Respondent PRC filed a motion to dismiss on October 21, 1987 on the ground that the lower court had no jurisdiction to
review and to enjoin the enforcement of its resolution. In an Order of October 21, 1987, the lower court declared that it had
jurisdiction to try the case and enjoined the respondent commission from enforcing and giving effect to Resolution No. 105
which it found to be unconstitutional.

Not satisfied therewith, respondent PRC, on November 10, 1986, filed with the Court of Appeals a petition for the
nullification of the above Order of the lower court. Said petiton was granted in the Decision of the Court of Appeals
promulagated on January 13, 1987, to wit:

WHEREFORE, finding the petition meritorious the same is hereby GRANTED and the other dated
October 21, 1986 issued by respondent court is declared null and void. The respondent court is
further directed to dismiss with prejudice Civil Case No. 86-37950 for want of jurisdiction over the
subject matter thereof. No cost in this instance.

SO ORDERED. 2

Hence, this petition.

The Court of Appeals, in deciding that the Regional Trial Court of Manila had no jurisdiction to entertain the case and to
enjoin the enforcement of the Resolution No. 105, stated as its basis its conclusion that the Professional Regulation
Commission and the Regional Trial Court are co-equal bodies. Thus it held —

That the petitioner Professional Regulatory Commission is at least a co-equal body with the
Regional Trial Court is beyond question, and co-equal bodies have no power to control each other or
interfere with each other's acts. 3

To strenghten its position, the Court of Appeals relied heavily on National Electrification Administration vs.
Mendoza, 4 which cites Pineda vs. Lantin 5 and Philippine Pacific Fishing, Inc. vs. Luna, 6 where this Court held that a
Court of First Instance cannot interfere with the orders of the Securities and Exchange Commission, the two being co-equal
bodies.

After a close scrutiny of the facts and the record of this case,

We rule in favor of the petitioner.

The cases cited by respondent court are not in point. It is glaringly apparent that the reason why this Court ruled that the
Court of First Instance could not interfere with the orders of the Securities and Exchange Commission was that this was so
provided for by the law. In Pineda vs. Lantin, We explained that whenever a party is aggrieved by or disagree with an
order or ruling of the Securities and Exchange Commission, he cannot seek relief from courts of general jurisdiction since
under the Rules of Court and Commonwealth Act No. 83, as amended by Republic Act No. 635, creating and setting forth
the powers and functions of the old Securities and Exchange Commission, his remedy is to go the Supreme Court on a
petition for review. Likewise, in Philippine Pacific Fishing Co., Inc. vs. Luna,it was stressed that if an order of the
Securities and Exchange Commission is erroneous, the appropriate remedy take is first, within the Commission itself, then,
to the Supreme Court as mandated in Presidential Decree No. 902-A, the law creating the new Securities and Exchange
Commission. Nowhere in the said cases was it held that a Court of First Instance has no jurisdiction over all other
government agencies. On the contrary, the ruling was specifically limited to the Securities and Exchange Commission.

29
The respondent court erred when it place the Securities and Exchange Commission and the Professional Regulation
Commsision in the same category. As alraedy mentioned, with respect to the Securities and Exchange Commission, the
laws cited explicitly provide with the procedure that need be taken when one is aggrieved by its order or ruling. Upon the
other hand, there is no law providing for the next course of action for a party who wants to question a ruling or order of the
Professional Regulation Commission. Unlike Commonwealth Act No. 83 and Presidential Decree No. 902-A, there is no
provision in Presidential Decree No. 223, creating the Professional Regulation Commission, that orders or resolutions of
the Commission are appealable either to the Court of Appeals or to theSupreme Court. Consequently, Civil Case No. 86-
37950, which was filed in order to enjoin the enforcement of a resolution of the respondent Professional Regulation
Commission alleged to be unconstitutional, should fall within the general jurisdiction of the Court of First Instance, now
the Regional Trial Court. 7

What is clear from Presidential Decree No. 223 is that the Professional Regulation Commission is attached to the Office of
the President for general direction and coordination. 8 Well settled in our jurisprudence is the view that even acts of the
Office of the President may be reviewed by the Court of First Instance (now the Regional Trial Court). In Medalla vs.
Sayo, 9 this rule was thoroughly propounded on, to wit:

In so far as jurisdiction of the Court below to review by certiorari decisions and/or resolutions of the
Civil Service Commission and of the residential Executive Asssistant is concerned, there should be
no question but that the power of judicial review should be upheld. The following rulings buttress
this conclusion:

The objection to a judicial review of a Presidential act arises from a failure to

recognize the most important principle in our system of government, i.e., the
separation of powers into three co-equal departments, the executives, the
legislative and the judicial, each supreme within its own assigned powers and
duties. When a presidential act is challenged before the courts of justice, it is
not to be implied therefrom that the Executive is being made subject and
subordinate to the courts. The legality of his acts are under judicial review, not
because the Executive is inferior to the courts, but because the law is above
the Chief Executive himself, and the courts seek only to interpret, apply or
implement it (the law). A judicial review of the President's decision on a case
of an employee decided by the Civil Service Board of Appeals should be
viewed in this light and the bringing of the case to the Courts should be
governed by the same principles as govern the jucucial review of all
administrative acts of all administrative officers. 10

Republic vs. Presiding Judge, CFI of Lanao del Norte, Br. II, 11 is another case in point. Here, "the Executive Office"' of
the Department of Education and Culture issued Memorandum Order No. 93 under the authority of then Secretary of
Education Juan Manuel. As in this case, a complaint for injunction was filed with the Court of First Instance of Lanao del
Norte because, allegedly, the enforcement of the circular would impair some contracts already entered into by public
school teachers. It was the contention of petitioner therein that "the Court of First Instance is not empowered to amend,
reverse and modify what is otherwise the clear and explicit provision of the memorandum circular issued by the Executive
Office which has the force and effect of law." In resolving the issue, We held:

... We definitely state that respondent Court lawfully acquired jurisdiction in Civil Case No. II-240
(8) because the plaintiff therein asked the lower court for relief, in the form of injunction, in defense
of a legal right (freedom to enter into contracts) . . . . .

30
 Hence there is a clear infringement of private respondent's constitutional right to enter into
agreements not contrary to law, which might run the risk of being violated by the threatened
implementation of Executive Office Memorandum Circular No. 93, dated February 5, 1968, which
prohibits, with certain exceptions, cashiers and disbursing officers from honoring special powers of
attorney executed by the payee employees. The respondent Court is not only right but duty bound to
take cognizance of cases of this nature wherein a constitutional and statutory right is allegedly
infringed by the administrative action of a government office. Courts of first Instance have original
jurisdiction over all civil actions in which the subject of the litigation is not capable of pecuniary
estimation (Sec. 44, Republic Act 296, as amended). 12 (Emphasis supplied.)

In San Miguel Corporation vs. Avelino, 13 We ruled that a judge of the Court of First Instance has the authority to decide on
the validity of a city tax ordinance even after its validity had been contested before the Secretary of Justice and an opinion
thereon had been rendered.

In view of the foregoing, We find no cogent reason why Resolution No. 105, issued by the respondent Professional
Regulation Commission, should be exempted from the general jurisdiction of the Regional Trial Court.

Respondent PRC, on the other hand, contends that under Section 9, paragraph 3 of B.P. Blg. 129, it is the Court of Appeals
which has jurisdiction over the case. The said law provides:

SEC. 9. Jurisdiction. — The Intermediate Appellate Court shall exercise:

xxx xxx xxx

(3) Exclusive appellate jurisdiction over all final judgments, decisions, resolutions, orders, or awards
of Regional Trial Courts and quasi-judicial agencies, instrumentalities, boards or commissions,
except those falling within the appellate jurisdiction of the Supreme Court in accordance with the
Constitution, the provisions of this Act, and of subparagraph (1) of the third paragraph and
subparagraph (4) of the fourth paragraph of Section 17 of the Judiciary Act of 1948.

The contention is devoid of merit.

In order to invoke the exclusive appellate jurisdiction of the Court of Appeals as provided for in Section 9, paragraph 3 of
B.P. Blg. 129, there has to be a final order or ruling which resulted from proceedings wherein the administrative body
involved exercised its quasi-judicial functions. In Black's Law Dictionary, quasi-judicial is defined as a term applied to the
action, discretion, etc., of public administrative officers or bodies required to investigate facts, or ascertain the existence of
facts, hold hearings, and draw conclusions from them, as a basis for their official action, and to exercise discretion of a
judicial nature. To expound thereon, quasi-judicial adjudication would mean a determination of rights, privileges and
duties resulting in a decision or order which applies to a specific situation . 14This does not cover rules and regulations of
general applicability issued by the administrative body to implement its purely administrative policies and functions like
Resolution No. 105 which was adopted by the respondent PRC as a measure to preserve the integrity of licensure
examinations.

The above rule was adhered to in Filipinas Engineering and Machine Shop vs. Ferrer. 15 In this case, the issue presented
was whether or not the Court of First Instance had jurisdiction over a case involving an order of the Commission on
Elections awarding a contract to a private party which originated from an invitation to bid. The said issue came about
because under the laws then in force, final awards, judgments, decisions or orders of the Commission on Elections fall

31
within the exclusive jurisdiction of the Supreme Court by way of certiorari. Hence, it has been consistently held that "it is
the Supreme Court, not the Court of First Instance, which has exclusive jurisdiction to review on certiorari final decisions,
orders, or rulings of the Commission on Elections relative to the conduct of elections and the enforcement of election
laws." 16

As to whether or not the Court of First Instance had jurisdiction in saidcase, We said:

We are however, far from convinced that an order of the COMELEC awarding a contract to a private
party, as a result of its choice among various proposals submitted in response to its invitation to bid
comes within the purview of a "final order" which is exclusively and directly appealable to this court
on certiorari. What is contemplated by the term "final orders, rulings and decisions, of the
COMELEC reviewable by certiorari by the Supreme Court as provided by law are those rendered in
actions or proceedings before the COMELEC and taken cognizance of by the said body in
the exercise of its adjudicatory or quasi-judicial powers. (Emphasis supplied.)

xxx xxx xxx

We agree with petitioner's contention that the order of the Commission granting the award to a
bidder is not an order rendered in a legal controversy before it wherein the parties filed their
respective pleadings and presented evidence after which the questioned order was issued; and that
this order of the commission was issued pursuant to its authority to enter into contracts in relation to
election purposes. In short, the COMELEC resolution awarding the contract in favor of Acme was
not issued pursuant to its quasi-judicial functions but merely as an incident of its inherent
administrative functions over the conduct of elections, and hence, the said resolution may not be
deemed as a "final order reviewable by certiorari by the Supreme Court. Being non-judicial in
character, no contempt order may be imposed by the COMELEC from said order, and no direct and
exclusive appeal by certiorari to this Tribunal lie from such order. Any question arising from said
order may be well taken in an ordinary civil action before the trial courts. (Emphasis supplied.) 17

One other case that should be mentioned in this regard is Salud vs. Central Bank of the Philippines. 18 Here, petitioner
Central Bank, like respondent in this case, argued that under Section 9, paragraph 3 of B.P. Blg. 129, orders of the
Monetary Board are appealable only to the Intermediate Appellate Court. Thus:

The Central Bank and its Liquidator also postulate, for the very first time, that the Monetary Board is
among the "quasi-judicial ... boards" whose judgments are within the exclusive appellate jurisdiction
of the IAC; hence, it is only said Court, "to the exclusion of the Regional Trial Courts," that may
review the Monetary Board's resolutions. 19

Anent the posture of the Central Bank, We made the following pronouncement:

The contention is utterly devoid of merit. The IAC has no appellate jurisdiction over resolution or
orders of the Monetary Board. No law prescribes any mode of appeal from the Monetary Board to
the IAC. 20

In view of the foregoing, We hold that the Regional Trial Court has jurisdiction to entertain Civil Case No. 86-37950 and
enjoin the respondent PRC from enforcing its resolution.

32
Although We have finally settled the issue of jurisdiction, We find it imperative to decide once and for all the validity of
Resolution No. 105 so as to provide the much awaited relief to those who are and will be affected by it.

Of course, We realize that the questioned resolution was adopted for a commendable purpose which is "to preserve the
integrity and purity of the licensure examinations." However, its good aim cannot be a cloak to conceal its constitutional
infirmities. On its face, it can be readily seen that it is unreasonable in that an examinee cannot even attend any review
class, briefing, conference or the like, or receive any hand-out, review material, or any tip from any school, collge or
university, or any review center or the like or any reviewer, lecturer, instructor, official or employee of any of the
aforementioned or similar institutions . ... 21

The unreasonableness is more obvious in that one who is caught committing the prohibited acts even without any ill
motives will be barred from taking future examinations conducted by the respondent PRC. Furthermore, it is inconceivable
how the Commission can manage to have a watchful eye on each and every examinee during the three days before the
examination period.

It is an aixiom in administrative law that administrative authorities should not act arbitrarily and capriciously in the
issuance of rules and regulations. To be valid, such rules and regulations must be reasonable and fairly adapted to the end
in view. If shown to bear no reasonable relation to the purposes for which they are authorized to be issued, then they must
be held to be invalid. 22

Resolution No. 105 is not only unreasonable and arbitrary, it also infringes on the examinees' right to liberty guaranteed by
the Constitution. Respondent PRC has no authority to dictate on the reviewees as to how they should prepare themselves
for the licensure examinations. They cannot be restrained from taking all the lawful steps needed to assure the fulfillment
of their ambition to become public accountants. They have every right to make use of their faculties in attaining success in
their endeavors. They should be allowed to enjoy their freedom to acquire useful knowledge that will promote their
personal growth. As defined in a decision of the United States Supreme Court:

The term "liberty" means more than mere freedom from physical restraint or the bounds of a prison.
It means freedom to go where one may choose and to act in such a manner not inconsistent with the
equal rights of others, as his judgment may dictate for the promotion of his happiness, to pursue such
callings and vocations as may be most suitable to develop his capacities, and giv to them their
highest enjoyment. 23

Another evident objection to Resolution No. 105 is that it violates the academic freedom of the schools concerned.
Respondent PRC cannot interfere with the conduct of review that review schools and centers believe would best enable
their enrolees to meet the standards required before becoming a full fledged public accountant. Unless the means or
methods of instruction are clearly found to be inefficient, impractical, or riddled with corruption, review schools and
centers may not be stopped from helping out their students. At this juncture, We call attention to Our pronouncement
in Garcia vs. The Faculty Admission Committee, Loyola School of Theology, 24 regarding academic freedom to wit:

... It would follow then that the school or college itself is possessed of such a right. It decides for
itself its aims and objectives and how best to attain them. It is free from outside coercion or
interference save possibly when the overriding public welfare calls for some restraint. It has a wide
sphere of autonomy certainly extending to the choice of students. This constitutional provision is not
to be construed in a niggardly manner or in a grudging fashion.

33
Needless to say, the enforcement of Resolution No. 105 is not a guarantee that the alleged leakages in the licensure
examinations will be eradicated or at least minimized. Making the examinees suffer by depriving them of legitimate means
of review or preparation on those last three precious days-when they should be refreshing themselves with all that they
have learned in the review classes and preparing their mental and psychological make-up for the examination day itself-
would be like uprooting the tree to get ride of a rotten branch. What is needed to be done by the respondent is to find out
the source of such leakages and stop it right there. If corrupt officials or personnel should be terminated from their loss,
then so be it. Fixers or swindlers should be flushed out. Strict guidelines to be observed by examiners should be set up and
if violations are committed, then licenses should be suspended or revoked. These are all within the powers of the
respondent commission as provided for in Presidential Decree No. 223. But by all means the right and freedom of the
examinees to avail of all legitimate means to prepare for the examinations should not be curtailed.

In the light of the above, We hereby REVERSE and SET ASIDE, the decision of the Court of Appeals in CA-G.R. SP No.
10591 and another judgment is hereby rendered declaring Resolution No. 105 null and void and of no force and effect for
being unconstitutional. This decision is immediately executory. No costs.

SO ORDERED.

34
G.R. No. 163583 August 20, 2008

BRITISH AMERICAN TOBACCO, petitioner,

vs.
JOSE ISIDRO N. CAMACHO, in his capacity as Secretary of the Department of Finance and GUILLERMO L.
PARAYNO, JR., in his capacity as Commissioner of the Bureau of Internal Revenue, respondents.
Philip Morris Philippines Manufacturing, Inc., fortune tobacco, corp., MIGHTY CORPORATION, and JT
InTERNATIONAL, S.A., respondents-in-intervention.

DECISION

YNARES-SANTIAGO, J.:

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 22-2003; and (4) Revenue Memorandum Order No. 6-2003. 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.

Paragraph (c) of Section 145, 1 states –

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 above Ten pesos
(P10.00) per pack, the tax shall be Thirteen pesos and forty-four centavos (P13.44) per pack;

(2) If the net retail price (excluding the excise tax and the value-added tax) exceeds Six pesos and
fifty centavos (P6.50) but does not exceed Ten pesos (10.00) per pack, the tax shall be Eight pesos
and ninety-six centavos (P8.96) per pack;

35
 (3) If the net retail price (excluding the excise tax and the value-added tax) is Five pesos (P5.00) but
does not exceed Six pesos and fifty centavos (P6.50) per pack, the tax shall be Five pesos and sixty
centavos (P5.60) per pack;

(4) If the net retail price (excluding the excise tax and the value-added tax) is below Five pesos
(P5.00) per pack, the tax shall be One peso 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 according to their current net retail price.

For the above purpose, net retail price shall mean the price at which the cigarette is sold on retail in 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.

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 or "old" brands
shall be taxed based on their net retail price as of October 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

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.

36
 Section 4. Classification and Manner of Taxation of Existing Brands, New Brands and Variant of Existing
Brands.

xxxx

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. 9-2003,4 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. 6-20035 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. 22-20036 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 Strike’s 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

37
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 Reconsideration12 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 decision15 upholding the constitutionality of Section 145 of the NIRC, Revenue
Regulations Nos. 1-97, 9-2003, 22-2003 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

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,–

(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;

(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 cigarettes shall 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:

38
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, 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 fifty-six 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:

39
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 value-added
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)

40
Under RA 9334, the excise tax due on petitioner’s products was increased to P25.00 per pack. In the implementation
thereof, respondent Commissioner assessed petitioner’s 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 Supplement19 and a Supplement20 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," petitioner’s 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 Corporation, 23 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 same status 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.

41
Before going into the substantive issues of this case, we must first address the matter of jurisdiction, in light of Fortune
Tobacco’s 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 quasi-legislative 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.

42
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 following are instances of conclusive presumptions:

(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.

43
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, 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

44
 Effective on January 1, 2011, Seven pesos and fifty-six 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

45
 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 value-added
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,33medium-priced,34 high-
priced,35 and premium-priced36 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, manufacturer’s 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, Marlboro’s 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 petitioner’s 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

46
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 petitioner’s 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 petitioner’s newly introduced brands arose only because the
former were classified based on their "current" net retail price as of October 1, 1996 and petitioner’s newly introduced
brands were classified based on their "current" net retail price as of 2003. Without this corresponding freezing of the
classification of petitioner’s 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 petitioner’s 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

47
 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.

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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 multi-tiered 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 valoremtaxation 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 four-tiered 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 manufacturer’s or importer’s 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 manufacturer’s or importer’s 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 manufacturer’s or importer’s 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).

49
 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 House’s 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.

50
 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 consumer’s 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 consumer’s 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
government’s policy of dismantling monopolies and combinations in restraint of trade. 56

For its part, the Senate’s 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. –

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;

51
 (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;

(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.

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 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.

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

52
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 valoremcomparator. 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.

53
 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 x60 (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?

54
 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 further dissected by the two senators. There was a genuine difference of opinion as to which system— one
with a fixed excise tax rate and classification or the 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

55
 the new ones will have tremendous difficulty. Therefore, this provision tends to indicate an anticompetitive
bias.

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.

Senator Enrile: Mr. President, I cannot foresee any anti-competitiveness 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.

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.

3. There is,— although the judgment call of the gentleman disagrees— to our view, an
anticompetitive situation that is geared at…63

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.

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 Senate’s 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.

56
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 Congress’s 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 Congress’s 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.

57
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 Congress’s 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 brands72 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

58
Be that as it may, petitioner’s 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-à-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 state’s 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 state’s interests, or what these interests
should be in the first place. This policy-determining 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 Congress’s 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 state’s 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

59
 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:

60
 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.

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 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

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

61
 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 one-time classification only.79Upon 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 valoremwhich 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.

62
 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 x80(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 Strike’s 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 petitioner’s 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. 9-2003. 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

63
 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, petitioner’s evidence was anchored on the alleged unequal tax treatment between old and new brands which
involves a different frame of reference vis-à-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 2181 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:

64
 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.

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

(1) Section 145 of the NIRC, as amended by Republic Act No. 9334, is CONSTITUTIONAL; and that

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

SO ORDERED.

65
 [G.R. No. 131082. June 19, 2000]

ROMULO, MABANTA, BUENAVENTURA, SAYOC & DE LOS ANGELES, petitioner, vs. HOME
DEVELOPMENT MUTUAL FUND, respondent.

DECISION

DAVIDE, JR., C.J.: CODES

Once again, this Court is confronted with the issue of the validity of the Amendments to the Rules and Regulations
Implementing Republic Act No. 7742, which require the existence of a plan providing for both provident/retirement and
housing benefits for exemption from the Pag~IBIG Fund coverage under Presidential Decree No. 1752, as amended.

Pursuant to Section 19[1] of P.D. No. 1752, as amended by R.A. No. 7742, petitioner Romulo, Mabanta, Buenaventura,
Sayoc and De Los Angeles (hereafter PETITIONER), a law firm, was exempted for the period 1 January to 31 December
1995 from the Pag~IBIG Fund coverage by respondent Home Development Mutual Fund (hereafter HDMF) because of a
superior retirement plan.[2]

On 1 September 1995, the HDMF Board of Trustees, pursuant to Section 5 of Republic Act No. 7742, issued Board
Resolution No. 1011, Series of 1995, amending and modifying the Rules and Regulations Implementing R.A. No. 7742. As
amended, Section 1 of Rule VII provides that for a company to be entitled to a waiver or suspension of Fund coverage, [3] it
must have a plan providing for both provident/ retirement and housing benefits superior to those provided under the
Pag~IBIG Fund.

On 16 November 1995, PETITIONER filed with the respondent an application for Waiver or Suspension of Fund
Coverage because of its superior retirement plan.[4] In support of said application, PETITIONER submitted to the HDMF a
letter explaining that the 1995 Amendments to the Rules are invalid. [5] Jksm

In a letter dated 18 March 1996, the President and Chief Executive Officer of HDMF disapproved PETITIONER's
application on the ground that the requirement that there should be both a provident retirement fund and a housing plan is
clear in the use of the phrase "and/or," and that the Rules Implementing R.A. No. 7742 did not amend nor repeal Section 19
of P.D. No. 1752 but merely implement the law.[6]

PETITIONER's appeal[7] with the HDMF Board of Trustees was denied for having been rendered moot and academic by
Board Resolution No. 1208, Series of 1996, removing the availment of waiver of the mandatory coverage of the Pag~IBIG
Fund, except for distressed employers.[8]

On 31 March 1997, PETITIONER filed a petition for review[9] before the Court of Appeals. On motion by HDMF, the
Court of Appeals dismissed[10] the petition on the ground that the coverage of employers and employees under the Home
Development Mutual Fund is mandatory in character as clearly worded in Section 4 of P.D. No. 1752, as amended by R.A.
No. 7742. There is no allegation that petitioner is a distressed employer to warrant its exemption from the Fund coverage.
As to the amendments to the Rules and Regulations Implementing R.A. No. 7742, the same are valid. Under P.D. No. 1752
and R.A. No. 7742 the Board of Trustees of the HDMF is authorized to promulgate rules and regulations, as well as
amendments thereto, concerning the extension, waiver or suspension of coverage under the Pag~IBIG Fund. And the
publication requirement was amply met, since the questioned amendments were published in the 21 October 1995 issue of
the Philippine Star, which is a newspaper of general circulation.

66
PETITIONER's motion for reconsideration[11] was denied.[12] Hence, on 6 November 1997, PETITIONER filed a petition
before this Court assailing the 1995 and the 1996 Amendments to the Rules and Regulations Implementing Republic Act
No. 7742 for being contrary to law. In support thereof, PETITIONER contends that the subject 1995 Amendments issued
by HDMF are inconsistent with the enabling law, P.D. No. 1752, as amended by R.A. No. 7742, which merely requires as
a pre~condition for exemption from coverage the existence of either a superior provident/ retirement plan or a superior
housing plan, and not the concurrence of both plans. Hence, considering that PETITIONER has a provident plan superior
to that offered by the HDMF, it is entitled to exemption from the coverage in accordance with Section 19 of P.D. No. 1752.
The 1996 Amendment are also void insofar as they abolished the exemption granted by Section 19 of P.D. 1752, as
amended. The repeal of such exemption involves the exercise of legislative power, which cannot be delegated to
HMDF. Kycalr

PETITIONER also cites Section 9 (1), Chapter 2, Book VII of the Administrative Code of 1987, which provides:

SEC. 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.

Since the Amendments to the Rules and Regulations Implementing Republic Act No. 7742 involve an imposition of an
additional burden, a public hearing should have first been conducted to give chance to the employers, like PETITIONER,
to be heard before the HDMF adopted the said Amendments. Absent such public hearing, the amendments should be
voided.

Finally, PETITIONER contends that HDMF did not comply with Section 3, Chapter 2, Book VII of the Administrative
Code of 1987, which provides that "[e]very agency shall file with the University of the Philippines Law Center three (3)
certified copies of every rule adopted by it."

On the other hand, the HDMF contends that in promulgating the amendments to the rules and regulations which require the
existence of a plan providing for both provident and housing benefits for exemption from the Fund Coverage, the
respondent Board was merely exercising its rule-making power under Section 13 of P.D. No. 1752. It had the option to use
"and" only instead of "or" in the rules on waiver in order to effectively implement the Pag-IBIG Fund Law. By choosing
"and," the Board has clarified the confusion brought about by the use of "and/or" in Section 19 of P.D. No. 1752, as
amended.

As to the public hearing, HDMF maintains that as can be clearly deduced from Section 9(1), Chapter 2, book VII of the
Revised Administrative Code of 1987, public hearing is required only when the law so provides, and if not, only if the
same is practicable. It follows that public hearing is only optional or discretionary on the part of the agency concerned,
except when the same is required by law. P.D. No. 1752 does not require that pubic hearing be first conducted before the
rules and regulations implementing it would become valid and effective. What it requires is the publication of said rules
and regulations at least once in a newspaper of general circulation. Having published said 1995 and 1996 Amendments
through the Philippine Star on 21 October 1995[13] and 15 November 1996,[14] respectively, HDMF has complied with the
publication requirement.

Finally, HDMF claims that as early as 18 October 1996, it had already filed certified true copies of the Amendments to the
Rules and Regulations with the University of the Philippines Law Center. This fact is evidenced by certified true copies of
the Certification from the Office of the National Administrative Register of the U.P. Law Center.[15]

We find for the PETITIONER. Calrky

67
The issue of the validity of the 1995 Amendments to the Rules and Regulations Implementing R.A. No. 7742, specifically
Section I, Rule VII on Waiver and Suspension, has been squarely resolved in the relatively recent case of China Banking
Corp. v. The Members of the Board of Trustees of the HDMF.[16] We held in that case that Section 1 of Rule VII of the
Amendments to the Rules and Regulations Implementing R.A. No. 7742, and HDMF Circular No. 124~B prescribing the
Revised Guidelines and Procedure for Filing Application for Waiver or Suspension of Fund Coverage under P.D. No.
1752, as amended by R.A. No. 7742, are null and void insofar as they require that an employer should have both a
provident/ retirement plan and a housing plan superior to the benefits offered by the Fund in order to qualify for waiver or
suspension of the Fund coverage. In arriving at said conclusion, we ruled:

The controversy lies in the legal signification of the words "and/or."

In the instant case, the legal meaning of the words "and/or" should be taken in its ordinary
signification, i.e., "either and or; e.g. butter and/or eggs means butter and eggs or butter or eggs.

"The term and/or means that the effect shall be given to both the conjunctive
"and" and the disjunctive "or"; or that one word or the other may be taken
accordingly as one or the other will best effectuate the purpose intended by
the legislature as gathered from the whole statute. The term is used to avoid a
construction which by the use of the disjunctive "or" alone will exclude the
combination of several of the alternatives or by the use of the conjunctive
"and" will exclude the efficacy of any one of the alternatives standing alone."

It is accordingly ordinarily held that the intention of the legislature in using the term "and/or" is that
the word "and" and the word "or" are to be used interchangeably.

It ... seems to us clear from the language of the enabling law that Section 19 of P.D. No.
1752 intended that an employer with a provident plan or an employee housing plan superior to that
of the fund may obtain exemption from coverage. If the law had intended that the employee [sic]
should have both a superior provident plan and a housing plan in order to qualify for exemption, it
would have used the words "and" instead of "and/or." Notably, paragraph (a) of Section 19 requires
for annual certification of waiver or suspension, that the features of the plan or plans are superior to
the fund or continue to be so. The law obviously contemplates that the existence of either plan is
considered as sufficient basis for the grant of an exemption; needless to state, the concurrence of
both plans is more than sufficient. To require the existence of both plans would radically impose a
more stringent condition for waiver which was not clearly envisioned by the basic law. By removing
the disjunctive word "or" in the implementing rules the respondent Board has exceeded its
authority. Slx

It is without doubt that the HDMF Board has rule~making power as provided in Section 5[17] of R.A. No. 7742 and Section
13[18] of P.D. No. 1752. However, 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.[19] It is required that the regulation be germane to the
objects and purposes of the law, and be not in contradiction to, but in conformity with, the standards prescribed by law. [20]

In the present case, when the Board of Trustees of the HDMF required in Section 1, Rule VII of the 1995 Amendments to
the Rules and Regulations Implementing R.A. No. 7742 that employers should have both provident/retirement and housing
benefits for all its employees in order to qualify for exemption from the Fund, it effectively amended Section 19 of P.D.
No. 1752. And when the Board subsequently abolished that exemption through the 1996 Amendments, it repealed Section

68
19 of P.D. No. 1752. Such amendment and subsequent repeal of Section 19 are both invalid, as they are not within the
delegated power of the Board. The HDMF cannot, in the exercise of its rule~making power, issue a regulation not
consistent with the law it seeks to apply. Indeed, administrative issuances must not override, supplant or modify the law,
but must remain consistent with the law they intend to carry out. [21] Only Congress can repeal or amend the law. Scslx

While it may be conceded that the requirement of having both plans to qualify for an exemption, as well as the abolition of
the exemption, would enhance the interest of the working group and further strengthen the Home Development Mutual
Fund in its pursuit of promoting public welfare through ample social services as mandated by the Constitution, we are of
the opinion that the basic law should prevail. A department zeal may not be permitted to outrun the authority conferred by
the statute.[22]

Considering the foregoing conclusions, it is unnecessary to dwell on the other issues raised.

WHEREFORE, the petition is GRANTED. The assailed decision of 31 July 1997 of the Court of Appeals in CA~G.R.
No. SP~43668 and its Resolution of 15 October 1997 are hereby REVERSED and SET ASIDE. The disapproval by the
Home Development Mutual Fund of the application of the petitioner for waiver or suspension of Fund coverage is SET
ASIDE, and the Home Development Mutual Fund is hereby directed to refund to petitioner all sums of money it collected
from the latter.

SO ORDERED. Slxsc

69