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G.R. No.

L-31156 February 27, 1976

PEPSI-COLA BOTTLING COMPANY OF THE PHILIPPINES, INC., plaintiff-appellant,


vs.
MUNICIPALITY OF TANAUAN, LEYTE, THE MUNICIPAL MAYOR, ET AL., defendant
appellees.

Sabido, Sabido & Associates for appellant.

Provincial Fiscal Zoila M. Redona & Assistant Provincial Fiscal Bonifacio R Matol and Assistant
Solicitor General Conrado T. Limcaoco & Solicitor Enrique M. Reyes for appellees.

MARTIN, J.:

This is an appeal from the decision of the Court of First Instance of Leyte in its Civil Case No.
3294, which was certified to Us by the Court of Appeals on October 6, 1969, as involving only
pure questions of law, challenging the power of taxation delegated to municipalities under the
Local Autonomy Act (Republic Act No. 2264, as amended, June 19, 1959).

On February 14, 1963, the plaintiff-appellant, Pepsi-Cola Bottling Company of the Philippines,
Inc., commenced a complaint with preliminary injunction before the Court of First Instance of
Leyte for that court to declare Section 2 of Republic Act No. 2264. 1 otherwise known as the Local
Autonomy Act, unconstitutional as an undue delegation of taxing authority as well as to declare
Ordinances Nos. 23 and 27, series of 1962, of the municipality of Tanauan, Leyte, null and void.

On July 23, 1963, the parties entered into a Stipulation of Facts, the material portions of which
state that, first, both Ordinances Nos. 23 and 27 embrace or cover the same subject matter and the
production tax rates imposed therein are practically the same, and second, that on January 17,
1963, the acting Municipal Treasurer of Tanauan, Leyte, as per his letter addressed to the Manager
of the Pepsi-Cola Bottling Plant in said municipality, sought to enforce compliance by the latter
of the provisions of said Ordinance No. 27, series of 1962.

Municipal Ordinance No. 23, of Tanauan, Leyte, which was approved on September 25, 1962,
levies and collects "from soft drinks producers and manufacturers a tai of one-sixteenth (1/16) of
a centavo for every bottle of soft drink corked." 2 For the purpose of computing the taxes due, the
person, firm, company or corporation producing soft drinks shall submit to the Municipal
Treasurer a monthly report, of the total number of bottles produced and corked during the month. 3

On the other hand, Municipal Ordinance No. 27, which was approved on October 28, 1962, levies
and collects "on soft drinks produced or manufactured within the territorial jurisdiction of this
municipality a tax of ONE CENTAVO (P0.01) on each gallon (128 fluid ounces, U.S.) of volume
capacity." 4 For the purpose of computing the taxes due, the person, fun company, partnership,
corporation or plant producing soft drinks shall submit to the Municipal Treasurer a monthly report
of the total number of gallons produced or manufactured during the month. 5
The tax imposed in both Ordinances Nos. 23 and 27 is denominated as "municipal production tax.'

On October 7, 1963, the Court of First Instance of Leyte rendered judgment "dismissing the
complaint and upholding the constitutionality of [Section 2, Republic Act No. 2264] declaring
Ordinance Nos. 23 and 27 legal and constitutional; ordering the plaintiff to pay the taxes due under
the oft the said Ordinances; and to pay the costs."

From this judgment, the plaintiff Pepsi-Cola Bottling Company appealed to the Court of Appeals,
which, in turn, elevated the case to Us pursuant to Section 31 of the Judiciary Act of 1948, as
amended.

There are three capital questions raised in this appeal:

1. — Is Section 2, Republic Act No. 2264 an undue delegation of power,


confiscatory and oppressive?

2. — Do Ordinances Nos. 23 and 27 constitute double taxation and impose


percentage or specific taxes?

3. — Are Ordinances Nos. 23 and 27 unjust and unfair?

1. The power of taxation is an essential and inherent attribute of sovereignty, belonging as a matter
of right to every independent government, without being expressly conferred by the people. 6 It is
a power that is purely legislative and which the central legislative body cannot delegate either to
the executive or judicial department of the government without infringing upon the theory of
separation of powers. The exception, however, lies in the case of municipal corporations, to which,
said theory does not apply. Legislative powers may be delegated to local governments in respect
of matters of local concern. 7 This is sanctioned by immemorial practice. 8 By necessary
implication, the legislative power to create political corporations for purposes of local self-
government carries with it the power to confer on such local governmental agencies the power to
tax. 9 Under the New Constitution, local governments are granted the autonomous authority to
create their own sources of revenue and to levy taxes. Section 5, Article XI provides: "Each local
government unit shall have the power to create its sources of revenue and to levy taxes, subject to
such limitations as may be provided by law." Withal, it cannot be said that Section 2 of Republic
Act No. 2264 emanated from beyond the sphere of the legislative power to enact and vest in local
governments the power of local taxation.

The plenary nature of the taxing power thus delegated, contrary to plaintiff-appellant's pretense,
would not suffice to invalidate the said law as confiscatory and oppressive. In delegating the
authority, the State is not limited 6 the exact measure of that which is exercised by itself. When it
is said that the taxing power may be delegated to municipalities and the like, it is meant that there
may be delegated such measure of power to impose and collect taxes as the legislature may deem
expedient. Thus, municipalities may be permitted to tax subjects which for reasons of public policy
the State has not deemed wise to tax for more general purposes. 10 This is not to say though that
the constitutional injunction against deprivation of property without due process of law may be
passed over under the guise of the taxing power, except when the taking of the property is in the
lawful exercise of the taxing power, as when (1) the tax is for a public purpose; (2) the rule on
uniformity of taxation is observed; (3) either the person or property taxed is within the jurisdiction
of the government levying the tax; and (4) in the assessment and collection of certain kinds of
taxes notice and opportunity for hearing are provided. 11 Due process is usually violated where the
tax imposed is for a private as distinguished from a public purpose; a tax is imposed on property
outside the State, i.e., extraterritorial taxation; and arbitrary or oppressive methods are used in
assessing and collecting taxes. But, a tax does not violate the due process clause, as applied to a
particular taxpayer, although the purpose of the tax will result in an injury rather than a benefit to
such taxpayer. Due process does not require that the property subject to the tax or the amount of
tax to be raised should be determined by judicial inquiry, and a notice and hearing as to the amount
of the tax and the manner in which it shall be apportioned are generally not necessary to due
process of law. 12

There is no validity to the assertion that the delegated authority can be declared unconstitutional
on the theory of double taxation. It must be observed that the delegating authority specifies the
limitations and enumerates the taxes over which local taxation may not be exercised. 13 The reason
is that the State has exclusively reserved the same for its own prerogative. Moreover, double
taxation, in general, is not forbidden by our fundamental law, since We have not adopted as part
thereof the injunction against double taxation found in the Constitution of the United States and
some states of the Union. 14 Double taxation becomes obnoxious only where the taxpayer is taxed
twice for the benefit of the same governmental entity 15 or by the same jurisdiction for the same
purpose, 16 but not in a case where one tax is imposed by the State and the other by the city or
municipality. 17

2. The plaintiff-appellant submits that Ordinance No. 23 and 27 constitute double taxation, because
these two ordinances cover the same subject matter and impose practically the same tax rate. The
thesis proceeds from its assumption that both ordinances are valid and legally enforceable. This is
not so. As earlier quoted, Ordinance No. 23, which was approved on September 25, 1962, levies
or collects from soft drinks producers or manufacturers a tax of one-sixteen (1/16) of a centavo for
.every bottle corked, irrespective of the volume contents of the bottle used. When it was discovered
that the producer or manufacturer could increase the volume contents of the bottle and still pay the
same tax rate, the Municipality of Tanauan enacted Ordinance No. 27, approved on October 28,
1962, imposing a tax of one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume
capacity. The difference between the two ordinances clearly lies in the tax rate of the soft drinks
produced: in Ordinance No. 23, it was 1/16 of a centavo for every bottle corked; in Ordinance No.
27, it is one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity. The
intention of the Municipal Council of Tanauan in enacting Ordinance No. 27 is thus clear: it was
intended as a plain substitute for the prior Ordinance No. 23, and operates as a repeal of the latter,
even without words to that effect. 18 Plaintiff-appellant in its brief admitted that defendants-
appellees are only seeking to enforce Ordinance No. 27, series of 1962. Even the stipulation of
facts confirms the fact that the Acting Municipal Treasurer of Tanauan, Leyte sought t6 compel
compliance by the plaintiff-appellant of the provisions of said Ordinance No. 27, series of 1962.
The aforementioned admission shows that only Ordinance No. 27, series of 1962 is being enforced
by defendants-appellees. Even the Provincial Fiscal, counsel for defendants-appellees admits in
his brief "that Section 7 of Ordinance No. 27, series of 1962 clearly repeals Ordinance No. 23 as
the provisions of the latter are inconsistent with the provisions of the former."
That brings Us to the question of whether the remaining Ordinance No. 27 imposes a percentage
or a specific tax. Undoubtedly, the taxing authority conferred on local governments under Section
2, Republic Act No. 2264, is broad enough as to extend to almost "everything, accepting those
which are mentioned therein." As long as the text levied under the authority of a city or municipal
ordinance is not within the exceptions and limitations in the law, the same comes within the ambit
of the general rule, pursuant to the rules of exclucion attehus and exceptio firmat regulum in
cabisus non excepti 19 The limitation applies, particularly, to the prohibition against municipalities
and municipal districts to impose "any percentage tax or other taxes in any form based thereon nor
impose taxes on articles subject to specific taxexcept gasoline, under the provisions of the National
Internal Revenue Code." For purposes of this particular limitation, a municipal ordinance which
prescribes a set ratio between the amount of the tax and the volume of sale of the taxpayer imposes
a sales tax and is null and void for being outside the power of the municipality to enact. 20 But, the
imposition of "a tax of one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume
capacity" on all soft drinks produced or manufactured under Ordinance No. 27 does not partake of
the nature of a percentage tax on sales, or other taxes in any form based thereon. The tax is levied
on the produce (whether sold or not) and not on the sales. The volume capacity of the taxpayer's
production of soft drinks is considered solely for purposes of determining the tax rate on the
products, but there is not set ratio between the volume of sales and the amount of the tax. 21

Nor can the tax levied be treated as a specific tax. Specific taxes are those imposed on specified
articles, such as distilled spirits, wines, fermented liquors, products of tobacco other than cigars
and cigarettes, matches firecrackers, manufactured oils and other fuels, coal, bunker fuel oil, diesel
fuel oil, cinematographic films, playing cards, saccharine, opium and other habit-forming
drugs. 22 Soft drink is not one of those specified.

3. The tax of one (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity on all
softdrinks, produced or manufactured, or an equivalent of 1-½ centavos per case, 23 cannot be
considered unjust and unfair. 24 an increase in the tax alone would not support the claim that the
tax is oppressive, unjust and confiscatory. Municipal corporations are allowed much discretion in
determining the reates of imposable taxes. 25 This is in line with the constutional policy of
according the widest possible autonomy to local governments in matters of local taxation, an aspect
that is given expression in the Local Tax Code (PD No. 231, July 1, 1973). 26 Unless the amount
is so excessive as to be prohibitive, courts will go slow in writing off an ordinance as unreasonable.
27 Reluctance should not deter compliance with an ordinance such as Ordinance No. 27 if the
purpose of the law to further strengthen local autonomy were to be realized. 28

Finally, the municipal license tax of P1,000.00 per corking machine with five but not more than
ten crowners or P2,000.00 with ten but not more than twenty crowners imposed on manufacturers,
producers, importers and dealers of soft drinks and/or mineral waters under Ordinance No. 54,
series of 1964, as amended by Ordinance No. 41, series of 1968, of defendant
Municipality, 29 appears not to affect the resolution of the validity of Ordinance No. 27.
Municipalities are empowered to impose, not only municipal license taxes upon persons engaged
in any business or occupation but also to levy for public purposes, just and uniform taxes. The
ordinance in question (Ordinance No. 27) comes within the second power of a municipality.
ACCORDINGLY, the constitutionality of Section 2 of Republic Act No. 2264, otherwise known
as the Local Autonomy Act, as amended, is hereby upheld and Municipal Ordinance No. 27 of the
Municipality of Tanauan, Leyte, series of 1962, re-pealing Municipal Ordinance No. 23, same
series, is hereby declared of valid and legal effect. Costs against petitioner-appellant.

SO ORDERED.

Castro, C.J., Teehankee, Barredo, Makasiar, Antonio, Esguerra, Muñoz Palma, Aquino and
Concepcion, Jr., JJ., concur.

Separate Opinions

FERNANDO, J., concurring:

The opinion of the Court penned by Justice Martin is impressed with a scholarly and
comprehensive character. Insofar as it shows adherence to tried and tested concepts of the law of
municipal taxation, I am only in agreement. If I limit myself to concurrence in the result, it is
primarily because with the article on Local Autonomy found in the present Constitution, I feel a
sense of reluctance in restating doctrines that arose from a different basic premise as to the scope
of such power in accordance with the 1935 Charter. Nonetheless it is well-nigh unavoidable that I
do so as I am unable to share fully what for me are the nuances and implications that could arise
from the approach taken by my brethren. Likewise as to the constitutional aspect of the thorny
question of double taxation, I would limit myself to what has been set forth in City of Baguio v.
De Leon. 1

1. The present Constitution is quite explicit as to the power of taxation vested in local and
municipal corporations. It is therein specifically provided: "Each local government unit shall have
the power to create its own sources of revenue and to levy taxes subject to such limitations as may
be provided by law. 2 That was not the case under the 1935 Charter. The only limitation then on
the authority, plenary in character of the national government, was that while the President of the
Philippines was vested with the power of control over all executive departments, bureaus, or
offices, he could only . It exercise general supervision over all local governments as may be
provided by law ... 3 As far as legislative power over local government was concerned, no
restriction whatsoever was placed on the Congress of the Philippines. It would appear therefore
that the extent of the taxing power was solely for the legislative body to decide. It is true that in
1939, there was a statute that enlarged the scope of the municipal taxing power. 4 Thereafter, in
1959 such competence was further expanded in the Local Autonomy Act. 5 Nevertheless, as late
as December of 1964, five years after its enactment of the Local Autonomy Act, this Court, through
Justice Dizon, in Golden Ribbon Lumber Co. v. City of Butuan, 6 reaffirmed the traditional concept
in these words: "The rule is well-settled that municipal corporations, unlike sovereign states, after
clothed with no power of taxation; that its charter or a statute must clearly show an intent to confer
that power or the municipal corporation cannot assume and exercise it, and that any such power
granted must be construed strictly, any doubt or ambiguity arising from the terms of the grant to
be resolved against the municipality." 7

Taxation, according to Justice Parades in the earlier case of Tan v. Municipality of Pagbilao, 8 "is
an attribute of sovereignty which municipal corporations do not enjoy." 9 That case left no doubt
either as to weakness of a claim "based merely by inferences, implications and deductions, [as they
have no place in the interpretation of the power to tax of a municipal corporation." 10 As the
conclusion reached by the Court finds support in such grant of the municipal taxing power, I concur
in the result. 2. As to any possible infirmity based on an alleged double taxation, I would prefer to
rely on the doctrine announced by this Court in City of Baguio v. De Leon. 11 Thus: "As to why
double taxation is not violative of due process, Justice Holmes made clear in this language: 'The
objection to the taxation as double may be laid down on one side. ... The 14th Amendment [the
due process clause) no more forbids double taxation than it does doubling the amount of a tax,
short of (confiscation or proceedings unconstitutional on other grouse With that decision rendered
at a time when American sovereignty in the Philippines was recognized, it possesses more than
just a persuasive effect. To some, it delivered the coup justice to the bogey of double taxation as a
constitutional bar to the exercise of the taxing power. It would seem though that in the United
States, as with us, its ghost, as noted by an eminent critic, still stalks the juridical stage. 'In a 1947
decision, however, we quoted with approval this excerpt from a leading American decision:
'Where, as here, Congress has clearly expressed its intention, the statute must be sustained even
though double taxation results. 12

So I would view the issues in this suit and accordingly concur in the result.

G.R. No. L-22814 August 28, 1968

PEPSI-COLA BOTTLING CO. OF THE PHILIPPINES, INC., plaintiff-appellant,


vs.
CITY OF BUTUAN, MEMBERS OF THE MUNICIPAL BOARD,
THE CITY MAYOR and THE CITY TREASURER, all of the CITY OF
BUTUAN, defendants-appellees.

Sabido, Sabido and Associates for plaintiff-appellant.


The City Attorney of Butuan City for defendants-appellees.

CONCEPCION, C.J.:

Direct appeal to this Court, from a decision of the Court of First Instance of Agusan, dismissing
plaintiff's complaint, with costs.

Plaintiff, Pepsi-Cola Bottling Company of the Philippines, is a domestic corporation with offices
and principal place of business in Quezon City. The defendants are the City of Butuan, its City
Mayor, the members of its municipal board and its City Treasurer. Plaintiff — seeks to recover the
sums paid by it to the City of Butuan — hereinafter referred to as the City and collected by the
latter, pursuant to its Municipal Ordinance No. 110, as amended by Municipal Ordinance No. 122,
both series of 1960, which plaintiff assails as null and void, and to prevent the enforcement thereof.
Both parties submitted the case for decision in the lower court upon a stipulation to the effect:

1. That plaintiff's warehouse in the City of Butuan serves as a storage for its products the
"Pepsi-Cola" soft drinks for sale to customers in the City of Butuan and all the
municipalities in the Province of Agusan. These "Pepsi-Cola Cola" soft drinks are bottled
in Cebu City and shipped to the Butuan City warehouse of plaintiff for distribution and
sale in the City of Butuan and all municipalities of Agusan. .

2. That on August 16, 1960, the City of Butuan enacted Ordinance No. 110 which was
subsequently amended by Ordinance No. 122 and effective November 28, 1960. A copy of
Ordinance No. 110, Series of 1960 and Ordinance No. 122 are incorporated herein as
Exhibits "A" and "B", respectively.

3. That Ordinance No. 110 as amended, imposes a tax on any person, association, etc., of
P0.10 per case of 24 bottles of Pepsi-Cola and the plaintiff paid under protest the amount
of P4,926.63 from August 16 to December 31, 1960 and the amount of P9,250.40 from
January 1 to July 30, 1961.

4. That the plaintiff filed the foregoing complaint for the recovery of the total amount of
P14,177.03 paid under protest and those that if may later on pay until the termination of
this case on the ground that Ordinance No. 110 as amended of the City of Butuan is illegal,
that the tax imposed is excessive and that it is unconstitutional.

5. That pursuant to Ordinance No. 110 as amended, the City Treasurer of Butuan City, has
prepared a form to be accomplished by the plaintiff for the computation of the tax. A copy
of the form is enclosed herewith as Exhibit "C".

6. That the Profit and Loss Statement of the plaintiff for the period from January 1, 1961
to July 30, 1961 of its warehouse in Butuan City is incorporated herein as Exhibits "D" to
"D-1" to "D-5". In this Profit and Loss Statement, the defendants claim that the plaintiff is
not entitled to a depreciation of P3,052.63 but only P1,202.55 in which case the profit of
plaintiff will be increased from P1,254.44 to P3,104.52. The plaintiff differs only on the
claim of depreciation which the company claims to be P3,052.62. This is in accordance
with the findings of the representative of the undersigned City Attorney who verified the
records of the plaintiff.

7. That beginning November 21, 1960, the price of Pepsi-Cola per case of 24 bottles was
increased to P1.92 which price is uniform throughout the Philippines. Said increase was
made due to the increase in the production cost of its manufacture.
8. That the parties reserve the right to submit arguments on the constitutionality and
illegality of Ordinance No. 110, as amended of the City of Butuan in their respective
memoranda.

xxx xxx x x x1äwphï1.ñët

Section 1 of said Ordinance No. 110, as amended, states what products are "liquors", within the
purview thereof. Section 2 provides for the payment by "any agent and/or consignee" of any dealer
"engaged in selling liquors, imported or local, in the City," of taxes at specified rates. Section 3
prescribes a tax of P0.10 per case of 24 bottles of the soft drinks and carbonated beverages therein
named, and "all other soft drinks or carbonated drinks." Section 3-A, defines the meaning of the
term "consignee or agent" for purposes of the ordinance. Section 4 provides that said taxes "shall
be paid at the end of every calendar month." Pursuant to Section 5, the taxes "shall be based and
computed from the cargo manifest or bill of lading or any other record showing the number of
cases of soft drinks, liquors or all other soft drinks or carbonated drinks received within the month."
Sections 6, 7 and 8 specify the surcharge to be added for failure to pay the taxes within the period
prescribed and the penalties imposable for "deliberate and willful refusal to pay the tax mentioned
in Sections 2 and 3" or for failure "to furnish the office of the City Treasurer a copy of the bill of
lading or cargo manifest or record of soft drinks, liquors or carbonated drinks for sale in the City."
Section 9 makes the ordinance applicable to soft drinks, liquors or carbonated drinks "received
outside" but "sold within" the City. Section 10 of the ordinance provides that the revenue derived
therefrom "shall be alloted as follows: 40% for Roads and Bridges Fund; 40% for the General
Fund and 20% for the School Fund."

Plaintiff maintains that the disputed ordinance is null and void because: (1) it partakes of the nature
of an import tax; (2) it amounts to double taxation; (3) it is excessive, oppressive and confiscatory;
(4) it is highly unjust and discriminatory; and (5) section 2 of Republic Act No. 2264, upon the
authority of which it was enacted, is an unconstitutional delegation of legislative powers.

The second and last objections are manifestly devoid of merit. Indeed — independently of whether
or not the tax in question, when considered in relation to the sales tax prescribed by Acts of
Congress, amounts to double taxation, on which we need not and do not express any opinion -
double taxation, in general, is not forbidden by our fundamental law. We have not adopted, as part
thereof, the injunction against double taxation found in the Constitution of the United States and
of some States of the Union.1 Then, again, the general principle against delegation of legislative
powers, in consequence of the theory of separation of powers2 is subject to one well-established
exception, namely: legislative powers may be delegated to local governments — to which said
theory does not apply3 — in respect of matters of local concern.

The third objection is, likewise, untenable. The tax of "P0.10 per case of 24 bottles," of soft drinks
or carbonated drinks — in the production and sale of which plaintiff is engaged — or less than
P0.0042 per bottle, is manifestly too small to be excessive, oppressive, or confiscatory.

The first and the fourth objections merit, however, serious consideration. In this connection, it is
noteworthy that the tax prescribed in section 3 of Ordinance No. 110, as originally approved, was
imposed upon dealers "engaged in selling" soft drinks or carbonated drinks. Thus, it would seem
that the intent was then to levy a tax upon the sale of said merchandise. As amended by Ordinance
No. 122, the tax is, however, imposed only upon "any agent and/or consignee of any person,
association, partnership, company or corporation engaged in selling ... soft drinks or carbonated
drinks." And, pursuant to section 3-A, which was inserted by said Ordinance No. 122:

... — Definition of the Term Consignee or Agent. — For purposes of this Ordinance, a
consignee of agent shall mean any person, association, partnership, company or
corporation who acts in the place of another by authority from him or one entrusted with
the business of another or to whom is consigned or shipped no less than 1,000 cases of hard
liquors or soft drinks every month for resale, either retail or wholesale.

As a consequence, merchants engaged in the sale of soft drink or carbonated drinks, are not subject
to the tax,unless they are agents and/or consignees of another dealer, who, in the very nature of
things, must be one engaged in business outside the City. Besides, the tax would not be applicable
to such agent and/or consignee, if less than 1,000 cases of soft drinks are consigned or shipped to
him every month. When we consider, also, that the tax "shall be based and computed from
the cargo manifest or bill of lading ... showing the number of cases" — not sold — but "received"
by the taxpayer, the intention to limit the application of the ordinance to soft drinks and carbonated
drinks brought into the City from outside thereof becomes apparent. Viewed from this angle, the
tax partakes of the nature of an import duty, which is beyond defendant's authority to impose by
express provision of law.4

Even however, if the burden in question were regarded as a tax on the sale of said beverages, it
would still be invalid, as discriminatory, and hence, violative of the uniformity required by the
Constitution and the law therefor, since only sales by "agents or consignees" of outside dealers
would be subject to the tax. Sales by local dealers, not acting for or on behalf of other
merchants, regardless of the volume of their sales, and even if the same exceeded those made by
said agents or consignees of producers or merchants established outside the City of Butuan, would
be exempt from the disputed tax.

It is true that the uniformity essential to the valid exercise of the power of taxation does not require
identity or equality under all circumstances, or negate the authority to classify the objects of
taxation.5 The classification made in the exercise of this authority, to be valid, must, however, be
reasonable6 and this requirement is not deemed satisfied unless: (1) it is based upon substantial
distinctions which make real differences; (2) these are germane to the purpose of the legislation or
ordinance; (3) the classification applies, not only to present conditions, but, also, to future
conditions substantially identical to those of the present; and (4) the classification applies equally
all those who belong to the same class.7

These conditions are not fully met by the ordinance in question.8 Indeed, if its purpose were merely
to levy a burden upon the sale of soft drinks or carbonated beverages, there is no reason why sales
thereof by sealers other than agents or consignees of producers or merchants established outside
the City of Butuan should be exempt from the tax.

WHEREFORE, the decision appealed from is hereby reversed, and another one shall be entered
annulling Ordinance No. 110, as amended by Ordinance No. 122, and sentencing the City of
Butuan to refund to plaintiff herein the amounts collected from and paid under protest by the latter,
with interest thereon at the legal rate from the date of the promulgation of this decision, in addition
to the costs, and defendants herein are, accordingly, restrained and prohibited permanently from
enforcing said Ordinance, as amended. It is so ordered.

G.R. No. 164171 February 20, 2006

HON. EXECUTIVE SECRETARY, HON. SECRETARY OF THE DEPARTMENT OF


TRANSPORTATION AND COMMUNICATIONS (DOTC), COMMISSIONER OF
CUSTOMS, ASSISTANT SECRETARY, LAND TRANSPORTATION OFFICE (LTO),
COLLECTOR OF CUSTOMS, SUBIC BAY FREE PORT ZONE, AND CHIEF OF LTO,
SUBIC BAY FREE PORT ZONE, Petitioners,
vs.
SOUTHWING HEAVY INDUSTRIES, INC., represented by its President JOSE T. DIZON,
UNITED AUCTIONEERS, INC., represented by its President DOMINIC SYTIN, and
MICROVAN, INC., represented by its President MARIANO C. SONON, Respondents.

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

G.R. No. 164172 February 20, 2006

HON. EXECUTIVE SECRETARY, SECRETARY OF THE DEPARTMENT OF


TRANSPORTATION AND COMMUNICATION (DOTC), COMMISSIONER OF
CUSTOMS, ASSISTANT SECRETARY, LAND TRANSPORTATION OFFICE (LTO),
COLLECTOR OF CUSTOMS, SUBIC BAY FREE PORT ZONE AND CHIEF OF LTO,
SUBIC BAY FREE PORT ZONE, Petitioners,
vs.
SUBIC INTEGRATED MACRO VENTURES CORP., represented by its President
YOLANDA AMBAR,Respondent.

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

G.R. No. 168741 February 20, 2006

HON. EXECUTIVE SECRETARY, HON. SECRETARY OF FINANCE, THE CHIEF OF


THE LAND TRANSPORTATION OFFICE, THE COMMISSIONER OF CUSTOMS, and
THE COLLECTOR OF CUSTOMS, SUBIC SPECIAL ECONOMIC ZONE, Petitioners,
vs.
MOTOR VEHICLE IMPORTERS ASSOCIATION OF SUBIC BAY FREEPORT, INC.,
represented by its President ALFREDO S. GALANG, Respondent.

DECISION

YNARES-SANTIAGO, J.:
The instant consolidated petitions seek to annul and set aside the Decisions of the Regional Trial
Court of Olongapo City, Branch 72, in Civil Case No. 20-0-04 and Civil Case No. 22-0-04, both
dated May 24, 2004; and the February 14, 2005 Decision of the Court of Appeals in CA-G.R. SP.
No. 83284, which declared Article 2, Section 3.1 of Executive Order No. 156 (EO 156)
unconstitutional. Said executive issuance prohibits the importation into the country, inclusive of
the Special Economic and Freeport Zone or the Subic Bay Freeport (SBF or Freeport), of used
motor vehicles, subject to a few exceptions.

The undisputed facts show that on December 12, 2002, President Gloria Macapagal-Arroyo,
through Executive Secretary Alberto G. Romulo, issued EO 156, entitled "Providing for a
comprehensive industrial policy and directions for the motor vehicle development program and its
implementing guidelines." The challenged provision states:

3.1 The importation into the country, inclusive of the Freeport, of all types of used
motor vehicles is prohibited, except for the following:

3.1.1 A vehicle that is owned and for the personal use of a returning resident or
immigrant and covered by an authority to import issued under the No-dollar
Importation Program. Such vehicles cannot be resold for at least three (3) years;

3.1.2 A vehicle for the use of an official of the Diplomatic Corps and authorized to
be imported by the Department of Foreign Affairs;

3.1.3 Trucks excluding pickup trucks;

1. with GVW of 2.5-6.0 tons covered by an authority to import issued by


the DTI.

2. With GVW above 6.0 tons.

3.1.4 Buses:

1. with GVW of 6-12 tons covered by an authority to import issued by DTI;

2. with GVW above 12 tons.

3.1.5 Special purpose vehicles:

1. fire trucks

2. ambulances

3. funeral hearse/coaches

4. crane lorries
5. tractor heads and truck tractors

6. boom trucks

7. tanker trucks

8. tank lorries with high pressure spray gun

9. reefers or refrigerated trucks

10. mobile drilling derricks

11. transit/concrete mixers

12. mobile radiological units

13. wreckers or tow trucks

14. concrete pump trucks

15. aerial/bucket flat-form trucks

16. street sweepers

17. vacuum trucks

18. garbage compactors

19. self loader trucks

20. man lift trucks

21. lighting trucks

22. trucks mounted with special purpose equipment

23. all other types of vehicle designed for a specific use.

The issuance of EO 156 spawned three separate actions for declaratory relief before Branch 72 of
the Regional Trial Court of Olongapo City, all seeking the declaration of the unconstitutionality
of Article 2, Section 3.1 of said executive order. The cases were filed by herein respondent entities,
who or whose members, are classified as Subic Bay Freeport Enterprises and engaged in the
business of, among others, importing and/or trading used motor vehicles.

G.R. No. 164171:


On January 16, 2004, respondents Southwing Heavy Industries, Inc., (Southwing) United
Auctioneers, Inc. (United Auctioneers), and Microvan, Inc. (Microvan), instituted a declaratory
relief case docketed as Civil Case No. 20-0-04,1 against the Executive Secretary, Secretary of
Transportation and Communication, Commissioner of Customs, Assistant Secretary and Head of
the Land Transportation Office, Subic Bay Metropolitan Authority (SBMA), Collector of Customs
for the Port at Subic Bay Freeport Zone, and the Chief of the Land Transportation Office at Subic
Bay Freeport Zone.

Southwing, United Auctioneers and Microvan prayed that judgment be rendered (1) declaring
Article 2, Section 3.1 of EO 156 unconstitutional and illegal; (2) directing the Secretary of Finance,
Commissioner of Customs, Collector of Customs and the Chairman of the SBMA to allow the
importation of used motor vehicles; (2) ordering the Land Transportation Office and its
subordinates inside the Subic Special Economic Zone to process the registration of the imported
used motor vehicles; and (3) in general, to allow the unimpeded entry and importation of used
motor vehicles subject only to the payment of the required customs duties.

Upon filing of petitioners’ answer/comment, respondents Southwing and Microvan filed a motion
for summary judgment which was granted by the trial court. On May 24, 2004, a summary
judgment was rendered declaring that Article 2, Section 3.1 of EO 156 constitutes an unlawful
usurpation of legislative power vested by the Constitution with Congress. The trial court further
held that the proviso is contrary to the mandate of Republic Act No. 7227 (RA 7227) or the Bases
Conversion and Development Act of 1992 which allows the free flow of goods and capital within
the Freeport. The dispositive portion of the said decision reads:

WHEREFORE, judgment is hereby rendered in favor of petitioner declaring Executive Order 156
[Article 2, Section] 3.1 for being unconstitutional and illegal; directing respondents Collector of
Customs based at SBMA to allow the importation and entry of used motor vehicles pursuant to the
mandate of RA 7227; directing respondent Chief of the Land Transportation Office and its
subordinates inside the Subic Special Economic Zone or SBMA to process the registration of
imported used motor vehicle; and in general, to allow unimpeded entry and importation of used
motor vehicles to the Philippines subject only to the payment of the required customs duties.

SO ORDERED.2

From the foregoing decision, petitioners sought relief before this Court via a petition for review
on certiorari, docketed as G.R. No. 164171.

G.R. No. 164172:

On January 20, 2004, respondent Subic Integrated Macro Ventures Corporation (Macro Ventures)
filed with the same trial court, a similar action for declaratory relief docketed as Civil Case No.
22-0-04,3 with the same prayer and against the same parties4 as those in Civil Case No. 20-0-04.

In this case, the trial court likewise rendered a summary judgment on May 24, 2004, holding that
Article 2, Section 3.1 of EO 156, is repugnant to the constitution.5 Elevated to this Court via a
petition for review on certiorari, Civil Case No. 22-0-04 was docketed as G.R. No. 164172.
G.R. No. 168741

On January 22, 2003, respondent Motor Vehicle Importers Association of Subic Bay Freeport, Inc.
(Association), filed another action for declaratory relief with essentially the same prayer as those
in Civil Case No. 22-0-04 and Civil Case No. 20-0-04, against the Executive Secretary, Secretary
of Finance, Chief of the Land Transportation Office, Commissioner of Customs, Collector of
Customs at SBMA and the Chairman of SBMA. This was docketed as Civil Case No. 30-0-
2003,6 before the same trial court.

In a decision dated March 10, 2004, the court a quo granted the Association’s prayer and declared
the assailed proviso as contrary to the Constitution, to wit:

WHEREFORE, judgment is hereby rendered in favor of petitioner declaring Executive Order 156
[Article 2, Section] 3.1 for being unconstitutional and illegal; directing respondents Collector of
Customs based at SBMA to allow the importation and entry of used motor vehicles pursuant to the
mandate of RA 7227; directing respondent Chief of the Land Transportation Office and its
subordinates inside the Subic Special Economic Zone or SBMA to process the registration of
imported used motor vehicles; directing the respondent Chairman of the SBMA to allow the entry
into the Subic Special Economic Zone or SBMA imported used motor vehicle; and in general, to
allow unimpeded entry and importation of used motor vehicles to the Philippines subject only to
the payment of the required customs duties.

SO ORDERED.7

Aggrieved, the petitioners in Civil Case No. 30-0-2003, filed a petition for certiorari8 with the
Court of Appeals (CA-G.R. SP. No. 83284) which denied the petition on February 14, 2005 and
sustained the finding of the trial court that Article 2, Section 3.1 of EO 156, is void for being
repugnant to the constitution. The dispositive portion thereof, reads:

WHEREFORE, the instant petition for certiorari is hereby DENIED. The assailed decision of the
Regional Trial Court, Third Judicial Region, Branch 72, Olongapo City, in Civil Case No. 30-0-
2003, accordingly, STANDS.

SO ORDERED.9

The aforequoted decision of the Court of Appeals was elevated to this Court and docketed as G.R.
No. 168741. In a Resolution dated October 4, 2005,10 said case was consolidated with G.R. No.
164171 and G.R. No. 164172.

Petitioners are now before this Court contending that Article 2, Section 3.1 of EO 156 is valid and
applicable to the entire country, including the Freeeport. In support of their arguments, they raise
procedural and substantive issues bearing on the constitutionality of the assailed proviso.
The procedural issues are: the lack of respondents’ locus standi to question the validity of EO
156, the propriety of challenging EO 156 in a declaratory relief proceeding and the applicability
of a judgment on the pleadings in this case.
Petitioners argue that respondents will not be affected by the importation ban considering that their
certificate of registration and tax exemption do not authorize them to engage in the importation
and/or trading of used cars. They also aver that the actions filed by respondents do not qualify as
declaratory relief cases. Section 1, Rule 63 of the Rules of Court provides that a petition for
declaratory relief may be filed before there is a breach or violation of rights. Petitioners claim that
there was already a breach of respondents’ supposed right because the cases were filed more than
a year after the issuance of EO 156. In fact, in Civil Case No. 30-0-2003, numerous warrants of
seizure and detention were issued against imported used motor vehicles belonging to respondent
Association’s members.

Petitioners’ arguments lack merit.

The established rule that the constitutionality of a law or administrative issuance can be challenged
by one who will sustain a direct injury as a result of its enforcement11 has been satisfied in the
instant case. The broad subject of the prohibited importation is "all types of used motor vehicles."
Respondents would definitely suffer a direct injury from the implementation of EO 156 because
their certificate of registration and tax exemption authorize them to trade and/or import new and
used motor vehicles and spare parts, except "used cars."12 Other types of motor vehicles
imported and/or traded by respondents and not falling within the category of used cars would thus
be subjected to the ban to the prejudice of their business. Undoubtedly, respondents have the legal
standing to assail the validity of EO 156.

As to the propriety of declaratory relief as a vehicle for assailing the executive issuance, suffice it
to state that any breach of the rights of respondents will not affect the case. In Commission on
Audit of the Province of Cebu v. Province of Cebu,13 the Court entertained a suit for declaratory
relief to finally settle the doubt as to the proper interpretation of the conflicting laws involved,
notwithstanding a violation of the right of the party affected. We find no reason to deviate from
said ruling mindful of the significance of the present case to the national economy.

So also, summary judgments were properly rendered by the trial court because the issues involved
in the instant case were pure questions of law. A motion for summary judgment is premised on the
assumption that the issues presented need not be tried either because these are patently devoid of
substance or that there is no genuine issue as to any pertinent fact. It is a method sanctioned by the
Rules of Court for the prompt disposition of a civil action in which the pleadings raise only a legal
issue, not a genuine issue as to any material fact.14

At any rate, even assuming the procedural flaws raised by petitioners truly exist, the Court is not
precluded from brushing aside these technicalities and taking cognizance of the action filed by
respondents considering its importance to the public and in keeping with the duty to determine
whether the other branches of the government have kept themselves within the limits of the
Constitution.15

We now come to the substantive issues, which are: (1) whether there is statutory basis for the
issuance of EO 156; and (2) if the answer is in the affirmative, whether the application of Article
2, Section 3.1 of EO 156, reasonable and within the scope provided by law.
The main thrust of the petition is that EO 156 is constitutional because it was issued pursuant to
EO 226, the Omnibus Investment Code of the Philippines and that its application should be
extended to the Freeport because the guarantee of RA 7227 on the free flow of goods into the said
zone is merely an exemption from customs duties and taxes on items brought into the Freeport and
not an open floodgate for all kinds of goods and materials without restriction.

In G.R. No. 168741, the Court of Appeals invalidated Article 2, Section 3.1 of EO 156, on the
ground of lack of any statutory basis for the President to issue the same. It held that the prohibition
on the importation of used motor vehicles is an exercise of police power vested on the legislature
and absent any enabling law, the exercise thereof by the President through an executive issuance,
is void.

Police power is inherent in a government to enact laws, within constitutional limits, to promote
the order, safety, health, morals, and general welfare of society. It is lodged primarily with the
legislature. By virtue of a valid delegation of legislative power, it may also be exercised by the
President and administrative boards, as well as the lawmaking bodies on all municipal levels,
including the barangay.16 Such delegation confers upon the Presidentquasi-legislative
power which may be defined as the authority delegated by the law-making body to the
administrative body to adopt rules and regulations intended to carry out the provisions of the law
and implement legislative policy.17 To be valid, an administrative issuance, such as an executive
order, must comply with the following requisites:

(1) Its promulgation must be authorized by the legislature;

(2) It must be promulgated in accordance with the prescribed procedure;

(3) It must be within the scope of the authority given by the legislature; and

(4) It must be reasonable.18

Contrary to the conclusion of the Court of Appeals, EO 156 actually satisfied the first requisite of
a valid administrative order. It has both constitutional and statutory bases.

Delegation of legislative powers to the President is permitted in Section 28(2) of Article VI of the
Constitution. It provides:

(2) The Congress may, by law, authorize the President to fix within specified limits, and subject
to such limitations and restrictions as it may impose, tariff rates, import and export quotas, tonnage
and wharfage dues, and other duties or imposts within the framework of the national development
program of the Government.19 (Emphasis supplied)

The relevant statutes to execute this provision are:

1) The Tariff and Customs Code which authorizes the President, in the interest of national
economy, general welfare and/or national security, to, inter alia, prohibit the importation of any
commodity. Section 401 thereof, reads:
Sec. 401. Flexible Clause. —

a. In the interest of national economy, general welfare and/or national security, and subject
to the limitations herein prescribed, the President, upon recommendation of the National
Economic and Development Authority (hereinafter referred to as NEDA), is hereby
empowered: x x x (2) to establish import quota or to ban imports of any commodity, as may
be necessary; x x x Provided, That upon periodic investigations by the Tariff Commission and
recommendation of the NEDA, the President may cause a gradual reduction of protection levels
granted in Section One hundred and four of this Code, including those subsequently granted
pursuant to this section. (Emphasis supplied)

2) Executive Order No. 226, the Omnibus Investment Code of the Philippines which was issued
on July 16, 1987, by then President Corazon C. Aquino, in the exercise of legislative power under
the Provisional Freedom Constitution,20 empowers the President to approve or reject the
prohibition on the importation of any equipment or raw materials or finished products. Pertinent
provisions thereof, read:

ART. 4. Composition of the board. The Board of Investments shall be composed of seven (7)
governors: The Secretary of Trade and Industry, three (3) Undersecretaries of Trade and Industry
to be chosen by the President; and three (3) representatives from the government agencies and the
private sector x x x.

ART. 7. Powers and duties of the Board.

xxxx

(12) Formulate and implement rationalization programs for certain industries whose operation may
result in dislocation, overcrowding or inefficient use of resources, thus impeding economic growth.
For this purpose, the Board may formulate guidelines for progressive manufacturing programs,
local content programs, mandatory sourcing requirements and dispersal of industries. In
appropriate cases and upon approval of the President, the Board may restrict, either totally
or partially, the importation of any equipment or raw materials or finished products
involved in the rationalization program; (Emphasis supplied)

3) Republic Act No. 8800, otherwise known as the "Safeguard Measures Act" (SMA), and entitled
"An Act Protecting Local Industries By Providing Safeguard Measures To Be Undertaken In
Response To Increased Imports And Providing Penalties For Violation Thereof,"21 designated the
Secretaries22 of the Department of Trade and Industry (DTI) and the Department of Agriculture,
in their capacity as alter egos of the President, as the implementing authorities of the safeguard
measures, which include, inter alia, modification or imposition of any quantitative restriction on
the importation of a product into the Philippines. The purpose of the SMA is stated in the
declaration of policy, thus:

SEC. 2. Declaration of Policy. – The State shall promote competitiveness of domestic industries
and producers based on sound industrial and agricultural development policies, and efficient use
of human, natural and technical resources. In pursuit of this goal and in the public interest, the
State shall provide safeguard measures to protect domestic industries and producers from increased
imports which cause or threaten to cause serious injury to those domestic industries and producers.

There are thus explicit constitutional and statutory permission authorizing the President to ban or
regulate importation of articles and commodities into the country.

Anent the second requisite, that is, that the order must be issued or promulgated in accordance
with the prescribed procedure, it is necessary that the nature of the administrative issuance is
properly determined. As in the enactment of laws, the general rule is that, the promulgation of
administrative issuances requires previous notice and hearing, the only exception being where the
legislature itself requires it and mandates that the regulation shall be based on certain facts as
determined at an appropriate investigation.23 This exception pertains to the issuance of legislative
rules as distinguished from interpretative rules which give no real consequence more than what
the law itself has already prescribed;24 and are designed merely to provide guidelines to the law
which the administrative agency is in charge of enforcing.25 A legislative rule, on the other hand,
is in the nature of subordinate legislation, crafted to implement a primary legislation.

In Commissioner of Internal Revenue v. Court of Appeals,26 and Commissioner of Internal


Revenue v. Michel J. Lhuillier Pawnshop, Inc.,27 the Court enunciated the doctrine that when an
administrative rule goes beyond merely providing for the means that can facilitate or render less
cumbersome the implementation of the law and substantially increases the burden of those
governed, it behooves the agency to accord at least to those directly affected a chance to be heard
and, thereafter, to be duly informed, before the issuance is given the force and effect of law.

In the instant case, EO 156 is obviously a legislative rule as it seeks to implement or execute
primary legislative enactments intended to protect the domestic industry by imposing a ban on the
importation of a specified product not previously subject to such prohibition. The due process
requirements in the issuance thereof are embodied in Section 40128 of the Tariff and Customs Code
and Sections 5 and 9 of the SMA29 which essentially mandate the conduct of investigation and
public hearings before the regulatory measure or importation ban may be issued.

In the present case, respondents neither questioned before this Court nor with the courts below the
procedure that paved the way for the issuance of EO 156. What they challenged in their petitions
before the trial court was the absence of "substantive due process" in the issuance of the
EO.30 Their main contention before the court a quo is that the importation ban is illogical and
unfair because it unreasonably drives them out of business to the prejudice of the national
economy.

Considering the settled principle that in the absence of strong evidence to the contrary, acts of the
other branches of the government are presumed to be valid,31 and there being no objection from
the respondents as to the procedure in the promulgation of EO 156, the presumption is that said
executive issuance duly complied with the procedures and limitations imposed by law.

To determine whether EO 156 has complied with the third and fourth requisites of a valid
administrative issuance, to wit, that it was issued within the scope of authority given by the
legislature and that it is reasonable, an examination of the nature of a Freeport under RA 7227 and
the primordial purpose of the importation ban under the questioned EO is necessary.

RA 7227 was enacted providing for, among other things, the sound and balanced conversion of
the Clark and Subic military reservations and their extensions into alternative productive uses in
the form of Special Economic and Freeport Zone, or the Subic Bay Freeport, in order to promote
the economic and social development of Central Luzon in particular and the country in general.

The Rules and Regulations Implementing RA 7227 specifically defines the territory comprising
the Subic Bay Freeport, referred to as the Special Economic and Freeport Zone in Section 12 of
RA 7227 as "a separate customs territory consisting of the City of Olongapo and the Municipality
of Subic, Province of Zambales, the lands occupied by the Subic Naval Base and its contiguous
extensions as embraced, covered and defined by the 1947 Philippine-U.S. Military Base
Agreement as amended and within the territorial jurisdiction of Morong and Hermosa, Province
of Bataan, the metes and bounds of which shall be delineated by the President of the Philippines;
provided further that pending establishment of secure perimeters around the entire SBF, the SBF
shall refer to the area demarcated by the SBMA pursuant to Section 1332 hereof."

Among the salient provisions of RA 7227 are as follows:

SECTION 12. Subic Special Economic Zone. —

xxxx

The abovementioned zone shall be subject to the following policies:

xxxx

(a) Within the framework and subject to the mandate and limitations of the Constitution
and the pertinent provisions of the Local Government Code, the Subic Special Economic
Zone shall be developed into a self-sustaining, industrial, commercial, financial and
investment center to generate employment opportunities in and around the zone and to
attract and promote productive foreign investments;

(b) The Subic Special Economic Zone shall be operated and managed as a separate customs
territory ensuring free flow or movement of goods and capital within, into and exported
out of the Subic Special Economic Zone, as well as provide incentives such as tax and
duty-free importations of raw materials, capital and equipment. However, exportation or
removal of goods from the territory of the Subic Special Economic Zone to the other parts
of the Philippine territory shall be subject to customs duties and taxes under the Customs
and Tariff Code and other relevant tax laws of the Philippines;

The Freeport was designed to ensure free flow or movement of goods and capital within a portion
of the Philippine territory in order to attract investors to invest their capital in a business climate
with the least governmental intervention. The concept of this zone was explained by Senator
Guingona in this wise:
Senator Guingona. Mr. President, the special economic zone is successful in many places,
particularly Hong Kong, which is a free port. The difference between a special economic zone and
an industrial estate is simply expansive in the sense that the commercial activities, including the
establishment of banks, services, financial institutions, agro-industrial activities, maybe
agriculture to a certain extent.

This delineates the activities that would have the least of government intervention, and the
running of the affairs of the special economic zone would be run principally by the investors
themselves, similar to a housing subdivision, where the subdivision owners elect their
representatives to run the affairs of the subdivision, to set the policies, to set the guidelines.

We would like to see Subic area converted into a little Hong Kong, Mr. President, where
there is a hub of free port and free entry, free duties and activities to a maximum spur
generation of investment and jobs.

While the investor is reluctant to come in the Philippines, as a rule, because of red tape and
perceived delays, we envision this special economic zone to be an area where there will be
minimum government interference.

The initial outlay may not only come from the Government or the Authority as envisioned here,
but from them themselves, because they would be encouraged to invest not only for the land but
also for the buildings and factories. As long as they are convinced that in such an area they can do
business and reap reasonable profits, then many from other parts, both local and foreign, would
invest, Mr. President.33 (Emphasis, added)

With minimum interference from the government, investors can, in general, engage in any kind of
business as well as import and export any article into and out of the Freeport. These are among the
rights accorded to Subic Bay Freeport Enterprises under Section 39 of the Rules and Regulations
Implementing RA 7227, thus –

SEC. 39. Rights and Obligations.- SBF Enterprises shall have the following rights and obligations:

a. To freely engage in any business, trade, manufacturing, financial or service activity, and to
import and export freely all types of goods into and out of the SBF, subject to the provisions of the
Act, these Rules and other regulations that may be promulgated by the SBMA;

Citing, inter alia, the interpellations of Senator Enrile, petitioners claim that the "free flow or
movement of goods and capital" only means that goods and material brought within the Freeport
shall not be subject to customs duties and other taxes and should not be construed as an open
floodgate for entry of all kinds of goods. They thus surmise that the importation ban on motor
vehicles is applicable within the Freeport. Pertinent interpellations of Senator Enrile on the concept
of Freeport is as follows:

Senator Enrile: Mr. President, I think we are talking here of sovereign concepts, not territorial
concepts. The concept that we are supposed to craft here is to carve out a portion of our terrestrial
domain as well as our adjacent waters and say to the world: "Well, you can set up your factories
in this area that we are circumscribing, and bringing your equipment and bringing your goods, you
are not subject to any taxes and duties because you are not within the customs jurisdiction of the
Republic of the Philippines, whether you store the goods or only for purposes of transshipment or
whether you make them into finished products again to be reexported to other lands."

xxxx

My understanding of a "free port" is, we are in effect carving out a part of our territory and
make it as if it were foreign territory for purposes of our customs laws, and that people can
come, bring their goods, store them there and bring them out again, as long as they do not
come into the domestic commerce of the Republic.

We do not really care whether these goods are stored here. The only thing that we care is for our
people to have an employment because of the entry of these goods that are being discharged,
warehoused and reloaded into the ships so that they can be exported. That will generate
employment for us. For as long as that is done, we are saying, in effect, that we have the least
contact with our tariff and customs laws and our tax laws. Therefore, we consider these goods as
outside of the customs jurisdiction of the Republic of the Philippines as yet, until we draw them
from this territory and bring them inside our domestic commerce. In which case, they have to pass
through our customs gate. I thought we are carving out this entire area and convert it into this kind
of concept.34

However, contrary to the claim of petitioners, there is nothing in the foregoing excerpts which
absolutely limits the incentive to Freeport investors only to exemption from customs duties and
taxes. Mindful of the legislative intent to attract investors, enhance investment and boost the
economy, the legislature could not have limited the enticement only to exemption from taxes. The
minimum interference policy of the government on the Freeport extends to the kind of business
that investors may embark on and the articles which they may import or export into and out of the
zone. A contrary interpretation would defeat the very purpose of the Freeport and drive away
investors.

It does not mean, however, that the right of Freeport enterprises to import all types of goods and
article is absolute. Such right is of course subject to the limitation that articles absolutely prohibited
by law cannot be imported into the Freeport.35 Nevertheless, in determining whether the
prohibition would apply to the Freeport, resort to the purpose of the prohibition is necessary.

In issuing EO 156, particularly the prohibition on importation under Article 2, Section 3.1, the
President envisioned to rationalize the importation of used motor vehicles and to enhance the
capabilities of the Philippine motor manufacturing firms to be globally competitive producers of
completely build-up units and their parts and components for the local and export markets.36 In
justifying the issuance of EO 156, petitioners alleged that there has been a decline in the sales of
new vehicles and a remarkable growth of the sales of imported used motor vehicles. To address
the same, the President issued the questioned EO to prevent further erosion of the already
depressed market base of the local motor vehicle industry and to curtail the harmful effects of the
increase in the importation of used motor vehicles.37
Taking our bearings from the foregoing discussions, we hold that the importation ban runs afoul
the third requisitefor a valid administrative order. To be valid, an administrative issuance must
not be ultra vires or beyond the limits of the authority conferred. It must not supplant or modify
the Constitution, its enabling statute and other existing laws, for such is the sole function of the
legislature which the other branches of the government cannot usurp. As held inUnited BF
Homeowner’s Association v. BF Homes, Inc.:38

The rule-making power of a public administrative body is a delegated legislative power, which it
may not use either to abridge the authority given it by Congress or the Constitution or to enlarge
its power beyond the scope intended. Constitutional and statutory provisions control what rules
and regulations may be promulgated by such a body, as well as with respect to what fields are
subject to regulation by it. It may not make rules and regulations which are inconsistent with the
provisions of the Constitution or a statute, particularly the statute it is administering or which
created it, or which are in derogation of, or defeat, the purpose of a statute.

In the instant case, the subject matter of the laws authorizing the President to regulate or forbid
importation of used motor vehicles, is the domestic industry. EO 156, however, exceeded the
scope of its application by extending the prohibition on the importation of used cars to the Freeport,
which RA 7227, considers to some extent, a foreign territory. The domestic industry which the
EO seeks to protect is actually the "customs territory" which is defined under the Rules and
Regulations Implementing RA 7227, as follows:

"the portion of the Philippines outside the Subic Bay Freeport where the Tariff and Customs
Code of the Philippines and other national tariff and customs laws are in force and effect."39

The proscription in the importation of used motor vehicles should be operative only outside the
Freeport and the inclusion of said zone within the ambit of the prohibition is an invalid
modification of RA 7227. Indeed, when the application of an administrative issuance modifies
existing laws or exceeds the intended scope, as in the instant case, the issuance becomes void, not
only for being ultra vires, but also for being unreasonable.

This brings us to the fourth requisite. It is an axiom 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 secure the end in
view. If shown to bear no reasonable relation to the purposes for which they were authorized to be
issued, then they must be held to be invalid.40

There is no doubt that the issuance of the ban to protect the domestic industry is a reasonable
exercise of police power. The deterioration of the local motor manufacturing firms due to the influx
of imported used motor vehicles is an urgent national concern that needs to be swiftly addressed
by the President. In the exercise of delegated police power, the executive can therefore validly
proscribe the importation of these vehicles. Thus, in Taxicab Operators of Metro Manila, Inc. v.
Board of Transportation,41 the Court held that a regulation phasing out taxi cabs more than six
years old is a valid exercise of police power. The regulation was sustained as reasonable holding
that the purpose thereof was to promote the convenience and comfort and protect the safety of the
passengers.
The problem, however, lies with respect to the application of the importation ban to the Freeport.
The Court finds no logic in the all encompassing application of the assailed provision to the
Freeport which is outside the customs territory. As long as the used motor vehicles do not enter
the customs territory, the injury or harm sought to be prevented or remedied will not arise. The
application of the law should be consistent with the purpose of and reason for the law. Ratione
cessat lex, et cessat lex. When the reason for the law ceases, the law ceases. It is not the letter alone
but the spirit of the law also that gives it life.42 To apply the proscription to the Freeport would not
serve the purpose of the EO. Instead of improving the general economy of the country, the
application of the importation ban in the Freeport would subvert the avowed purpose of RA 7227
which is to create a market that would draw investors and ultimately boost the national economy.

In similar cases, we also declared void the administrative issuance or ordinances concerned for
being unreasonable. To illustrate, in De la Cruz v. Paras,43 the Court held as unreasonable and
unconstitutional an ordinance characterized by overbreadth. In that case, the Municipality of
Bocaue, Bulacan, prohibited the operation of all night clubs, cabarets and dance halls within its
jurisdiction for the protection of public morals. As explained by the Court:

x x x It cannot be said that such a sweeping exercise of a lawmaking power by Bocaue could
qualify under the term reasonable. The objective of fostering public morals, a worthy and desirable
end can be attained by a measure that does not encompass too wide a field. Certainly the ordinance
on its face is characterized by overbreadth. The purpose sought to be achieved could have been
attained by reasonable restrictions rather than by an absolute prohibition. The admonition in
Salaveria should be heeded: "The Judiciary should not lightly set aside legislative action when
there is not a clear invasion of personal or property rights under the guise of police regulation." It
is clear that in the guise of a police regulation, there was in this instance a clear invasion of personal
or property rights, personal in the case of those individuals desirous of patronizing those night
clubs and property in terms of the investments made and salaries to be earned by those therein
employed.

Lupangco v. Court of Appeals,44 is a case involving a resolution issued by the Professional


Regulation Commission which prohibited examinees from attending review classes and receiving
handout materials, tips, and the like three days before the date of examination in order to preserve
the integrity and purity of the licensure examinations in accountancy. Besides being unreasonable
on its face and violative of academic freedom, the measure was found to be more sweeping than
what was necessary, viz:

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 rid 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. x x x
In Lucena Grand Central Terminal, Inc. v. JAC Liner, Inc.,45 the Court likewise struck down as
unreasonable and overbreadth a city ordinance granting an exclusive franchise for 25 years,
renewable for another 25 years, to one entity for the construction and operation of one common
bus and jeepney terminal facility in Lucena City. While professedly aimed towards alleviating the
traffic congestion alleged to have been caused by the existence of various bus and jeepney
terminals within the city, the ordinance was held to be beyond what is reasonably necessary to
solve the traffic problem in the city.

By parity of reasoning, the importation ban in this case should also be declared void for its too
sweeping and unnecessary application to the Freeport which has no bearing on the objective of the
prohibition. If the aim of the EO is to prevent the entry of used motor vehicles from the Freeport
to the customs territory, the solution is not to forbid entry of these vehicles into the Freeport, but
to intensify governmental campaign and measures to thwart illegal ingress of used motor vehicles
into the customs territory.

At this juncture, it must be mentioned that on June 19, 1993, President Fidel V. Ramos issued
Executive Order No. 97-A, "Further Clarifying The Tax And Duty-Free Privilege Within The
Subic Special Economic And Free Port Zone," Section 1 of which provides:

SECTION 1. The following guidelines shall govern the tax and duty-free privilege within the
Secured Area of the Subic Special Economic and Free Port Zone:

1.1. The Secured Area consisting of the presently fenced-in former Subic Naval Base shall be the
only completely tax and duty-free area in the SSEFPZ. Business enterprises and individuals
(Filipinos and foreigners) residing within the Secured Area are free to import raw materials, capital
goods, equipment, and consumer items tax and dutry-free. Consumption items, however, must be
consumed within the Secured Area. Removal of raw materials, capital goods, equipment and
consumer items out of the Secured Area for sale to non-SSEFPZ registered enterprises shall be
subject to the usual taxes and duties, except as may be provided herein.

In Tiu v. Court of Appeals46 as reiterated in Coconut Oil Refiners Association, Inc. v. Torres,47 this
provision limiting the special privileges on tax and duty-free importation in the presently fenced-
in former Subic Naval Base has been declared valid and constitutional and in accordance with RA
7227. Consistent with these rulings and for easier management and monitoring of activities and to
prevent fraudulent importation of merchandise and smuggling, the free flow and importation of
used motor vehicles shall be operative only within the "secured area."

In sum, the Court finds that Article 2, Section 3.1 of EO 156 is void insofar as it is made applicable
to the presently secured fenced-in former Subic Naval Base area as stated in Section 1.1 of EO 97-
A. Pursuant to the separability clause48 of EO 156, Section 3.1 is declared valid insofar as it applies
to the customs territory or the Philippine territory outside the presently secured fenced-in former
Subic Naval Base area as stated in Section 1.1 of EO 97-A. Hence, used motor vehicles that come
into the Philippine territory via the secured fenced-in former Subic Naval Base area may be stored,
used or traded therein, or exported out of the Philippine territory, but they cannot be imported into
the Philippine territory outside of the secured fenced-in former Subic Naval Base area.
WHEREFORE, the petitions are PARTIALLY GRANTED and the May 24, 2004 Decisions of
Branch 72, Regional Trial Court of Olongapo City, in Civil Case No. 20-0-04 and Civil Case No.
22-0-04; and the February 14, 2005 Decision of the Court of Appeals in CA-G.R. SP No. 63284,
are MODIFIED insofar as they declared Article 2, Section 3.1 of Executive Order No. 156, void
in its entirety.

Said provision is declared VALID insofar as it applies to the Philippine territory outside the
presently fenced-in former Subic Naval Base area and VOID with respect to its application to the
secured fenced-in former Subic Naval Base area.

SO ORDERED.

G.R. No. L-4043 May 26, 1952

CENON S. CERVANTES, petitioner,


vs.
THE AUDITOR GENERAL, respondent.

Cenon Cervantes in his own behalf.


Office of the Solicitor General Pompeyo Diaz and Solicitor Felix V. Makasiar for respondent.

REYES, J.:

This is a petition to review a decision of the Auditor General denying petitioner's claim for quarters
allowance as manager of the National Abaca and Other Fibers Corporation, otherwise known as
the NAFCO.

It appears that petitioner was in 1949 the manager of the NAFCO with a salary of P15,000 a year.
By a resolution of the Board of Directors of this corporation approved on January 19 of that year,
he was granted quarters allowance of not exceeding P400 a month effective the first of that month.
Submitted the Control Committee of the Government Enterprises Council for approval, the said
resolution was on August 3, 1949, disapproved by the said Committee on strenght of the
recommendation of the NAFCO auditor, concurred in by the Auditor General, (1) that quarters
allowance constituted additional compensation prohibited by the charter of the NAFCO, which
fixes the salary of the general manager thereof at the sum not to exceed P15,000 a year, and (2)
that the precarious financial condition of the corporation did not warrant the granting of such
allowance.

On March 16, 1949, the petitioner asked the Control Committee to reconsider its action and
approve his claim for allowance for January to June 15, 1949, amounting to P1,650. The claim
was again referred by the Control Committee to the auditor General for comment. The latter, in
turn referred it to the NAFCO auditor, who reaffirmed his previous recommendation and
emphasized that the fact that the corporation's finances had not improved. In view of this, the
auditor General also reiterated his previous opinion against the granting of the petitioner's claim
and so informed both the Control Committee and the petitioner. But as the petitioner insisted on
his claim the Auditor General Informed him on June 19, 1950, of his refusal to modify his decision.
Hence this petition for review.

The NAFCO was created by the Commonwealth Act No. 332, approved on June 18, 1939, with a
capital stock of P20,000,000, 51 per cent of which was to be able to be subscribed by the National
Government and the remainder to be offered to provincial, municipal, and the city governments
and to the general public. The management the corporation was vested in a board of directors of
not more than 5 members appointed by the president of the Philippines with the consent of the
Commission on Appointments. But the corporation was made subject to the provisions of the
corporation law in so far as they were compatible with the provisions of its charter and the purposes
of which it was created and was to enjoy the general powers mentioned in the corporation law in
addition to those granted in its charter. The members of the board were to receive each a per
diem of not to exceed P30 for each day of meeting actually attended, except the chairman of the
board, who was to be at the same time the general manager of the corporation and to receive a
salary not to exceed P15,000 per annum.

On October 4, 1946, Republic Act No. 51 was approved authorizing the President of the
Philippines, among other things, to effect such reforms and changes in government owned and
controlled corporations for the purpose of promoting simplicity, economy and efficiency in their
operation Pursuant to this authority, the President on October 4, 1947, promulgated Executive
Order No. 93 creating the Government Enterprises Council to be composed of the President of the
Philippines as chairman, the Secretary of Commerce and Industry as vice-chairman, the chairman
of the board of directors and managing heads of all such corporations as ex-officio members, and
such additional members as the President might appoint from time to time with the consent of the
Commission on Appointments. The council was to advise the President in the excercise of his
power of supervision and control over these corporations and to formulate and adopt such policy
and measures as might be necessary to coordinate their functions and activities. The Executive
Order also provided that the council was to have a Control Committee composed of the Secretary
of Commerce and Industry as chairman, a member to be designated by the President from among
the members of the council as vice-chairman and the secretary as ex-officio member, and with the
power, among others —

(1) To supervise, for and under the direction of the President, all the corporations owned
or controlled by the Government for the purpose of insuring efficiency and economy in
their operations;

(2) To pass upon the program of activities and the yearly budget of expenditures approved
by the respective Boards of Directors of the said corporations; and

(3) To carry out the policies and measures formulated by the Government Enterprises
Council with the approval of the President. (Sec. 3, Executive Order No. 93.)

With its controlling stock owned by the Government and the power of appointing its directors
vested in the President of the Philippines, there can be no question that the NAFCO is Government
controlled corporation subject to the provisions of Republic Act No. 51 and the executive order
(No. 93) promulgated in accordance therewith. Consequently, it was also subject to the powers of
the Control Committee created in said executive order, among which is the power of supervision
for the purpose of insuring efficiency and economy in the operations of the corporation and also
the power to pass upon the program of activities and the yearly budget of expenditures approved
by the board of directors. It can hardly be questioned that under these powers the Control
Committee had the right to pass upon, and consequently to approve or disapprove, the resolution
of the NAFCO board of directors granting quarters allowance to the petitioners as such allowance
necessarily constitute an item of expenditure in the corporation's budget. That the Control
Committee had good grounds for disapproving the resolution is also clear, for, as pointed out by
the Auditor General and the NAFCO auditor, the granting of the allowance amounted to an illegal
increase of petitioner's salary beyond the limit fixed in the corporate charter and was furthermore
not justified by the precarious financial condition of the corporation.

It is argued, however, that Executive Order No. 93 is null and void, not only because it is based on
a law that is unconstitutional as an illegal delegation of legislature power to executive, but also
because it was promulgated beyond the period of one year limited in said law.

The second ground ignores the rule that in the computation of the time for doing an act, the first
day is excluded and the last day included (Section 13 Rev. Ad. Code.) As the act was approved on
October 4, 1946, and the President was given a period of one year within which to promulgate his
executive order and that the order was in fact promulgated on October 4, 1947, it is obvious that
under the above rule the said executive order was promulgated within the period given.

As to the first ground, the rule is that so long as the Legislature "lays down a policy and a standard
is established by the statute" there is no undue delegation. (11 Am. Jur. 957). Republic Act No. 51
in authorizing the President of the Philippines, among others, to make reforms and changes in
government-controlled corporations, lays down a standard and policy that the purpose shall be to
meet the exigencies attendant upon the establishment of the free and independent government of
the Philippines and to promote simplicity, economy and efficiency in their operations. The
standard was set and the policy fixed. The President had to carry the mandate. This he did by
promulgating the executive order in question which, tested by the rule above cited, does not
constitute an undue delegation of legislative power.

It is also contended that the quarters allowance is not compensation and so the granting of it to the
petitioner by the NAFCO board of directors does not contravene the provisions of the NAFCO
charter that the salary of the chairman of said board who is also to be general manager shall not
exceed P15,000 per anum. But regardless of whether quarters allowance should be considered as
compensation or not, the resolution of the board of the directors authorizing payment thereof to
the petitioner cannot be given effect since it was disapproved by the Control Committee in the
exercise of powers granted to it by Executive Order No. 93. And in any event, petitioner's
contention that quarters allowance is not compensation, a proposition on which American
authorities appear divided, cannot be insisted on behalf of officers and employees working for the
Government of the Philippines and its Instrumentalities, including, naturally, government-
controlled corporations. This is so because Executive Order No. 332 of 1941, which prohibits the
payment of additional compensation to those working for the Government and its
Instrumentalities, including government-controlled corporations, was in 1945 amended by
Executive Order No. 77 by expressly exempting from the prohibition the payment of quarters
allowance "in favor of local government officials and employees entitled to this under existing
law." The amendment is a clear indication that quarters allowance was meant to be included in the
term "additional compensation", for otherwise the amendment would not have expressly excepted
it from the prohibition. This being so, we hold that, for the purpose of the executive order just
mentioned, quarters allowance is considered additional compensation and, therefore, prohibited.

In view of the foregoing, the petition for review is dismissed, with costs

G.R. No. 88291 June 8, 1993

ERNESTO M. MACEDA, petitioner,


vs.
HON. CATALINO MACARAIG, JR., in his capacity as Executive Secretary, Office of the
President, HON. VICENTE JAYME, ETC., ET AL., respondents.

Angara, Abello, Concepcion & Cruz for respondent Pilipinas Shell Petroleum Corporation.

Siguion Reyna, Montecillo & Ongsiako for Caltex.

NOCON, J.:

Just like lightning which does strike the same place twice in some instances, this matter of indirect
tax exemption of the private respondent National Power Corporation (NPC) is brought to this
Court a second time. Unfazed by the Decision We promulgated on May 31, 1991 1 petitioner
Ernesto Maceda asks this Court to reconsider said Decision. Lest We be criticized for denying due
process to the petitioner. We have decided to take a second look at the issues. In the process, a
hearing was held on July 9, 1992 where all parties presented their respective arguments. Etched in
this Court's mind are the paradoxical claims by both petitioner and private respondents that their
respective positions are for the benefit of the Filipino people.

A Chronological review of the relevant NPC laws, specially with respect to its tax exemption
provisions, at the risk of being repetitious is, therefore, in order.

On November 3, 1936, Commonwealth Act No. 120 was enacted creating the National Power
Corporation, a public corporation, mainly to develop hydraulic power from all water sources in
the Philippines. 2 The sum of P250,000.00 was appropriated out of the funds in the Philippine
Treasury for the purpose of organizing the NPC and conducting its preliminary work. 3 The main
source of funds for the NPC was the flotation of bonds in the capital markets 4 and these bonds

. . . issued under the authority of this Act shall be exempt from the payment of all
taxes by the Commonwealth of the Philippines, or by any authority, branch,
division or political subdivision thereof and subject to the provisions of the Act of
Congress, approved March 24, 1934, otherwise known as the Tydings McDuffle
Law, which facts shall be stated upon the face of said bonds. . . . . 5

On June 24, 1938, C.A. No. 344 was enacted increasing to P550,000.00 the funds needed for the
initial operations of the NPC and reiterating the provision of the flotation of bonds as soon as the
first construction of any hydraulic power project was to be decided by the NPC Board. 6 The
provision on tax exemption in relation to the issuance of the NPC bonds was neither amended nor
deleted.

On September 30, 1939, C.A. No. 495 was enacted removing the provision on the payment of the
bond's principal and interest in "gold coins" but adding that payment could be made in United
States dollars. 7 The provision on tax exemption in relation to the issuance of the NPC bonds was
neither amended nor deleted.

On June 4, 1949, Republic Act No. 357 was enacted authorizing the President of the Philippines
to guarantee, absolutely and unconditionally, as primary obligor, the payment of any and all NPC
loans. 8 He was also authorized to contract on behalf of the NPC with the International Bank for
Reconstruction and Development (IBRD) for NPC loans for the accomplishment of NPC's
corporate objectives 9 and for the reconstruction and development of the economy of the
country.10 It was expressly stated that:

Any such loan or loans shall be exempt from taxes, duties, fees, imposts, charges,
contributions and restrictions of the Republic of the Philippines, its provinces, cities
and municipalities. 11

On the same date, R.A. No. 358 was enacted expressly authorizing the NPC, for the first time, to
incur other types of indebtedness, aside from indebtedness incurred by flotation of bonds. 12 As to
the pertinent tax exemption provision, the law stated as follows:

To facilitate payment of its indebtedness, the National Power Corporation shall be


exempt from all taxes, duties, fees, imposts, charges, and restrictions of the
Republic of the Philippines, its provinces, cities and municipalities. 13

On July 10, 1952, R.A. No. 813 was enacted amending R.A. No. 357 in that, aside from the IBRD,
the President of the Philippines was authorized to negotiate, contract and guarantee loans with the
Export-Import Bank of of Washigton, D.C., U.S.A., or any other international financial
institution. 14 The tax provision for repayment of these loans, as stated in R.A. No. 357, was not
amended.

On June 2, 1954, R.A. No. 987 was enacted specifically to withdraw NPC's tax exemption for real
estate taxes. As enacted, the law states as follows:

To facilitate payment of its indebtedness, the National Power Corporation shall be


exempt from all taxes, except real property tax, and from all duties, fees, imposts,
charges, and restrictions of the Republic of the Philippines, its provinces, cities, and
municipalities. 15
On September 8, 1955, R.A. No. 1397 was enacted directing that the NPC projects to be funded
by the increased indebtedness 16 should bear the National Economic Council's stamp of approval.
The tax exemption provision related to the payment of this total indebtedness was not amended
nor deleted.

On June 13, 1958, R.A. No. 2055 was enacted increasing the total amount of foreign loans NPC
was authorized to incur to US$100,000,000.00 from the US$50,000,000.00 ceiling in R.A. No.
357. 17 The tax provision related to the repayment of these loans was not amended nor deleted.

On June 13, 1958, R.A. No. 2058 was enacting fixing the corporate life of NPC to December 31,
2000. 18 All laws or provisions of laws and executive orders contrary to said R.A. No. 2058 were
expressly repealed. 19

On June 18, 1960, R.A. No 2641 was enacted converting the NPC from a public corporation into
a stock corporation with an authorized capital stock of P100,000,000.00 divided into 1,000.000
shares having a par value of P100.00 each, with said capital stock wholly subscribed to by the
Government. 20 No tax exemption was incorporated in said Act.

On June 17, 1961, R.A. No. 3043 was enacted increasing the above-mentioned authorized capital
stock to P250,000,000.00 with the increase to be wholly subscribed by the Government. 21 No tax
provision was incorporated in said Act.

On June 17, 1967, R.A. No 4897 was enacted. NPC's capital stock was increased again to
P300,000,000.00, the increase to be wholly subscribed by the Government. No tax provision was
incorporated in said Act. 22

On September 10, 1971, R.A. No. 6395 was enacted revising the charter of the NPC, C.A. No.
120, as amended. Declared as primary objectives of the nation were:

Declaration of Policy. — Congress hereby declares that (1) the comprehensive


development, utilization and conservation of Philippine water resources for all
beneficial uses, including power generation, and (2) the total electrification of the
Philippines through the development of power from all sources to meet the needs
of industrial development and dispersal and the needs of rural electrification are
primary objectives of the nation which shall be pursued coordinately and supported
by all instrumentalities and agencies of the government, including the financial
institutions. 23

Section 4 of C.A. No. 120, was renumbered as Section 8, and divided into sections 8 (a) (Authority
to incur Domestic Indebtedness) and Section 8 (b) (Authority to Incur Foreign Loans).

As to the issuance of bonds by the NPC, Paragraph No. 3 of Section 8(a), states as follows:

The bonds issued under the authority of this subsection shall be exempt from the
payment of all taxes by the Republic of the Philippines, or by any authority, branch,
division or political subdivision thereof which facts shall be stated upon the face of
said bonds. . . . 24

As to the foreign loans the NPC was authorized to contract, Paragraph No. 5, Section 8(b), states
as follows:

The loans, credits and indebtedness contracted under this subsection and the
payment of the principal, interest and other charges thereon, as well as the
importation of machinery, equipment, materials and supplies by the Corporation,
paid from the proceeds of any loan, credit or indebtedeness incurred under this Act,
shall also be exempt from all taxes, fees, imposts, other charges and restrictions,
including import restrictions, by the Republic of the Philippines, or any of its
agencies and political subdivisions.25

A new section was added to the charter, now known as Section 13, R.A. No. 6395, which declares
the non-profit character and tax exemptions of NPC as follows:

The Corporation shall be non-profit and shall devote all its returns from its capital
investment, as well as excess revenues from its operation, for expansion. To enable
the Corporation to pay its indebtedness and obligations and in furtherance and
effective implementation of the policy enunciated in Section one of this Act, the
Corporation is hereby declared exempt:

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

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

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

(d) From all taxes, duties, fees, imposts and all other charges its provinces, cities,
municipalities and other government agencies and instrumentalities, on all
petroleum products used by the Corporation in the generation, transmission,
utilization, and sale of electric power. 26

On November 7, 1972, Presidential Decree No. 40 was issued declaring that the
electrification of the entire country was one of the primary concerns of the country.
And in connection with this, it was specifically stated that:
The setting up of transmission line grids and the construction of associated
generation facilities in Luzon, Mindanao and major islands of the country,
including the Visayas, shall be the responsibility of the National Power Corporation
(NPC) as the authorized implementing agency of the State. 27

xxx xxx xxx

It is the ultimate objective of the State for the NPC to own and operate as a single
integrated system all generating facilities supplying electric power to the entire area
embraced by any grid set up by the NPC. 28

On January 22, 1974, P.D. No. 380 was issued giving extra powers to the NPC to enable it to fulfill
its role under aforesaid P.D. No. 40. Its authorized capital stock was raised to
P2,000,000,000.00, 29 its total domestic indebtedness was pegged at a maximum of
P3,000,000,000.00 at any one time, 30 and the NPC was authorized to borrow a total of
US$1,000,000,000.00 31 in foreign loans.

The relevant tax exemption provision for these foreign loans states as follows:

The loans, credits and indebtedness contracted under this subsection and the
payment of the principal, interest and other charges thereon, as well as the
importation of machinery, equipment, materials, supplies and services, by the
Corporation, paid from the proceeds of any loan, credit or indebtedness incurred
under this Act, shall also be exempt from all direct and indirect taxes, fees, imposts,
other charges and restrictions, including import restrictions previously and
presently imposed, and to be imposed by the Republic of the Philippines, or any of
its agencies and political subdivisions. 32(Emphasis supplied)

Section 13(a) and 13(d) of R.A. No 6395 were amended to read as follows:

(a) From the payment of all taxes, duties, fees, imposts, charges and restrictions to
the Republic of the Philippines, its provinces, cities, municipalities and other
government agencies and instrumentalities including the taxes, duties, fees, imposts
and other charges provided for under the Tariff and Customs Code of the
Philippines, Republic Act Numbered Nineteen Hundred Thirty-Seven, as amended,
and as further amended by Presidential Decree No. 34 dated October 27, 1972, and
Presidential Decree No. 69, dated November 24, 1972, and costs and service fees
in any court or administrative proceedings in which it may be a party;

xxx xxx xxx

(d) From all taxes, duties, fees, imposts, and all other charges imposed directly or
indirectly by the Republic of the Philippines, its provinces, cities, municipalities
and other government agencies and instrumentalities, on all petroleum products
used by the Corporation in the generation, transmission, utilization and sale of
electric power. 33 (Emphasis supplied)
On February 26, 1970, P.D. No. 395 was issued removing certain restrictions in the NPC's sale of
electricity to its different customers. 34 No tax exemption provision was amended, deleted or
added.

On July 31, 1975, P.D. No. 758 was issued directing that P200,000,000.00 would be appropriated
annually to cover the unpaid subscription of the Government in the NPC authorized capital stock,
which amount would be taken from taxes accruing to the General Funds of the Government,
proceeds from loans, issuance of bonds, treasury bills or notes to be issued by the Secretary of
Finance for this particular purpose. 35

On May 27, 1976 P.D. No. 938 was issued

(I)n view of the accelerated expansion programs for generation and transmission
facilities which includes nuclear power generation, the present capitalization of
National Power Corporation (NPC) and the ceilings for domestic and foreign
borrowings are deemed insufficient; 36

xxx xxx xxx

(I)n the application of the tax exemption provisions of the Revised Charter, the non-
profit character of NPC has not been fully utilized because of restrictive
interpretation of the taxing agencies of the government on said provisions; 37

xxx xxx xxx

(I)n order to effect the accelerated expansion program and attain the declared
objective of total electrification of the country, further amendments of certain
sections of Republic Act No. 6395, as amended by Presidential Decrees Nos. 380,
395 and 758, have become imperative; 38

Thus NPC's capital stock was raised to P8,000,000,000.00, 39 the total domestic indebtedness
ceiling was increased to P12,000,000,000.00, 40 the total foreign loan ceiling was raised to
US$4,000,000,000.00 41 and Section 13 of R.A. No. 6395, was amended to read as follows:

The Corporation shall be non-profit and shall devote all its returns from its capital
investment as well as excess revenues from its operation, for expansion. To enable
the Corporation to pay to its indebtedness and obligations and in furtherance and
effective implementation of the policy enunciated in Section one of this Act, the
Corporation, including its subsidiaries, is hereby declared exempt from the payment
of all forms of taxes, duties, fees, imposts as well as costs and service fees including
filing fees, appeal bonds, supersedeas bonds, in any court or administrative
proceedings. 42

II
On the other hand, the pertinent tax laws involved in this controversy are P.D. Nos. 882, 1177,
1931 and Executive Order No. 93 (S'86).

On January 30, 1976, P.D. No. 882 was issued withdrawing the tax exemption of NPC with regard
to imports as follows:

WHEREAS, importations by certain government agencies, including government-


owned or controlled corporation, are exempt from the payment of customs duties
and compensating tax; and

WHEREAS, in order to reduce foreign exchange spending and to protect domestic


industries, it is necessary to restrict and regulate such tax-free importations.

NOW THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines,


by virtue of the powers vested in me by the Constitution, and do hereby decree and
order the following:

Sec. 1. All importations of any government agency, including government-owned


or controlled corporations which are exempt from the payment of customs duties
and internal revenue taxes, shall be subject to the prior approval of an Inter-Agency
Committee which shall insure compliance with the following conditions:

(a) That no such article of local manufacture are available in sufficient quantity and
comparable quality at reasonable prices;

(b) That the articles to be imported are directly and actually needed and will be used
exclusively by the grantee of the exemption for its operations and projects or in the
conduct of its functions; and

(c) The shipping documents covering the importation are in the name of the grantee
to whom the goods shall be delivered directly by customs authorities.

xxx xxx xxx

Sec. 3. The Committee shall have the power to regulate and control the tax-free
importation of government agencies in accordance with the conditions set forth in
Section 1 hereof and the regulations to be promulgated to implement the provisions
of this Decree. Provided, however, That any government agency or government-
owned or controlled corporation, or any local manufacturer or business firm
adversely affected by any decision or ruling of the Inter-Agency Committee may
file an appeal with the Office of the President within ten days from the date of notice
thereof. . . . .

xxx xxx xxx


Sec. 6. . . . . Section 13 of Republic Act No. 6395; . . .. and all similar provisions of
all general and special laws and decrees are hereby amended accordingly.

xxx xxx xxx

On July 30, 1977, P.D. 1177 was issued as it was

. . . declared the policy of the State to formulate and implement a National Budget
that is an instrument of national development, reflective of national objectives,
strategies and plans. The budget shall be supportive of and consistent with the
socio-economic development plan and shall be oriented towards the achievement
of explicit objectives and expected results, to ensure that funds are utilized and
operations are conducted effectively, economically and efficiently. The national
budget shall be formulated within a context of a regionalized government structure
and of the totality of revenues and other receipts, expenditures and borrowings of
all levels of government-owned or controlled corporations. The budget shall
likewise be prepared within the context of the national long-term plan and of a long-
term budget program. 43

In line with such policy, the law decreed that

All units of government, including government-owned or controlled corporations, shall pay


income taxes, customs duties and other taxes and fees are imposed under revenues laws: provided,
that organizations otherwise exempted by law from the payment of such taxes/duties may ask for
a subsidy from the General Fund in the exact amount of taxes/duties due: provided, further, that a
procedure shall be established by the Secretary of Finance and the Commissioner of the Budget,
whereby such subsidies shall automatically be considered as both revenue and expenditure of the
General Fund. 44

The law also declared that —

[A]ll laws, decrees, executive orders, rules and regulations or parts thereof which
are inconsistent with the provisions of the Decree are hereby repealed and/or
modified accordingly. 45

On July 11, 1984, most likely due to the economic morass the Government found itself in after the
Aquino assassination, P.D. No. 1931 was issued to reiterate that:

WHEREAS, Presidential Decree No. 1177 has already expressly repealed the grant
of tax privileges to any government-owned or controlled corporation and all other
units of government; 46

and since there was a


. . . need for government-owned or controlled corporations and all other units of
government enjoying tax privileges to share in the requirements of development,
fiscal or otherwise, by paying the duties, taxes and other charges due from them. 47

it was decreed that:

Sec. 1. The provisions of special on general law to the contrary notwithstanding, all
exemptions from the payment of duties, taxes, fees, imposts and other charges
heretofore granted in favor of government-owned or controlled corporations
including their subsidiaries, are hereby withdrawn.

Sec. 2. The President of the Philippines and/or the Minister of Finance, upon the
recommendation of the Fiscal Incentives Review Board created under Presidential
Decree No. 776, is hereby empowered to restore, partially or totally, the exemptions
withdrawn by Section 1 above, any applicable tax and duty, taking into account,
among others, any or all of the following:

1) The effect on the relative price levels;

2) The relative contribution of the corporation to the revenue generation effort;

3) The nature of the activity in which the corporation is engaged in; or

4) In general the greater national interest to be served.

xxx xxx xxx

Sec. 5. The provisions of Presidential Decree No. 1177 as well as all other laws,
decrees, executive orders, administrative orders, rules, regulations or parts thereof
which are inconsistent with this Decree are hereby repealed, amended or modified
accordingly.

On December 17, 1986, E.O. No. 93 (S'86) was issued with a view to correct presidential
restoration or grant of tax exemption to other government and private entities without benefit of
review by the Fiscal Incentives Review Board, to wit:

WHEREAS, Presidential Decree Nos. 1931 and 1955 issued on June 11, 1984 and
October 14, 1984, respectively, withdrew the tax and duty exemption privileges,
including the preferential tax treatment, of government and private entities with
certain exceptions, in order that the requirements of national economic
development, in terms of fiscals and other resources, may be met more adequately;

xxx xxx xxx

WHEREAS, in addition to those tax and duty exemption privileges were restored
by the Fiscal Incentives Review Board (FIRB), a number of affected entities,
government and private, had their tax and duty exemption privileges restored or
granted by Presidential action without benefit or review by the Fiscal Incentives
Review Board (FIRB);

xxx xxx xxx

Since it was decided that:

[A]ssistance to government and private entities may be better provided where


necessary by explicit subsidy and budgetary support rather than tax and duty
exemption privileges if only to improve the fiscal monitoring aspects of
government operations.

It was thus ordered that:

Sec. 1. The Provisions of any general or special law to the contrary notwithstanding,
all tax and duty incentives granted to government and private entities are hereby
withdrawn, except:

a) those covered by the non-impairment clause of the Constitution;

b) those conferred by effective internation agreement to which the Government of


the Republic of the Philippines is a signatory;

c) those enjoyed by enterprises registered with:

(i) the Board of Investment pursuant to Presidential Decree No.


1789, as amended;

(ii) the Export Processing Zone Authority, pursuant to Presidential


Decree No. 66 as amended;

(iii) the Philippine Veterans Investment Development Corporation


Industrial Authority pursuant to Presidential Decree No. 538, was
amended.

d) those enjoyed by the copper mining industry pursuant to the provisions of Letter
of Instructions No. 1416;

e) those conferred under the four basic codes namely:

(i) the Tariff and Customs Code, as amended;

(ii) the National Internal Revenue Code, as amended;

(iii) the Local Tax Code, as amended;


(iv) the Real Property Tax Code, as amended;

f) those approved by the President upon the recommendation of the


Fiscal Incentives Review Board.

Sec. 2. The Fiscal Incentives Review Board created under Presidential Decree No.
776, as amended, is hereby authorized to:

a) restore tax and/or duty exemptions withdrawn hereunder in whole or in part;

b) revise the scope and coverage of tax and/or duty exemption that may be restored;

c) impose conditions for the restoration of tax and/or duty exemption;

d) prescribe the date of period of effectivity of the restoration of tax and/or duty
exemption;

e) formulate and submit to the President for approval, a complete system for the
grant of subsidies to deserving beneficiaries, in lieu of or in combination with the
restoration of tax and duty exemptions or preferential treatment in taxation,
indicating the source of funding therefor, eligible beneficiaries and the terms and
conditions for the grant thereof taking into consideration the international
commitment of the Philippines and the necessary precautions such that the grant of
subsidies does not become the basis for countervailing action.

Sec. 3. In the discharge of its authority hereunder, the Fiscal Incentives Review
Board shall take into account any or all of the following considerations:

a) the effect on relative price levels;

b) relative contribution of the beneficiary to the revenue generation effort;

c) nature of the activity the beneficiary is engaged; and

d) in general, the greater national interest to be served.

xxx xxx xxx

Sec. 5. All laws, orders, issuances, rules and regulations or parts thereof
inconsistent with this Executive Order are hereby repealed or modified accordingly.

E.O. No. 93 (S'86) was decreed to be effective 48 upon the promulgation of the rules and
regulations, to be issued by the Ministry of Finance. 49 Said rules and regulations were
promulgated and published in the Official Gazette
50
on February 23, 1987. These became effective on the 15th day after promulgation in the Official
Gasetter, 51 which 15th day was March 10, 1987.
III

Now to some definitions. We refer to the very simplistic approach that all would-be lawyers, learn
in their TAXATION I course, which fro convenient reference, is as follows:

Classifications or kinds of Taxes:

According to Persons who pay or who bear the burden:

a. Direct Tax — the where the person supposed to pay the tax really pays
it. WITHOUT transferring the burden to someone else.

Examples: Individual income tax, corporate income tax, transfer taxes (estate tax,
donor's tax), residence tax, immigration tax

b. Indirect Tax — that where the tax is imposed upon goods BEFORE reaching the
consumer who ultimately pays for it, not as a tax, but as a part of the purchase price.

Examples: the internal revenue indirect taxes (specific tax, percentage taxes, (VAT)
and the tariff and customs indirect taxes (import duties, special import tax and other
dues) 52

IV

To simply matter, the issues raised by petitioner in his motion for reconsideration can be reduced
to the following:

(1) What kind of tax exemption privileges did NPC have?

(2) For what periods in time were these privileges being enjoyed?

(3) If there are taxes to be paid, who shall pay for these taxes?

Petitioner contends that P.D. No. 938 repealed the indirect tax exemption of NPC as the phrase
"all forms of taxes etc.," in its section 10, amending Section 13, R.A. No. 6395, as amended by
P.D. No. 380, does not expressly include "indirect taxes."

His point is not well-taken.

A chronological review of the NPC laws will show that it has been the lawmaker's intention that
the NPC was to be completely tax exempt from all forms of taxes — direct and indirect.

NPC's tax exemptions at first applied to the bonds it was authorized to float to finance its operations
upon its creation by virtue of C.A. No. 120.
When the NPC was authorized to contract with the IBRD for foreign financing, any loans obtained
were to be completely tax exempt.

After the NPC was authorized to borrow from other sources of funds — aside issuance of bonds
— it was again specifically exempted from all types of taxes "to facilitate payment of its
indebtedness." Even when the ceilings for domestic and foreign borrowings were periodically
increased, the tax exemption privileges of the NPC were maintained.

NPC's tax exemption from real estate taxes was, however, specifically withdrawn by Rep. Act No.
987, as above stated. The exemption was, however, restored by R.A. No. 6395.

Section 13, R.A. No. 6395, was very comprehensive in its enumeration of the tax exemptions
allowed NPC. Its section 13(d) is the starting point of this bone of contention among the parties.
For easy reference, it is reproduced as follows:

[T]he Corporation is hereby declared exempt:

xxx xxx xxx

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

P.D. No. 380 added phrase "directly or indirectly" to said Section 13(d), which now reads as
follows:

xxx xxx xxx

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

Then came P.D. No. 938 which amended Sec. 13(a), (b), (c) and (d) into one very simple paragraph
as follows:

The Corporation shall be non-profit and shall devote all its returns from its capital
investment as well as excess revenues from its operation, for expansion. To enable
the Corporation to pay its indebtedness and obligations and in furtherance and
effective implementation of the policy enunciated in Section one of this Act, the
Corporation, including its subsidiaries, is hereby declared exempt from the payment
ofALL FORMS OF taxes, duties, fees, imposts as well as costs and service fees
including filing fees, appeal bonds, supersedeas bonds, in any court or
administrative proceedings. (Emphasis supplied)
Petitioner reminds Us that:

[I]t must be borne in mind that Presidential Decree Nos. 380


and 938 were issued by one man, acting as such the Executive and Legislative. 53

xxx xxx xxx

[S]ince both presidential decrees were made by the same person, it would have been
very easy for him to retain the same or similar language used in P.D. No. 380 P.D.
No. 938 if his intention were to preserve the indirect tax exemption of NPC. 54

Actually, P.D. No. 938 attests to the ingenuousness of then President Marcos no matter what his
fault were. It should be noted that section 13, R.A. No. 6395, provided for tax exemptions for the
following items:

13(a) : court or administrative proceedings;

13(b) : income, franchise, realty taxes;

13(c) : import of foreign goods required for its operations and projects;

13(d) : petroleum products used in generation of electric power.

P.D. No. 938 lumped up 13(b), 13(c), and 13(d) into the phrase "ALL FORMS OF TAXES,
ETC.,", included 13(a) under the "as well as" clause and added PNOC subsidiaries as qualified for
tax exemptions.

This is the only conclusion one can arrive at if he has read all the NPC laws in the order of
enactment or issuance as narrated above in part I hereof. President Marcos must have considered
all the NPC statutes from C.A. No. 120 up to its latest amendments, P.D. No. 380, P.D. No. 395
and P.D. No. 759, AND came up 55 with a very simple Section 13, R.A. No. 6395, as amended by
P.D. No. 938.

One common theme in all these laws is that the NPC must be enable to pay its
indebtedness 56 which, as of P.D. No. 938, was P12 Billion in total domestic indebtedness, at any
one time, and U$4 Billion in total foreign loans at any one time. The NPC must be and has to be
exempt from all forms of taxes if this goal is to be achieved.

By virtue of P.D. No. 938 NPC's capital stock was raised to P8 Billion. It must be remembered
that to pay the government share in its capital stock P.D. No. 758 was issued mandating that P200
Million would be appropriated annually to cover the said unpaid subscription of the Government
in NPC's authorized capital stock. And significantly one of the sources of this annual appropriation
of P200 million is TAX MONEY accruing to the General Fund of the Government. It does not
stand to reason then that former President Marcos would order P200 Million to be taken partially
or totally from tax money to be used to pay the Government subscription in the NPC, on one hand,
and then order the NPC to pay all its indirect taxes, on the other.
The above conclusion that then President Marcos lumped up Sections 13 (b), 13 (c) and (d) into
the phrase "All FORMS OF" is supported by the fact that he did not do the same for the tax
exemption provision for the foreign loans to be incurred.

The tax exemption on foreign loans found in Section 8(b), R.A. No. 6395, reads as follows:

The loans, credits and indebtedness contracted under this subsection and the
payment of the principal, interest and other charges thereon, as well as the
importation of machinery, equipment, materials and supplies by the Corporation,
paid from the proceeds of any loan, credit or indebtedness incurred under this Act,
shall also be exempt from all taxes, fees, imposts, other charges and restrictions,
including import restrictions, by the Republic of the Philippines, or any of its
agencies and political subdivisions.57

The same was amended by P.D. No. 380 as follows:

The loans, credits and indebtedness contracted this subsection and the payment of
the principal, interest and other charges thereon, as well as the importation of
machinery, equipment, materials, supplies and services, by the Corporation, paid
from the proceeds of any loan, credit or indebtedness incurred under this Act, shall
also be exempt from all direct and indirect taxes, fees, imposts, other charges and
restrictions, including import restrictions previously and presently imposed, and to
be imposed by the Republic of the Philippines, or any of its agencies and political
subdivisions. 58(Emphasis supplied)

P.D. No. 938 did not amend the same 59 and so the tax exemption provision in Section 8 (b), R.A.
No. 6395, as amended by P.D. No. 380, still stands. Since the subject matter of this particular
Section 8 (b) had to do only with loans and machinery imported, paid for from the proceeds of
these foreign loans, THERE WAS NO OTHER SUBJECT MATTER TO LUMP IT UP WITH, and
so, the tax exemption stood as is — with the express mention of "direct
and indirect" tax exemptions. And this "direct and indirect" tax exemption privilege extended to
"taxes, fees, imposts, other charges . . . to be imposed" in the future — surely, an indication that
the lawmakers wanted the NPC to be exempt from ALL FORMS of taxes — direct and indirect.

It is crystal clear, therefore, that NPC had been granted tax exemption privileges for both direct
and indirect taxes under P.D. No. 938.

VI

Five (5) years on into the now discredited New Society, the Government decided to rationalize
government receipts and expenditures by formulating and implementing a National Budget. 60 The
NPC, being a government owned and controlled corporation had to be shed off its tax exemption
status privileges under P.D. No. 1177. It was, however, allowed to ask for a subsidy from the
General Fund in the exact amount of taxes/duties due.
Actually, much earlier, P.D. No. 882 had already repealed NPC's tax-free importation privileges.
It allowed, however, NPC to appeal said repeal with the Office of the President and to avail of tax-
free importation privileges under its Section 1, subject to the prior approval of an Inter-Agency
Committed created by virtue of said P.D. No. 882. It is presumed that the NPC, being the special
creation of the State, was allowed to continue its tax-free importations.

This Court notes that petitioner brought to the attention of this Court, the matter of the abolition
of NPC's tax exemption privileges by P.D. No. 1177 61 only in his Common Reply/Comment to
private Respondents' "Opposition" and "Comment" to Motion for Reconsideration, four (4)
months AFTER the motion for Reconsideration had been filed. During oral arguments heard on
July 9, 1992, he proceeded to discuss this tax exemption withdrawal as explained by then Secretary
of Justice Vicente Abad Santos in opinion No. 133 (S '77). 62 A careful perusal of petitioner's
senate Blue Ribbon Committee Report No. 474, the basis of the petition at bar, fails to yield any
mention of said P.D. No. 1177's effect on NPC's tax exemption privileges. 63 Applying by
analogy Pulido vs. Pablo, 64 the court declares that the matter of P.D. No. 1177 abolishing NPC's
tax exemption privileges was not seasonably invoked 65 by the petitioner.

Be that as it may, the Court still has to discuss the effect of P.D. No. 1177 on the NPC tax
exemption privileges as this statute has been reiterated twice in P.D. No. 1931. The express repeal
of tax privileges of any government-owned or controlled corporation (GOCC). NPC included, was
reiterated in the fourth whereas clause of P.D. No. 1931's preamble. The subsidy provided for in
Section 23, P.D. No. 1177, being inconsistent with Section 2, P.D. No. 1931, was deemed repealed
as the Fiscal Incentives Revenue Board was tasked with recommending the partial or total
restoration of tax exemptions withdrawn by Section 1, P.D. No. 1931.

The records before Us do not indicate whether or not NPC asked for the subsidy contemplated in
Section 23, P.D. No. 1177. Considering, however, that under Section 16 of P.D. No. 1177, NPC
had to submit to the Office of the President its request for the P200 million mandated by P.D. No.
758 to be appropriated annually by the Government to cover its unpaid subscription to the NPC
authorized capital stock and that under Section 22, of the same P.D. No. NPC had to likewise
submit to the Office of the President its internal operating budget for review due to capital inputs
of the government (P.D. No. 758) and to the national government's guarantee of the domestic and
foreign indebtedness of the NPC, it is clear that NPC was covered by P.D. No. 1177.

There is reason to believe that NPC availed of subsidy granted to exempt GOCC's that suddenly
found themselves having to pay taxes. It will be noted that Section 23, P.D. No. 1177, mandated
that the Secretary of Finance and the Commissioner of the Budget had to establish the necessary
procedure to accomplish the tax payment/tax subsidy scheme of the Government. In effect, NPC,
did not put any cash to pay any tax as it got from the General Fund the amounts necessary to pay
different revenue collectors for the taxes it had to pay.

In his memorandum filed July 16, 1992, petitioner submits:

[T]hat with the enactment of P.D. No. 1177 on July 30, 1977, the NPC lost all its
duty and tax exemptions, whether direct or indirect. And so there was nothing to be
withdrawn or to be restored under P.D. No. 1931, issued on June 11, 1984. This is
evident from sections 1 and 2 of said P.D. No. 1931, which reads:

"Section 1. The provisions of special or general law to the contrary


notwithstanding, all exemptions from the payment of duties, taxes,
fees, imports and other charges heretofore granted in favor of
government-owned or controlled corporations including their
subsidiaries are hereby withdrawn."

Sec. 2. The President of the Philippines and/or the Minister of


Finance, upon the recommendation of the Fiscal Incentives Review
Board created under P.D. No. 776, is hereby empowered to restore
partially or totally, the exemptions withdrawn by section 1 above. .
..

Hence, P.D. No. 1931 did not have any effect or did it change NPC's status. Since
it had already lost all its tax exemptions privilege with the issuance of P.D. No.
1177 seven (7) years earlier or on July 30, 1977, there were no tax exemptions to
be withdrawn by section 1 which could later be restored by the Minister of Finance
upon the recommendation of the FIRB under Section 2 of P.D. No. 1931.
Consequently, FIRB resolutions No. 10-85, and 1-86, were all illegally and validly
issued since FIRB acted beyond their statutory authority by creating and not merely
restoring the tax exempt status of NPC. The same is true for FIRB Res. No. 17-87
which restored NPC's tax exemption under E.O. No. 93 which likewise abolished
all duties and tax exemptions but allowed the President upon recommendation of
the FIRB to restore those abolished.

The Court disagrees.

Applying by analogy the weight of authority that:

When a revised and consolidated act re-enacts in the same or substantially the same
terms the provisions of the act or acts so revised and consolidated, the revision and
consolidation shall be taken to be a continuation of the former act or acts, although
the former act or acts may be expressly repealed by the revised and consolidated
act; and all rights
and liabilities under the former act or acts are preserved and may be enforced. 66

the Court rules that when P.D. No. 1931 basically reenacted in its Section 1 the first half of Section
23, P.D. No. 1177, on withdrawal of tax exemption privileges of all GOCC's said Section 1, P.D.
No. 1931 was deemed to be a continuation of the first half of Section 23, P.D. No. 1177, although
the second half of Section 23, P.D. No. 177, on the subsidy scheme for former tax exempt GOCCs
had been expressly repealed by Section 2 with its institution of the FIRB recommendation of
partial/total restoration of tax exemption privileges.
The NPC tax privileges withdrawn by Section 1. P.D. No. 1931, were, therefore, the same NPC
tax exemption privileges withdrawn by Section 23, P.D. No. 1177. NPC could no longer obtain a
subsidy for the taxes it had to pay. It could, however, under P.D. No. 1931, ask for a total
restoration of its tax exemption privileges, which, it did, and the same were granted under FIRB
Resolutions Nos. 10-85 67 and 1-86 68 as approved by the Minister of Finance.

Consequently, contrary to petitioner's submission, FIRB Resolutions Nos. 10-85 and 1-86 were
both legally and validly issued by the FIRB pursuant to P.D. No. 1931. FIRB did not created NPC's
tax exemption status but merely restored it. 69

Some quarters have expressed the view that P.D. No. 1931 was illegally issued under the now
rather infamous Amendment No. 6 70 as there was no showing that President Marcos'
encroachment on legislative prerogatives was justified under the then prevailing condition that he
could legislate "only if the Batasang Pambansa 'failed or was unable to act inadequately on any
matter that in his judgment required immediate action' to meet the 'exigency'. 71

Actually under said Amendment No. 6, then President Marcos could issue decrees not only when
the Interim Batasang Pambansa failed or was unable to act adequately on any matter for any reason
that in his (Marcos') judgment required immediate action, but also when there existed a grave
emergency or a threat or thereof. It must be remembered that said Presidential Decree was issued
only around nine (9) months after the Philippines unilaterally declared a moratorium on its foreign
debt payments 72 as a result of the economic crisis triggered by loss of confidence in the
government brought about by the Aquino assassination. The Philippines was then trying to
reschedule its debt payments. 73 One of the big borrowers was the NPC 74 which had a US$ 2.1
billion white elephant of a Bataan Nuclear Power Plant on its back. 75 From all indications, it must
have been this grave emergency of a debt rescheduling which compelled Marcos to issue P.D. No.
1931, under his Amendment 6 power. 76

The rule, therefore, that under the 1973 Constitution "no law granting a tax exemption shall be
passed without the concurrence of a majority of all the members of the Batasang
Pambansa" 77 does not apply as said P.D. No. 1931 was not passed by the Interim Batasang
Pambansa but by then President Marcos under His Amendment No. 6 power.

P.D. No. 1931 was, therefore, validly issued by then President Marcos under his Amendment No.
6 authority.

Under E.O No. 93 (S'86) NPC's tax exemption privileges were again clipped by, this time,
President Aquino. Its section 2 allowed the NPC to apply for the restoration of its tax exemption
privileges. The same was granted under FIRB Resolution No. 17-87 78 dated June 24, 1987 which
restored NPC's tax exemption privileges effective, starting March 10, 1987, the date of effectivity
of E.O. No. 93 (S'86).

FIRB Resolution No. 17-87 was approved by the President on October 5, 1987. 79 There is no
indication, however, from the records of the case whether or not similar approvals were given by
then President Marcos for FIRB Resolutions Nos. 10-85 and 1- 86. This has led some quarters to
believe that a "travesty of justice" might have occurred when the Minister of Finance approved his
own recommendation as Chairman of the Fiscal Incentives Review Board as what happened
inZambales Chromate vs. Court of Appeals 80 when the Secretary of Agriculture and Natural
Resources approved a decision earlier rendered by him when he was the Director of Mines, 81 and
in Anzaldo vs. Clave 82 where Presidential Executive Assistant Clave affirmed, on appeal to
Malacañang, his own decision as Chairman of the Civil Service Commission. 83

Upon deeper analysis, the question arises as to whether one can talk about "due process" being
violated when FIRB Resolutions Nos. 10-85 and 1-86 were approved by the Minister of Finance
when the same were recommended by him in his capacity as Chairman of the Fiscal Incentives
Review Board. 84

In Zambales Chromite and Anzaldo, two (2) different parties were involved: mining groups and
scientist-doctors, respectively. Thus, there was a need for procedural due process to be followed.

In the case of the tax exemption restoration of NPC, there is no other comparable entity — not
even a single public or private corporation — whose rights would be violated if NPC's tax
exemption privileges were to be restored. While there might have been a MERALCO before
Martial Law, it is of public knowledge that the MERALCO generating plants were sold to the NPC
in line with the State policy that NPC was to be the State implementing arm for the electrification
of the entire country. Besides, MERALCO was limited to Manila and its environs. And as of 1984,
there was no more MERALCO — as a producer of electricity — which could have objected to the
restoration of NPC's tax exemption privileges.

It should be noted that NPC was not asking to be granted tax exemption privileges for the first
time. It was just asking that its tax exemption privileges be restored. It is for these reasons that, at
least in NPC's case, the recommendation and approval of NPC's tax exemption privileges under
FIRB Resolution Nos. 10-85 and 1-86, done by the same person acting in his dual capacities as
Chairman of the Fiscal Incentives Review Board and Minister of Finance, respectively, do not
violate procedural due process.

While as above-mentioned, FIRB Resolution No. 17-87 was approved by President Aquino on
October 5, 1987, the view has been expressed that President Aquino, at least with regard to E.O.
93 (S'86), had no authority to sub-delegate to the FIRB, which was allegedly not a delegate of the
legislature, the power delegated to her thereunder.

A misconception must be cleared up.

When E.O No. 93 (S'86) was issued, President Aquino was exercising both Executive and
Legislative powers. Thus, there was no power delegated to her, rather it was she who was
delegating her power. She delegated it to the FIRB, which, for purposes of E.O No. 93 (S'86), is a
delegate of the legislature. Clearly, she was not sub-delegating her power.

And E.O. No. 93 (S'86), as a delegating law, was complete in itself — it set forth the policy to be
carried out 85 and it fixed the standard to which the delegate had to conform in the performance of
his functions, 86 both qualities having been enunciated by this Court in Pelaez vs. Auditor
General. 87
Thus, after all has been said, it is clear that the NPC had its tax exemption privileges restored from
June 11, 1984 up to the present.

VII

The next question that projects itself is — who pays the tax?

The answer to the question could be gleamed from the manner by which the Commissaries of the
Armed Forces of the Philippines sell their goods.

By virtue of P.D. No. 83, 88 veterans, members of the Armed of the Philippines, and their
defendants but groceries and other goods free of all taxes and duties if bought from any AFP
Commissaries.

In practice, the AFP Commissary suppliers probably treat the unchargeable specific, ad
valorem and other taxes on the goods earmarked for AFP Commissaries as an added cost of
operation and distribute it over the total units of goods sold as it would any other cost. Thus, even
the ordinary supermarket buyer probably pays for the specific, ad valorem and other taxes which
theses suppliers do not charge the AFP Commissaries. 89

IN MUCH THE SAME MANNER, it is clear that private respondents-oil companies have to
absorb the taxes they add to the bunker fuel oil they sell to NPC.

It should be stated at this juncture that, as early as May 14, 1954, the Secretary of Justice renders
an opinion, 90wherein he stated and We quote:

xxx xxx xxx

Republic Act No. 358 exempts the National Power Corporation from "all taxes,
duties, fees, imposts, charges, and restrictions of the Republic of the Philippines
and its provinces, cities, and municipalities." This exemption is broad enough to
include all taxes, whether direct or indirect, which the National Power Corporation
may be required to pay, such as the specific tax on petroleum products. That it is
indirect or is of no amount [should be of no moment], for it is the corporation that
ultimately pays it. The view which refuses to accord the exemption because the tax
is first paid by the seller disregards realities and gives more importance to form
than to substance. Equity and law always exalt substance over from.

xxx xxx xxx

Tax exemptions are undoubtedly to be construed strictly but not so grudgingly as


knowledge that many impositions taxpayers have to pay are in the nature of indirect
taxes. To limit the exemption granted the National Power Corporation to direct
taxes notwithstanding the general and broad language of the statue will be to thwrat
the legislative intention in giving exemption from all forms of taxes and impositions
without distinguishing between those that are direct and those that are not.
(Emphasis supplied)

In view of all the foregoing, the Court rules and declares that the oil companies which supply
bunker fuel oil to NPC have to pay the taxes imposed upon said bunker fuel oil sold to NPC. By
the very nature of indirect taxation, the economic burden of such taxation is expected to be passed
on through the channels of commerce to the user or consumer of the goods sold. Because, however,
the NPC has been exempted from both direct and indirect taxation, the NPC must beheld exempted
from absorbing the economic burden of indirect taxation. This means, on the one hand, that the oil
companies which wish to sell to NPC absorb all or part of the economic burden of the taxes
previously paid to BIR, which could they shift to NPC if NPC did not enjoy exemption from
indirect taxes. This means also, on the other hand, that the NPC may refuse to pay the part of the
"normal" purchase price of bunker fuel oil which represents all or part of the taxes previously paid
by the oil companies to BIR. If NPC nonetheless purchases such oil from the oil companies —
because to do so may be more convenient and ultimately less costly for NPC than NPC itself
importing and hauling and storing the oil from overseas — NPC is entitled to be reimbursed by
the BIR for that part of the buying price of NPC which verifiably represents the tax already paid
by the oil company-vendor to the BIR.

It should be noted at this point in time that the whole issue of who WILL pay these indirect taxes
HAS BEEN RENDERED moot and academic by E.O. No. 195 issued on June 16, 1987 by virtue
of which the ad valorem tax rate on bunker fuel oil was reduced to ZERO (0%) PER CENTUM.
Said E.O. no. 195 reads as follows:

EXECUTIVE ORDER NO. 195

AMENDING PARAGRAPH (b) OF SECTION 128 OF THE NATIONAL


INTERNAL REVENUE CODE, AS AMENDED BY REVISING THE EXCISE
TAX RATES OF CERTAIN PETROLEUM PRODUCTS.

xxx xxx xxx

Sec. 1. Paragraph (b) of Section 128 of the National Internal Revenue Code, as
amended, is hereby amended to read as follows:

Par. (b) — For products subject to ad valorem tax only:

PRODUCT AD VALOREM TAX RATE

1. . . .

2. . . .

3. . . .
4. Fuel oil, commercially known as bunker oil and on similar fuel oils having more
or less the same generating power 0%

xxx xxx xxx

Sec. 3. This Executive Order shall take effect immediately.

Done in the city of Manila, this 17th day of June, in the year of Our Lord, nineteen
hundred and eighty-seven. (Emphasis supplied)

The oil companies can now deliver bunker fuel oil to NPC without having to worry about who is
going to bear the economic burden of the ad valorem taxes. What this Court will now dispose of
are petitioner's complaints that some indirect tax money has been illegally refunded by the Bureau
of Internal Revenue to the NPC and that more claims for refunds by the NPC are being processed
for payment by the BIR.

A case in point is the Tax Credit Memo issued by the Bureau of Internal Revenue in favor of the
NPC last July 7, 1986 for P58.020.110.79 which were for "erroneously paid specific and ad
valorem taxes during the period from October 31, 1984 to April 27, 1985. 91 Petitioner asks Us to
declare this Tax Credit Memo illegal as the PNC did not have indirect tax exemptions with the
enactment of P.D. No. 938. As We have already ruled otherwise, the only questions left are
whether NPC Is entitled to a tax refund for the tax component of the price of the bunker fuel oil
purchased from Caltex (Phils.) Inc. and whether the Bureau of Internal Revenue properly refunded
the amount to NPC.

After P.D. No. 1931 was issued on June 11, 1984 withdrawing the
tax exemptions of all GOCCs — NPC included, it was only on May 8, 1985 when the BIR issues
its letter authority to the NPC authorizing it to withdraw tax-free bunker fuel oil from the oil
companies pursuant to FIRB Resolution No. 10-85. 92 Since the tax exemption restoration was
retroactive to June 11, 1984 there was a need. therefore, to recover said amount as Caltex (PhiIs.)
Inc. had already paid the BIR the specific and ad valorem taxes on the bunker oil it sold NPC
during the period above indicated and had billed NPC correspondingly. 93 It should be noted that
the NPC, in its letter-claim dated September 11, 1985 to the Commissioner of the Bureau of
Internal Revenue DID NOT CATEGORICALLY AND UNEQUIVOCALLY STATE that itself
paid the P58.020,110.79 as part of the bunker fuel oil price it purchased from Caltex (Phils) Inc. 94

The law governing recovery of erroneously or illegally, collected taxes is section 230 of the
National Internal Revenue Code of 1977, as amended which reads as follows:

Sec. 230. Recover of tax erroneously or illegally collected. — No suit or proceeding


shall be maintained in any court for the recovery of any national internal revenue
tax hereafter alleged to have been erroneously or illegally assessed or collected, or
of any penalty claimed to have been collected without authority, or of any sum
alleged to have been excessive or in any Manner wrongfully collected. until a claim
for refund or credit has been duly filed with the Commissioner; but such suit or
proceeding may be maintained, whether or not such tax, penalty, or sum has been
paid under protest or duress.

In any case, no such suit or proceeding shall be begun after the expiration of two
years from the date of payment of the tax or penalty regardless of any supervening
cause that may arise after payment; Provided, however, That the Commissioner
may, even without a written claim therefor, refund or credit any tax, where on the
face of the return upon which payment was made, such payment appears clearly, to
have been erroneously paid.

xxx xxx xxx

Inasmuch as NPC filled its claim for P58.020,110.79 on September 11, 1985, 95 the Commissioner
correctly issued the Tax Credit Memo in view of NPC's indirect tax exemption.

Petitioner, however, asks Us to restrain the Commissioner from acting favorably on NPC's claim
for P410.580,000.00 which represents specific and ad valorem taxes paid by the oil companies to
the BIR from June 11, 1984 to the early part of 1986. 96

A careful examination of petitioner's pleadings and annexes attached thereto does not reveal when
the alleged claim for a P410,580,000.00 tax refund was filed. It is only stated In paragraph No. 2
of the Deed of Assignment 97executed by and between NPC and Caltex (Phils.) Inc., as follows:

That the ASSIGNOR(NPC) has a pending tax credit claim with the Bureau of
Internal Revenue amounting to P442,887,716.16. P58.020,110.79 of which is due
to Assignor's oil purchases from the Assignee (Caltex [Phils.] Inc.)

Actually, as the Court sees it, this is a clear case of a "Mexican standoff." We cannot restrain the
BIR from refunding said amount because of Our ruling that NPC has both direct and indirect tax
exemption privileges. Neither can We order the BIR to refund said amount to NPC as there is no
pending petition for review on certiorari of a suit for its collection before Us. At any rate, at this
point in time, NPC can no longer file any suit to collect said amount EVEN IF lt has previously
filed a claim with the BIR because it is time-barred under Section 230 of the National Internal
Revenue Code of 1977. as amended, which states:

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. . . . (Emphasis supplied)

The date of the Deed of Assignment is June 6. 1986. Even if We were to assume that payment by
NPC for the amount of P410,580,000.00 had been made on said date. it is clear that more than two
(2) years had already elapsed from said date. At the same time, We should note that there is no
legal obstacle to the BIR granting, even without a suit by NPC, the tax credit or refund claimed by
NPC, assuming that NPC's claim had been made seasonably, and assuming the amounts covered
had actually been paid previously by the oil companies to the BIR.
WHEREFORE, in view of all the foregoing, the Motion for Reconsideration of petitioner is hereby
DENIED for lack of merit and the decision of this Court promulgated on May 31, 1991 is hereby
AFFIRMED. SO ORDERED.

G.R. No. L-59431 July 25, 1984

ANTERO M. SISON, JR., petitioner,


vs.
RUBEN B. ANCHETA, Acting Commissioner, Bureau of Internal Revenue; ROMULO
VILLA, Deputy Commissioner, Bureau of Internal Revenue; TOMAS TOLEDO Deputy
Commissioner, Bureau of Internal Revenue; MANUEL ALBA, Minister of Budget,
FRANCISCO TANTUICO, Chairman, Commissioner on Audit, and CESAR E. A.
VIRATA, Minister of Finance, respondents.

Antero Sison for petitioner and for his own behalf.

The Solicitor General for respondents.

FERNANDO, C.J.:

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

The Court, in a resolution of January 26, 1982, required respondents to file an answer within 10
days from notice. Such an answer, after two extensions were granted the Office of the Solicitor
General, was filed on May 28, 1982. 8The facts as alleged were admitted but not the allegations
which to their mind are "mere arguments, opinions or conclusions on the part of the petitioner, the
truth [for them] being those stated [in their] Special and Affirmative Defenses." 9 The answer then
affirmed: "Batas Pambansa Big. 135 is a valid exercise of the State's power to tax. The authorities
and cases cited while correctly quoted or paraghraph do not support petitioner's stand." 10 The
prayer is for the dismissal of the petition for lack of merit.
This Court finds such a plea more than justified. The petition must be dismissed.

1. It is manifest that the field of state activity has assumed a much wider scope, The reason was so
clearly set forth by retired Chief Justice Makalintal thus: "The areas which used to be left to private
enterprise and initiative and which the government was called upon to enter optionally, and only
'because it was better equipped to administer for the public welfare than is any private individual
or group of individuals,' continue to lose their well-defined boundaries and to be absorbed within
activities that the government must undertake in its sovereign capacity if it is to meet the increasing
social challenges of the times." 11 Hence the need for more revenues. The power to tax, an inherent
prerogative, has to be availed of to assure the performance of vital state functions. It is the source
of the bulk of public funds. To praphrase a recent decision, taxes being the lifeblood of the
government, their prompt and certain availability is of the essence. 12

2. The power to tax moreover, to borrow from Justice Malcolm, "is an attribute of sovereignty. It
is the strongest of all the powers of of government." 13 It is, of course, to be admitted that for all
its plenitude 'the power to tax is not unconfined. There are restrictions. The Constitution sets forth
such limits . Adversely affecting as it does properly rights, both the due process and equal
protection clauses inay properly be invoked, all petitioner does, to invalidate in appropriate cases
a revenue measure. if it were otherwise, there would -be truth to the 1803 dictum of Chief Justice
Marshall that "the power to tax involves the power to destroy." 14 In a separate opinion in Graves
v. New York, 15 Justice Frankfurter, after referring to it as an 1, unfortunate remark characterized
it as "a flourish of rhetoric [attributable to] the intellectual fashion of the times following] a free
use of absolutes." 16 This is merely to emphasize that it is riot and there cannot be such a
constitutional mandate. Justice Frankfurter could rightfully conclude: "The web of unreality spun
from Marshall's famous dictum was brushed away by one stroke of Mr. Justice Holmess pen: 'The
power to tax is not the power to destroy while this Court sits." 17 So it is in the Philippines.

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

4, The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. A mere


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

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

6. Now for equal protection. The applicable standard to avoid the charge that there is a denial of
this constitutional mandate whether the assailed act is in the exercise of the lice power or the power
of eminent domain is to demonstrated 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 circumtances which if not Identical
are analogous. If law be looked upon in terms of burden or charges, those that fall within a class
should be treated in the same fashion, whatever restrictions cast on some in the group equally
binding on the rest." 20 That same formulation applies as well to taxation measures. The equal
protection clause is, of course, inspired by the noble concept of approximating the Ideal of the laws
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, address to the attainment of specific
ends by the use of specific remedies. The Constitution does not require things which are different
in fact or opinion to be treated in law as though they were the same."21 Hence the constant
reiteration of the view that classification if rational in character is allowable. As a matter of fact,
in a leading case of Lutz V. Araneta, 22 this Court, through Justice J.B.L. Reyes, went so far as to
hold "at any rate, it is inherent in the power to tax that a state be free to select the subjects of
taxation, and it has been repeatedly held that 'inequalities which result from a singling out of one
particular class for taxation, or exemption infringe no constitutional limitation.'" 23

7. Petitioner likewise invoked the kindred concept of uniformity. According to the Constitution:
"The rule of taxation shag be uniform and equitable." 24 This requirement is met according to
Justice Laurel in Philippine Trust Company v. Yatco, 25 decided in 1940, when the tax "operates
with the same force and effect in every place where the subject may be found. " 26 He likewise
added: "The rule of uniformity does not call for perfect uniformity or perfect equality, because this
is hardly attainable." 27 The problem of classification did not present itself in that case. It did not
arise until nine years later, when the Supreme Court held: "Equality and uniformity in taxation
means that all taxable articles or kinds of property of the same class shall be taxed at the same rate.
The taxing power has the authority to make reasonable and natural classifications for purposes of
taxation, ... . 28 As clarified by Justice Tuason, where "the differentiation" complained of
"conforms to the practical dictates of justice and equity" it "is not discriminatory within the
meaning of this clause and is therefore uniform." 29 There is quite a similarity then to the standard
of equal protection for all that is required is that the tax "applies equally to all persons, firms and
corporations placed in similar situation." 30
8. Further on this point. Apparently, what misled petitioner is his failure to take into consideration
the distinction between a tax rate and a tax base. There is no legal objection to a broader tax base
or taxable income by eliminating all deductible items and at the same time reducing the applicable
tax rate. Taxpayers may be classified into different categories. To repeat, it. is enough that the
classification must rest upon substantial distinctions that make real differences. In the case of the
gross income taxation embodied in Batas Pambansa Blg. 135, the, discernible basis of
classification is the susceptibility of the income to the application of generalized rules removing
all deductible items for all taxpayers within the class and fixing a set of reduced tax rates to be
applied to all of them. Taxpayers who are recipients of compensation income are set apart as a
class. As there is practically no overhead expense, these taxpayers are e not entitled to make
deductions for income tax purposes because they are in the same situation more or less. On the
other hand, in the case of professionals in the practice of their calling and businessmen, there is no
uniformity in the costs or expenses necessary to produce their income. It would not be just then to
disregard the disparities by giving all of them zero deduction and indiscriminately impose on all
alike the same tax rates on the basis of gross income. There is ample justification then for the
Batasang Pambansa to adopt the gross system of income taxation to compensation income, while
continuing the system of net income taxation as regards professional and business income.

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

WHEREFORE, the petition is dismissed. Costs against petitioner.

G.R. No. 167330 September 18, 2009

PHILIPPINE HEALTH CARE PROVIDERS, INC., Petitioner,


vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

RESOLUTION

CORONA, J.:

ARTICLE II
Declaration of Principles and State Policies

Section 15. The State shall protect and promote the right to health of the people and instill health
consciousness among them.

ARTICLE XIII
Social Justice and Human Rights
Section 11. The State shall adopt an integrated and comprehensive approach to health development
which shall endeavor to make essential goods, health and other social services available to all the
people at affordable cost. There shall be priority for the needs of the underprivileged sick, elderly,
disabled, women, and children. The State shall endeavor to provide free medical care to paupers.1

For resolution are a motion for reconsideration and supplemental motion for reconsideration dated
July 10, 2008 and July 14, 2008, respectively, filed by petitioner Philippine Health Care Providers,
Inc.2

We recall the facts of this case, as follows:

Petitioner is a domestic corporation whose primary purpose is "[t]o establish, maintain, conduct
and operate a prepaid group practice health care delivery system or a health maintenance
organization to take care of the sick and disabled persons enrolled in the health care plan and to
provide for the administrative, legal, and financial responsibilities of the organization." Individuals
enrolled in its health care programs pay an annual membership fee and are entitled to various
preventive, diagnostic and curative medical services provided by its duly licensed physicians,
specialists and other professional technical staff participating in the group practice health delivery
system at a hospital or clinic owned, operated or accredited by it.

xxx xxx xxx

On January 27, 2000, respondent Commissioner of Internal Revenue [CIR] sent petitioner a formal
demand letter and the corresponding assessment notices demanding the payment of deficiency
taxes, including surcharges and interest, for the taxable years 1996 and 1997 in the total amount
of P224,702,641.18. xxxx

The deficiency [documentary stamp tax (DST)] assessment was imposed on petitioner’s health
care agreement with the members of its health care program pursuant to Section 185 of the 1997
Tax Code xxxx

xxx xxx xxx

Petitioner protested the assessment in a letter dated February 23, 2000. As respondent did not act
on the protest, petitioner filed a petition for review in the Court of Tax Appeals (CTA) seeking the
cancellation of the deficiency VAT and DST assessments.

On April 5, 2002, the CTA rendered a decision, the dispositive portion of which read:

WHEREFORE, in view of the foregoing, the instant Petition for Review is PARTIALLY
GRANTED. Petitioner is hereby ORDERED to PAY the deficiency VAT amounting
to P22,054,831.75 inclusive of 25% surcharge plus 20% interest from January 20, 1997 until fully
paid for the 1996 VAT deficiency and P31,094,163.87 inclusive of 25% surcharge plus 20%
interest from January 20, 1998 until fully paid for the 1997 VAT deficiency. Accordingly, VAT
Ruling No. [231]-88 is declared void and without force and effect. The 1996 and 1997 deficiency
DST assessment against petitioner is hereby CANCELLED AND SET ASIDE. Respondent is
ORDERED to DESIST from collecting the said DST deficiency tax.

SO ORDERED.

Respondent appealed the CTA decision to the [Court of Appeals (CA)] insofar as it cancelled the
DST assessment. He claimed that petitioner’s health care agreement was a contract of insurance
subject to DST under Section 185 of the 1997 Tax Code.

On August 16, 2004, the CA rendered its decision. It held that petitioner’s health care agreement
was in the nature of a non-life insurance contract subject to DST.

WHEREFORE, the petition for review is GRANTED. The Decision of the Court of Tax Appeals,
insofar as it cancelled and set aside the 1996 and 1997 deficiency documentary stamp tax
assessment and ordered petitioner to desist from collecting the same is REVERSED and SET
ASIDE.

Respondent is ordered to pay the amounts of P55,746,352.19 and P68,450,258.73 as deficiency


Documentary Stamp Tax for 1996 and 1997, respectively, plus 25% surcharge for late payment
and 20% interest per annum from January 27, 2000, pursuant to Sections 248 and 249 of the Tax
Code, until the same shall have been fully paid.

SO ORDERED.

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

xxx xxx xxx

In a decision dated June 12, 2008, the Court denied the petition and affirmed the CA’s decision.
We held that petitioner’s health care agreement during the pertinent period was in the nature of
non-life insurance which is a contract of indemnity, citing Blue Cross Healthcare, Inc. v.
Olivares3 and Philamcare Health Systems, Inc. v. CA.4We also ruled that petitioner’s contention
that it is a health maintenance organization (HMO) and not an insurance company is irrelevant
because contracts between companies like petitioner and the beneficiaries under their plans are
treated as insurance contracts. Moreover, DST is not a tax on the business transacted but an excise
on the privilege, opportunity or facility offered at exchanges for the transaction of the business.

Unable to accept our verdict, petitioner filed the present motion for reconsideration and
supplemental motion for reconsideration, asserting the following arguments:

(a) The DST under Section 185 of the National Internal Revenue of 1997 is imposed only
on a company engaged in the business of fidelity bonds and other insurance policies.
Petitioner, as an HMO, is a service provider, not an insurance company.
(b) The Court, in dismissing the appeal in CIR v. Philippine National Bank, affirmed in
effect the CA’s disposition that health care services are not in the nature of an insurance
business.

(c) Section 185 should be strictly construed.

(d) Legislative intent to exclude health care agreements from items subject to DST is clear,
especially in the light of the amendments made in the DST law in 2002.

(e) Assuming arguendo that petitioner’s agreements are contracts of indemnity, they are
not those contemplated under Section 185.

(f) Assuming arguendo that petitioner’s agreements are akin to health insurance, health
insurance is not covered by Section 185.

(g) The agreements do not fall under the phrase "other branch of insurance" mentioned in
Section 185.

(h) The June 12, 2008 decision should only apply prospectively.

(i) Petitioner availed of the tax amnesty benefits under RA5 9480 for the taxable year 2005
and all prior years. Therefore, the questioned assessments on the DST are now rendered
moot and academic.6

Oral arguments were held in Baguio City on April 22, 2009. The parties submitted their
memoranda on June 8, 2009.

In its motion for reconsideration, petitioner reveals for the first time that it availed of a tax amnesty
under RA 94807(also known as the "Tax Amnesty Act of 2007") by fully paying the amount
of P5,127,149.08 representing 5% of its net worth as of the year ending December 31, 2005.8

We find merit in petitioner’s motion for reconsideration.

Petitioner was formally registered and incorporated with the Securities and Exchange Commission
on June 30, 1987.9 It is engaged in the dispensation of the following medical services to individuals
who enter into health care agreements with it:

Preventive medical services such as periodic monitoring of health problems, family planning
counseling, consultation and advices on diet, exercise and other healthy habits, and immunization;

Diagnostic medical services such as routine physical examinations, x-rays, urinalysis, fecalysis,
complete blood count, and the like and

Curative medical services which pertain to the performing of other remedial and therapeutic
processes in the event of an injury or sickness on the part of the enrolled member.10
Individuals enrolled in its health care program pay an annual membership fee. Membership is on
a year-to-year basis. The medical services are dispensed to enrolled members in a hospital or clinic
owned, operated or accredited by petitioner, through physicians, medical and dental practitioners
under contract with it. It negotiates with such health care practitioners regarding payment schemes,
financing and other procedures for the delivery of health services. Except in cases of emergency,
the professional services are to be provided only by petitioner's physicians,i.e. those directly
employed by it11 or whose services are contracted by it.12 Petitioner also provides hospital services
such as room and board accommodation, laboratory services, operating rooms, x-ray facilities and
general nursing care.13 If and when a member avails of the benefits under the agreement, petitioner
pays the participating physicians and other health care providers for the services rendered, at pre-
agreed rates.14

To avail of petitioner’s health care programs, the individual members are required to sign and
execute a standard health care agreement embodying the terms and conditions for the provision of
the health care services. The same agreement contains the various health care services that can be
engaged by the enrolled member, i.e., preventive, diagnostic and curative medical services. Except
for the curative aspect of the medical service offered, the enrolled member may actually make use
of the health care services being offered by petitioner at any time.

Health Maintenance Organizations Are Not Engaged In The Insurance Business

We said in our June 12, 2008 decision that it is irrelevant that petitioner is an HMO and not an
insurer because its agreements are treated as insurance contracts and the DST is not a tax on the
business but an excise on the privilege, opportunity or facility used in the transaction of the
business.15

Petitioner, however, submits that it is of critical importance to characterize the business it is


engaged in, that is, to determine whether it is an HMO or an insurance company, as this distinction
is indispensable in turn to the issue of whether or not it is liable for DST on its health care
agreements.16

A second hard look at the relevant law and jurisprudence convinces the Court that the arguments
of petitioner are meritorious.

Section 185 of the National Internal Revenue Code of 1997 (NIRC of 1997) provides:

Section 185. Stamp tax on fidelity bonds and other insurance policies. – On all policies of
insurance or bonds or obligations of the nature of indemnity for loss, damage, or liability made
or renewed by any person, association or company or corporation transacting the business
of accident, fidelity, employer’s liability, plate, glass, steam boiler, burglar, elevator, automatic
sprinkler, or other branch of insurance (except life, marine, inland, and fire insurance), and
all bonds, undertakings, or recognizances, conditioned for the performance of the duties of any
office or position, for the doing or not doing of anything therein specified, and on all obligations
guaranteeing the validity or legality of any bond or other obligations issued by any province, city,
municipality, or other public body or organization, and on all obligations guaranteeing the title to
any real estate, or guaranteeing any mercantile credits, which may be made or renewed by any
such person, company or corporation, there shall be collected a documentary stamp tax of fifty
centavos (P0.50) on each four pesos (P4.00), or fractional part thereof, of the premium charged.
(Emphasis supplied)

It is a cardinal rule in statutory construction that no word, clause, sentence, provision or part of a
statute shall be considered surplusage or superfluous, meaningless, void and insignificant. To this
end, a construction which renders every word operative is preferred over that which makes some
words idle and nugatory.17 This principle is expressed in the maxim Ut magis valeat quam
pereat, that is, we choose the interpretation which gives effect to the whole of the statute – its
every word.18

From the language of Section 185, it is evident that two requisites must concur before the DST
can apply, namely: (1) the document must be a policy of insurance or an obligation in the nature
of indemnity and (2) the maker should be transacting the business of accident, fidelity,
employer’s liability, plate, glass, steam boiler, burglar, elevator, automatic sprinkler, or other
branch of insurance (except life, marine, inland, and fire insurance).

Petitioner is admittedly an HMO. Under RA 7875 (or "The National Health Insurance Act of
1995"), an HMO is "an entity that provides, offers or arranges for coverage of designated health
services needed by plan members for a fixed prepaid premium."19 The payments do not vary with
the extent, frequency or type of services provided.

The question is: was petitioner, as an HMO, engaged in the business of insurance during the
pertinent taxable years? We rule that it was not.

Section 2 (2) of PD20 1460 (otherwise known as the Insurance Code) enumerates what constitutes
"doing an insurance business" or "transacting an insurance business:"

a) making or proposing to make, as insurer, any insurance contract;

b) making or proposing to make, as surety, any contract of suretyship as a vocation and not
as merely incidental to any other legitimate business or activity of the surety;

c) doing any kind of business, including a reinsurance business, specifically recognized as


constituting the doing of an insurance business within the meaning of this Code;

d) doing or proposing to do any business in substance equivalent to any of the foregoing in


a manner designed to evade the provisions of this Code.

In the application of the provisions of this Code, the fact that no profit is derived from the making
of insurance contracts, agreements or transactions or that no separate or direct consideration is
received therefore, shall not be deemed conclusive to show that the making thereof does not
constitute the doing or transacting of an insurance business.

Various courts in the United States, whose jurisprudence has a persuasive effect on our
decisions,21 have determined that HMOs are not in the insurance business. One test that they have
applied is whether the assumption of risk and indemnification of loss (which are elements of an
insurance business) are the principal object and purpose of the organization or whether they are
merely incidental to its business. If these are the principal objectives, the business is that of
insurance. But if they are merely incidental and service is the principal purpose, then the business
is not insurance.

Applying the "principal object and purpose test,"22 there is significant American case law
supporting the argument that a corporation (such as an HMO, whether or not organized for profit),
whose main object is to provide the members of a group with health services, is not engaged in the
insurance business.

The rule was enunciated in Jordan v. Group Health Association23 wherein the Court of Appeals of
the District of Columbia Circuit held that Group Health Association should not be considered as
engaged in insurance activities since it was created primarily for the distribution of health care
services rather than the assumption of insurance risk.

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

That an incidental element of risk distribution or assumption may be present should not outweigh
all other factors. If attention is focused only on that feature, the line between insurance or
indemnity and other types of legal arrangement and economic function becomes faint, if not
extinct. This is especially true when the contract is for the sale of goods or services on contingency.
But obviously it was not the purpose of the insurance statutes to regulate all arrangements for
assumption or distribution of risk. That view would cause them to engulf practically all contracts,
particularly conditional sales and contingent service agreements. The fallacy is in looking only
at the risk element, to the exclusion of all others present or their subordination to it. The
question turns, not on whether risk is involved or assumed, but on whether that or something
else to which it is related in the particular plan is its principal object purpose. 24 (Emphasis
supplied)

In California Physicians’ Service v. Garrison,25 the California court felt that, after scrutinizing the
plan of operation as a whole of the corporation, it was service rather than indemnity which stood
as its principal purpose.

There is another and more compelling reason for holding that the service is not engaged in the
insurance business.Absence or presence of assumption of risk or peril is not the sole test to be
applied in determining its status. The question, more broadly, is whether, looking at the plan
of operation as a whole, ‘service’ rather than ‘indemnity’ is its principal object and
purpose. Certainly the objects and purposes of the corporation organized and maintained by the
California physicians have a wide scope in the field of social service. Probably there is no more
impelling need than that of adequate medical care on a voluntary, low-cost basis for persons
of small income. The medical profession unitedly is endeavoring to meet that need.
Unquestionably this is ‘service’ of a high order and not ‘indemnity.’26 (Emphasis supplied)

American courts have pointed out that the main difference between an HMO and an insurance
company is that HMOs undertake to provide or arrange for the provision of medical services
through participating physicians while insurance companies simply undertake to indemnify the
insured for medical expenses incurred up to a pre-agreed limit. Somerset Orthopedic Associates,
P.A. v. Horizon Blue Cross and Blue Shield of New Jersey27 is clear on this point:

The basic distinction between medical service corporations and ordinary health and accident
insurers is that the former undertake to provide prepaid medical services through participating
physicians, thus relieving subscribers of any further financial burden, while the latter only
undertake to indemnify an insured for medical expenses up to, but not beyond, the schedule of
rates contained in the policy.

xxx xxx xxx

The primary purpose of a medical service corporation, however, is an undertaking to provide


physicians who will render services to subscribers on a prepaid basis. Hence, if there are no
physicians participating in the medical service corporation’s plan, not only will the
subscribers be deprived of the protection which they might reasonably have expected would
be provided, but the corporation will, in effect, be doing business solely as a health and
accident indemnity insurer without having qualified as such and rendering itself subject to the
more stringent financial requirements of the General Insurance Laws….

A participating provider of health care services is one who agrees in writing to render health care
services to or for persons covered by a contract issued by health service corporation in return for
which the health service corporation agrees to make payment directly to the participating
provider.28 (Emphasis supplied)

Consequently, the mere presence of risk would be insufficient to override the primary purpose of
the business to provide medical services as needed, with payment made directly to the provider of
these services.29 In short, even if petitioner assumes the risk of paying the cost of these services
even if significantly more than what the member has prepaid, it nevertheless cannot be considered
as being engaged in the insurance business.

By the same token, any indemnification resulting from the payment for services rendered in case
of emergency by non-participating health providers would still be incidental to petitioner’s purpose
of providing and arranging for health care services and does not transform it into an insurer. To
fulfill its obligations to its members under the agreements, petitioner is required to set up a system
and the facilities for the delivery of such medical services. This indubitably shows that
indemnification is not its sole object.

In fact, a substantial portion of petitioner’s services covers preventive and diagnostic medical
services intended to keep members from developing medical conditions or diseases.30 As an HMO,
it is its obligation to maintain the good health of its members. Accordingly, its health care
programs are designed to prevent or to minimize thepossibility of any assumption of risk on
its part. Thus, its undertaking under its agreements is not to indemnify its members against any
loss or damage arising from a medical condition but, on the contrary, to provide the health and
medical services needed to prevent such loss or damage.31

Overall, petitioner appears to provide insurance-type benefits to its members (with respect to
its curative medical services), but these are incidental to the principal activity of providing them
medical care. The "insurance-like" aspect of petitioner’s business is miniscule compared to its
noninsurance activities. Therefore, since it substantially provides health care services rather than
insurance services, it cannot be considered as being in the insurance business.

It is important to emphasize that, in adopting the "principal purpose test" used in the above-quoted
U.S. cases, we are not saying that petitioner’s operations are identical in every respect to those of
the HMOs or health providers which were parties to those cases. What we are stating is that, for
the purpose of determining what "doing an insurance business" means, we have to scrutinize the
operations of the business as a whole and not its mere components. This is of course only prudent
and appropriate, taking into account the burdensome and strict laws, rules and regulations
applicable to insurers and other entities engaged in the insurance business. Moreover, we are also
not unmindful that there are other American authorities who have found particular HMOs to be
actually engaged in insurance activities.32

Lastly, it is significant that petitioner, as an HMO, is not part of the insurance industry. This is
evident from the fact that it is not supervised by the Insurance Commission but by the Department
of Health.33 In fact, in a letter dated September 3, 2000, the Insurance Commissioner confirmed
that petitioner is not engaged in the insurance business. This determination of the commissioner
must be accorded great weight. It is well-settled that the interpretation of an administrative agency
which is tasked to implement a statute is accorded great respect and ordinarily controls the
interpretation of laws by the courts. The reason behind this rule was explained in Nestle
Philippines, Inc. v. Court of Appeals:34

The rationale for this rule relates not only to the emergence of the multifarious needs of a modern
or modernizing society and the establishment of diverse administrative agencies for addressing
and satisfying those needs; it also relates to the accumulation of experience and growth of
specialized capabilities by the administrative agency charged with implementing a particular
statute. In Asturias Sugar Central, Inc. vs. Commissioner of Customs,35 the Court stressed that
executive officials are presumed to have familiarized themselves with all the considerations
pertinent to the meaning and purpose of the law, and to have formed an independent, conscientious
and competent expert opinion thereon. The courts give much weight to the government agency
officials charged with the implementation of the law, their competence, expertness, experience and
informed judgment, and the fact that they frequently are the drafters of the law they interpret.36

A Health Care Agreement Is Not An Insurance Contract Contemplated Under Section 185
Of The NIRC of 1997

Section 185 states that DST is imposed on "all policies of insurance… or obligations of the nature
of indemnity for loss, damage, or liability…." In our decision dated June 12, 2008, we ruled that
petitioner’s health care agreements are contracts of indemnity and are therefore insurance
contracts:

It is … incorrect to say that the health care agreement is not based on loss or damage because,
under the said agreement, petitioner assumes the liability and indemnifies its member for hospital,
medical and related expenses (such as professional fees of physicians). The term "loss or damage"
is broad enough to cover the monetary expense or liability a member will incur in case of illness
or injury.

Under the health care agreement, the rendition of hospital, medical and professional services to
the member in case of sickness, injury or emergency or his availment of so-called "out-patient
services" (including physical examination, x-ray and laboratory tests, medical consultations,
vaccine administration and family planning counseling) is the contingent event which gives rise to
liability on the part of the member. In case of exposure of the member to liability, he would be
entitled to indemnification by petitioner.

Furthermore, the fact that petitioner must relieve its member from liability by paying for expenses
arising from the stipulated contingencies belies its claim that its services are prepaid. The expenses
to be incurred by each member cannot be predicted beforehand, if they can be predicted at all.
Petitioner assumes the risk of paying for the costs of the services even if they are significantly and
substantially more than what the member has "prepaid." Petitioner does not bear the costs alone
but distributes or spreads them out among a large group of persons bearing a similar risk, that is,
among all the other members of the health care program. This is insurance.37

We reconsider. We shall quote once again the pertinent portion of Section 185:
Section 185. Stamp tax on fidelity bonds and other insurance policies. – On all policies of
insurance or bonds or obligations of the nature of indemnity for loss, damage, or
liability made or renewed by any person, association or company or corporation transacting the
business of accident, fidelity, employer’s liability, plate, glass, steam boiler, burglar, elevator,
automatic sprinkler, or other branch of insurance (except life, marine, inland, and fire insurance),
xxxx (Emphasis supplied)

In construing this provision, we should be guided by the principle that tax statutes are strictly
construed against the taxing authority.38 This is because taxation is a destructive power which
interferes with the personal and property rights of the people and takes from them a portion of their
property for the support of the government.39 Hence, tax laws may not be extended by implication
beyond the clear import of their language, nor their operation enlarged so as to embrace matters
not specifically provided.40

We are aware that, in Blue Cross and Philamcare, the Court pronounced that a health care
agreement is in the nature of non-life insurance, which is primarily a contract of indemnity.
However, those cases did not involve the interpretation of a tax provision. Instead, they dealt with
the liability of a health service provider to a member under the terms of their health care agreement.
Such contracts, as contracts of adhesion, are liberally interpreted in favor of the member and
strictly against the HMO. For this reason, we reconsider our ruling that Blue
Cross andPhilamcare are applicable here.

Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement whereby one
undertakes for a consideration to indemnify another against loss, damage or liability arising from
an unknown or contingent event. An insurance contract exists where the following elements
concur:

1. The insured has an insurable interest;

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

3. The insurer assumes the risk;

4. Such assumption of risk is part of a general scheme to distribute actual losses among a
large group of persons bearing a similar risk and

5. In consideration of the insurer’s promise, the insured pays a premium.41

Do the agreements between petitioner and its members possess all these elements? They do not.

First. In our jurisdiction, a commentator of our insurance laws has pointed out that, even if a
contract contains all the elements of an insurance contract, if its primary purpose is the rendering
of service, it is not a contract of insurance:

It does not necessarily follow however, that a contract containing all the four elements mentioned
above would be an insurance contract. The primary purpose of the parties in making the
contract may negate the existence of an insurance contract. For example, a law firm which
enters into contracts with clients whereby in consideration of periodical payments, it promises to
represent such clients in all suits for or against them, is not engaged in the insurance business. Its
contracts are simply for the purpose of rendering personal services. On the other hand, a contract
by which a corporation, in consideration of a stipulated amount, agrees at its own expense to defend
a physician against all suits for damages for malpractice is one of insurance, and the corporation
will be deemed as engaged in the business of insurance. Unlike the lawyer’s retainer contract, the
essential purpose of such a contract is not to render personal services, but to indemnify against
loss and damage resulting from the defense of actions for malpractice.42 (Emphasis supplied)

Second. Not all the necessary elements of a contract of insurance are present in petitioner’s
agreements. To begin with, there is no loss, damage or liability on the part of the member that
should be indemnified by petitioner as an HMO. Under the agreement, the member pays petitioner
a predetermined consideration in exchange for the hospital, medical and professional services
rendered by the petitioner’s physician or affiliated physician to him. In case of availment by a
member of the benefits under the agreement, petitioner does not reimburse or indemnify the
member as the latter does not pay any third party. Instead, it is the petitioner who pays the
participating physicians and other health care providers for the services rendered at pre-agreed
rates. The member does not make any such payment.

In other words, there is nothing in petitioner's agreements that gives rise to a monetary liability on
the part of the member to any third party-provider of medical services which might in turn
necessitate indemnification from petitioner. The terms "indemnify" or "indemnity" presuppose that
a liability or claim has already been incurred. There is no indemnity precisely because the member
merely avails of medical services to be paid or already paid in advance at a pre-agreed price under
the agreements.

Third. According to the agreement, a member can take advantage of the bulk of the benefits
anytime, e.g. laboratory services, x-ray, routine annual physical examination and consultations,
vaccine administration as well as family planning counseling, even in the absence of any peril, loss
or damage on his or her part.

Fourth. In case of emergency, petitioner is obliged to reimburse the member who receives care
from a non-participating physician or hospital. However, this is only a very minor part of the list
of services available. The assumption of the expense by petitioner is not confined to the happening
of a contingency but includes incidents even in the absence of illness or injury.

In Michigan Podiatric Medical Association v. National Foot Care Program, Inc.,43 although the
health care contracts called for the defendant to partially reimburse a subscriber for treatment
received from a non-designated doctor, this did not make defendant an insurer. Citing Jordan, the
Court determined that "the primary activity of the defendant (was) the provision of podiatric
services to subscribers in consideration of prepayment for such services."44 Since indemnity of the
insured was not the focal point of the agreement but the extension of medical services to the
member at an affordable cost, it did not partake of the nature of a contract of insurance.
Fifth. Although risk is a primary element of an insurance contract, it is not necessarily true that
risk alone is sufficient to establish it. Almost anyone who undertakes a contractual obligation
always bears a certain degree of financial risk. Consequently, there is a need to distinguish prepaid
service contracts (like those of petitioner) from the usual insurance contracts.

Indeed, petitioner, as an HMO, undertakes a business risk when it offers to provide health services:
the risk that it might fail to earn a reasonable return on its investment. But it is not the risk of the
type peculiar only to insurance companies. Insurance risk, also known as actuarial risk, is the risk
that the cost of insurance claims might be higher than the premiums paid. The amount of premium
is calculated on the basis of assumptions made relative to the insured.45

However, assuming that petitioner’s commitment to provide medical services to its members can
be construed as an acceptance of the risk that it will shell out more than the prepaid fees, it still
will not qualify as an insurance contract because petitioner’s objective is to provide medical
services at reduced cost, not to distribute risk like an insurer.

In sum, an examination of petitioner’s agreements with its members leads us to conclude that it is
not an insurance contract within the context of our Insurance Code.

There Was No Legislative Intent To Impose DST On Health Care Agreements Of HMOs

Furthermore, militating in convincing fashion against the imposition of DST on petitioner’s health
care agreements under Section 185 of the NIRC of 1997 is the provision’s legislative history. The
text of Section 185 came into U.S. law as early as 1904 when HMOs and health care agreements
were not even in existence in this jurisdiction. It was imposed under Section 116, Article XI of Act
No. 1189 (otherwise known as the "Internal Revenue Law of 1904")46enacted on July 2, 1904 and
became effective on August 1, 1904. Except for the rate of tax, Section 185 of the NIRC of 1997
is a verbatim reproduction of the pertinent portion of Section 116, to wit:

ARTICLE XI
Stamp Taxes on Specified Objects

Section 116. There shall be levied, collected, and paid for and in respect to the several bonds,
debentures, or certificates of stock and indebtedness, and other documents, instruments, matters,
and things mentioned and described in this section, or for or in respect to the vellum, parchment,
or paper upon which such instrument, matters, or things or any of them shall be written or printed
by any person or persons who shall make, sign, or issue the same, on and after January first,
nineteen hundred and five, the several taxes following:

xxx xxx xxx

Third xxx (c) on all policies of insurance or bond or obligation of the nature of indemnity for
loss, damage, or liability made or renewed by any person, association, company, or
corporation transacting the business of accident, fidelity, employer’s liability, plate glass,
steam boiler, burglar, elevator, automatic sprinkle, or other branch of insurance (except life,
marine, inland, and fire insurance) xxxx (Emphasis supplied)
On February 27, 1914, Act No. 2339 (the Internal Revenue Law of 1914) was enacted revising
and consolidating the laws relating to internal revenue. The aforecited pertinent portion of Section
116, Article XI of Act No. 1189 was completely reproduced as Section 30 (l), Article III of Act
No. 2339. The very detailed and exclusive enumeration of items subject to DST was thus retained.

On December 31, 1916, Section 30 (l), Article III of Act No. 2339 was again reproduced as Section
1604 (l), Article IV of Act No. 2657 (Administrative Code). Upon its amendment on March 10,
1917, the pertinent DST provision became Section 1449 (l) of Act No. 2711, otherwise known as
the Administrative Code of 1917.

Section 1449 (1) eventually became Sec. 222 of Commonwealth Act No. 466 (the NIRC of 1939),
which codified all the internal revenue laws of the Philippines. In an amendment introduced by
RA 40 on October 1, 1946, the DST rate was increased but the provision remained substantially
the same.

Thereafter, on June 3, 1977, the same provision with the same DST rate was reproduced in PD
1158 (NIRC of 1977) as Section 234. Under PDs 1457 and 1959, enacted on June 11, 1978 and
October 10, 1984 respectively, the DST rate was again increased.1avvphi1

Effective January 1, 1986, pursuant to Section 45 of PD 1994, Section 234 of the NIRC of 1977
was renumbered as Section 198. And under Section 23 of EO47 273 dated July 25, 1987, it was
again renumbered and became Section 185.

On December 23, 1993, under RA 7660, Section 185 was amended but, again, only with respect
to the rate of tax.

Notwithstanding the comprehensive amendment of the NIRC of 1977 by RA 8424 (or the NIRC
of 1997), the subject legal provision was retained as the present Section 185. In 2004, amendments
to the DST provisions were introduced by RA 924348 but Section 185 was untouched.

On the other hand, the concept of an HMO was introduced in the Philippines with the formation
of Bancom Health Care Corporation in 1974. The same pioneer HMO was later reorganized and
renamed Integrated Health Care Services, Inc. (or Intercare). However, there are those who claim
that Health Maintenance, Inc. is the HMO industry pioneer, having set foot in the Philippines as
early as 1965 and having been formally incorporated in 1991. Afterwards, HMOs proliferated
quickly and currently, there are 36 registered HMOs with a total enrollment of more than 2
million.49

We can clearly see from these two histories (of the DST on the one hand and HMOs on the other)
that when the law imposing the DST was first passed, HMOs were yet unknown in the Philippines.
However, when the various amendments to the DST law were enacted, they were already in
existence in the Philippines and the term had in fact already been defined by RA 7875. If it had
been the intent of the legislature to impose DST on health care agreements, it could have done so
in clear and categorical terms. It had many opportunities to do so. But it did not. The fact that the
NIRC contained no specific provision on the DST liability of health care agreements of HMOs at
a time they were already known as such, belies any legislative intent to impose it on them. As a
matter of fact, petitioner was assessed its DST liability only on January 27, 2000, after more
than a decade in the business as an HMO.50

Considering that Section 185 did not change since 1904 (except for the rate of tax), it would be
safe to say that health care agreements were never, at any time, recognized as insurance contracts
or deemed engaged in the business of insurance within the context of the provision.

The Power To Tax Is Not The Power To Destroy

As a general rule, the power to tax is an incident of sovereignty and is unlimited in its range,
acknowledging in its very nature no limits, so that security against its abuse is to be found only in
the responsibility of the legislature which imposes the tax on the constituency who is to pay it.51 So
potent indeed is the power that it was once opined that "the power to tax involves the power to
destroy."52

Petitioner claims that the assessed DST to date which amounts to P376 million53 is way beyond its
net worth ofP259 million.54 Respondent never disputed these assertions. Given the realities on the
ground, imposing the DST on petitioner would be highly oppressive. It is not the purpose of the
government to throttle private business. On the contrary, the government ought to encourage
private enterprise.55 Petitioner, just like any concern organized for a lawful economic activity, has
a right to maintain a legitimate business.56 As aptly held in Roxas, et al. v. CTA, et al.:57

The power of taxation is sometimes called also the power to destroy. Therefore it should be
exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be
exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden
egg."58

Legitimate enterprises enjoy the constitutional protection not to be taxed out of existence.
Incurring losses because of a tax imposition may be an acceptable consequence but killing the
business of an entity is another matter and should not be allowed. It is counter-productive and
ultimately subversive of the nation’s thrust towards a better economy which will ultimately benefit
the majority of our people.59

Petitioner’s Tax Liability Was Extinguished Under The Provisions Of RA 9840

Petitioner asserts that, regardless of the arguments, the DST assessment for taxable years 1996 and
1997 became moot and academic60 when it availed of the tax amnesty under RA 9480 on
December 10, 2007. It paidP5,127,149.08 representing 5% of its net worth as of the year ended
December 31, 2005 and complied with all requirements of the tax amnesty. Under Section 6(a) of
RA 9480, it is entitled to immunity from payment of taxes as well as additions thereto, and the
appurtenant civil, criminal or administrative penalties under the 1997 NIRC, as amended, arising
from the failure to pay any and all internal revenue taxes for taxable year 2005 and prior years.61

Far from disagreeing with petitioner, respondent manifested in its memorandum:


Section 6 of [RA 9840] provides that availment of tax amnesty entitles a taxpayer to immunity
from payment of the tax involved, including the civil, criminal, or administrative penalties
provided under the 1997 [NIRC], for tax liabilities arising in 2005 and the preceding years.

In view of petitioner’s availment of the benefits of [RA 9840], and without conceding the merits
of this case as discussed above, respondent concedes that such tax amnesty extinguishes the
tax liabilities of petitioner. This admission, however, is not meant to preclude a revocation of the
amnesty granted in case it is found to have been granted under circumstances amounting to tax
fraud under Section 10 of said amnesty law.62 (Emphasis supplied)

Furthermore, we held in a recent case that DST is one of the taxes covered by the tax amnesty
program under RA 9480.63 There is no other conclusion to draw than that petitioner’s liability for
DST for the taxable years 1996 and 1997 was totally extinguished by its availment of the tax
amnesty under RA 9480.

Is The Court Bound By A Minute Resolution In Another Case?

Petitioner raises another interesting issue in its motion for reconsideration: whether this Court is
bound by the ruling of the CA64 in CIR v. Philippine National Bank65 that a health care agreement
of Philamcare Health Systems is not an insurance contract for purposes of the DST.

In support of its argument, petitioner cites the August 29, 2001 minute resolution of this Court
dismissing the appeal in Philippine National Bank (G.R. No. 148680).66 Petitioner argues that the
dismissal of G.R. No. 148680 by minute resolution was a judgment on the merits; hence, the Court
should apply the CA ruling there that a health care agreement is not an insurance contract.

It is true that, although contained in a minute resolution, our dismissal of the petition was a
disposition of the merits of the case. When we dismissed the petition, we effectively affirmed the
CA ruling being questioned. As a result, our ruling in that case has already become final. 67 When
a minute resolution denies or dismisses a petition for failure to comply with formal and substantive
requirements, the challenged decision, together with its findings of fact and legal conclusions, are
deemed sustained.68 But what is its effect on other cases?

With respect to the same subject matter and the same issues concerning the same parties, it
constitutes res judicata.69 However, if other parties or another subject matter (even with the same
parties and issues) is involved, the minute resolution is not binding precedent. Thus, in CIR v.
Baier-Nickel,70 the Court noted that a previous case,CIR v. Baier-Nickel71 involving the same
parties and the same issues, was previously disposed of by the Court thru a minute resolution
dated February 17, 2003 sustaining the ruling of the CA. Nonetheless, the Court ruled thatthe
previous case "ha(d) no bearing" on the latter case because the two cases involved different
subject matters as they were concerned with the taxable income of different taxable years.72

Besides, there are substantial, not simply formal, distinctions between a minute resolution and a
decision. The constitutional requirement under the first paragraph of Section 14, Article VIII of
the Constitution that the facts and the law on which the judgment is based must be expressed
clearly and distinctly applies only to decisions, not to minute resolutions. A minute resolution is
signed only by the clerk of court by authority of the justices, unlike a decision. It does not require
the certification of the Chief Justice. Moreover, unlike decisions, minute resolutions are not
published in the Philippine Reports. Finally, the proviso of Section 4(3) of Article VIII speaks of
a decision.73Indeed, as a rule, this Court lays down doctrines or principles of law which constitute
binding precedent in a decision duly signed by the members of the Court and certified by the Chief
Justice.

Accordingly, since petitioner was not a party in G.R. No. 148680 and since petitioner’s liability
for DST on its health care agreement was not the subject matter of G.R. No. 148680, petitioner
cannot successfully invoke the minute resolution in that case (which is not even binding precedent)
in its favor. Nonetheless, in view of the reasons already discussed, this does not detract in any way
from the fact that petitioner’s health care agreements are not subject to DST.

A Final Note

Taking into account that health care agreements are clearly not within the ambit of Section 185 of
the NIRC and there was never any legislative intent to impose the same on HMOs like petitioner,
the same should not be arbitrarily and unjustly included in its coverage.

It is a matter of common knowledge that there is a great social need for adequate medical services
at a cost which the average wage earner can afford. HMOs arrange, organize and manage health
care treatment in the furtherance of the goal of providing a more efficient and inexpensive health
care system made possible by quantity purchasing of services and economies of scale. They offer
advantages over the pay-for-service system (wherein individuals are charged a fee each time they
receive medical services), including the ability to control costs. They protect their members from
exposure to the high cost of hospitalization and other medical expenses brought about by a
fluctuating economy. Accordingly, they play an important role in society as partners of the State
in achieving its constitutional mandate of providing its citizens with affordable health services.

The rate of DST under Section 185 is equivalent to 12.5% of the premium charged.74 Its imposition
will elevate the cost of health care services. This will in turn necessitate an increase in the
membership fees, resulting in either placing health services beyond the reach of the ordinary wage
earner or driving the industry to the ground. At the end of the day, neither side wins, considering
the indispensability of the services offered by HMOs.

WHEREFORE, the motion for reconsideration is GRANTED. The August 16, 2004 decision of
the Court of Appeals in CA-G.R. SP No. 70479 is REVERSED and SET ASIDE. The 1996 and
1997 deficiency DST assessment against petitioner is hereby CANCELLED and SET
ASIDE. Respondent is ordered to desist from collecting the said tax.

No costs.

SO ORDERED.

G.R. No. 166006 March 14, 2008


PLANTERS PRODUCTS, INC., Petitioner,
vs.
FERTIPHIL CORPORATION, Respondent.

DECISION

REYES, R.T., J.:

THE Regional Trial Courts (RTC) have the authority and jurisdiction to consider the
constitutionality of statutes, executive orders, presidential decrees and other issuances. The
Constitution vests that power not only in the Supreme Court but in all Regional Trial Courts.

The principle is relevant in this petition for review on certiorari of the Decision1 of the Court of
Appeals (CA) affirming with modification that of the RTC in Makati City,2 finding petitioner
Planters Products, Inc. (PPI) liable to private respondent Fertiphil Corporation (Fertiphil) for the
levies it paid under Letter of Instruction (LOI) No. 1465.

The Facts

Petitioner PPI and private respondent Fertiphil are private corporations incorporated under
Philippine laws.3 They are both engaged in the importation and distribution of fertilizers, pesticides
and agricultural chemicals.

On June 3, 1985, then President Ferdinand Marcos, exercising his legislative powers, issued LOI
No. 1465 which provided, among others, for the imposition of a capital recovery component (CRC)
on the domestic sale of all grades of fertilizers in the Philippines.4 The LOI provides:

3. The Administrator of the Fertilizer Pesticide Authority to include in its fertilizer pricing formula
a capital contribution component of not less than P10 per bag. This capital contribution shall be
collected until adequate capital is raised to make PPI viable. Such capital contribution shall be
applied by FPA to all domestic sales of fertilizers in the Philippines.5 (Underscoring supplied)

Pursuant to the LOI, Fertiphil paid P10 for every bag of fertilizer it sold in the domestic market to
the Fertilizer and Pesticide Authority (FPA). FPA then remitted the amount collected to the Far
East Bank and Trust Company, the depositary bank of PPI. Fertiphil paid P6,689,144 to FPA from
July 8, 1985 to January 24, 1986.6

After the 1986 Edsa Revolution, FPA voluntarily stopped the imposition of the P10 levy. With the
return of democracy, Fertiphil demanded from PPI a refund of the amounts it paid under LOI No.
1465, but PPI refused to accede to the demand.7

Fertiphil filed a complaint for collection and damages8 against FPA and PPI with the RTC in
Makati. It questioned the constitutionality of LOI No. 1465 for being unjust, unreasonable,
oppressive, invalid and an unlawful imposition that amounted to a denial of due process of
law.9 Fertiphil alleged that the LOI solely favored PPI, a privately owned corporation, which used
the proceeds to maintain its monopoly of the fertilizer industry.
In its Answer,10 FPA, through the Solicitor General, countered that the issuance of LOI No. 1465
was a valid exercise of the police power of the State in ensuring the stability of the fertilizer
industry in the country. It also averred that Fertiphil did not sustain any damage from the LOI
because the burden imposed by the levy fell on the ultimate consumer, not the seller.

RTC Disposition

On November 20, 1991, the RTC rendered judgment in favor of Fertiphil, disposing as follows:

WHEREFORE, in view of the foregoing, the Court hereby renders judgment in favor of the
plaintiff and against the defendant Planters Product, Inc., ordering the latter to pay the former:

1) the sum of P6,698,144.00 with interest at 12% from the time of judicial demand;

2) the sum of P100,000 as attorney’s fees;

3) the cost of suit.

SO ORDERED.11

Ruling that the imposition of the P10 CRC was an exercise of the State’s inherent power of
taxation, the RTC invalidated the levy for violating the basic principle that taxes can only be levied
for public purpose, viz.:

It is apparent that the imposition of P10 per fertilizer bag sold in the country by LOI 1465 is
purportedly in the exercise of the power of taxation. It is a settled principle that the power of
taxation by the state is plenary. Comprehensive and supreme, the principal check upon its abuse
resting in the responsibility of the members of the legislature to their constituents. However, there
are two kinds of limitations on the power of taxation: the inherent limitations and the constitutional
limitations.

One of the inherent limitations is that a tax may be levied only for public purposes:

The power to tax can be resorted to only for a constitutionally valid public purpose. By the same
token, taxes may not be levied for purely private purposes, for building up of private fortunes, or
for the redress of private wrongs. They cannot be levied for the improvement of private property,
or for the benefit, and promotion of private enterprises, except where the aid is incident to the
public benefit. It is well-settled principle of constitutional law that no general tax can be levied
except for the purpose of raising money which is to be expended for public use. Funds cannot be
exacted under the guise of taxation to promote a purpose that is not of public interest. Without
such limitation, the power to tax could be exercised or employed as an authority to destroy the
economy of the people. A tax, however, is not held void on the ground of want of public interest
unless the want of such interest is clear. (71 Am. Jur. pp. 371-372)

In the case at bar, the plaintiff paid the amount of P6,698,144.00 to the Fertilizer and Pesticide
Authority pursuant to the P10 per bag of fertilizer sold imposition under LOI 1465 which, in turn,
remitted the amount to the defendant Planters Products, Inc. thru the latter’s depository bank, Far
East Bank and Trust Co. Thus, by virtue of LOI 1465 the plaintiff, Fertiphil Corporation, which is
a private domestic corporation, became poorer by the amount ofP6,698,144.00 and the defendant,
Planters Product, Inc., another private domestic corporation, became richer by the amount
of P6,698,144.00.

Tested by the standards of constitutionality as set forth in the afore-quoted jurisprudence, it is quite
evident that LOI 1465 insofar as it imposes the amount of P10 per fertilizer bag sold in the country
and orders that the said amount should go to the defendant Planters Product, Inc. is unlawful
because it violates the mandate that a tax can be levied only for a public purpose and not to benefit,
aid and promote a private enterprise such as Planters Product, Inc.12

PPI moved for reconsideration but its motion was denied.13 PPI then filed a notice of appeal with
the RTC but it failed to pay the requisite appeal docket fee. In a separate but related proceeding,
this Court14 allowed the appeal of PPI and remanded the case to the CA for proper disposition.

CA Decision

On November 28, 2003, the CA handed down its decision affirming with modification that of the
RTC, with the following fallo:

IN VIEW OF ALL THE FOREGOING, the decision appealed from is hereby AFFIRMED, subject
to the MODIFICATION that the award of attorney’s fees is hereby DELETED.15

In affirming the RTC decision, the CA ruled that the lis mota of the complaint for collection was
the constitutionality of LOI No. 1465, thus:

The question then is whether it was proper for the trial court to exercise its power to judicially
determine the constitutionality of the subject statute in the instant case.

As a rule, where the controversy can be settled on other grounds, the courts will not resolve the
constitutionality of a law (Lim v. Pacquing, 240 SCRA 649 [1995]). The policy of the courts is to
avoid ruling on constitutional questions and to presume that the acts of political departments are
valid, absent a clear and unmistakable showing to the contrary.

However, the courts are not precluded from exercising such power when the following requisites
are obtaining in a controversy before it: First, there must be before the court an actual case calling
for the exercise of judicial review. Second, the question must be ripe for adjudication. Third, the
person challenging the validity of the act must have standing to challenge. Fourth, the question of
constitutionality must have been raised at the earliest opportunity; and lastly, the issue of
constitutionality must be the very lis mota of the case (Integrated Bar of the Philippines v. Zamora,
338 SCRA 81 [2000]).

Indisputably, the present case was primarily instituted for collection and damages. However, a
perusal of the complaint also reveals that the instant action is founded on the claim that the levy
imposed was an unlawful and unconstitutional special assessment. Consequently, the requisite that
the constitutionality of the law in question be the very lis mota of the case is present, making it
proper for the trial court to rule on the constitutionality of LOI 1465.16

The CA held that even on the assumption that LOI No. 1465 was issued under the police power of
the state, it is still unconstitutional because it did not promote public welfare. The CA explained:

In declaring LOI 1465 unconstitutional, the trial court held that the levy imposed under the said
law was an invalid exercise of the State’s power of taxation inasmuch as it violated the inherent
and constitutional prescription that taxes be levied only for public purposes. It reasoned out that
the amount collected under the levy was remitted to the depository bank of PPI, which the latter
used to advance its private interest.

On the other hand, appellant submits that the subject statute’s passage was a valid exercise of
police power. In addition, it disputes the court a quo’s findings arguing that the collections under
LOI 1465 was for the benefit of Planters Foundation, Incorporated (PFI), a foundation created by
law to hold in trust for millions of farmers, the stock ownership of PPI.

Of the three fundamental powers of the State, the exercise of police power has been characterized
as the most essential, insistent and the least limitable of powers, extending as it does to all the great
public needs. It may be exercised as long as the activity or the property sought to be regulated has
some relevance to public welfare (Constitutional Law, by Isagani A. Cruz, p. 38, 1995 Edition).

Vast as the power is, however, it must be exercised within the limits set by the Constitution, which
requires the concurrence of a lawful subject and a lawful method. Thus, our courts have laid down
the test to determine the validity of a police measure as follows: (1) the interests of the public
generally, as distinguished from those of a particular class, requires its exercise; and (2) the means
employed are reasonably necessary for the accomplishment of the purpose and not unduly
oppressive upon individuals (National Development Company v. Philippine Veterans Bank, 192
SCRA 257 [1990]).

It is upon applying this established tests that We sustain the trial court’s holding LOI 1465
unconstitutional. To be sure, ensuring the continued supply and distribution of fertilizer in the
country is an undertaking imbued with public interest. However, the method by which LOI 1465
sought to achieve this is by no means a measure that will promote the public welfare. The
government’s commitment to support the successful rehabilitation and continued viability of PPI,
a private corporation, is an unmistakable attempt to mask the subject statute’s impartiality. There
is no way to treat the self-interest of a favored entity, like PPI, as identical with the general interest
of the country’s farmers or even the Filipino people in general. Well to stress, substantive due
process exacts fairness and equal protection disallows distinction where none is needed. When a
statute’s public purpose is spoiled by private interest, the use of police power becomes a travesty
which must be struck down for being an arbitrary exercise of government power.To rule in favor
of appellant would contravene the general principle that revenues derived from taxes cannot be
used for purely private purposes or for the exclusive benefit of private individuals.17
The CA did not accept PPI’s claim that the levy imposed under LOI No. 1465 was for the benefit
of Planters Foundation, Inc., a foundation created to hold in trust the stock ownership of PPI. The
CA stated:

Appellant next claims that the collections under LOI 1465 was for the benefit of Planters
Foundation, Incorporated (PFI), a foundation created by law to hold in trust for millions of farmers,
the stock ownership of PFI on the strength of Letter of Undertaking (LOU) issued by then Prime
Minister Cesar Virata on April 18, 1985 and affirmed by the Secretary of Justice in an Opinion
dated October 12, 1987, to wit:

"2. Upon the effective date of this Letter of Undertaking, the Republic shall cause FPA to include
in its fertilizer pricing formula a capital recovery component, the proceeds of which will be used
initially for the purpose of funding the unpaid portion of the outstanding capital stock of Planters
presently held in trust by Planters Foundation, Inc. (Planters Foundation), which unpaid capital is
estimated at approximately P206 million (subject to validation by Planters and Planters
Foundation) (such unpaid portion of the outstanding capital stock of Planters being hereafter
referred to as the ‘Unpaid Capital’), and subsequently for such capital increases as may be required
for the continuing viability of Planters.

The capital recovery component shall be in the minimum amount of P10 per bag, which will be
added to the price of all domestic sales of fertilizer in the Philippines by any importer and/or
fertilizer mother company. In this connection, the Republic hereby acknowledges that the advances
by Planters to Planters Foundation which were applied to the payment of the Planters shares now
held in trust by Planters Foundation, have been assigned to, among others, the Creditors.
Accordingly, the Republic, through FPA, hereby agrees to deposit the proceeds of the capital
recovery component in the special trust account designated in the notice dated April 2, 1985,
addressed by counsel for the Creditors to Planters Foundation. Such proceeds shall be deposited
by FPA on or before the 15th day of each month.

The capital recovery component shall continue to be charged and collected until payment in full
of (a) the Unpaid Capital and/or (b) any shortfall in the payment of the Subsidy Receivables, (c)
any carrying cost accruing from the date hereof on the amounts which may be outstanding from
time to time of the Unpaid Capital and/or the Subsidy Receivables and (d) the capital increases
contemplated in paragraph 2 hereof. For the purpose of the foregoing clause (c), the ‘carrying cost’
shall be at such rate as will represent the full and reasonable cost to Planters of servicing its debts,
taking into account both its peso and foreign currency-denominated obligations." (Records, pp.
42-43)

Appellant’s proposition is open to question, to say the least. The LOU issued by then Prime
Minister Virata taken together with the Justice Secretary’s Opinion does not preponderantly
demonstrate that the collections made were held in trust in favor of millions of farmers.
Unfortunately for appellant, in the absence of sufficient evidence to establish its claims, this Court
is constrained to rely on what is explicitly provided in LOI 1465 – that one of the primary aims in
imposing the levy is to support the successful rehabilitation and continued viability of PPI.18
PPI moved for reconsideration but its motion was denied.19 It then filed the present petition with
this Court.

Issues

Petitioner PPI raises four issues for Our consideration, viz.:

THE CONSTITUTIONALITY OF LOI 1465 CANNOT BE COLLATERALLY


ATTACKED AND BE DECREED VIA A DEFAULT JUDGMENT IN A CASE FILED FOR
COLLECTION AND DAMAGES WHERE THE ISSUE OF CONSTITUTIONALITY IS NOT
THE VERY LIS MOTA OF THE CASE. NEITHER CAN LOI 1465 BE CHALLENGED BY
ANY PERSON OR ENTITY WHICH HAS NO STANDING TO DO SO.

II

LOI 1465, BEING A LAW IMPLEMENTED FOR THE PURPOSE OF ASSURING THE
FERTILIZER SUPPLY AND DISTRIBUTION IN THE COUNTRY, AND FOR BENEFITING
A FOUNDATION CREATED BY LAW TO HOLD IN TRUST FOR MILLIONS OF FARMERS
THEIR STOCK OWNERSHIP IN PPI CONSTITUTES A VALID LEGISLATION PURSUANT
TO THE EXERCISE OF TAXATION AND POLICE POWER FOR PUBLIC PURPOSES.

III

THE AMOUNT COLLECTED UNDER THE CAPITAL RECOVERY COMPONENT WAS


REMITTED TO THE GOVERNMENT, AND BECAME GOVERNMENT FUNDS PURSUANT
TO AN EFFECTIVE AND VALIDLY ENACTED LAW WHICH IMPOSED DUTIES AND
CONFERRED RIGHTS BY VIRTUE OF THE PRINCIPLE OF "OPERATIVE FACT" PRIOR
TO ANY DECLARATION OF UNCONSTITUTIONALITY OF LOI 1465.

IV

THE PRINCIPLE OF UNJUST VEXATION (SHOULD BE ENRICHMENT) FINDS NO


APPLICATION IN THE INSTANT CASE.20 (Underscoring supplied)

Our Ruling

We shall first tackle the procedural issues of locus standi and the jurisdiction of the RTC to resolve
constitutional issues.

Fertiphil has locus standi because it suffered direct injury; doctrine of standing is a mere procedural
technicality which may be waived.

PPI argues that Fertiphil has no locus standi to question the constitutionality of LOI No. 1465
because it does not have a "personal and substantial interest in the case or will sustain direct injury
as a result of its enforcement."21 It asserts that Fertiphil did not suffer any damage from the CRC
imposition because "incidence of the levy fell on the ultimate consumer or the farmers themselves,
not on the seller fertilizer company."22

We cannot agree. The doctrine of locus standi or the right of appearance in a court of justice has
been adequately discussed by this Court in a catena of cases. Succinctly put, the doctrine requires
a litigant to have a material interest in the outcome of a case. In private suits, locus standi requires
a litigant to be a "real party in interest," which is defined as "the party who stands to be benefited
or injured by the judgment in the suit or the party entitled to the avails of the suit."23

In public suits, this Court recognizes the difficulty of applying the doctrine especially when
plaintiff asserts a public right on behalf of the general public because of conflicting public policy
issues. 24 On one end, there is the right of the ordinary citizen to petition the courts to be freed
from unlawful government intrusion and illegal official action. At the other end, there is the public
policy precluding excessive judicial interference in official acts, which may unnecessarily hinder
the delivery of basic public services.

In this jurisdiction, We have adopted the "direct injury test" to determine locus standi in public
suits. In People v. Vera,25 it was held that a person who impugns the validity of a statute must have
"a personal and substantial interest in the case such that he has sustained, or will sustain direct
injury as a result." The "direct injury test" in public suits is similar to the "real party in interest"
rule for private suits under Section 2, Rule 3 of the 1997 Rules of Civil Procedure.26

Recognizing that a strict application of the "direct injury" test may hamper public interest, this
Court relaxed the requirement in cases of "transcendental importance" or with "far reaching
implications." Being a mere procedural technicality, it has also been held that locus standi may be
waived in the public interest.27

Whether or not the complaint for collection is characterized as a private or public suit, Fertiphil
has locus standi to file it. Fertiphil suffered a direct injury from the enforcement of LOI No. 1465.
It was required, and it did pay, the P10 levy imposed for every bag of fertilizer sold on the domestic
market. It may be true that Fertiphil has passed some or all of the levy to the ultimate consumer,
but that does not disqualify it from attacking the constitutionality of the LOI or from seeking a
refund. As seller, it bore the ultimate burden of paying the levy. It faced the possibility of severe
sanctions for failure to pay the levy. The fact of payment is sufficient injury to Fertiphil.

Moreover, Fertiphil suffered harm from the enforcement of the LOI because it was compelled to
factor in its product the levy. The levy certainly rendered the fertilizer products of Fertiphil and
other domestic sellers much more expensive. The harm to their business consists not only in fewer
clients because of the increased price, but also in adopting alternative corporate strategies to meet
the demands of LOI No. 1465. Fertiphil and other fertilizer sellers may have shouldered all or part
of the levy just to be competitive in the market. The harm occasioned on the business of Fertiphil
is sufficient injury for purposes of locus standi.

Even assuming arguendo that there is no direct injury, We find that the liberal policy consistently
adopted by this Court on locus standi must apply. The issues raised by Fertiphil are of paramount
public importance. It involves not only the constitutionality of a tax law but, more importantly, the
use of taxes for public purpose. Former President Marcos issued LOI No. 1465 with the intention
of rehabilitating an ailing private company. This is clear from the text of the LOI. PPI is expressly
named in the LOI as the direct beneficiary of the levy. Worse, the levy was made dependent and
conditional upon PPI becoming financially viable. The LOI provided that "the capital contribution
shall be collected until adequate capital is raised to make PPI viable."

The constitutionality of the levy is already in doubt on a plain reading of the statute. It is Our
constitutional duty to squarely resolve the issue as the final arbiter of all justiciable controversies.
The doctrine of standing, being a mere procedural technicality, should be waived, if at all, to
adequately thresh out an important constitutional issue.

RTC may resolve constitutional issues; the constitutional issue was adequately raised in the
complaint; it is the lis mota of the case.

PPI insists that the RTC and the CA erred in ruling on the constitutionality of the LOI. It asserts
that the constitutionality of the LOI cannot be collaterally attacked in a complaint for
collection.28 Alternatively, the resolution of the constitutional issue is not necessary for a
determination of the complaint for collection.29

Fertiphil counters that the constitutionality of the LOI was adequately pleaded in its complaint. It
claims that the constitutionality of LOI No. 1465 is the very lis mota of the case because the trial
court cannot determine its claim without resolving the issue.30

It is settled that the RTC has jurisdiction to resolve the constitutionality of a statute, presidential
decree or an executive order. This is clear from Section 5, Article VIII of the 1987 Constitution,
which provides:

SECTION 5. The Supreme Court shall have the following powers:

xxxx

(2) Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or the Rules of
Court may provide,final judgments and orders of lower courts in:

(a) All cases in which the constitutionality or validity of any treaty, international or executive
agreement, law, presidential decree, proclamation, order, instruction, ordinance, or regulation is in
question. (Underscoring supplied)

In Mirasol v. Court of Appeals,31 this Court recognized the power of the RTC to resolve
constitutional issues, thus:

On the first issue. It is settled that Regional Trial Courts have the authority and jurisdiction to
consider the constitutionality of a statute, presidential decree, or executive order. The Constitution
vests the power of judicial review or the power to declare a law, treaty, international or executive
agreement, presidential decree, order, instruction, ordinance, or regulation not only in this Court,
but in all Regional Trial Courts.32

In the recent case of Equi-Asia Placement, Inc. v. Department of Foreign Affairs,33 this Court
reiterated:

There is no denying that regular courts have jurisdiction over cases involving the validity or
constitutionality of a rule or regulation issued by administrative agencies. Such jurisdiction,
however, is not limited to the Court of Appeals or to this Court alone for even the regional trial
courts can take cognizance of actions assailing a specific rule or set of rules promulgated by
administrative bodies. Indeed, the Constitution vests the power of judicial review or the power to
declare a law, treaty, international or executive agreement, presidential decree, order, instruction,
ordinance, or regulation in the courts, including the regional trial courts.34

Judicial review of official acts on the ground of unconstitutionality may be sought or availed of
through any of the actions cognizable by courts of justice, not necessarily in a suit for declaratory
relief. Such review may be had in criminal actions, as in People v. Ferrer35 involving the
constitutionality of the now defunct Anti-Subversion law, or in ordinary actions, as in Krivenko v.
Register of Deeds36 involving the constitutionality of laws prohibiting aliens from acquiring public
lands. The constitutional issue, however, (a) must be properly raised and presented in the case, and
(b) its resolution is necessary to a determination of the case, i.e., the issue of constitutionality must
be the very lis mota presented.37

Contrary to PPI’s claim, the constitutionality of LOI No. 1465 was properly and adequately raised
in the complaint for collection filed with the RTC. The pertinent portions of the complaint allege:

6. The CRC of P10 per bag levied under LOI 1465 on domestic sales of all grades of fertilizer in
the Philippines, isunlawful, unjust, uncalled for, unreasonable, inequitable and
oppressive because:

xxxx

(c) It favors only one private domestic corporation, i.e., defendant PPPI, and imposed at the
expense and disadvantage of the other fertilizer importers/distributors who were themselves in
tight business situation and were then exerting all efforts and maximizing management and
marketing skills to remain viable;

xxxx

(e) It was a glaring example of crony capitalism, a forced program through which the PPI, having
been presumptuously masqueraded as "the" fertilizer industry itself, was the sole and anointed
beneficiary;

7. The CRC was an unlawful; and unconstitutional special assessment and its imposition is
tantamount to illegal exaction amounting to a denial of due process since the persons of entities
which had to bear the burden of paying the CRC derived no benefit therefrom; that on the contrary
it was used by PPI in trying to regain its former despicable monopoly of the fertilizer industry to
the detriment of other distributors and importers.38 (Underscoring supplied)

The constitutionality of LOI No. 1465 is also the very lis mota of the complaint for collection.
Fertiphil filed the complaint to compel PPI to refund the levies paid under the statute on the ground
that the law imposing the levy is unconstitutional. The thesis is that an unconstitutional law is void.
It has no legal effect. Being void, Fertiphil had no legal obligation to pay the levy. Necessarily, all
levies duly paid pursuant to an unconstitutional law should be refunded under the civil code
principle against unjust enrichment. The refund is a mere consequence of the law being declared
unconstitutional. The RTC surely cannot order PPI to refund Fertiphil if it does not declare the
LOI unconstitutional. It is the unconstitutionality of the LOI which triggers the refund. The issue
of constitutionality is the very lis mota of the complaint with the RTC.

The P10 levy under LOI No. 1465 is an exercise of the power of taxation.

At any rate, the Court holds that the RTC and the CA did not err in ruling against the
constitutionality of the LOI.

PPI insists that LOI No. 1465 is a valid exercise either of the police power or the power of taxation.
It claims that the LOI was implemented for the purpose of assuring the fertilizer supply and
distribution in the country and for benefiting a foundation created by law to hold in trust for
millions of farmers their stock ownership in PPI.

Fertiphil counters that the LOI is unconstitutional because it was enacted to give benefit to a private
company. The levy was imposed to pay the corporate debt of PPI. Fertiphil also argues that, even
if the LOI is enacted under the police power, it is still unconstitutional because it did not promote
the general welfare of the people or public interest.

Police power and the power of taxation are inherent powers of the State. These powers are distinct
and have different tests for validity. Police power is the power of the State to enact legislation that
may interfere with personal liberty or property in order to promote the general welfare,39 while the
power of taxation is the power to levy taxes to be used for public purpose. The main purpose of
police power is the regulation of a behavior or conduct, while taxation is revenue generation. The
"lawful subjects" and "lawful means" tests are used to determine the validity of a law enacted
under the police power.40 The power of taxation, on the other hand, is circumscribed by inherent
and constitutional limitations.

We agree with the RTC that the imposition of the levy was an exercise by the State of its taxation
power. While it is true that the power of taxation can be used as an implement of police
power,41 the primary purpose of the levy is revenue generation. If the purpose is primarily revenue,
or if revenue is, at least, one of the real and substantial purposes, then the exaction is properly
called a tax.42

In Philippine Airlines, Inc. v. Edu,43 it was held that the imposition of a vehicle registration fee is
not an exercise by the State of its police power, but of its taxation power, thus:
It is clear from the provisions of Section 73 of Commonwealth Act 123 and Section 61 of the Land
Transportation and Traffic Code that the legislative intent and purpose behind the law requiring
owners of vehicles to pay for their registration is mainly to raise funds for the construction and
maintenance of highways and to a much lesser degree, pay for the operating expenses of the
administering agency. x x x Fees may be properly regarded as taxes even though they also serve
as an instrument of regulation.

Taxation may be made the implement of the state's police power (Lutz v. Araneta, 98 Phil. 148). If
the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial purposes,
then the exaction is properly called a tax. Such is the case of motor vehicle registration fees. The
same provision appears as Section 59(b) in the Land Transportation Code. It is patent therefrom
that the legislators had in mind a regulatory tax as the law refers to the imposition on the
registration, operation or ownership of a motor vehicle as a "tax or fee." x x x Simply put, if the
exaction under Rep. Act 4136 were merely a regulatory fee, the imposition in Rep. Act 5448 need
not be an "additional" tax. Rep. Act 4136 also speaks of other "fees" such as the special permit
fees for certain types of motor vehicles (Sec. 10) and additional fees for change of registration
(Sec. 11). These are not to be understood as taxes because such fees are very minimal to be
revenue-raising. Thus, they are not mentioned by Sec. 59(b) of the Code as taxes like the motor
vehicle registration fee and chauffeurs’ license fee. Such fees are to go into the expenditures of the
Land Transportation Commission as provided for in the last proviso of Sec. 61.44 (Underscoring
supplied)

The P10 levy under LOI No. 1465 is too excessive to serve a mere regulatory purpose. The levy,
no doubt, was a big burden on the seller or the ultimate consumer. It increased the price of a bag
of fertilizer by as much as five percent.45 A plain reading of the LOI also supports the conclusion
that the levy was for revenue generation. The LOI expressly provided that the levy was imposed
"until adequate capital is raised to make PPI viable."

Taxes are exacted only for a public purpose. The P10 levy is unconstitutional because it was not
for a public purpose. The levy was imposed to give undue benefit to PPI.

An inherent limitation on the power of taxation is public purpose. Taxes are exacted only for a
public purpose. They cannot be used for purely private purposes or for the exclusive benefit of
private persons.46 The reason for this is simple. The power to tax exists for the general welfare;
hence, implicit in its power is the limitation that it should be used only for a public purpose. It
would be a robbery for the State to tax its citizens and use the funds generated for a private purpose.
As an old United States case bluntly put it: "To lay with one hand, the power of the government
on the property of the citizen, and with the other to bestow it upon favored individuals to aid private
enterprises and build up private fortunes, is nonetheless a robbery because it is done under the
forms of law and is called taxation."47

The term "public purpose" is not defined. It is an elastic concept that can be hammered to fit
modern standards. Jurisprudence states that "public purpose" should be given a broad
interpretation. It does not only pertain to those purposes which are traditionally viewed as
essentially government functions, such as building roads and delivery of basic services, but also
includes those purposes designed to promote social justice. Thus, public money may now be used
for the relocation of illegal settlers, low-cost housing and urban or agrarian reform.

While the categories of what may constitute a public purpose are continually expanding in light of
the expansion of government functions, the inherent requirement that taxes can only be exacted
for a public purpose still stands. Public purpose is the heart of a tax law. When a tax law is only a
mask to exact funds from the public when its true intent is to give undue benefit and advantage to
a private enterprise, that law will not satisfy the requirement of "public purpose."

The purpose of a law is evident from its text or inferable from other secondary sources. Here, We
agree with the RTC and that CA that the levy imposed under LOI No. 1465 was not for a public
purpose.

First, the LOI expressly provided that the levy be imposed to benefit PPI, a private company. The
purpose is explicit from Clause 3 of the law, thus:

3. The Administrator of the Fertilizer Pesticide Authority to include in its fertilizer pricing formula
a capital contribution component of not less than P10 per bag. This capital contribution shall be
collected until adequate capital is raised to make PPI viable. Such capital contribution shall be
applied by FPA to all domestic sales of fertilizers in the Philippines.48 (Underscoring supplied)

It is a basic rule of statutory construction that the text of a statute should be given a literal meaning.
In this case, the text of the LOI is plain that the levy was imposed in order to raise capital for PPI.
The framers of the LOI did not even hide the insidious purpose of the law. They were cavalier
enough to name PPI as the ultimate beneficiary of the taxes levied under the LOI. We find it utterly
repulsive that a tax law would expressly name a private company as the ultimate beneficiary of the
taxes to be levied from the public. This is a clear case of crony capitalism.

Second, the LOI provides that the imposition of the P10 levy was conditional and dependent upon
PPI becoming financially "viable." This suggests that the levy was actually imposed to benefit PPI.
The LOI notably does not fix a maximum amount when PPI is deemed financially "viable." Worse,
the liability of Fertiphil and other domestic sellers of fertilizer to pay the levy is made indefinite.
They are required to continuously pay the levy until adequate capital is raised for PPI.

Third, the RTC and the CA held that the levies paid under the LOI were directly remitted and
deposited by FPA to Far East Bank and Trust Company, the depositary bank of PPI.49 This proves
that PPI benefited from the LOI. It is also proves that the main purpose of the law was to give
undue benefit and advantage to PPI.

Fourth, the levy was used to pay the corporate debts of PPI. A reading of the Letter of
Understanding50 dated May 18, 1985 signed by then Prime Minister Cesar Virata reveals that PPI
was in deep financial problem because of its huge corporate debts. There were pending petitions
for rehabilitation against PPI before the Securities and Exchange Commission. The government
guaranteed payment of PPI’s debts to its foreign creditors. To fund the payment, President Marcos
issued LOI No. 1465. The pertinent portions of the letter of understanding read:
Republic of the Philippines
Office of the Prime Minister
Manila

LETTER OF UNDERTAKING

May 18, 1985

TO: THE BANKING AND FINANCIAL INSTITUTIONS


LISTED IN ANNEX A HERETO WHICH ARE
CREDITORS (COLLECTIVELY, THE "CREDITORS")
OF PLANTERS PRODUCTS, INC. ("PLANTERS")

Gentlemen:

This has reference to Planters which is the principal importer and distributor of fertilizer, pesticides
and agricultural chemicals in the Philippines. As regards Planters, the Philippine Government
confirms its awareness of the following: (1) that Planters has outstanding obligations in foreign
currency and/or pesos, to the Creditors, (2) that Planters is currently experiencing financial
difficulties, and (3) that there are presently pending with the Securities and Exchange Commission
of the Philippines a petition filed at Planters’ own behest for the suspension of payment of all its
obligations, and a separate petition filed by Manufacturers Hanover Trust Company, Manila
Offshore Branch for the appointment of a rehabilitation receiver for Planters.

In connection with the foregoing, the Republic of the Philippines (the "Republic") confirms that it
considers and continues to consider Planters as a major fertilizer distributor. Accordingly, for and
in consideration of your expressed willingness to consider and participate in the effort to
rehabilitate Planters, the Republic hereby manifests its full and unqualified support of the
successful rehabilitation and continuing viability of Planters, and to that end, hereby binds and
obligates itself to the creditors and Planters, as follows:

xxxx

2. Upon the effective date of this Letter of Undertaking, the Republic shall cause FPA to include
in its fertilizer pricing formula a capital recovery component, the proceeds of which will be used
initially for the purpose of funding the unpaid portion of the outstanding capital stock of Planters
presently held in trust by Planters Foundation, Inc. ("Planters Foundation"), which unpaid capital
is estimated at approximately P206 million (subject to validation by Planters and Planters
Foundation) such unpaid portion of the outstanding capital stock of Planters being hereafter
referred to as the "Unpaid Capital"), and subsequently for such capital increases as may be required
for the continuing viability of Planters.

xxxx

The capital recovery component shall continue to be charged and collected until payment in full
of (a) the Unpaid Capital and/or (b) any shortfall in the payment of the Subsidy Receivables, (c)
any carrying cost accruing from the date hereof on the amounts which may be outstanding from
time to time of the Unpaid Capital and/or the Subsidy Receivables, and (d) the capital increases
contemplated in paragraph 2 hereof. For the purpose of the foregoing clause (c), the "carrying cost"
shall be at such rate as will represent the full and reasonable cost to Planters of servicing its debts,
taking into account both its peso and foreign currency-denominated obligations.

REPUBLIC OF THE PHILIPPINES

By:

(signed)
CESAR E. A. VIRATA
Prime Minister and Minister of Finance51

It is clear from the Letter of Understanding that the levy was imposed precisely to pay the corporate
debts of PPI. We cannot agree with PPI that the levy was imposed to ensure the stability of the
fertilizer industry in the country. The letter of understanding and the plain text of the LOI clearly
indicate that the levy was exacted for the benefit of a private corporation.

All told, the RTC and the CA did not err in holding that the levy imposed under LOI No. 1465 was
not for a public purpose. LOI No. 1465 failed to comply with the public purpose requirement for
tax laws.

The LOI is still unconstitutional even if enacted under the police power; it did not promote public
interest.

Even if We consider LOI No. 1695 enacted under the police power of the State, it would still be
invalid for failing to comply with the test of "lawful subjects" and "lawful means." Jurisprudence
states the test as follows: (1) the interest of the public generally, as distinguished from those of
particular class, requires its exercise; and (2) the means employed are reasonably necessary for the
accomplishment of the purpose and not unduly oppressive upon individuals.52

For the same reasons as discussed, LOI No. 1695 is invalid because it did not promote public
interest. The law was enacted to give undue advantage to a private corporation. We quote with
approval the CA ratiocination on this point, thus:

It is upon applying this established tests that We sustain the trial court’s holding LOI 1465
unconstitutional.1awphil To be sure, ensuring the continued supply and distribution of fertilizer in
the country is an undertaking imbued with public interest. However, the method by which LOI
1465 sought to achieve this is by no means a measure that will promote the public welfare. The
government’s commitment to support the successful rehabilitation and continued viability of PPI,
a private corporation, is an unmistakable attempt to mask the subject statute’s impartiality. There
is no way to treat the self-interest of a favored entity, like PPI, as identical with the general interest
of the country’s farmers or even the Filipino people in general. Well to stress, substantive due
process exacts fairness and equal protection disallows distinction where none is needed. When a
statute’s public purpose is spoiled by private interest, the use of police power becomes a travesty
which must be struck down for being an arbitrary exercise of government power.To rule in favor
of appellant would contravene the general principle that revenues derived from taxes cannot be
used for purely private purposes or for the exclusive benefit of private individuals. (Underscoring
supplied)

The general rule is that an unconstitutional law is void; the doctrine of operative fact is
inapplicable.

PPI also argues that Fertiphil cannot seek a refund even if LOI No. 1465 is declared
unconstitutional. It banks on the doctrine of operative fact, which provides that an unconstitutional
law has an effect before being declared unconstitutional. PPI wants to retain the levies paid under
LOI No. 1465 even if it is subsequently declared to be unconstitutional.

We cannot agree. It is settled that no question, issue or argument will be entertained on appeal,
unless it has been raised in the court a quo.53 PPI did not raise the applicability of the doctrine of
operative fact with the RTC and the CA. It cannot belatedly raise the issue with Us in order to
extricate itself from the dire effects of an unconstitutional law.

At any rate, We find the doctrine inapplicable. The general rule is that an unconstitutional law is
void. It produces no rights, imposes no duties and affords no protection. It has no legal effect. It
is, in legal contemplation, inoperative as if it has not been passed.54 Being void, Fertiphil is not
required to pay the levy. All levies paid should be refunded in accordance with the general civil
code principle against unjust enrichment. The general rule is supported by Article 7 of the Civil
Code, which provides:

ART. 7. Laws are repealed only by subsequent ones, and their violation or non-observance shall
not be excused by disuse or custom or practice to the contrary.

When the courts declare a law to be inconsistent with the Constitution, the former shall be void and
the latter shall govern.

The doctrine of operative fact, as an exception to the general rule, only applies as a matter of equity
and fair play.55It nullifies the effects of an unconstitutional law by recognizing that the existence
of a statute prior to a determination of unconstitutionality is an operative fact and may have
consequences which cannot always be ignored. The past cannot always be erased by a new judicial
declaration.56

The doctrine is applicable when a declaration of unconstitutionality will impose an undue burden
on those who have relied on the invalid law. Thus, it was applied to a criminal case when a
declaration of unconstitutionality would put the accused in double jeopardy57 or would put in
limbo the acts done by a municipality in reliance upon a law creating it.58

Here, We do not find anything iniquitous in ordering PPI to refund the amounts paid by Fertiphil
under LOI No. 1465. It unduly benefited from the levy. It was proven during the trial that the levies
paid were remitted and deposited to its bank account. Quite the reverse, it would be inequitable
and unjust not to order a refund. To do so would unjustly enrich PPI at the expense of Fertiphil.
Article 22 of the Civil Code explicitly provides that "every person who, through an act of
performance by another comes into possession of something at the expense of the latter without
just or legal ground shall return the same to him." We cannot allow PPI to profit from an
unconstitutional law. Justice and equity dictate that PPI must refund the amounts paid by Fertiphil.

WHEREFORE, the petition is DENIED. The Court of Appeals Decision dated November 28, 2003
is AFFIRMED.

SO ORDERED.

G.R. No. L-10405 December 29, 1960

WENCESLAO PASCUAL, in his official capacity as Provincial Governor of


Rizal, petitioner-appellant,
vs.
THE SECRETARY OF PUBLIC WORKS AND COMMUNICATIONS, ET
AL., respondents-appellees.

Asst. Fiscal Noli M. Cortes and Jose P. Santos for appellant.


Office of the Asst. Solicitor General Jose G. Bautista and Solicitor A. A. Torres for appellee.

CONCEPCION, J.:

Appeal, by petitioner Wenceslao Pascual, from a decision of the Court of First Instance of Rizal,
dismissing the above entitled case and dissolving the writ of preliminary injunction therein issued,
without costs.

On August 31, 1954, petitioner Wenceslao Pascual, as Provincial Governor of Rizal, instituted this
action for declaratory relief, with injunction, upon the ground that Republic Act No. 920, entitled
"An Act Appropriating Funds for Public Works", approved on June 20, 1953, contained, in section
1-C (a) thereof, an item (43[h]) of P85,000.00 "for the construction, reconstruction, repair,
extension and improvement" of Pasig feeder road terminals (Gen. Roxas — Gen. Araneta — Gen.
Lucban — Gen. Capinpin — Gen. Segundo — Gen. Delgado — Gen. Malvar — Gen. Lim)"; that,
at the time of the passage and approval of said Act, the aforementioned feeder roads were "nothing
but projected and planned subdivision roads, not yet constructed, . . . within the Antonio
Subdivision . . . situated at . . . Pasig, Rizal" (according to the tracings attached to the petition as
Annexes A and B, near Shaw Boulevard, not far away from the intersection between the latter and
Highway 54), which projected feeder roads "do not connect any government property or any
important premises to the main highway"; that the aforementioned Antonio Subdivision (as well
as the lands on which said feeder roads were to be construed) were private properties of respondent
Jose C. Zulueta, who, at the time of the passage and approval of said Act, was a member of the
Senate of the Philippines; that on May, 1953, respondent Zulueta, addressed a letter to the
Municipal Council of Pasig, Rizal, offering to donate said projected feeder roads to the
municipality of Pasig, Rizal; that, on June 13, 1953, the offer was accepted by the council, subject
to the condition "that the donor would submit a plan of the said roads and agree to change the
names of two of them"; that no deed of donation in favor of the municipality of Pasig was, however,
executed; that on July 10, 1953, respondent Zulueta wrote another letter to said council, calling
attention to the approval of Republic Act. No. 920, and the sum of P85,000.00 appropriated therein
for the construction of the projected feeder roads in question; that the municipal council of Pasig
endorsed said letter of respondent Zulueta to the District Engineer of Rizal, who, up to the present
"has not made any endorsement thereon" that inasmuch as the projected feeder roads in question
were private property at the time of the passage and approval of Republic Act No. 920, the
appropriation of P85,000.00 therein made, for the construction, reconstruction, repair, extension
and improvement of said projected feeder roads, was illegal and, therefore, void ab initio"; that
said appropriation of P85,000.00 was made by Congress because its members were made to
believe that the projected feeder roads in question were "public roads and not private streets of a
private subdivision"'; that, "in order to give a semblance of legality, when there is absolutely none,
to the aforementioned appropriation", respondents Zulueta executed on December 12, 1953, while
he was a member of the Senate of the Philippines, an alleged deed of donation — copy of which
is annexed to the petition — of the four (4) parcels of land constituting said projected feeder roads,
in favor of the Government of the Republic of the Philippines; that said alleged deed of donation
was, on the same date, accepted by the then Executive Secretary; that being subject to an onerous
condition, said donation partook of the nature of a contract; that, such, said donation violated the
provision of our fundamental law prohibiting members of Congress from being directly or
indirectly financially interested in any contract with the Government, and, hence, is
unconstitutional, as well as null and void ab initio, for the construction of the projected feeder
roads in question with public funds would greatly enhance or increase the value of the
aforementioned subdivision of respondent Zulueta, "aside from relieving him from the burden of
constructing his subdivision streets or roads at his own expense"; that the construction of said
projected feeder roads was then being undertaken by the Bureau of Public Highways; and that,
unless restrained by the court, the respondents would continue to execute, comply with, follow and
implement the aforementioned illegal provision of law, "to the irreparable damage, detriment and
prejudice not only to the petitioner but to the Filipino nation."

Petitioner prayed, therefore, that the contested item of Republic Act No. 920 be declared null and
void; that the alleged deed of donation of the feeder roads in question be "declared unconstitutional
and, therefor, illegal"; that a writ of injunction be issued enjoining the Secretary of Public Works
and Communications, the Director of the Bureau of Public Works and Highways and Jose C.
Zulueta from ordering or allowing the continuance of the above-mentioned feeder roads project,
and from making and securing any new and further releases on the aforementioned item of
Republic Act No. 920, and the disbursing officers of the Department of Public Works and
Highways from making any further payments out of said funds provided for in Republic Act No.
920; and that pending final hearing on the merits, a writ of preliminary injunction be issued
enjoining the aforementioned parties respondent from making and securing any new and further
releases on the aforesaid item of Republic Act No. 920 and from making any further payments out
of said illegally appropriated funds.

Respondents moved to dismiss the petition upon the ground that petitioner had "no legal capacity
to sue", and that the petition did "not state a cause of action". In support to this motion, respondent
Zulueta alleged that the Provincial Fiscal of Rizal, not its provincial governor, should represent
the Province of Rizal, pursuant to section 1683 of the Revised Administrative Code; that said
respondent is " not aware of any law which makes illegal the appropriation of public funds for the
improvements of . . . private property"; and that, the constitutional provision invoked by petitioner
is inapplicable to the donation in question, the same being a pure act of liberality, not a contract.
The other respondents, in turn, maintained that petitioner could not assail the appropriation in
question because "there is no actual bona fide case . . . in which the validity of Republic Act No.
920 is necessarily involved" and petitioner "has not shown that he has a personal and substantial
interest" in said Act "and that its enforcement has caused or will cause him a direct injury."

Acting upon said motions to dismiss, the lower court rendered the aforementioned decision, dated
October 29, 1953, holding that, since public interest is involved in this case, the Provincial
Governor of Rizal and the provincial fiscal thereof who represents him therein, "have the requisite
personalities" to question the constitutionality of the disputed item of Republic Act No. 920; that
"the legislature is without power appropriate public revenues for anything but a public purpose",
that the instructions and improvement of the feeder roads in question, if such roads where private
property, would not be a public purpose; that, being subject to the following condition:

The within donation is hereby made upon the condition that the Government of the
Republic of the Philippines will use the parcels of land hereby donated for street purposes
only and for no other purposes whatsoever; it being expressly understood that should the
Government of the Republic of the Philippines violate the condition hereby imposed upon
it, the title to the land hereby donated shall, upon such violation, ipso facto revert to the
DONOR, JOSE C. ZULUETA. (Emphasis supplied.)

which is onerous, the donation in question is a contract; that said donation or contract is "absolutely
forbidden by the Constitution" and consequently "illegal", for Article 1409 of the Civil Code of
the Philippines, declares in existence and void from the very beginning contracts "whose cause,
objector purpose is contrary to law, morals . . . or public policy"; that the legality of said donation
may not be contested, however, by petitioner herein, because his "interest are not directly affected"
thereby; and that, accordingly, the appropriation in question "should be upheld" and the case
dismissed.

At the outset, it should be noted that we are concerned with a decision granting the aforementioned
motions to dismiss, which as much, are deemed to have admitted hypothetically the allegations of
fact made in the petition of appellant herein. According to said petition, respondent Zulueta is the
owner of several parcels of residential land situated in Pasig, Rizal, and known as the Antonio
Subdivision, certain portions of which had been reserved for the projected feeder roads
aforementioned, which, admittedly, were private property of said respondent when Republic Act
No. 920, appropriating P85,000.00 for the "construction, reconstruction, repair, extension and
improvement" of said roads, was passed by Congress, as well as when it was approved by the
President on June 20, 1953. The petition further alleges that the construction of said roads, to be
undertaken with the aforementioned appropriation of P85,000.00, would have the effect of
relieving respondent Zulueta of the burden of constructing his subdivision streets or roads at his
own expenses, 1and would "greatly enhance or increase the value of the subdivision" of said
respondent. The lower court held that under these circumstances, the appropriation in question was
"clearly for a private, not a public purpose."
Respondents do not deny the accuracy of this conclusion, which is self-evident. 2However,
respondent Zulueta contended, in his motion to dismiss that:

A law passed by Congress and approved by the President can never be illegal because
Congress is the source of all laws . . . Aside from the fact that movant is not aware of any
law which makes illegal the appropriation of public funds for the improvement of what we,
in the meantime, may assume as private property . . . (Record on Appeal, p. 33.)

The first proposition must be rejected most emphatically, it being inconsistent with the nature of
the Government established under the Constitution of the Republic of the Philippines and the
system of checks and balances underlying our political structure. Moreover, it is refuted by the
decisions of this Court invalidating legislative enactments deemed violative of the Constitution or
organic laws. 3

As regards the legal feasibility of appropriating public funds for a public purpose, the principle
according to Ruling Case Law, is this:

It is a general rule that the legislature is without power to appropriate public revenue for
anything but a public purpose. . . . It is the essential character of the direct object of the
expenditure which must determine its validity as justifying a tax, and not the magnitude of
the interest to be affected nor the degree to which the general advantage of the community,
and thus the public welfare, may be ultimately benefited by their promotion. Incidental to
the public or to the state, which results from the promotion of private interest and the
prosperity of private enterprises or business, does not justify their aid by the use public
money. (25 R.L.C. pp. 398-400; Emphasis supplied.)

The rule is set forth in Corpus Juris Secundum in the following language:

In accordance with the rule that the taxing power must be exercised for public purposes
only, discussed suprasec. 14, money raised by taxation can be expended only for public
purposes and not for the advantage of private individuals. (85 C.J.S. pp. 645-646; emphasis
supplied.)

Explaining the reason underlying said rule, Corpus Juris Secundum states:

Generally, under the express or implied provisions of the constitution, public funds may be
used only for public purpose. The right of the legislature to appropriate funds is correlative
with its right to tax, and, under constitutional provisions against taxation except for public
purposes and prohibiting the collection of a tax for one purpose and the devotion thereof
to another purpose, no appropriation of state funds can be made for other than for a public
purpose.

xxx xxx xxx

The test of the constitutionality of a statute requiring the use of public funds is whether the
statute is designed to promote the public interest, as opposed to the furtherance of the
advantage of individuals, although each advantage to individuals might incidentally serve
the public. (81 C.J.S. pp. 1147; emphasis supplied.)

Needless to say, this Court is fully in accord with the foregoing views which, apart from being
patently sound, are a necessary corollary to our democratic system of government, which, as such,
exists primarily for the promotion of the general welfare. Besides, reflecting as they do, the
established jurisprudence in the United States, after whose constitutional system ours has been
patterned, said views and jurisprudence are, likewise, part and parcel of our own constitutional
law.lawphil.net

This notwithstanding, the lower court felt constrained to uphold the appropriation in question,
upon the ground that petitioner may not contest the legality of the donation above referred to
because the same does not affect him directly. This conclusion is, presumably, based upon the
following premises, namely: (1) that, if valid, said donation cured the constitutional infirmity of
the aforementioned appropriation; (2) that the latter may not be annulled without a previous
declaration of unconstitutionality of the said donation; and (3) that the rule set forth in Article 1421
of the Civil Code is absolute, and admits of no exception. We do not agree with these premises.

The validity of a statute depends upon the powers of Congress at the time of its passage or
approval, not upon events occurring, or acts performed, subsequently thereto, unless the latter
consists of an amendment of the organic law, removing, with retrospective operation, the
constitutional limitation infringed by said statute. Referring to the P85,000.00 appropriation for
the projected feeder roads in question, the legality thereof depended upon whether said roads were
public or private property when the bill, which, latter on, became Republic Act 920, was passed
by Congress, or, when said bill was approved by the President and the disbursement of said sum
became effective, or on June 20, 1953 (see section 13 of said Act). Inasmuch as the land on which
the projected feeder roads were to be constructed belonged then to respondent Zulueta, the result
is that said appropriation sought a private purpose, and hence, was null and void. 4 The donation
to the Government, over five (5) months after the approval and effectivity of said Act, made,
according to the petition, for the purpose of giving a "semblance of legality", or legalizing, the
appropriation in question, did not cure its aforementioned basic defect. Consequently, a judicial
nullification of said donation need not precede the declaration of unconstitutionality of said
appropriation.

Again, Article 1421 of our Civil Code, like many other statutory enactments, is subject to
exceptions. For instance, the creditors of a party to an illegal contract may, under the conditions
set forth in Article 1177 of said Code, exercise the rights and actions of the latter, except only
those which are inherent in his person, including therefore, his right to the annulment of said
contract, even though such creditors are not affected by the same, except indirectly, in the manner
indicated in said legal provision.

Again, it is well-stated that the validity of a statute may be contested only by one who will sustain
a direct injury in consequence of its enforcement. Yet, there are many decisions nullifying, at the
instance of taxpayers, laws providing for the disbursement of public funds, 5upon the theory that
"the expenditure of public funds by an officer of the State for the purpose of administering
an unconstitutional act constitutes a misapplication of such funds," which may be enjoined at the
request of a taxpayer. 6Although there are some decisions to the contrary, 7the prevailing view in
the United States is stated in the American Jurisprudence as follows:

In the determination of the degree of interest essential to give the requisite standing to
attack the constitutionality of a statute, the general rule is that not only persons individually
affected, but also taxpayers, have sufficient interest in preventing the illegal expenditure
of moneys raised by taxation and may therefore question the constitutionality of statutes
requiring expenditure of public moneys. (11 Am. Jur. 761; emphasis supplied.)

However, this view was not favored by the Supreme Court of the U.S. in Frothingham vs. Mellon
(262 U.S. 447), insofar as federal laws are concerned, upon the ground that the relationship of a
taxpayer of the U.S. to its Federal Government is different from that of a taxpayer of a municipal
corporation to its government. Indeed, under thecomposite system of government existing in the
U.S., the states of the Union are integral part of the Federation from an international viewpoint,
but, each state enjoys internally a substantial measure of sovereignty, subject to the limitations
imposed by the Federal Constitution. In fact, the same was made by representatives of each state of
the Union, not of the people of the U.S., except insofar as the former represented the people of the
respective States, and the people of each State has, independently of that of the others, ratified said
Constitution. In other words, the Federal Constitution and the Federal statutes have become
binding upon the people of the U.S. in consequence of an act of, and, in this sense, through the
respective states of the Union of which they are citizens. The peculiar nature of the relation
between said people and the Federal Government of the U.S. is reflected in the election of its
President, who is chosen directly, not by the people of the U.S., but by electors chosen by each
State, in such manner as the legislature thereof may direct (Article II, section 2, of the Federal
Constitution).lawphi1.net

The relation between the people of the Philippines and its taxpayers, on the other hand, and the
Republic of the Philippines, on the other, is not identical to that obtaining between the people and
taxpayers of the U.S. and its Federal Government. It is closer, from a domestic viewpoint, to that
existing between the people and taxpayers of each state and the government thereof, except that
the authority of the Republic of the Philippines over the people of the Philippines is more fully
direct than that of the states of the Union, insofar as the simple and unitary type of our national
government is not subject to limitations analogous to those imposed by the Federal Constitution
upon the states of the Union, and those imposed upon the Federal Government in the interest of
the Union. For this reason, the rule recognizing the right of taxpayers to assail the constitutionality
of a legislation appropriating local or state public funds — which has been upheld by the Federal
Supreme Court (Crampton vs. Zabriskie, 101 U.S. 601) — has greater application in the
Philippines than that adopted with respect to acts of Congress of the United States appropriating
federal funds.

Indeed, in the Province of Tayabas vs. Perez (56 Phil., 257), involving the expropriation of a land
by the Province of Tayabas, two (2) taxpayers thereof were allowed to intervene for the purpose
of contesting the price being paid to the owner thereof, as unduly exorbitant. It is true that in
Custodio vs. President of the Senate (42 Off. Gaz., 1243), a taxpayer and employee of the
Government was not permitted to question the constitutionality of an appropriation for backpay of
members of Congress. However, in Rodriguez vs. Treasurer of the Philippines and
Barredo vs.Commission on Elections (84 Phil., 368; 45 Off. Gaz., 4411), we entertained the action
of taxpayers impugning the validity of certain appropriations of public funds, and invalidated the
same. Moreover, the reason that impelled this Court to take such position in said two (2) cases —
the importance of the issues therein raised — is present in the case at bar. Again, like the petitioners
in the Rodriguez and Barredo cases, petitioner herein is not merely a taxpayer. The Province of
Rizal, which he represents officially as its Provincial Governor, is our most populated political
subdivision, 8and, the taxpayers therein bear a substantial portion of the burden of taxation, in the
Philippines.

Hence, it is our considered opinion that the circumstances surrounding this case sufficiently justify
petitioners action in contesting the appropriation and donation in question; that this action should
not have been dismissed by the lower court; and that the writ of preliminary injunction should have
been maintained.

Wherefore, the decision appealed from is hereby reversed, and the records are remanded to the
lower court for further proceedings not inconsistent with this decision, with the costs of this
instance against respondent Jose C. Zulueta. It is so ordered.

G.R. No. L-7859 December 22, 1955

WALTER LUTZ, as Judicial Administrator of the Intestate Estate of the deceased Antonio
Jayme Ledesma,plaintiff-appellant,
vs.
J. ANTONIO ARANETA, as the Collector of Internal Revenue, defendant-appellee.

Ernesto J. Gonzaga for appellant.


Office of the Solicitor General Ambrosio Padilla, First Assistant Solicitor General Guillermo E.
Torres and Solicitor Felicisimo R. Rosete for appellee.

REYES, J.B L., J.:

This case was initiated in the Court of First Instance of Negros Occidental to test the legality of
the taxes imposed by Commonwealth Act No. 567, otherwise known as the Sugar Adjustment Act.

Promulgated in 1940, the law in question opens (section 1) with a declaration of emergency, due
to the threat to our industry by the imminent imposition of export taxes upon sugar as provided in
the Tydings-McDuffe Act, and the "eventual loss of its preferential position in the United States
market"; wherefore, the national policy was expressed "to obtain a readjustment of the benefits
derived from the sugar industry by the component elements thereof" and "to stabilize the sugar
industry so as to prepare it for the eventuality of the loss of its preferential position in the United
States market and the imposition of the export taxes."

In section 2, Commonwealth Act 567 provides for an increase of the existing tax on the
manufacture of sugar, on a graduated basis, on each picul of sugar manufactured; while section 3
levies on owners or persons in control of lands devoted to the cultivation of sugar cane and ceded
to others for a consideration, on lease or otherwise —

a tax equivalent to the difference between the money value of the rental or consideration
collected and the amount representing 12 per centum of the assessed value of such land.

According to section 6 of the law —

SEC. 6. All collections made under this Act shall accrue to a special fund in the Philippine
Treasury, to be known as the 'Sugar Adjustment and Stabilization Fund,' and shall be paid
out only for any or all of the following purposes or to attain any or all of the following
objectives, as may be provided by law.

First, to place the sugar industry in a position to maintain itself, despite the gradual loss of
the preferntial position of the Philippine sugar in the United States market, and ultimately
to insure its continued existence notwithstanding the loss of that market and the consequent
necessity of meeting competition in the free markets of the world;

Second, to readjust the benefits derived from the sugar industry by all of the component
elements thereof — the mill, the landowner, the planter of the sugar cane, and the laborers
in the factory and in the field — so that all might continue profitably to engage
therein;lawphi1.net

Third, to limit the production of sugar to areas more economically suited to the production
thereof; and

Fourth, to afford labor employed in the industry a living wage and to improve their living
and working conditions: Provided, That the President of the Philippines may, until the
adjourment of the next regular session of the National Assembly, make the necessary
disbursements from the fund herein created (1) for the establishment and operation of sugar
experiment station or stations and the undertaking of researchers (a) to increase the
recoveries of the centrifugal sugar factories with the view of reducing manufacturing costs,
(b) to produce and propagate higher yielding varieties of sugar cane more adaptable to
different district conditions in the Philippines, (c) to lower the costs of raising sugar cane,
(d) to improve the buying quality of denatured alcohol from molasses for motor fuel, (e) to
determine the possibility of utilizing the other by-products of the industry, (f) to determine
what crop or crops are suitable for rotation and for the utilization of excess cane lands, and
(g) on other problems the solution of which would help rehabilitate and stabilize the
industry, and (2) for the improvement of living and working conditions in sugar mills and
sugar plantations, authorizing him to organize the necessary agency or agencies to take
charge of the expenditure and allocation of said funds to carry out the purpose hereinbefore
enumerated, and, likewise, authorizing the disbursement from the fund herein created of
the necessary amount or amounts needed for salaries, wages, travelling expenses,
equipment, and other sundry expenses of said agency or agencies.
Plaintiff, Walter Lutz, in his capacity as Judicial Administrator of the Intestate Estate of Antonio
Jayme Ledesma, seeks to recover from the Collector of Internal Revenue the sum of P14,666.40
paid by the estate as taxes, under section 3 of the Act, for the crop years 1948-1949 and 1949-
1950; alleging that such tax is unconstitutional and void, being levied for the aid and support of
the sugar industry exclusively, which in plaintiff's opinion is not a public purpose for which a tax
may be constitutioally levied. The action having been dismissed by the Court of First Instance, the
plaintifs appealed the case directly to this Court (Judiciary Act, section 17).

The basic defect in the plaintiff's position is his assumption that the tax provided for in
Commonwealth Act No. 567 is a pure exercise of the taxing power. Analysis of the Act, and
particularly of section 6 (heretofore quoted in full), will show that the tax is levied with a regulatory
purpose, to provide means for the rehabilitation and stabilization of the threatened sugar industry.
In other words, the act is primarily an exercise of the police power.

This Court can take judicial notice of the fact that sugar production is one of the great industries
of our nation, sugar occupying a leading position among its export products; that it gives
employment to thousands of laborers in fields and factories; that it is a great source of the state's
wealth, is one of the important sources of foreign exchange needed by our government, and is thus
pivotal in the plans of a regime committed to a policy of currency stability. Its promotion,
protection and advancement, therefore redounds greatly to the general welfare. Hence it was
competent for the legislature to find that the general welfare demanded that the sugar industry
should be stabilized in turn; and in the wide field of its police power, the lawmaking body could
provide that the distribution of benefits therefrom be readjusted among its components to enable
it to resist the added strain of the increase in taxes that it had to sustain (Sligh vs. Kirkwood, 237
U. S. 52, 59 L. Ed. 835; Johnson vs. State ex rel. Marey, 99 Fla. 1311, 128 So. 853; Maxcy Inc.
vs. Mayo, 103 Fla. 552, 139 So. 121).

As stated in Johnson vs. State ex rel. Marey, with reference to the citrus industry in Florida —

The protection of a large industry constituting one of the great sources of the state's wealth
and therefore directly or indirectly affecting the welfare of so great a portion of the
population of the State is affected to such an extent by public interests as to be within the
police power of the sovereign. (128 Sp. 857).

Once it is conceded, as it must, that the protection and promotion of the sugar industry is a matter
of public concern, it follows that the Legislature may determine within reasonable bounds what is
necessary for its protection and expedient for its promotion. Here, the legislative discretion must
be allowed fully play, subject only to the test of reasonableness; and it is not contended that the
means provided in section 6 of the law (above quoted) bear no relation to the objective pursued or
are oppressive in character. If objective and methods are alike constitutionally valid, no reason is
seen why the state may not levy taxes to raise funds for their prosecution and attainment. Taxation
may be made the implement of the state's police power (Great Atl. & Pac. Tea Co. vs. Grosjean,
301 U. S. 412, 81 L. Ed. 1193; U. S. vs. Butler, 297 U. S. 1, 80 L. Ed. 477; M'Culloch vs. Maryland,
4 Wheat. 316, 4 L. Ed. 579).
That the tax to be levied should burden the sugar producers themselves can hardly be a ground of
complaint; indeed, it appears rational that the tax be obtained precisely from those who are to be
benefited from the expenditure of the funds derived from it. At any rate, it is inherent in the power
to tax that a state be free to select the subjects of taxation, and it has been repeatedly held that
"inequalities which result from a singling out of one particular class for taxation, or exemption
infringe no constitutional limitation" (Carmichael vs. Southern Coal & Coke Co., 301 U. S. 495,
81 L. Ed. 1245, citing numerous authorities, at p. 1251).

From the point of view we have taken it appears of no moment that the funds raised under the
Sugar Stabilization Act, now in question, should be exclusively spent in aid of the sugar industry,
since it is that very enterprise that is being protected. It may be that other industries are also in
need of similar protection; that the legislature is not required by the Constitution to adhere to a
policy of "all or none." As ruled in Minnesota ex rel. Pearson vs. Probate Court, 309 U. S. 270, 84
L. Ed. 744, "if the law presumably hits the evil where it is most felt, it is not to be overthrown
because there are other instances to which it might have been applied;" and that "the legislative
authority, exerted within its proper field, need not embrace all the evils within its reach" (N. L. R.
B. vs. Jones & Laughlin Steel Corp. 301 U. S. 1, 81 L. Ed. 893).

Even from the standpoint that the Act is a pure tax measure, it cannot be said that the devotion of
tax money to experimental stations to seek increase of efficiency in sugar production, utilization
of by-products and solution of allied problems, as well as to the improvements of living and
working conditions in sugar mills or plantations, without any part of such money being channeled
directly to private persons, constitutes expenditure of tax money for private purposes, (compare
Everson vs. Board of Education, 91 L. Ed. 472, 168 ALR 1392, 1400).

The decision appealed from is affirmed, with costs against appellant. So ordered.

G.R. No. L-23645 October 29, 1968

BENJAMIN P. GOMEZ, petitioner-appellee,


vs.
ENRICO PALOMAR, in his capacity as Postmaster General, HON. BRIGIDO R.
VALENCIA, in his capacity as Secretary of Public Works and Communications, and
DOMINGO GOPEZ, in his capacity as Acting Postmaster of San Fernando,
Pampanga, respondent-appellants.

Lorenzo P. Navarro and Narvaro Belar S. Navarro for petitioner-appellee.


Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Frine C. Zaballero
and Solicitor Dominador L. Quiroz for respondents-appellants.

CASTRO, J.:

This appeal puts in issue the constitutionality of Republic Act 1635,1 as amended by Republic Act
2631,2 which provides as follows:
To help raise funds for the Philippine Tuberculosis Society, the Director of Posts shall
order for the period from August nineteen to September thirty every year the printing and
issue of semi-postal stamps of different denominations with face value showing the regular
postage charge plus the additional amount of five centavos for the said purpose, and during
the said period, no mail matter shall be accepted in the mails unless it bears such semi-
postal stamps: Provided, That no such additional charge of five centavos shall be imposed
on newspapers. The additional proceeds realized from the sale of the semi-postal stamps
shall constitute a special fund and be deposited with the National Treasury to be expended
by the Philippine Tuberculosis Society in carrying out its noble work to prevent and
eradicate tuberculosis.

The respondent Postmaster General, in implementation of the law, thereafter issued four (4)
administrative orders numbered 3 (June 20, 1958), 7 (August 9, 1958), 9 (August 28, 1958), and
10 (July 15, 1960). All these administrative orders were issued with the approval of the respondent
Secretary of Public Works and Communications.

The pertinent portions of Adm. Order 3 read as follows:

Such semi-postal stamps could not be made available during the period from August 19 to
September 30, 1957, for lack of time. However, two denominations of such stamps, one at
"5 + 5" centavos and another at "10 + 5" centavos, will soon be released for use by the
public on their mails to be posted during the same period starting with the year 1958.

xxx xxx xxx

During the period from August 19 to September 30 each year starting in 1958, no mail
matter of whatever class, and whether domestic or foreign, posted at any Philippine Post
Office and addressed for delivery in this country or abroad, shall be accepted for mailing
unless it bears at least one such semi-postal stamp showing the additional value of five
centavos intended for the Philippine Tuberculosis Society.

In the case of second-class mails and mails prepaid by means of mail permits or
impressions of postage meters, each piece of such mail shall bear at least one such semi-
postal stamp if posted during the period above stated starting with the year 1958, in addition
to being charged the usual postage prescribed by existing regulations. In the case of
business reply envelopes and cards mailed during said period, such stamp should be
collected from the addressees at the time of delivery. Mails entitled to franking privilege
like those from the office of the President, members of Congress, and other offices to which
such privilege has been granted, shall each also bear one such semi-postal stamp if posted
during the said period.

Mails posted during the said period starting in 1958, which are found in street or post-office
mail boxes without the required semi-postal stamp, shall be returned to the sender, if
known, with a notation calling for the affixing of such stamp. If the sender is unknown, the
mail matter shall be treated as nonmailable and forwarded to the Dead Letter Office for
proper disposition.
Adm. Order 7, amending the fifth paragraph of Adm. Order 3, reads as follows:

In the case of the following categories of mail matter and mails entitled to franking
privilege which are not exempted from the payment of the five centavos intended for the
Philippine Tuberculosis Society, such extra charge may be collected in cash, for which
official receipt (General Form No. 13, A) shall be issued, instead of affixing the semi-postal
stamp in the manner hereinafter indicated:

1. Second-class mail. — Aside from the postage at the second-class rate, the extra charge
of five centavos for the Philippine Tuberculosis Society shall be collected on each
separately-addressed piece of second-class mail matter, and the total sum thus collected
shall be entered in the same official receipt to be issued for the postage at the second-class
rate. In making such entry, the total number of pieces of second-class mail posted shall be
stated, thus: "Total charge for TB Fund on 100 pieces . .. P5.00." The extra charge shall be
entered separate from the postage in both of the official receipt and the Record of
Collections.

2. First-class and third-class mail permits. — Mails to be posted without postage affixed
under permits issued by this Bureau shall each be charged the usual postage, in addition to
the five-centavo extra charge intended for said society. The total extra charge thus received
shall be entered in the same official receipt to be issued for the postage collected, as in
subparagraph 1.

3. Metered mail. — For each piece of mail matter impressed by postage meter under
metered mail permit issued by this Bureau, the extra charge of five centavos for said society
shall be collected in cash and an official receipt issued for the total sum thus received, in
the manner indicated in subparagraph 1.

4. Business reply cards and envelopes. — Upon delivery of business reply cards and
envelopes to holders of business reply permits, the five-centavo charge intended for said
society shall be collected in cash on each reply card or envelope delivered, in addition to
the required postage which may also be paid in cash. An official receipt shall be issued for
the total postage and total extra charge received, in the manner shown in subparagraph 1.

5. Mails entitled to franking privilege. — Government agencies, officials, and other


persons entitled to the franking privilege under existing laws may pay in cash such extra
charge intended for said society, instead of affixing the semi-postal stamps to their mails,
provided that such mails are presented at the post-office window, where the five-centavo
extra charge for said society shall be collected on each piece of such mail matter. In such
case, an official receipt shall be issued for the total sum thus collected, in the manner stated
in subparagraph 1.

Mail under permits, metered mails and franked mails not presented at the post-office
window shall be affixed with the necessary semi-postal stamps. If found in mail boxes
without such stamps, they shall be treated in the same way as herein provided for other
mails.
Adm. Order 9, amending Adm. Order 3, as amended, exempts "Government and its Agencies and
Instrumentalities Performing Governmental Functions." Adm. Order 10, amending Adm. Order 3,
as amended, exempts "copies of periodical publications received for mailing under any class of
mail matter, including newspapers and magazines admitted as second-class mail."

The FACTS. On September l5, 1963 the petitioner Benjamin P. Gomez mailed a letter at the post
office in San Fernando, Pampanga. Because this letter, addressed to a certain Agustin Aquino of
1014 Dagohoy Street, Singalong, Manila did not bear the special anti-TB stamp required by the
statute, it was returned to the petitioner.

In view of this development, the petitioner brough suit for declaratory relief in the Court of First
Instance of Pampanga, to test the constitutionality of the statute, as well as the implementing
administrative orders issued, contending that it violates the equal protection clause of the
Constitution as well as the rule of uniformity and equality of taxation. The lower court declared
the statute and the orders unconstitutional; hence this appeal by the respondent postal authorities.

For the reasons set out in this opinion, the judgment appealed from must be reversed.

I.

Before reaching the merits, we deem it necessary to dispose of the respondents' contention that
declaratory relief is unavailing because this suit was filed after the petitioner had committed a
breach of the statute. While conceding that the mailing by the petitioner of a letter without the
additional anti-TB stamp was a violation of Republic Act 1635, as amended, the trial court
nevertheless refused to dismiss the action on the ground that under section 6 of Rule 64 of the
Rules of Court, "If before the final termination of the case a breach or violation of ... a statute ...
should take place, the action may thereupon be converted into an ordinary action."

The prime specification of an action for declaratory relief is that it must be brought "before breach
or violation" of the statute has been committed. Rule 64, section 1 so provides. Section 6 of the
same rule, which allows the court to treat an action for declaratory relief as an ordinary action,
applies only if the breach or violation occurs after the filing of the action but before the termination
thereof.3

Hence, if, as the trial court itself admitted, there had been a breach of the statute before the firing
of this action, then indeed the remedy of declaratory relief cannot be availed of, much less can the
suit be converted into an ordinary action.

Nor is there merit in the petitioner's argument that the mailing of the letter in question did not
constitute a breach of the statute because the statute appears to be addressed only to postal
authorities. The statute, it is true, in terms provides that "no mail matter shall be accepted in the
mails unless it bears such semi-postal stamps." It does not follow, however, that only postal
authorities can be guilty of violating it by accepting mails without the payment of the anti-TB
stamp. It is obvious that they can be guilty of violating the statute only if there are people who use
the mails without paying for the additional anti-TB stamp. Just as in bribery the mere offer
constitutes a breach of the law, so in the matter of the anti-TB stamp the mere attempt to use the
mails without the stamp constitutes a violation of the statute. It is not required that the mail be
accepted by postal authorities. That requirement is relevant only for the purpose of fixing the
liability of postal officials.

Nevertheless, we are of the view that the petitioner's choice of remedy is correct because this suit
was filed not only with respect to the letter which he mailed on September 15, 1963, but also with
regard to any other mail that he might send in the future. Thus, in his complaint, the petitioner
prayed that due course be given to "other mails without the semi-postal stamps which he may
deliver for mailing ... if any, during the period covered by Republic Act 1635, as amended, as well
as other mails hereafter to be sent by or to other mailers which bear the required postage, without
collection of additional charge of five centavos prescribed by the same Republic Act." As one
whose mail was returned, the petitioner is certainly interested in a ruling on the validity of the
statute requiring the use of additional stamps.

II.

We now consider the constitutional objections raised against the statute and the implementing
orders.

1. It is said that the statute is violative of the equal protection clause of the Constitution. More
specifically the claim is made that it constitutes mail users into a class for the purpose of the tax
while leaving untaxed the rest of the population and that even among postal patrons the statute
discriminatorily grants exemption to newspapers while Administrative Order 9 of the respondent
Postmaster General grants a similar exemption to offices performing governmental functions. .

The five centavo charge levied by Republic Act 1635, as amended, is in the nature of an excise
tax, laid upon the exercise of a privilege, namely, the privilege of using the mails. As such the
objections levelled against it must be viewed in the light of applicable principles of taxation.

To begin with, it is settled that the legislature has the inherent power to select the subjects of
taxation and to grant exemptions.4 This power has aptly been described as "of wide range and
flexibility."5 Indeed, it is said that in the field of taxation, more than in other areas, the legislature
possesses the greatest freedom in classification.6 The reason for this is that traditionally,
classification has been a device for fitting tax programs to local needs and usages in order to
achieve an equitable distribution of the tax burden.7

That legislative classifications must be reasonable is of course undenied. But what the petitioner
asserts is that statutory classification of mail users must bear some reasonable relationship to the
end sought to be attained, and that absent such relationship the selection of mail users is
constitutionally impermissible. This is altogether a different proposition. As explained
in Commonwealth v. Life Assurance Co.:8

While the principle that there must be a reasonable relationship between classification
made by the legislation and its purpose is undoubtedly true in some contexts, it has no
application to a measure whose sole purpose is to raise revenue ... So long as the
classification imposed is based upon some standard capable of reasonable comprehension,
be that standard based upon ability to produce revenue or some other legitimate distinction,
equal protection of the law has been afforded. See Allied Stores of Ohio, Inc. v.
Bowers, supra, 358 U.S. at 527, 79 S. Ct. at 441; Brown Forman Co. v. Commonwealth of
Kentucky, 2d U.S. 56, 573, 80 S. Ct. 578, 580 (1910).

We are not wont to invalidate legislation on equal protection grounds except by the clearest
demonstration that it sanctions invidious discrimination, which is all that the Constitution forbids.
The remedy for unwise legislation must be sought in the legislature. Now, the classification of
mail users is not without any reason. It is based on ability to pay, let alone the enjoyment of a
privilege, and on administrative convinience. In the allocation of the tax burden, Congress must
have concluded that the contribution to the anti-TB fund can be assured by those whose who can
afford the use of the mails.

The classification is likewise based on considerations of administrative convenience. For it is now


a settled principle of law that "consideration of practical administrative convenience and cost in
the administration of tax laws afford adequate ground for imposing a tax on a well recognized and
defined class."9 In the case of the anti-TB stamps, undoubtedly, the single most important and
influential consideration that led the legislature to select mail users as subjects of the tax is the
relative ease and convenienceof collecting the tax through the post offices. The small amount of
five centavos does not justify the great expense and inconvenience of collecting through the regular
means of collection. On the other hand, by placing the duty of collection on postal authorities the
tax was made almost self-enforcing, with as little cost and as little inconvenience as possible.

And then of course it is not accurate to say that the statute constituted mail users into a class. Mail
users were already a class by themselves even before the enactment of the statue and all that the
legislature did was merely to select their class. Legislation is essentially empiric and Republic Act
1635, as amended, no more than reflects a distinction that exists in fact. As Mr. Justice Frankfurter
said, "to recognize differences that exist in fact is living law; to disregard [them] and concentrate
on some abstract identities is lifeless logic."10

Granted the power to select the subject of taxation, the State's power to grant exemption must
likewise be conceded as a necessary corollary. Tax exemptions are too common in the law; they
have never been thought of as raising issues under the equal protection clause.

It is thus erroneous for the trial court to hold that because certain mail users are exempted from the
levy the law and administrative officials have sanctioned an invidious discrimination offensive to
the Constitution. The application of the lower courts theory would require all mail users to be
taxed, a conclusion that is hardly tenable in the light of differences in status of mail users. The
Constitution does not require this kind of equality.

As the United States Supreme Court has said, the legislature may withhold the burden of the tax
in order to foster what it conceives to be a beneficent enterprise.11 This is the case of newspapers
which, under the amendment introduced by Republic Act 2631, are exempt from the payment of
the additional stamp.
As for the Government and its instrumentalities, their exemption rests on the State's sovereign
immunity from taxation. The State cannot be taxed without its consent and such consent, being in
derogation of its sovereignty, is to be strictly construed.12 Administrative Order 9 of the respondent
Postmaster General, which lists the various offices and instrumentalities of the Government
exempt from the payment of the anti-TB stamp, is but a restatement of this well-known principle
of constitutional law.

The trial court likewise held the law invalid on the ground that it singles out tuberculosis to the
exclusion of other diseases which, it is said, are equally a menace to public health. But it is never
a requirement of equal protection that all evils of the same genus be eradicated or none at all.13 As
this Court has had occasion to say, "if the law presumably hits the evil where it is most felt, it is
not to be overthrown because there are other instances to which it might have been applied."14

2. The petitioner further argues that the tax in question is invalid, first, because it is not levied for
a public purpose as no special benefits accrue to mail users as taxpayers, and second, because it
violates the rule of uniformity in taxation.

The eradication of a dreaded disease is a public purpose, but if by public purpose the petitioner
means benefit to a taxpayer as a return for what he pays, then it is sufficient answer to say that the
only benefit to which the taxpayer is constitutionally entitled is that derived from his enjoyment
of the privileges of living in an organized society, established and safeguarded by the devotion of
taxes to public purposes. Any other view would preclude the levying of taxes except as they are
used to compensate for the burden on those who pay them and would involve the abandonment of
the most fundamental principle of government — that it exists primarily to provide for the common
good.15

Nor is the rule of uniformity and equality of taxation infringed by the imposition of a flat rate
rather than a graduated tax. A tax need not be measured by the weight of the mail or the extent of
the service rendered. We have said that considerations of administrative convenience and cost
afford an adequate ground for classification. The same considerations may induce the legislature
to impose a flat tax which in effect is a charge for the transaction, operating equally on all persons
within the class regardless of the amount involved.16 As Mr. Justice Holmes said in sustaining the
validity of a stamp act which imposed a flat rate of two cents on every $100 face value of stock
transferred:

One of the stocks was worth $30.75 a share of the face value of $100, the other $172. The
inequality of the tax, so far as actual values are concerned, is manifest. But, here again
equality in this sense has to yield to practical considerations and usage. There must be a
fixed and indisputable mode of ascertaining a stamp tax. In another sense, moreover, there
is equality. When the taxes on two sales are equal, the same number of shares is sold in
each case; that is to say, the same privilege is used to the same extent. Valuation is not the
only thing to be considered. As was pointed out by the court of appeals, the familiar stamp
tax of 2 cents on checks, irrespective of income or earning capacity, and many others,
illustrate the necessity and practice of sometimes substituting count for weight ...17
According to the trial court, the money raised from the sales of the anti-TB stamps is spent for the
benefit of the Philippine Tuberculosis Society, a private organization, without appropriation by
law. But as the Solicitor General points out, the Society is not really the beneficiary but only the
agency through which the State acts in carrying out what is essentially a public function. The
money is treated as a special fund and as such need not be appropriated by law.18

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

Administrative Order 3, as amended by Administrative Orders 7 and 10, provides that for certain
classes of mail matters (such as mail permits, metered mails, business reply cards, etc.), the five-
centavo charge may be paid in cash instead of the purchase of the anti-TB stamp. It further states
that mails deposited during the period August 19 to September 30 of each year in mail boxes
without the stamp should be returned to the sender, if known, otherwise they should be treated as
nonmailable.

It is true that the law does not expressly authorize the collection of five centavos except through
the sale of anti-TB stamps, but such authority may be implied in so far as it may be necessary to
prevent a failure of the undertaking. The authority given to the Postmaster General to raise funds
through the mails must be liberally construed, consistent with the principle that where the end is
required the appropriate means are given.19

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

It is likewise true that the statute does not provide for the disposition of mails which do not bear
the anti-TB stamp, but a declaration therein that "no mail matter shall be accepted in the mails
unless it bears such semi-postal stamp" is a declaration that such mail matter is nonmailable within
the meaning of section 1952 of the Administrative Code. Administrative Order 7 of the Postmaster
General is but a restatement of the law for the guidance of postal officials and employees. As for
Administrative Order 9, we have already said that in listing the offices and entities of the
Government exempt from the payment of the stamp, the respondent Postmaster General merely
observed an established principle, namely, that the Government is exempt from taxation.

ACCORDINGLY, the judgment a quo is reversed, and the complaint is dismissed, without
pronouncement as to costs.

G.R. No. L-34150 October 16, 1971

ARTURO M. TOLENTINO, petitioner,


vs.
COMMISSION ON ELECTIONS, and THE CHIEF ACCOUNTANT, THE AUDITOR,
and THE DISBURSING OFFICER OF THE 1971 CONSTITUTIONAL
CONVENTION, respondents, RAUL S. MANGLAPUS, JESUS G. BARRERA, PABLO S.
TRILLANA III, VICTOR DE LA SERNA, MARCELO B. FERNAN, JOSE Y. FERIA,
LEONARDO SIGUION REYNA, VICTOR F. ORTEGA, and JUAN V.
BORRA, Intervenors.

Arturo M. Tolentino in his own behalf.

Ramon A. Gonzales for respondents Chief Accountant and Auditor of the 1971 Constitutional
Convention.

Emmanuel Pelaez, Jorge M. Juco and Tomas L. Echivarre for respondent Disbursing Officer of
the 1971 Constitutional Convention.

Intervenors in their own behalf.

BARREDO, J.:

Petition for prohibition principally to restrain the respondent Commission on Elections "from
undertaking to hold a plebiscite on November 8, 1971," at which the proposed constitutional
amendment "reducing the voting age" in Section 1 of Article V of the Constitution of the
Philippines to eighteen years "shall be, submitted" for ratification by the people pursuant to
Organic Resolution No. 1 of the Constitutional Convention of 1971, and the subsequent
implementing resolutions, by declaring said resolutions to be without the force and effect of law
in so far as they direct the holding of such plebiscite and by also declaring the acts of the respondent
Commission (COMELEC) performed and to be done by it in obedience to the aforesaid
Convention resolutions to be null and void, for being violative of the Constitution of the
Philippines.

As a preliminary step, since the petition named as respondent only the COMELEC, the Count
required that copies thereof be served on the Solicitor General and the Constitutional Convention,
through its President, for such action as they may deem proper to take. In due time, respondent
COMELEC filed its answer joining issues with petitioner. To further put things in proper order,
and considering that the fiscal officers of the Convention are indispensable parties in a proceeding
of this nature, since the acts sought to be enjoined involve the expenditure of funds appropriated
by law for the Convention, the Court also ordered that the Disbursing Officer, Chief Accountant
and Auditor of the Convention be made respondents. After the petition was so amended, the first
appeared thru Senator Emmanuel Pelaez and the last two thru Delegate Ramon Gonzales. All said
respondents, thru counsel, resist petitioner's action.

For reasons of orderliness and to avoid unnecessary duplication of arguments and even possible
confusion, and considering that with the principal parties being duly represented by able counsel,
their interests would be adequately protected already, the Court had to limit the number of
intervenors from the ranks of the delegates to the Convention who, more or less, have legal interest
in the success of the respondents, and so, only Delegates Raul S. Manglapus, Jesus G. Barrera,
Pablo S. Trillana III, Victor de la Serna, Marcelo B. Fernan, Jose Y. Feria, Leonardo Siguion
Reyna, Victor Ortega and Juan B. Borra, all distinguished lawyers in their own right, have been
allowed to intervene jointly. The Court feels that with such an array of brilliant and dedicated
counsel, all interests involved should be duly and amply represented and protected. At any rate,
notwithstanding that their corresponding motions for leave to intervene or to appear as amicus
curiae 1 have been denied, the pleadings filed by the other delegates and some private parties, the
latter in representation of their minor children allegedly to be affected by the result of this case
with the records and the Court acknowledges that they have not been without value as materials in
the extensive study that has been undertaken in this case.

The background facts are beyond dispute. The Constitutional Convention of 1971 came into being
by virtue of two resolutions of the Congress of the Philippines approved in its capacity as a
constituent assembly convened for the purpose of calling a convention to propose amendments to
the Constitution namely, Resolutions 2 and 4 of the joint sessions of Congress held on March 16,
1967 and June 17, 1969 respectively. The delegates to the said Convention were all elected under
and by virtue of said resolutions and the implementing legislation thereof, Republic Act 6132. The
pertinent portions of Resolution No 2 read as follows:

SECTION 1. There is hereby called a convention to propose amendments to the


Constitution of the Philippines, to be composed of two elective Delegates from each
representative district who shall have the same qualifications as those required of
Members of the House of Representatives.

xxx xxx xxx

SECTION 7. The amendments proposed by the Convention shall be valid and


considered part of the Constitution when approved by a majority of the votes cast
in an election at which they are submitted to the people for their ratification
pursuant to Article XV of the Constitution.

Resolution No. 4 merely modified the number of delegates to represent the different cities and
provinces fixed originally in Resolution No 2.

After the election of the delegates held on November 10, 1970, the Convention held its inaugural
session on June 1, 1971. Its preliminary labors of election of officers, organization of committees
and other preparatory works over, as its first formal proposal to amend the Constitution, its session
which began on September 27, 1971, or more accurately, at about 3:30 in the morning of
September 28, 1971, the Convention approved Organic Resolution No. 1 reading thus: .

CC ORGANIC RESOLUTION NO. 1

A RESOLUTION AMENDING SECTION ONE OF ARTICLE V OF THE


CONSTITUTION OF THE PHILIPPINES SO AS TO LOWER THE VOTING
AGE TO 18
BE IT RESOLVED as it is hereby resolved by the 1971 Constitutional Convention:

Section 1. Section One of Article V of the Constitution of the Philippines is


amended to as follows:

Section 1. Suffrage may be exercised by (male) citizens of the


Philippines not otherwise disqualified by law, who are (twenty-one)
EIGHTEEN years or over and are able to read and write, and who
shall have resided in the Philippines for one year and in the
municipality wherein they propose to vote for at least six months
preceding the election.

Section 2. This amendment shall be valid as part of the Constitution of the


Philippines when approved by a majority of the votes cast in a plebiscite to coincide
with the local elections in November 1971.

Section 3. This partial amendment, which refers only to the age qualification for
the exercise of suffrage shall be without prejudice to other amendments that will be
proposed in the future by the 1971 Constitutional Convention on other portions of
the amended Section or on other portions of the entire Constitution.

Section 4. The Convention hereby authorizes the use of the sum of P75,000.00 from
its savings or from its unexpended funds for the expense of the advanced plebiscite;
provided, however that should there be no savings or unexpended sums, the
Delegates waive P250.00 each or the equivalent of 2-1/2 days per diem.

By a letter dated September 28, 1971, President Diosdado Macapagal, called upon respondent
Comelec "to help the Convention implement (the above) resolution." The said letter reads:

September 28, 1971

The Commission on Elections Manila

Thru the Chairman

Gentlemen:

Last night the Constitutional Convention passed Resolution No. 1 quoted as


follows:

xxx xxx xxx

(see above)
Pursuant to the provision of Section 14, Republic Act No. 6132 otherwise known
as the Constitutional Convention Act of 1971, may we call upon you to help the
Convention implement this resolution:

Sincerely,

(Sgd.) DIOSDADO P.
MACAPAGAL
DIOSDADO P.
MACAPAGAL
President

On September 30, 1971, COMELEC "RESOLVED to inform the Constitutional Convention that
it will hold the plebiscite on condition that:

(a) The Constitutional Convention will undertake the printing of separate official
ballots, election returns and tally sheets for the use of said plebiscite at its expense;

(b) The Constitutional Convention will adopt its own security measures for the
printing and shipment of said ballots and election forms; and

(c) Said official ballots and election forms will be delivered to the Commission in
time so that they could be distributed at the same time that the Commission will
distribute its official and sample ballots to be used in the elections on November 8,
1971.

What happened afterwards may best be stated by quoting from intervenors' Governors' statement
of the genesis of the above proposal:

The President of the Convention also issued an order forming an Ad Hoc


Committee to implement the Resolution.

This Committee issued implementing guidelines which were approved by the


President who then transmitted them to the Commission on Elections.

The Committee on Plebiscite and Ratification filed a report on the progress of the
implementation of the plebiscite in the afternoon of October 7,1971, enclosing
copies of the order, resolution and letters of transmittal above referred to (Copy of
the report is hereto attached as Annex 8-Memorandum).

RECESS RESOLUTION

In its plenary session in the evening of October 7, 1971, the Convention approved
a resolution authored by Delegate Antonio Olmedo of Davao Oriental, calling for
a recess of the Convention from November 1, 1971 to November 9, 1971 to permit
the delegates to campaign for the ratification of Organic Resolution No. 1. (Copies
of the resolution and the transcript of debate thereon are hereto attached as Annexes
9 and 9-A Memorandum, respectively).

RESOLUTION CONFIRMING IMPLEMENTATION

On October 12, 1971, the Convention passed Resolution No. 24 submitted by


Delegate Jose Ozamiz confirming the authority of the President of the Convention
to implement Organic Resolution No. 1, including the creation of the Ad Hoc
Committee ratifying all acts performed in connection with said implementation.

Upon these facts, the main thrust of the petition is that Organic Resolution No. 1 and the other
implementing resolutions thereof subsequently approved by the Convention have no force and
effect as laws in so far as they provide for the holding of a plebiscite co-incident with the elections
of eight senators and all city, provincial and municipal officials to be held on November 8, 1971,
hence all of Comelec's acts in obedience thereof and tending to carry out the holding of the
plebiscite directed by said resolutions are null and void, on the ground that the calling and holding
of such a plebiscite is, by the Constitution, a power lodged exclusively in Congress, as a legislative
body, and may not be exercised by the Convention, and that, under Section 1, Article XV of the
Constitution, the proposed amendment in question cannot be presented to the people for
ratification separately from each and all of the other amendments to be drafted and proposed by
the Convention. On the other hand, respondents and intervenors posit that the power to provide
for, fix the date and lay down the details of the plebiscite for the ratification of any amendment the
Convention may deem proper to propose is within the authority of the Convention as a necessary
consequence and part of its power to propose amendments and that this power includes that of
submitting such amendments either individually or jointly at such time and manner as the
Convention may direct in discretion. The Court's delicate task now is to decide which of these two
poses is really in accord with the letter and spirit of the Constitution.

As a preliminary and prejudicial matter, the intervenors raise the question of jurisdiction. They
contend that the issue before Us is a political question and that the Convention being legislative
body of the highest order is sovereign, and as such, its acts impugned by petitioner are beyond the
control of the Congress and the courts. In this connection, it is to be noted that none of the
respondent has joined intervenors in this posture. In fact, respondents Chief Accountant and
Auditor of the convention expressly concede the jurisdiction of this Court in their answer
acknowledging that the issue herein is a justifiable one.

Strangely, intervenors cite in support of this contention portions of the decision of this Court in
the case of Gonzales v. Comelec, 21 SCRA 774, wherein the members of the Court, despite their
being divided in their opinions as to the other matters therein involved, were precisely unanimous
in upholding its jurisdiction. Obviously, distinguished counsel have either failed to grasp the full
impact of the portions of Our decision they have quoted or would misapply them by taking them
out of context.

There should be no more doubt as to the position of this Court regarding its jurisdiction vis-a-vis
the constitutionality of the acts of the Congress, acting as a constituent assembly, and, for that
matter, those of a constitutional convention called for the purpose of proposing amendments to the
Constitution, which concededly is at par with the former. A simple reading of Our ruling in that
very case of Gonzales relied upon by intervenors should dispel any lingering misgivings as regards
that point. Succinctly but comprehensively, Chief Justice Concepcion held for the Court thus: .

As early as Angara vs. Electoral Commission (63 Phil. 139, 157), this Court —
speaking through one of the leading members of the Constitutional Convention and
a respected professor of Constitutional Law, Dr. Jose P. Laurel — declared that
"the judicial department is the only constitutional organ which can be called upon
to determine the proper allocation of powers between the several departments and
among the integral or constituent units thereof."

It is true that in Mabanag v. Lopez Vito (supra), this Court characterizing the issue
submitted thereto as a political one declined to pass upon the question whether or
not a given number of votes cast in Congress in favor of a proposed amendment to
the Constitution — which was being submitted to the people for ratification —
satisfied the three-fourths vote requirement of the fundamental law. The force of
this precedent has been weakened, however, by Suanes v. Chief Accountant of the
Senate (81 Phil. 818), Avelino v. Cuenco, (L-2851, March 4 & 14, 1949), Tañada
v. Cuenco, (L-10520, Feb. 28, 1957) and Macias v. Commission on Elections, (L-
18684, Sept. 14, 1961). In the first we held that the officers and employees of the
Senate Electoral Tribunal are under its supervision and control, not of that of the
Senate President, as claimed by the latter; in the second, this Court proceeded to
determine the number of Senators necessary for quorum in the Senate; in the third,
we nullified the election, by Senators belonging to the party having the largest
number of votes in said chamber, purporting to act, on behalf of the party having
the second largest number of votes therein of two (2) Senators belonging to the first
party, as members, for the second party, of the Senate Electoral Tribunal; and in
the fourth, we declared unconstitutional an act of Congress purporting to apportion
the representatives districts for the House of Representatives, upon the ground that
the apportionment had not been made as may be possible according to the number
of inhabitants of each province. Thus we rejected the theory, advanced in these four
(4) cases that the issues therein raised were political questions the determination of
which is beyond judicial review.

Indeed, the power to amend the Constitution or to propose amendments thereto is


not included in the general grant of legislative powers to Congress (Section 1, Art.
VI, Constitution of the Philippines). It is part of the inherent powers of the
people — as the repository sovereignty in a republican state, such as ours (Section
1, Art. 11, Constitution of the Philippines) — to make, and, hence, to amend their
own Fundamental Law. Congress may propose amendments to the Constitution
merely because the same explicitly grants such power. (Section 1, Art. XV,
Constitution of the Philippines) Hence, when exercising the same, it is said that
Senators and members of the House of Representatives act, not as members of
Congress, but as component elements of a constituent assembly. When acting as
such, the members of Congress derive their authority from the Constitution, unlike
the people, when performing the same function, (Of amending the Constitution) for
their authority does not emanate from the Constitution — they are the very
source of all powers of government including the Constitution itself.

Since, when proposing, as a constituent assembly, amendments to the Constitution,


the members of Congress derive their authority from the Fundamental Law, it
follows, necessarily, that they do not have the final say on whether or not their acts
are within or beyond constitutional limits. Otherwise, they could brush aside and
set the same at naught, contrary to the basic tenet that ours is a government of laws,
not of men, and to the rigid nature of our Constitution. Such rigidity is stressed by
the fact that the Constitution expressly confers upon the Supreme Court, (And,
inferentially, to lower courts.) the power to declare a treaty unconstitutional. (Sec.
2(1), Art. VIII of the Constitution), despite the eminently political character of
treaty-making power.

In short, the issue whether or not a Resolution of Congress — acting as a constituent


assembly — violates the Constitution is essentially justiciable not political, and,
hence, subject to judicial review, and, to the extent that this view may be
inconsistent with the stand taken in Mabanag v. Lopez Vito, (supra) the latter
should be deemed modified accordingly. The Members of the Court are unanimous
on this point.

No one can rightly claim that within the domain of its legitimate authority, the Convention is not
supreme. Nowhere in his petition and in his oral argument and memoranda does petitioner point
otherwise. Actually, what respondents and intervenors are seemingly reluctant to admit is that the
Constitutional Convention of 1971, as any other convention of the same nature, owes its existence
and derives all its authority and power from the existing Constitution of the Philippines. This
Convention has not been called by the people directly as in the case of a revolutionary convention
which drafts the first Constitution of an entirely new government born of either a war of liberation
from a mother country or of a revolution against an existing government or of a bloodless seizure
of powera la coup d'etat. As to such kind of conventions, it is absolutely true that the convention
is completely without restrain and omnipotent all wise, and it is as to such conventions that the
remarks of Delegate Manuel Roxas of the Constitutional Convention of 1934 quoted by Senator
Pelaez refer. No amount of rationalization can belie the fact that the current convention came into
being only because it was called by a resolution of a joint session of Congress acting as a
constituent assembly by authority of Section 1, Article XV of the present Constitution which
provides:

ARTICLE XV — AMENDMENTS

SECTION 1. The Congress in joint session assembled, by a vote of three-fourths


of all the Members of the Senate and of the House of Representatives voting
separately, may propose amendments to this Constitution or call a convention for
the purpose. Such amendments shall be valid as part of this Constitution when
approved by a majority of the votes cast at an election at which the amendments
are submitted to the people for their ratification.
True it is that once convened, this Convention became endowed with extra ordinary powers
generally beyond the control of any department of the existing government, but the compass of
such powers can be co-extensive only with the purpose for which the convention was called and
as it may propose cannot have any effect as part of the Constitution until the same are duly ratified
by the people, it necessarily follows that the acts of convention, its officers and members are not
immune from attack on constitutional grounds. The present Constitution is in full force and effect
in its entirety and in everyone of its parts the existence of the Convention notwithstanding, and
operates even within the walls of that assembly. While it is indubitable that in its internal operation
and the performance of its task to propose amendments to the Constitution it is not subject to any
degree of restraint or control by any other authority than itself, it is equally beyond cavil that
neither the Convention nor any of its officers or members can rightfully deprive any person of life,
liberty or property without due process of law, deny to anyone in this country the equal protection
of the laws or the freedom of speech and of the press in disregard of the Bill of Rights of the
existing Constitution. Nor, for that matter, can such Convention validly pass any resolution
providing for the taking of private property without just compensation or for the imposition or
exacting of any tax, impost or assessment, or declare war or call the Congress to a special session,
suspend the privilege of the writ of habeas corpus, pardon a convict or render judgment in a
controversy between private individuals or between such individuals and the state, in violation of
the distribution of powers in the Constitution.

It being manifest that there are powers which the Convention may not and cannot validly assert,
much less exercise, in the light of the existing Constitution, the simple question arises, should an
act of the Convention be assailed by a citizen as being among those not granted to or inherent in
it, according to the existing Constitution, who can decide whether such a contention is correct or
not? It is of the very essence of the rule of law that somehow somewhere the Power and duty to
resolve such a grave constitutional question must be lodged on some authority, or we would have
to confess that the integrated system of government established by our founding fathers contains
a wide vacuum no intelligent man could ignore, which is naturally unworthy of their learning,
experience and craftsmanship in constitution-making.

We need not go far in search for the answer to the query We have posed. The very decision of
Chief Justice Concepcion in Gonzales, so much invoked by intervenors, reiterates and reinforces
the irrefutable logic and wealth of principle in the opinion written for a unanimous Court by Justice
Laurel in Angara vs. Electoral Commission, 63 Phil., 134, reading:

... (I)n the main, the Constitution has blocked out with deft strokes and in bold lines,
allotment of power to the executive, the legislative and the judicial departments of
the government. The overlapping and interlacing of functions and duties between
the several departments, however, sometimes makes it hard to say where the one
leaves off and the other begins. In times of social disquietude or political
excitement, the great landmark of the Constitution are apt to be forgotten or marred,
if not entirely obliterated. In cases of conflict, the judicial department is the only
constitutional organ which can be called upon to determine the proper allocation of
powers between the several departments and among the integral or constituent units
thereof.
As any human production our Constitution is of course lacking perfection and
perfectibility, but as much as it was within the power of our people, acting through
their delegates to so provide, that instrument which is the expression of their
sovereignty however limited, has established a republican government intended to
operate and function as a harmonious whole, under a system of check and balances
and subject to specific limitations and restrictions provided in the said instrument.
The Constitution sets forth in no uncertain language the restrictions and limitations
upon governmental powers and agencies. If these restrictions and limitations are
transcended it would be inconceivable if the Constitution had not provided for a
mechanism by which to direct the course of government along constitutional
channels, for then the distribution of powers would be mere verbiage, the bill of
rights mere expressions of sentiment and the principles of good government mere
political apothegms. Certainly the limitations and restrictions embodied in our
Constitution are real as they should be in any living Constitution. In the United
States where no express constitutional grant is found in their constitution, the
possession of this moderating power of the courts, not to speak of its historical
origin and development there, has been set at rest by popular acquiescence for a
period of more than one and half centuries. In our case, this moderating power is
granted, if not expressly, by clear implication from section 2 of Article VIII of our
Constitution.

The Constitution is a definition of the powers or government. Who is to determine


the nature, scope and extent of such powers? The Constitution itself has provided
for the instrumentality of the judiciary as the rational way. And when the judiciary
mediates to allocate constitutional boundaries, it does not assert any superiority
over the other departments; it does not in reality nullify or invalidate an act of the
legislature, but only asserts the solemn and sacred obligation assigned to it by the
Constitution to determine conflicting claims of authority under the Constitution and
to establish for the parties in an actual controversy the rights which that instrument
secures and guarantees to them. This is in truth all that is involved in what is termed
"judicial supremacy" which properly is the power of judicial review under the
Constitution. Even then, this power of judicial review is limited to actual cases and
controversies to be exercised after full opportunity of argument by the parties, and
limited further to the constitutional question raised or the very lis mota presented.
Any attempt at abstraction could only lead to dialectics and barren legal questions
and to strike conclusions unrelated to actualities. Narrowed as its functions is in
this manner the judiciary does not pass upon questions of wisdom, justice or
expediency of legislation. More than that, courts accord the presumption of
constitutionality to legislative enactments, not only because the legislature is
presumed to abide by the Constitution but also because the judiciary in the
determination of actual cases and controversies must reflect the wisdom and justice
of the people as expressed through their representatives in the executive and
legislative departments of the government.

But much as we might postulate on the internal checks of power provided in our
Constitution, it ought not the less to be remembered that, in the language of James
Madison, the system itself is not "the chief palladium of constitutional liberty ... the
people who are authors of this blessing must also be its guardians ... their eyes must
be ever ready to mark, their voices to pronounce ... aggression on the authority of
their Constitution." In the last and ultimate analysis then, must the success of our
government in the unfolding years to come be tested in the crucible of Filipino
minds and hearts than in consultation rooms and court chambers.

In the case at bar, the National Assembly has by resolution (No. 8) of December 3,
1935, confirmed the election of the herein petitioner to the said body. On the other
hand, the Electoral Commission has by resolution adopted on December 9, 1935,
fixed said date as the last day for the filing of protests against the election, returns
and qualifications of members of the National Assembly; notwithstanding the
previous confirmations made by the National Assembly as aforesaid. If, as
contended by the petitioner, the resolution of the National Assembly has the effect
of cutting off the power of the Electoral Commission to entertain protests against
the election, returns and qualifications of members of the National Assembly,
submitted after December 3, 1935 then the resolution of the Electoral Commission
of December 9, 1935, is mere surplusage and had no effect. But, if, as contended
by the respondents, the Electoral Commission has the sole power of regulating its
proceedings to the exclusion of the National Assembly, then the resolution of
December 9, 1935, by which the Electoral Commission fixed said date as the last
day for filing protests against the election, returns and qualifications of members of
the National Assembly, should be upheld.

Here is then presented an actual controversy involving as it does a conflict of a


grave constitutional nature between the National Assembly on the one hand and the
Electoral Commission on the other. From the very nature of the republican
government established in our country in the light of American experience and of
our own, upon the judicial department is thrown the solemn and inescapable
obligation of interpreting the Constitution and defining constitutional boundaries.
The Electoral Commission as we shall have occasion to refer hereafter, is a
constitutional organ, created for a specific purpose, namely, to determine all
contests relating to the election, returns and qualifications of the members of the
National Assembly. Although the Electoral Commission may not be interfered
with, when and while acting within the limits of its authority, it does not follow that
it is beyond the reach of the constitutional mechanism adopted by the people and
that it is not subject to constitutional restriction. The Electoral Commission is not a
separate department of the government, and even if it were, conflicting claims of
authority under the fundamental law between departmental powers and agencies of
the government are necessarily determined by the judiciary in justiciable and
appropriate cases. Discarding the English type and other European types of
constitutional government, the framers of our Constitution adopted the American
type where the written constitution is interpreted and given effect by the judicial
department. In some countries which have declined to follow the American
example, provisions have been inserted in their constitutions prohibiting the courts
from exercising the power to interpret the fundamental law. This is taken as a
recognition of what otherwise would be the rule that in the absence of direct
prohibition, courts are bound to assume what is logically their function. For
instance, the Constitution of Poland of 1921 expressly provides that courts shall
have no power to examine the validity of statutes (art. 81, Chap. IV). The former
Austrian Constitution contained a similar declaration. In countries whose
constitution are silent in this respect, courts have assumed this power. This is true
in Norway, Greece, Australia and South Africa. Whereas, in Czechoslovakia (arts.
2 and 3, Preliminary Law to Constitutional Charter of the Czechoslavak, Republic,
February 29, 1920) and Spain (arts. 121-123, Title IX, Constitution of the Republic
of 1931) especial constitutional courts are established to pass upon the validity of
ordinary laws. In our case, the nature of the present controversy shows the necessity
of a final constitutional arbiter to determine the conflict of authority between two
agencies created by the Constitution. Were we to decline to take cognizance of the
controversy, who will determine the conflict? And if the conflict were left
undecided and undetermined, would not a void be thus created in our constitutional
system which may in the long run prove destructive of the entire framework? To
ask these questions is to answer them. Natura vacuum abhorret, so must we avoid
exhaustion in our constitutional system. Upon principle, reason, and authority, we
are clearly of the opinion that upon the admitted facts of the present case, this court
has jurisdiction over the Electoral Commission and the subject matter of the present
controversy for the purpose of determining the character, scope and extent of the
constitutional grant to the Electoral Commission as "the sole judge of all contests
relating to the election, returns and qualifications of the members of the National
Assembly." .

As the Chief Justice has made it clear in Gonzales, like Justice Laurel did in Angara, these
postulates just quoted do not apply only to conflicts of authority between the three existing regular
departments of the government but to all such conflicts between and among these departments, or,
between any of them, on the one hand, and any other constitutionally created independent body,
like the electoral tribunals in Congress, the Comelec and the Constituent assemblies constituted by
the House of Congress, on the other. We see no reason of logic or principle whatsoever, and none
has been convincingly shown to Us by any of the respondents and intervenors, why the same ruling
should not apply to the present Convention, even if it is an assembly of delegate elected directly
by the people, since at best, as already demonstrated, it has been convened by authority of and
under the terms of the present Constitution..

Accordingly, We are left with no alternative but to uphold the jurisdiction of the Court over the
present case. It goes without saying that We do this not because the Court is superior to the
Convention or that the Convention is subject to the control of the Court, but simply because both
the Convention and the Court are subject to the Constitution and the rule of law, and "upon
principle, reason and authority," per Justice Laurel, supra, it is within the power as it is the solemn
duty of the Court, under the existing Constitution to resolve the issues in which petitioner,
respondents and intervenors have joined in this case.

II
The issue of jurisdiction thus resolved, We come to the crux of the petition. Is it within the powers
of the Constitutional Convention of 1971 to order, on its own fiat, the holding of a plebiscite for
the ratification of the proposed amendment reducing to eighteen years the age for the exercise of
suffrage under Section 1 of Article V of the Constitution proposed in the Convention's Organic
Resolution No. 1 in the manner and form provided for in said resolution and the subsequent
implementing acts and resolution of the Convention?

At the threshold, the environmental circumstances of this case demand the most accurate and
unequivocal statement of the real issue which the Court is called upon to resolve. Petitioner has
very clearly stated that he is not against the constitutional extension of the right of suffrage to the
eighteen-year-olds, as a matter of fact, he has advocated or sponsored in Congress such a proposal,
and that, in truth, the herein petition is not intended by him to prevent that the proposed amendment
here involved be submitted to the people for ratification, his only purpose in filing the petition
being to comply with his sworn duty to prevent, Whenever he can, any violation of the Constitution
of the Philippines even if it is committed in the course of or in connection with the most laudable
undertaking. Indeed, as the Court sees it, the specific question raised in this case is limited solely
and only to the point of whether or not it is within the power of the Convention to call for a
plebiscite for the ratification by the people of the constitutional amendment proposed in the
abovequoted Organic Resolution No. 1, in the manner and form provided in said resolution as well
as in the subject question implementing actions and resolution of the Convention and its officers,
at this juncture of its proceedings, when as it is a matter of common knowledge and judicial notice,
it is not set to adjourn sine die, and is, in fact, still in the preliminary stages of considering other
reforms or amendments affecting other parts of the existing Constitution; and, indeed, Organic
Resolution No. 1 itself expressly provides, that the amendment therein proposed "shall be without
prejudice to other amendments that will be proposed in the future by the 1971 Constitutional
Convention on other portions of the amended section or on other portions of the entire
Constitution." In other words, nothing that the Court may say or do, in this case should be
understood as reflecting, in any degree or means the individual or collective stand of the members
of the Court on the fundamental issue of whether or not the eighteen-year-olds should be allowed
to vote, simply because that issue is not before Us now. There should be no doubt in the mind of
anyone that, once the Court finds it constitutionally permissible, it will not hesitate to do its part
so that the said proposed amendment may be presented to the people for their approval or rejection.

Withal, the Court rests securely in the conviction that the fire and enthusiasm of the youth have
not blinded them to the absolute necessity, under the fundamental principles of democracy to
which the Filipino people is committed, of adhering always to the rule of law. Surely, their
idealism, sincerity and purity of purpose cannot permit any other line of conduct or approach in
respect of the problem before Us. The Constitutional Convention of 1971 itself was born, in a great
measure, because of the pressure brought to bear upon the Congress of the Philippines by various
elements of the people, the youth in particular, in their incessant search for a peaceful and orderly
means of bringing about meaningful changes in the structure and bases of the existing social and
governmental institutions, including the provisions of the fundamental law related to the well-
being and economic security of the underprivileged classes of our people as well as those
concerning the preservation and protection of our natural resources and the national patrimony, as
an alternative to violent and chaotic ways of achieving such lofty ideals. In brief, leaving aside the
excesses of enthusiasm which at times have justifiably or unjustifiably marred the demonstrations
in the streets, plazas and campuses, the youth of the Philippines, in general, like the rest of the
people, do not want confusion and disorder, anarchy and violence; what they really want are law
and order, peace and orderliness, even in the pursuit of what they strongly and urgently feel must
be done to change the present order of things in this Republic of ours. It would be tragic and
contrary to the plain compulsion of these perspectives, if the Court were to allow itself in deciding
this case to be carried astray by considerations other than the imperatives of the rule of law and of
the applicable provisions of the Constitution. Needless to say, in a larger measure than when it
binds other departments of the government or any other official or entity, the Constitution imposes
upon the Court the sacred duty to give meaning and vigor to the Constitution, by interpreting and
construing its provisions in appropriate cases with the proper parties, and by striking down any act
violative thereof. Here, as in all other cases, We are resolved to discharge that duty.

During these twice when most anyone feels very strongly the urgent need for constitutional
reforms, to the point of being convinced that meaningful change is the only alternative to a violent
revolution, this Court would be the last to put any obstruction or impediment to the work of the
Constitutional Convention. If there are respectable sectors opining that it has not been called to
supplant the existing Constitution in its entirety, since its enabling provision, Article XV, from
which the Convention itself draws life expressly speaks only of amendments which shall form part
of it, which opinion is not without persuasive force both in principle and in logic, the seemingly
prevailing view is that only the collective judgment of its members as to what is warranted by the
present condition of things, as they see it, can limit the extent of the constitutional innovations the
Convention may propose, hence the complete substitution of the existing constitution is not beyond
the ambit of the Convention's authority. Desirable as it may be to resolve, this grave divergence of
views, the Court does not consider this case to be properly the one in which it should discharge its
constitutional duty in such premises. The issues raised by petitioner, even those among them in
which respondents and intervenors have joined in an apparent wish to have them squarely passed
upon by the Court do not necessarily impose upon Us the imperative obligation to express Our
views thereon. The Court considers it to be of the utmost importance that the Convention should
be untrammelled and unrestrained in the performance of its constitutionally as signed mission in
the manner and form it may conceive best, and so the Court may step in to clear up doubts as to
the boundaries set down by the Constitution only when and to the specific extent only that it would
be necessary to do so to avoid a constitutional crisis or a clearly demonstrable violation of the
existing Charter. Withal, it is a very familiar principle of constitutional law that constitutional
questions are to be resolved by the Supreme Court only when there is no alternative but to do it,
and this rule is founded precisely on the principle of respect that the Court must accord to the acts
of the other coordinate departments of the government, and certainly, the Constitutional
Convention stands almost in a unique footing in that regard.

In our discussion of the issue of jurisdiction, We have already made it clear that the Convention
came into being by a call of a joint session of Congress pursuant to Section I of Article XV of the
Constitution, already quoted earlier in this opinion. We reiterate also that as to matters not related
to its internal operation and the performance of its assigned mission to propose amendments to the
Constitution, the Convention and its officers and members are all subject to all the provisions of
the existing Constitution. Now We hold that even as to its latter task of proposing amendments to
the Constitution, it is subject to the provisions of Section I of Article XV. This must be so, because
it is plain to Us that the framers of the Constitution took care that the process of amending the
same should not be undertaken with the same ease and facility in changing an ordinary legislation.
Constitution making is the most valued power, second to none, of the people in a constitutional
democracy such as the one our founding fathers have chosen for this nation, and which we of the
succeeding generations generally cherish. And because the Constitution affects the lives, fortunes,
future and every other conceivable aspect of the lives of all the people within the country and those
subject to its sovereignty, every degree of care is taken in preparing and drafting it. A constitution
worthy of the people for which it is intended must not be prepared in haste without adequate
deliberation and study. It is obvious that correspondingly, any amendment of the Constitution is
of no less importance than the whole Constitution itself, and perforce must be conceived and
prepared with as much care and deliberation. From the very nature of things, the drafters of an
original constitution, as already observed earlier, operate without any limitations, restraints or
inhibitions save those that they may impose upon themselves. This is not necessarily true of
subsequent conventions called to amend the original constitution. Generally, the framers of the
latter see to it that their handiwork is not lightly treated and as easily mutilated or changed, not
only for reasons purely personal but more importantly, because written constitutions are supposed
to be designed so as to last for some time, if not for ages, or for, at least, as long as they can be
adopted to the needs and exigencies of the people, hence, they must be insulated against precipitate
and hasty actions motivated by more or less passing political moods or fancies. Thus, as a rule, the
original constitutions carry with them limitations and conditions, more or less stringent, made so
by the people themselves, in regard to the process of their amendment. And when such limitations
or conditions are so incorporated in the original constitution, it does not lie in the delegates of any
subsequent convention to claim that they may ignore and disregard such conditions because they
are as powerful and omnipotent as their original counterparts.

Nothing of what is here said is to be understood as curtailing in any degree the number and nature
and the scope and extent of the amendments the Convention may deem proper to propose. Nor
does the Court propose to pass on the issue extensively and brilliantly discussed by the parties as
to whether or not the power or duty to call a plebiscite for the ratification of the amendments to be
proposed by the Convention is exclusively legislative and as such may be exercised only by the
Congress or whether the said power can be exercised concurrently by the Convention with the
Congress. In the view the Court takes of present case, it does not perceive absolute necessity to
resolve that question, grave and important as it may be. Truth to tell, the lack of unanimity or even
of a consensus among the members of the Court in respect to this issue creates the need for more
study and deliberation, and as time is of the essence in this case, for obvious reasons, November
8, 1971, the date set by the Convention for the plebiscite it is calling, being nigh, We will refrain
from making any pronouncement or expressing Our views on this question until a more appropriate
case comes to Us. After all, the basis of this decision is as important and decisive as any can be.

The ultimate question, therefore boils down to this: Is there any limitation or condition in Section
1 of Article XV of the Constitution which is violated by the act of the Convention of calling for a
plebiscite on the sole amendment contained in Organic Resolution No. 1? The Court holds that
there is, and it is the condition and limitation that all the amendments to be proposed by the same
Convention must be submitted to the people in a single "election" or plebiscite. It being
indisputable that the amendment now proposed to be submitted to a plebiscite is only the first
amendment the Convention propose We hold that the plebiscite being called for the purpose of
submitting the same for ratification of the people on November 8, 1971 is not authorized by Section
1 of Article XV of the Constitution, hence all acts of the Convention and the respondent Comelec
in that direction are null and void.

We have arrived at this conclusion for the following reasons:

1. The language of the constitutional provision aforequoted is sufficiently clear. lt says distinctly
that either Congress sitting as a constituent assembly or a convention called for the purpose "may
propose amendments to this Constitution," thus placing no limit as to the number of amendments
that Congress or the Convention may propose. The same provision also as definitely provides that
"such amendments shall be valid as part of this Constitution when approved by a majority of the
votes cast at an election at which the amendments are submitted to the people for their
ratification," thus leaving no room for doubt as to how many "elections" or plebiscites may be held
to ratify any amendment or amendments proposed by the same constituent assembly of Congress
or convention, and the provision unequivocably says "an election" which means only one.

(2) Very little reflection is needed for anyone to realize the wisdom and appropriateness of this
provision. As already stated, amending the Constitution is as serious and important an undertaking
as constitution making itself. Indeed, any amendment of the Constitution is as important as the
whole of it if only because the Constitution has to be an integrated and harmonious instrument, if
it is to be viable as the framework of the government it establishes, on the one hand, and adequately
formidable and reliable as the succinct but comprehensive articulation of the rights, liberties,
ideology, social ideals, and national and nationalistic policies and aspirations of the people, on the
other. lt is inconceivable how a constitution worthy of any country or people can have any part
which is out of tune with its other parts..

A constitution is the work of the people thru its drafters assembled by them for the purpose. Once
the original constitution is approved, the part that the people play in its amendment becomes
harder, for when a whole constitution is submitted to them, more or less they can assumed its
harmony as an integrated whole, and they can either accept or reject it in its entirety. At the very
least, they can examine it before casting their vote and determine for themselves from a study of
the whole document the merits and demerits of all or any of its parts and of the document as a
whole. And so also, when an amendment is submitted to them that is to form part of the existing
constitution, in like fashion they can study with deliberation the proposed amendment in relation
to the whole existing constitution and or any of its parts and thereby arrive at an intelligent
judgment as to its acceptability.

This cannot happen in the case of the amendment in question. Prescinding already from the fact
that under Section 3 of the questioned resolution, it is evident that no fixed frame of reference is
provided the voter, as to what finally will be concomitant qualifications that will be required by
the final draft of the constitution to be formulated by the Convention of a voter to be able to enjoy
the right of suffrage, there are other considerations which make it impossible to vote intelligently
on the proposed amendment, although it may already be observed that under Section 3, if a voter
would favor the reduction of the voting age to eighteen under conditions he feels are needed under
the circumstances, and he does not see those conditions in the ballot nor is there any possible
indication whether they will ever be or not, because Congress has reserved those for future action,
what kind of judgment can he render on the proposal?
But the situation actually before Us is even worse. No one knows what changes in the fundamental
principles of the constitution the Convention will be minded to approve. To be more specific, we
do not have any means of foreseeing whether the right to vote would be of any significant value at
all. Who can say whether or not later on the Convention may decide to provide for varying types
of voters for each level of the political units it may divide the country into. The root of the difficulty
in other words, lies in that the Convention is precisely on the verge of introducing substantial
changes, if not radical ones, in almost every part and aspect of the existing social and political
order enshrined in the present Constitution. How can a voter in the proposed plebiscite intelligently
determine the effect of the reduction of the voting age upon the different institutions which the
Convention may establish and of which presently he is not given any idea?

We are certain no one can deny that in order that a plebiscite for the ratification of an amendment
to the Constitution may be validly held, it must provide the voter not only sufficient time but ample
basis for an intelligent appraisal of the nature of the amendment per se as well as its relation to the
other parts of the Constitution with which it has to form a harmonious whole. In the context of the
present state of things, where the Convention has hardly started considering the merits of hundreds,
if not thousands, of proposals to amend the existing Constitution, to present to the people any
single proposal or a few of them cannot comply with this requirement. We are of the opinion that
the present Constitution does not contemplate in Section 1 of Article XV a plebiscite or "election"
wherein the people are in the dark as to frame of reference they can base their judgment on. We
reject the rationalization that the present Constitution is a possible frame of reference, for the
simple reason that intervenors themselves are stating that the sole purpose of the proposed
amendment is to enable the eighteen year olds to take part in the election for the ratification of the
Constitution to be drafted by the Convention. In brief, under the proposed plebiscite, there can be,
in the language of Justice Sanchez, speaking for the six members of the Court in Gonzales, supra,
"no proper submission".

III

The Court has no desire at all to hamper and hamstring the noble work of the Constitutional
Convention. Much less does the Court want to pass judgment on the merits of the proposal to allow
these eighteen years old to vote. But like the Convention, the Court has its own duties to the people
under the Constitution which is to decide in appropriate cases with appropriate parties Whether or
not the mandates of the fundamental law are being complied with. In the best light God has given
Us, we are of the conviction that in providing for the questioned plebiscite before it has finished,
and separately from, the whole draft of the constitution it has been called to formulate, the
Convention's Organic Resolution No. 1 and all subsequent acts of the Convention implementing
the same violate the condition in Section 1, Article XV that there should only be one "election" or
plebiscite for the ratification of all the amendments the Convention may propose. We are not
denying any right of the people to vote on the proposed amendment; We are only holding that
under Section 1, Article XV of the Constitution, the same should be submitted to them not
separately from but together with all the other amendments to be proposed by this present
Convention.

IN VIEW OF ALL THE FOREGOING, the petition herein is granted. Organic Resolution No. 1
of the Constitutional Convention of 1971 and the implementing acts and resolutions of the
Convention, insofar as they provide for the holding of a plebiscite on November 8, 1971, as well
as the resolution of the respondent Comelec complying therewith (RR Resolution No. 695) are
hereby declared null and void. The respondents Comelec, Disbursing Officer, Chief Accountant
and Auditor of the Constitutional Convention are hereby enjoined from taking any action in
compliance with the said organic resolution. In view of the peculiar circumstances of this case, the
Court declares this decision immediately executory. No costs.

G.R. No. L-44640 October 12, 1976

PABLO C. SANIDAD and PABLITO V. SANIDAD, petitioner,


vs.
HONORABLE COMMISSION ON ELECTIONS and HONORABLE NATIONAL
TREASURER, respondents.

G.R. No. L-44684. October 12,1976

VICENTE M. GUZMAN, petitioner,


vs.
COMMISSION ELECTIONS, respondent.

G.R. No. L-44714. October 12,1976

RAUL M. GONZALES, RAUL T. GONZALES, JR., and ALFREDO


SALAPANTAN, petitioners,
vs.
HONORABLE COMMISSION ON SELECTIONS and HONORABLE NATIONAL
TREASURER, respondents.

MARTIN, J,:

The capital question raised in these prohibition suits with preliminary injunction relates to the
power of the incumbent President of the Philippines to propose amendments to the present
Constitution in the absence of the interim National Assembly which has not been convened.

On September 2, 1976, President Ferdinand E. Marcos issued Presidential Decree No. 991 calling
for a national referendum on October 16, 1976 for the Citizens Assemblies ("barangays") to
resolve, among other things, the issues of martial law, the I . assembly, its replacement, the powers
of such replacement, the period of its existence, the length of the period for tile exercise by the
President of his present powers.1

Twenty days after or on September 22, 1976, the President issued another related decree,
Presidential Decree No. 1031, amending the previous Presidential Decree No. 991, by declaring
the provisions of presidential Decree No. 229 providing for the manner of voting and canvass of
votes in "barangays" (Citizens Assemblies) applicable to the national referendum-plebiscite of
October 16, 1976. Quite relevantly, Presidential Decree No. 1031 repealed Section 4, of
Presidential Decree No. 991, the full text of which (Section 4) is quoted in the footnote below. 2
On the same date of September 22, 1976, the President issued Presidential Decree No. 1033, stating
the questions to be submitted to the people in the referendum-plebiscite on October 16, 1976. The
Decree recites in its "whereas" clauses that the people's continued opposition to the convening of
the National Assembly evinces their desire to have such body abolished and replaced thru a
constitutional amendment, providing for a legislative body, which will be submitted directly to the
people in the referendum-plebiscite of October 16.

The questions ask, to wit:

(1) Do you want martial law to be continued?

(2) Whether or not you want martial law to be continued, do you approve the following
amendments to the Constitution? For the purpose of the second question, the referendum shall
have the effect of a plebiscite within the contemplation of Section 2 of Article XVI of the
Constitution.

PROPOSED AMENDMENTS:

1. There shall be, in lieu of the interim National Assembly, an interim Batasang Pambansa.
Members of the interim Batasang Pambansa which shall not be more than 120, unless otherwise
provided by law, shall include the incumbent President of the Philippines, representatives elected
from the different regions of the nation, those who shall not be less than eighteen years of age
elected by their respective sectors, and those chosen by the incumbent President from the members
of the Cabinet. Regional representatives shall be apportioned among the regions in accordance
with the number of their respective inhabitants and on the basis of a uniform and progressive ratio
while the sectors shall be determined by law. The number of representatives from each region or
sector and the, manner of their election shall be prescribed and regulated by law.

2. The interim Batasang Pambansa shall have the same powers and its members shall have the
same functions, responsibilities, rights, privileges, and disqualifications as the interim National
Assembly and the regular National Assembly and the members thereof. However, it shall not
exercise the power provided in Article VIII, Section 14(l) of the Constitution.

3. The incumbent President of the Philippines shall, within 30 days from the election and selection
of the members, convene the interim Batasang Pambansa and preside over its sessions until the
Speaker shall have been elected. The incumbent President of the Philippines shall be the Prime
Minister and he shall continue to exercise all his powers even after the interim Batasang Pambansa
is organized and ready to discharge its functions and likewise he shall continue to exercise his
powers and prerogatives under the nineteen hundred and thirty five. Constitution and the powers
vested in the President and the Prime Minister under this Constitution.

4. The President (Prime Minister) and his Cabinet shall exercise all the powers and functions, and
discharge the responsibilities of the regular President (Prime Minister) and his Cabinet, and shall
be subject only to such disqualifications as the President (Prime Minister) may prescribe. The
President (Prime Minister) if he so desires may appoint a Deputy Prime Minister or as many
Deputy Prime Ministers as he may deem necessary.
5. The incumbent President shall continue to exercise legislative powers until martial law shall
have been lifted.

6. Whenever in the judgment of the President (Prime Minister), there exists a grave emergency or
a threat or imminence thereof, or whenever the interim Batasang Pambansa or the regular National
Assembly fails or is unable to act adequately on any matter for any reason that in his judgment
requires immediate action, he may, in order to meet the exigency, issue the necessary decrees,
orders or letters of instructions, which shall form part of the law of the land.

7. The barangays and sanggunians shall continue as presently constituted but their functions,
powers, and composition may be altered by law.

Referenda conducted thru the barangays and under the Supervision of the Commission on
Elections may be called at any time the government deems it necessary to ascertain the will of the
people regarding any important matter whether of national or local interest.

8. All provisions of this Constitution not inconsistent with any of these amendments shall continue
in full force and effect.

9. These amendments shall take effect after the incumbent President shall have proclaimed that
they have been ratified by I majority of the votes cast in the referendum-plebiscite."

The Commission on Elections was vested with the exclusive supervision and control of the
October 1976 National Referendum-Plebiscite.

On September 27, 1976, PABLO C. SANIDAD and PABLITO V. SANIDAD, father and son,
commenced L-44640 for Prohibition with Preliminary Injunction seeking to enjoin the
Commission on Elections from holding and conducting the Referendum Plebiscite on October 16;
to declare without force and effect Presidential Decree Nos. 991 and 1033, insofar as they propose
amendments to the Constitution, as well as Presidential Decree No. 1031, insofar as it directs the
Commission on Elections to supervise, control, hold, and conduct the Referendum-Plebiscite
scheduled on October 16, 1976.

Petitioners contend that under the 1935 and 1973 Constitutions there is no grant to the incumbent
President to exercise the constituent power to propose amendments to the new Constitution. As a
consequence, the Referendum-Plebiscite on October 16 has no constitutional or legal basis.

On October 5, 1976, the Solicitor General filed the comment for respondent Commission on
Elections, The Solicitor General principally maintains that petitioners have no standing to sue; the
issue raised is political in nature, beyond judicial cognizance of this Court; at this state of the
transition period, only the incumbent President has the authority to exercise constituent power; the
referendum-plebiscite is a step towards normalization.

On September 30, 1976, another action for Prohibition with Preliminary Injunction, docketed as
L-44684, was instituted by VICENTE M. GUZMAN, a delegate to the 1971 Constitutional
Convention, asserting that the power to propose amendments to, or revision of the Constitution
during the transition period is expressly conferred on the interim National Assembly under Section
16, Article XVII of the Constitution.3

Still another petition for Prohibition with Preliminary Injunction was filed on October 5, 1976 by
RAUL M. GONZALES, his son RAUL, JR., and ALFREDO SALAPANTAN, docketed as L-
44714, to restrain the implementation of Presidential Decrees relative to the forthcoming
Referendum-Plebiscite of October 16.

These last petitioners argue that even granting him legislative powers under Martial Law, the
incumbent President cannot act as a constituent assembly to propose amendments to the
Constitution; a referendum-plebiscite is untenable under the Constitutions of 1935 and 1973; the
submission of the proposed amendments in such a short period of time for deliberation renders the
plebiscite a nullity; to lift Martial Law, the President need not consult the people via referendum;
and allowing 15-.year olds to vote would amount to an amendment of the Constitution, which
confines the right of suffrage to those citizens of the Philippines 18 years of age and above.

We find the petitions in the three entitled cases to be devoid of merit.

Justiciability of question raised.

1. As a preliminary resolution, We rule that the petitioners in L-44640 (Pablo C. Sanidad and
Pablito V. Sanidad) possess locus standi to challenge the constitutional premise of Presidential
Decree Nos. 991, 1031, and 1033. It is now an ancient rule that the valid source of a stature
Presidential Decrees are of such nature-may be contested by one who will sustain a direct injuries
as a in result of its enforcement. At the instance of taxpayers, laws providing for the disbursement
of public funds may be enjoined, upon the theory that the expenditure of public funds by an officer
of the State for the purpose of executing an unconstitutional act constitutes a misapplication of
such funds. 4 The breadth of Presidential Decree No. 991 carries all appropriation of Five Million
Pesos for the effective implementation of its purposes. 5 Presidential Decree No. 1031 appropriates
the sum of Eight Million Pesos to carry out its provisions. 6 The interest of the aforenamed
petitioners as taxpayers in the lawful expenditure of these amounts of public money sufficiently
clothes them with that personality to litigate the validity of the Decrees appropriating said funds.
Moreover, as regards taxpayer's suits, this Court enjoys that open discretion to entertain the same
or not. 7 For the present case, We deem it sound to exercise that discretion affirmatively so that
the authority upon which the disputed Decrees are predicated may be inquired into.

2. The Solicitor General would consider the question at bar as a pure political one, lying outside
the domain of judicial review. We disagree. The amending process both as to proposal and
ratification, raises a judicial question. 8This is especially true in cases where the power of the
Presidency to initiate the of normally exercised by the legislature, is seriously doubted. Under the
terms of the 1973 Constitution, the power to propose amendments o the constitution resides in the
interim National Assembly in the period of transition (See. 15, Transitory provisions). After that
period, and the regular National Assembly in its active session, the power to propose amendments
becomes ipso facto the prerogative of the regular National Assembly (Sec. 1, pars. 1 and 2 of Art.
XVI, 1973 constitution). The normal course has not been followed. Rather than calling the
National Assembly to constitute itself into a constituent assembly the incumbent President
undertook the proposal of amendments and submitted the proposed amendments thru Presidential
Decree 1033 to the people in a Referendum-Plebiscite on October 16. Unavoidably, the regularity
regularity of the procedure for amendments, written in lambent words in the very Constitution
sought to be amended, raises a contestable issue. The implementing Presidential Decree Nos. 991,
1031, and 1033, which commonly purport to have the force and effect of legislation are assailed
as invalid, thus the issue of the validity of said Decrees is plainly a justiciable one, within the
competence of this Court to pass upon. Section 2 (2), Article X of the new Constitution provides:
"All cases involving the constitutionality of a treaty, executive agreement, or law may shall be
heard and decided by the Supreme Court en banc and no treaty, executive agreement, or law may
be declared unconstitutional without the concurrence of at least ten Members. ..." The Supreme
Court has the last word in the construction not only of treaties and statutes, but also of the
Constitution itself The amending, like all other powers organized in the Constitution, is in form a
delegated and hence a limited power, so that the Supreme Court is vested with that authorities to
determine whether that power has been discharged within its limits.

Political questions are neatly associated with the wisdom, of the legality of a particular act. Where
the vortex of the controversy refers to the legality or validity of the contested act, that matter is
definitely justiciable or non-political. What is in the heels of the Court is not the wisdom of the act
of the incumbent President in proposing amendments to the Constitution, but his constitutional
authority to perform such act or to assume the power of a constituent assembly. Whether the
amending process confers on the President that power to propose amendments is therefore a
downright justiciable question. Should the contrary be found, the actuation of the President would
merely be abrutum fulmen. If the Constitution provides how it may be amended, the judiciary as
the interpreter of that Constitution, can declare whether the procedure followed or the authority
assumed was valid or not. 10

We cannot accept the view of the Solicitor General, in pursuing his theory of non-justiciability,
that the question of the President's authority to propose amendments and the regularity of the
procedure adopted for submission of the proposal to the people ultimately lie in the judgment of
the A clear Descartes fallacy of vicious circle. Is it not that the people themselves, by their
sovereign act, provided for the authority and procedure for the amending process when they
ratified the present Constitution in 1973? Whether, therefore, the constitutional provision has been
followed or not is the proper subject of inquiry, not by the people themselves of course who
exercise no power of judicial but by the Supreme Court in whom the people themselves vested that
power, a power which includes the competence to determine whether the constitutional norms for
amendments have been observed or not. And, this inquiry must be done a prior not a posterior i.e.,
before the submission to and ratification by the people.

Indeed, the precedents evolved by the Court or, prior constitutional cases underline the preference
of the Court's majority to treat such issue of Presidential role in the amending process as one of
non-political impression. In the Plebiscite Cases, 11 the contention of the Solicitor General that the
issue on the legality of Presidential Decree No. 73 "submitting to the Pilipino people (on January
15, 1973) for ratification or rejection the Constitution of the Republic of the Philippines proposed
by the 1971 Constitutional Convention and appropriating fund s therefore "is a political one, was
rejected and the Court unanimously considered the issue as justiciable in nature. Subsequently in
the Ratification Cases 12involving the issue of whether or not the validity of Presidential
Proclamation No. 1102. announcing the Ratification by the Filipino people of the constitution
proposed by the 1971 Constitutional Convention," partakes of the nature of a political question,
the affirmative stand of' the Solicitor General was dismissed, the Court ruled that the question
raised is justiciable. Chief Justice Concepcion, expressing the majority view, said, Thus, in the
aforementioned plebiscite cases, We rejected the theory of the respondents therein that the question
whether Presidential Decree No. 73 calling a plebiscite to be held on January 15, 1973, for the
ratification or rejection of the proposed new Constitution, was valid or not, was not a proper subject
of judicial inquiry because, they claimed, it partook of a political nature, and We unanimously
declared that the issue was a justiciable one. With Identical unanimity. We overruled the
respondent's contention in the 1971 habeas corpus cases, questioning Our authority to determine
the constitutional sufficiency of the factual bases of the Presidential proclamation suspending the
privilege of the writ of habeas corpus on August 21, 1971, despite the opposite view taken by this
Court in Barcelon vs. Baker and Montenegro vs. Castaneda, insofar as it adhered to the former
case, which view We, accordingly, abandoned and refused to apply. For the same reason, We did
not apply and expressly modified, in Gonzales vs. Commission on Elections, the political-question
theory adopted in Mabanag vs. Lopez Vito." 13 The return to Barcelon vs. Baker and Mabanag vs.
Lopez Vito, urged by the Solicitor General, was decisively refused by the Court. Chief Justice
Concepcion continued: "The reasons adduced in support thereof are, however, substantially the
same as those given in support on the political question theory advanced in said habeas corpus and
plebiscite cases, which were carefully considered by this Court and found by it to be legally
unsound and constitutionally untenable. As a consequence. Our decisions in the aforementioned
habeas corpus cases partakes of the nature and effect of a stare decisis which gained added weight
by its virtual reiteration."

II

The amending process as laid out

in the new Constitution.

1. Article XVI of the 1973 Constitution on Amendments ordains:

SECTION 1. (1) Any amendment to, or revision of, this Constitution may be
proposed by the National Assembly upon a vote of three-fourths of all its Members,
or by a constitutional convention. (2) The National Assembly may, by a vote of
two-thirds of all its Members, call a constitutional convention or, by a majority vote
of all its Members, submit the question of calling such a convention to the electorate
in an election.

SECTION 2. Any amendment to, or revision of, this Constitution shall be valid
when ratified by a majority of the votes cast in a plebiscite which shall be held not
later than three months after the approval of such amendment or revision.
In the present period of transition, the interim National Assembly instituted in the Transitory
Provisions is conferred with that amending power. Section 15 of the Transitory Provisions reads:

SECTION 15. The interim National Assembly, upon special call by the interim
Prime Minister, may, by a majority vote of all its Members, propose amendments
to this Constitution. Such amendments shall take effect when ratified in accordance
with Article Sixteen hereof.

There are, therefore, two periods contemplated in the constitutional life of the nation, i.e., period
of normalcy and period of transition. In times of normally, the amending process may be initiated
by the proposals of the (1) regular National Assembly upon a vote of three-fourths of all its
members; or (2) by a Constitutional Convention called by a vote of two-thirds of all the Members
of the National Assembly. However the calling of a Constitutional Convention may be submitted
to the electorate in an election voted upon by a majority vote of all the members of the National
Assembly. In times of transition, amendments may be proposed by a majority vote of all the
Members of the National Assembly upon special call by the interim Prime Minister,.

2. This Court in Aquino v. COMELEC," had already settled that the incumbent President is vested
with that prerogative of discretion as to when he shall initially convene the interim National
Assembly. Speaking for the majority opinion in that case, Justice Makasiar said: "The
Constitutional Convention intended to leave to the President the determination of the time when
he shall initially convene the interim National Assembly, consistent with the prevailing conditions
of peace and order in the country." Concurring, Justice Fernandez, himself a member of that
Constitutional Convention, revealed: "(W)hen the Delegates to the Constitutional Convention
voted on the Transitory Provisions, they were aware of the fact that under the same, the incumbent
President was given the discretion as to when he could convene the interim National Assembly; it
was so stated plainly by the sponsor, Delegate Yaneza; as a matter of fact, the proposal that it be
convened 'immediately', made by Delegate Pimentel (V) was rejected. The President's decision to
defer the convening of the interim National Assembly soon found support from the people
themselves. In the plebiscite of January 10-15, 1973, at which the ratification of the 1973
Constitution was submitted, the people voted against the convening of the interim National
Assembly. In the referendum of July 24, 1973, the Citizens Assemblies ("bagangays") reiterated
their sovereign will to withhold the convening of the interim National Assembly. Again, in the
referendum of February 27, 1975, the proposed question of whether the interim National Assembly
shall be initially convened was eliminated, because some of the members of Congress and
delegates of the Constitutional Convention, who were deemed automatically members of the I
interim National Assembly, were against its inclusion since in that referendum of January, 1973,
the people had already resolved against it.

3. In sensu strictiore, when the legislative arm of the state undertakes the proposals of amendment
to a Constitution, that body is not in the usual function of lawmaking. lt is not legislating when
engaged in the amending process.16 Rather, it is exercising a peculiar power bestowed upon it by
the fundamental charter itself. In the Philippines, that power is provided for in Article XVI of the
1973 Constitution (for the regular National Assembly) or in Section 15 of the Transitory Provisions
(for the National Assembly). While ordinarily it is the business of the legislating body to legislate
for the nation by virtue of constitutional conferment amending of the Constitution is not legislative
in character. In political science a distinction is made between constitutional content of an organic
character and that of a legislative character'. The distinction, however, is one of policy, not of
law. 17 Such being the case, approval of the President of any proposed amendment is a
misnomer 18 The prerogative of the President to approve or disapprove applies only to the ordinary
cases of legislation. The President has nothing to do with proposition or adoption of amendments
to the Constitution. 19

III

Concentration of Powers

in the President during

crisis government.

1. In general, the governmental powers in crisis government the Philippines is a crisis government
today are more or less concentrated in the President. 20 According to Rossiter, "(t)he concentration
of government power in a democracy faced by an emergency is a corrective to the crisis
inefficiencies inherent in the doctrine of the separation of powers. In most free states it has
generally been regarded as imperative that the total power of the government be parceled out
among three mutually independent branches executive, legislature, and judiciary. It is believed to
be destructive of constitutionalism if any one branch should exercise any two or more types of
power, and certainly a total disregard of the separation of powers is, as Madison wrote in the
Federalist, No. 47, 'the very definition of tyranny.' In normal times the separation of powers forms
a distinct obstruction to arbitrary governmental action. By this same token, in abnormal times it
may form an insurmountable barrier to a decisive emergency action in behalf of the state and its
independent existence. There are moments in the life of any government when all powers must
work together in unanimity of purpose and action, even if this means the temporary union of
executive, legislative, and judicial power in the hands of one man. The more complete the
separation of powers in a constitutional system, the more difficult and yet the more necessary will
be their fusion in time of crisis. This is evident in a comparison of the crisis potentialities of the
cabinet and presidential systems of government. In the former the all-important harmony of
legislature and executive is taken for granted; in the latter it is neither guaranteed nor to be to
confidently expected. As a result, cabinet is more easily established and more trustworthy than
presidential dictatorship. The power of the state in crisis must not only be concentrated and
expanded; it must also be freed from the normal system of constitutional and legal
limitations. 21 John Locke, on the other hand, claims for the executive in its own right a broad
discretion capable even of setting aside the ordinary laws in the meeting of special exigencies for
which the legislative power had not provided.22 The rationale behind such broad emergency
powers of the Executive is the release of the government from "the paralysis of constitutional
restrains" so that the crisis may be ended and normal times restored.

2. The presidential exercise of legislative powers in time of martial law is now a conceded valid
at. That sun clear authority of the President is saddled on Section 3 (pars. 1 and 2) of the Transitory
Provisions, thus: 23
The incumbent President of the Philippines shall initially convene the interim
National Assembly and shall preside over its sessions until the interim Speaker shall
have been elected. He shall continue to exercise his powers and prerogatives under
the nineteen hundred and thirty-five Constitution and the powers vested in the
President and the Prime Minister under this Constitution until the calls upon the
interim National Assembly to elect the interim President and the interim Prime
Minister, who shall then exercise their respective powers vested by this
Constitution.

All proclamations, orders, decrees, instructions, and acts promulgated, issued, or


done by the incumbent President shall be part of the law of the land, and shall
remain valid, binding, and effective even after lifting of martial law or the
ratification of this Constitution, unless modified, revoked, or superseded by
subsequent proclamations, orders, decrees, instructions, or other acts of the
incumbent President, or unless expressly and explicitly modified or repealed by the
regular National Assembly.

"It is unthinkable," said Justice Fernandez, a 1971 Constitutional Convention delegate, "that the
Constitutional Convention, while giving to the President the discretion when to call the interim
National Assembly to session, and knowing that it may not be convened soon, would create a
vacuum in the exercise of legislative powers. Otherwise, with no one to exercise the lawmaking
powers, there would be paralyzation of the entire governmental machinery."24 Paraphrasing
Rossiter, this is an extremely important factor in any constitutional dictatorship which extends
over a period of time. The separation of executive and legislature ordained in the Constitution
presents a distinct obstruction to efficient crisis government. The steady increase in executive
power is not too much a cause for as the steady increase in the magnitude and complexity of the
problems the President has been called upon by the Filipino people to solve in their behalf, which
involve rebellion, subversion, secession, recession, inflation, and economic crisis-a crisis greater
than war. In short, while conventional constitutional law just confines the President's power as
Commander-in-Chief to the direction of the operation of the national forces, yet the facts of our
political, social, and economic disturbances had convincingly shown that in meeting the same,
indefinite power should be attributed to tile President to take emergency measures 25

IV

Authority of the incumbent

President t to propose

amendments to the Constitution.

1. As earlier pointed out, the power to legislate is constitutionally consigned to the interim National
Assembly during the transition period. However, the initial convening of that Assembly is a matter
fully addressed to the judgment of the incumbent President. And, in the exercise of that judgment,
the President opted to defer convening of that body in utter recognition of the people's preference.
Likewise, in the period of transition, the power to propose amendments to the Constitution lies in
the interim National Assembly upon special call by the President (See. 15 of the Transitory
Provisions). Again, harking to the dictates of the sovereign will, the President decided not to call
the interim National Assembly. Would it then be within the bounds of the Constitution and of law
for the President to assume that constituent power of the interim Assembly vis-a-vis his assumption
of that body's legislative functions? The answer is yes. If the President has been legitimately
discharging the legislative functions of the interim Assembly, there is no reason why he cannot
validly discharge the function of that Assembly to propose amendments to the Constitution, which
is but adjunct, although peculiar, to its gross legislative power. This, of course, is not to say that
the President has converted his office into a constituent assembly of that nature normally
constituted by the legislature. Rather, with the interim National Assembly not convened and only
the Presidency and the Supreme Court in operation, the urges of absolute necessity render it
imperative upon the President to act as agent for and in behalf of the people to propose amendments
to the Constitution. Parenthetically, by its very constitution, the Supreme Court possesses no
capacity to propose amendments without constitutional infractions. For the President to shy away
from that actuality and decline to undertake the amending process would leave the governmental
machineries at a stalemate or create in the powers of the State a destructive vacuum, thereby
impeding the objective of a crisis government "to end the crisis and restore normal times." In these
parlous times, that Presidential initiative to reduce into concrete forms the constant voices of the
people reigns supreme. After all, constituent assemblies or constitutional conventions, like the
President now, are mere agents of the people .26

2. The President's action is not a unilateral move. As early as the referendums of January 1973 and
February 1975, the people had already rejected the calling of the interim National Assembly. The
Lupong Tagapagpaganap of the Katipunan ng mga Sanggunian, the Pambansang Katipunan ng
mga Barangay, and the Pambansang Katipunan ng mga Barangay, representing 42,000 barangays,
about the same number of Kabataang Barangay organizations, Sanggunians in 1,458
municipalities, 72 provinces, 3 sub-provinces, and 60 cities had informed the President that the
prevailing sentiment of the people is for the abolition of the interim National Assembly. Other
issues concerned the lifting of martial law and amendments to the Constitution .27 The national
organizations of Sangguniang Bayan presently proposed to settle the issues of martial law, the
interim Assembly, its replacement, the period of its existence, the length of the period for the
exercise by the President of its present powers in a referendum to be held on October 16 . 28 The
Batasang Bayan (legislative council) created under Presidential Decree 995 of September 10,
1976, composed of 19 cabinet members, 9 officials with cabinet rank, 91 members of the Lupong
Tagapagpaganap (executive committee) of the Katipunan ng mga Sangguniang Bayan voted in
session to submit directly to the people in a plebiscite on October 16, the previously quoted
proposed amendments to the Constitution, including the issue of martial law .29 Similarly, the
"barangays" and the "sanggunians" endorsed to the President the submission of the proposed
amendments to the people on October 16. All the foregoing led the President to initiate the proposal
of amendments to the Constitution and the subsequent issuance of Presidential Decree No, 1033
on September 22, 1976 submitting the questions (proposed amendments) to the people in the
National Referendum-Plebiscite on October 16.

The People is Sovereign


1. Unlike in a federal state, the location of sovereignty in a unitary state is easily seen. In the
Philippines, a republican and unitary state, sovereignty "resides in the people and all government
authority emanates from them.30 In its fourth meaning, Savigny would treat people as "that
particular organized assembly of individuals in which, according to the Constitution, the highest
power exists." 31 This is the concept of popular sovereignty. It means that the constitutional
legislator, namely the people, is sovereign 32 In consequence, the people may thus write into the
Constitution their convictions on any subject they choose in the absence of express constitutional
prohibition. 33 This is because, as Holmes said, the Constitution "is an experiment, as all life is all
experiment." 34 "The necessities of orderly government," wrote Rottschaefer, "do not require that
one generation should be permitted to permanently fetter all future generations." A constitution is
based, therefore, upon a self-limiting decision of the people when they adopt it. 35

2. The October 16 referendum-plebiscite is a resounding call to the people to exercise their


sovereign power as constitutional legislator. The proposed amendments, as earlier discussed,
proceed not from the thinking of a single man. Rather, they are the collated thoughts of the
sovereign will reduced only into enabling forms by the authority who can presently exercise the
powers of the government. In equal vein, the submission of those proposed amendments and the
question of martial law in a referendum-plebiscite expresses but the option of the people
themselves implemented only by the authority of the President. Indeed, it may well be said that
the amending process is a sovereign act, although the authority to initiate the same and the
procedure to be followed reside somehow in a particular body.

VI

Referendum-Plebiscite not

rendered nugatory by the

participation of the 15-year olds.

1. October 16 is in parts a referendum and a plebiscite. The question - (1) Do you want martial law
to be continued? - is a referendum question, wherein the 15-year olds may participate. This was
prompted by the desire of the Government to reach the larger mas of the people so that their true
pulse may be felt to guide the President in pursuing his program for a New Order. For the
succeeding question on the proposed amendments, only those of voting age of 18 years may
participate. This is the plebiscite aspect, as contemplated in Section 2, Article XVI of the new
Constitution. 36 On this second question, it would only be the votes of those 18 years old and above
which will have valid bearing on the results. The fact that the voting populace are simultaneously
asked to answer the referendum question and the plebiscite question does not infirm the
referendum-plebiscite. There is nothing objectionable in consulting the people on a given issue,
which is of current one and submitting to them for ratification of proposed constitutional
amendments. The fear of commingled votes (15-year olds and 18-year olds above) is readily
dispelled by the provision of two ballot boxes for every barangay center, one containing the ballots
of voters fifteen years of age and under eighteen, and another containing the ballots of voters
eighteen years of age and above. 37 The ballots in the ballot box for voters fifteen years of age and
under eighteen shall be counted ahead of the ballots of voters eighteen years and above contained
in another ballot box. And, the results of the referendum-plebiscite shall be separately prepared for
the age groupings, i.e., ballots contained in each of the two boxes. 38

2. It is apt to distinguish here between a "referendum" and a "plebiscite." A "referendum" is merely


consultative in character. It is simply a means of assessing public reaction to the given issues
submitted to the people foe their consideration, the calling of which is derived from or within the
totality of the executive power of the President. 39 It is participated in by all citizens from the age
of fifteen, regardless of whether or not they are illiterates, feeble-minded, or ex- convicts . 40 A
"plebiscite," on the other hand, involves the constituent act of those "citizens of the Philippines not
otherwise disqualified by law, who are eighteen years of age or over, and who shall have resided
in the Philippines for at least one year and in the place wherein they propose to vote for at least six
months preceding the election Literacy, property or any other substantive requirement is not
imposed. It is generally associated with the amending process of the Constitution, more
particularly, the ratification aspect.

VII

1. There appeals to be no valid basis for the claim that the regime of martial law stultifies in main
the freedom to dissent. That speaks of a bygone fear. The martial law regime which, in the
observation of Justice Fernando, 41 is impressed with a mild character recorded no State imposition
for a muffled voice. To be sure, there are restraints of the individual liberty, but on certain grounds
no total suppression of that liberty is aimed at. The for the referendum-plebiscite on October 16
recognizes all the embracing freedoms of expression and assembly The President himself had
announced that he would not countenance any suppression of dissenting views on the issues, as he
is not interested in winning a "yes" or "no" vote, but on the genuine sentiment of the people on the
issues at hand. 42 Thus, the dissenters soon found their way to the public forums, voicing out loud
and clear their adverse views on the proposed amendments and even (in the valid ratification of
the 1973 Constitution, which is already a settled matter. 43 Even government employees have been
held by the Civil Service Commission free to participate in public discussion and even campaign
for their stand on the referendum-plebiscite issues. 44

VIII

Time for deliberation

is not short.

1. The period from September 21 to October 16 or a period of 3 weeks is not too short for free
debates or discussions on the referendum-plebiscite issues. The questions are not new. They are
the issues of the day. The people have been living with them since the proclamation of martial law
four years ago. The referendums of 1973 and 1975 carried the same issue of martial law. That
notwithstanding, the contested brief period for discussion is not without counterparts in previous
plebiscites for constitutional amendments. Justice Makasiar, in the Referendum Case, recalls:
"Under the old Society, 15 days were allotted for the publication in three consecutive issues of the
Official Gazette of the women's suffrage amendment to the Constitution before the scheduled
plebiscite on April 30, 1937 (Com. Act No. 34). The constitutional amendment to append as
ordinance the complicated Tydings-Kocialskowski was published in only three consecutive issues
of the Official Gazette for 10 days prior to the scheduled plebiscite (Com. Act 492). For the 1940
Constitutional amendments providing for the bicameral Congress, the reelection of the President
and Vice President, and the creation of the Commission on Elections, 20 days of publication in
three consecutive issues of the Official Gazette was fixed (Com Act No. 517). And the Parity
Amendment, an involved constitutional amendment affecting the economy as well as the
independence of the Republic was publicized in three consecutive issues of the Official Gazette
for 20 days prior to the plebiscite (Rep. Act No. 73)." 45

2. It is worthy to note that Article XVI of the Constitution makes no provision as to the specific
date when the plebiscite shall be held, but simply states that it "shall be held not later than three
months after the approval of such amendment or revision." In Coleman v. Miller, 46 the United
States Supreme court held that this matter of submission involves "an appraisal of a great variety
of relevant conditions, political, social and economic," which "are essentially political and not
justiciable." The constituent body or in the instant cases, the President, may fix the time within
which the people may act. This is because proposal and ratification are not treated as unrelated
acts, but as succeeding steps in a single endeavor, the natural inference being that they are not to
be widely separated in time; second, it is only when there is deemed to be a necessity therefor that
amendments are to be proposed, the reasonable implication being that when proposed, they are to
be considered and disposed of presently, and third, ratification is but the expression of the
approbation of the people, hence, it must be done contemporaneously. 47 In the words of Jameson,
"(a)n alteration of the Constitution proposed today has relation to the sentiment and the felt needs
of today, and that, if not ratified early while that sentiment may fairly be supposed to exist. it ought
to be regarded as waived, and not again to be voted upon, unless a second time proposed by proper
body

IN RESUME

The three issues are

1. Is the question of the constitutionality of Presidential Decrees Nos. 991, 1031 and 1033 political
or justiciable?

2. During the present stage of the transition period, and under, the environmental circumstances
now obtaining, does the President possess power to propose amendments to the Constitution as
well as set up the required machinery and prescribe the procedure for the ratification of his
proposals by the people?

3. Is the submission to the people of the proposed amendments within the time frame allowed
therefor a sufficient and proper submission?

Upon the first issue, Chief Justice Fred Ruiz Castro and Associate Justices Enrique M. Fernando,
Claudio Teehankee, Antonio P. Barredo, Cecilia Munoz Palma, Hermogenes Concepcion Jr. and
Ruperto G. Martin are of the view that the question posed is justiciable, while Associate Justices
Felix V. Makasiar, Felix Q. Antonio and Ramon C. Aquino hold the view that the question is
political.
Upon the second issue, Chief Justice Castro and Associate Justices Barredo, Makasiar, Antonio,
Aquino, Concepcion Jr. and Martin voted in the affirmative, while Associate Justices Teehankee
and Munoz Palma voted in the negative. Associate Justice Fernando, conformably to his
concurring and dissenting opinion in Aquino vs. Enrile (59 SCRA 183), specifically dissents from
the proposition that there is concentration of powers in the Executive during periods of crisis, thus
raising serious doubts as to the power of the President to propose amendments.

Upon the third issue, Chief Justice Castro and Associate Justices Barredo, Makasiar, Aquino,
Concepcion Jr. and Martin are of the view that there is a sufficient and proper submission of the
proposed amendments for ratification by the people. Associate Justices Barredo and Makasiar
expressed the hope, however that the period of time may be extended. Associate Justices Fernando,
Makasiar and Antonio are of the view that the question is political and therefore beyond the
competence and cognizance of this Court, Associate Justice Fernando adheres to his concurrence
in the opinion of Chief Justice Concepcion in Gonzales vs. COMELEC (21 SCRA 774).Associate
Justices Teehankee and MUNOZ Palma hold that prescinding from the President's lack of authority
to exercise the constituent power to propose the amendments, etc., as above stated, there is no fair
and proper submission with sufficient information and time to assure intelligent consent or
rejection under the standards set by this Court in the controlling cases of Gonzales, supra, and
Tolentino vs. COMELEC (41 SCRA 702).

Chief Justice Castro and Associate Justices Barredo, Makasiar, Antonio, Aquino, Concepcion Jr.
and Martin voted to dismiss the three petitions at bar. For reasons as expressed in his separate
opinion, Associate Justice Fernando concurs in the result. Associate Justices Teehankee and
Munoz Palma voted to grant the petitions.

ACCORDINGLY, the vote being 8 to 2 to dismiss, the said petitions are hereby dismissed. This
decision is immediately executory.

SO ORDERED.

G.R. No. 144570 September 21, 2005

VIVENCIO V. JUMAMIL, Petitioners,


vs.
JOSE J. CAFE, GLICERIO L. ALERIA, RUDY G. ADLAON, DAMASCENO AGUIRRE,
RAMON PARING, MARIO ARGUELLES, ROLANDO STA. ANA, NELLIE UGDANG,
PEDRO ATUEL, RUBY BONSOBRE, RUTH FORNILLOS, DANIEL GATCHALIAN,
RUBEN GUTIERREZ, JULIET GATCHALIAN, ZENAIDA POBLETE, ARTHUR
LOUDY, LILIAN LU, ISABEL MEJIA, EDUARDO ARGUELLES, LAO SUI KIEN,
SAMUEL CONSOLACION, DR. ARTURO MONTERO, DRA. LILIOSA MONTERO,
PEDRO LACIA, CIRILA LACIA, EVELYN SANGALANG, DAVID CASTILLO,
ARSENIO SARMIENTO, ELIZABETH SY, METODIO NAVASCA, HELEN
VIRTUDAZO, IRENE LIMBAGA, SYLVIA BUSTAMANTE, JUANA DACALUS,
NELLIE RICAMORA, JUDITH ESPINOSA, PAZ KUDERA, EVELYN PANES, AGATON
BULICATIN, PRESCILLA GARCIA, ROSALIA OLITAO, LUZVIMINDA AVILA,
GLORIA OLAIR, LORITA MENCIAS, RENATO ARIETA, EDITHA ACUZAR,
LEONARDA VILLACAMPA, ELIAS JARDINICO, BOBINO NAMUAG, FELIMON
NAMUAG, EDGAR CABUNOC, HELEN ARGUELLES, HELEN ANG, FELECIDAD
PRIETO, LUISITO GRECIA, LILIBETH PARING, RUBEN CAMACHO, ROSALINDA
LALUNA, LUZ YAP, ROGELIO LAPUT, ROSEMARIE WEE, TACOTCHE RANAIN,
AVELINO DELOS REYES and ROGASIANO OROPEZA, Respondent.

DECISION

CORONA, J.:

In this petition for review on certiorari under Rule 45 of the Rules of Court, petitioner Vivencio
V. Jumamil seeks to reverse the decision of the Court of Appeals dated July 24, 20001 in CA-G.R.
CV No. 35082, the dispositive portion of which read:

With the foregoing, the assailed Decision of Branch 4, Regional Trial Court of Panabo Davao
dated 26 November 1990 in Sp. Civil Action No. 89-1 is hereby AFFIRMED.2

The Regional Trial Court dismissed petitioner’s petition for declaratory relief with prayer for
preliminary injunction and writ of restraining order, and ordered the petitioner to pay attorney’s
fees in the amount of P1,000 to each of the 57 private respondents.3

The factual antecedents follow.

In 1989, petitioner Jumamil4 filed before the Regional Trial Court (RTC) of Panabo, Davao del
Norte a petition for declaratory relief with prayer for preliminary injunction and writ of restraining
order against public respondents Mayor Jose J. Cafe and the members of the Sangguniang
Bayan of Panabo, Davao del Norte. He questioned the constitutionality of Municipal Resolution
No. 7, Series of 1989 (Resolution No. 7).

Resolution No. 7, enacting Appropriation Ordinance No. 111, provided for an initial appropriation
of P765,000 for the construction of stalls around a proposed terminal fronting the Panabo Public
Market5 which was destroyed by fire.

Subsequently, the petition was amended due to the passage of Resolution No. 49, series of 1989
(Resolution No. 49), denominated as Ordinance No. 10, appropriating a further amount
of P1,515,000 for the construction of additional stalls in the same public market.6

Prior to the passage of these resolutions, respondent Mayor Cafe had already entered into contracts
with those who advanced and deposited (with the municipal treasurer) from their personal funds
the sum of P40,000 each. Some of the parties were close friends and/or relatives of the public
respondents.7 The construction of the stalls which petitioner sought to stop through the preliminary
injunction in the RTC was nevertheless finished, rendering the prayer therefor moot and academic.
The leases of the stalls were then awarded by public raffle which, however, was limited to those
who had deposited P40,000 each.8 Thus, the petition was amended anew to include the 57
awardees of the stalls as private respondents.9
Petitioner alleges that Resolution Nos. 7 and 49 were unconstitutional because they were:

…passed for the business, occupation, enjoyment and benefit of private respondents who deposited
the amount ofP40,000.00 for each stall, and with whom also the mayor had a prior contract to
award the would be constructed stalls to all private respondents.… As admitted by public
respondents some of the private respondents are close friends and/or relatives of some of the public
respondents which makes the questioned acts discriminatory. The questioned resolutions and
ordinances did not provide for any notice of publication that the special privilege and unwarranted
benefits conferred on the private respondents maybe (sic) availed of by anybody who can deposit
the amount ofP40,000.00.10

Neither was there any prior notice or publication pertaining to contracts entered into by public and
private respondents for the construction of stalls to be awarded to private respondents that the same
can be availed of by anybody willing to deposit P40,000.00.11

In this petition, petitioner prays for the reversal of the decision of the Court of Appeals (CA) and
a declaration of the unconstitutionality, illegality and nullity of the questioned
resolutions/ordinances and lease contracts entered into by the public and private respondents; for
the declaration of the illegality of the award of the stalls during the pendency of this action and for
the re-raffling and award of the stalls in a manner that is fair and just to all interested
applicants;12for the issuance of an order to the local government to admit any and all interested
persons who can deposit the amount of P40,000 for a stall and to order a re-raffling for the award
of the stalls to the winners of the re-raffle; for the nullification of the award of attorney’s fees to
private respondents on the ground that it was erroneous and unmeritorious; and for the award of
damages in favor of petitioner in the form of attorney’s fees.13

At the outset, we must point out that the issue of the constitutionality of the questioned resolutions
was never ruled upon by both the RTC and the CA.

It appears that on May 21, 1990, both parties agreed14 to await the decision in CA G.R. SP No.
20424,15 which involved similar facts, issues and parties. The RTC, consequently, deferred the
resolution of the pending petition. The appellate court eventually rendered its decision in that case
finding that the petitioners were not entitled to the declaratory relief prayed for as they had no legal
interest in the controversy. Upon elevation to the Supreme Court as UDK Case No. 9948, the
petition for review on certiorari was denied for being insufficient in form and substance. 16

The RTC, after receipt of the entry of the SC judgment,17 dismissed the pending petition on
November 26, 1990. It adopted the ruling in CA G.R. SP No. 20424:

xxxxxxxxx

We find petitioners’ aforesaid submission utterly devoid of merit. It is, to say the least,
questionable whether or not a special civil action for declaratory relief can be filed in relation to a
contract by persons who are not parties thereto. Under Sec. 1 of Rule 64 of the Rules of Court, any
person interested under a deed, will, contract, or other written instruments may bring an action to
determine any question of the contract, or validly arising under the instrument for a declaratory
(sic) of his rights or duties thereunder. Since contracts take effect only between the parties (Art.
1311) it is quite plain that one who is not a party to a contract can not have the interest in it that
the rule requires as a basis for declaratory reliefs (PLUM vs. Santos, 45 SCRA 147).

Following this ruling, the petitioners were not parties in the agreement for the award of the market
stalls by the public respondents, in the public market of Panabo, Davao, and since the petitioners
were not parties to the award of the market stalls and whose rights are never affected by merely
stating that they are taxpayers, they have no legal interest in the controversy and they are not,
therefore, entitled to bring an action for declaratory relief.18

WHEREFORE, the petition of the petitioners as taxpayers being without merit and not in
consonance with law, is hereby ordered DISMISSED.

As to the counterclaim for damages, the same not having been actually and fully proven, the Court
gives no award as to the same. It is not amiss to state here that the petitioners agreed to be bound
by the outcome of Special Civil Case No. 89-10.

However, for unnecessarily dragging into Court the fifty-seven (57) private respondents who are
bonafide businessmen and stall holders in the public market of Panabo, it is fitting and proper for
the petitioners to be ordered payment of attorney’s fees.

Accordingly, the herein petitioners are ordered to pay ONE THOUSAND (P1,000.00) PESOS
EACH to the 57 private respondents, as attorney’s fees, jointly and severally, and for them to pay
the costs of this suit.

SO ORDERED.19

From this adverse decision, petitioner again appealed to the Court of Appeals in CA-G.R. CV No.
35082 which is now before us for review.

The appellate court, yet again, affirmed the RTC decision and held that:

Res judicata does not set in a case dismissed for lack of capacity to sue, because there has been no
determination on the merits. Neither does the law of the case apply. However, the court a quo took
judicial notice of the fact that petitioners agreed to be bound by the outcome of Special Civil Case
No. 89-10. Allegans contraria non est audiendus. (He is not to be heard who alleges things
contradictory to each other.) It must be here observed that petitioners-appellants were the ones
who manifested that it would be practical to await the decision of the Supreme Court in their
petition for certiorari, for after all the facts, circumstances and issues in that case, are exactly the
same as in the case that is here appealed. Granting that they may evade such assumption, a careful
evaluation of the case would lead Us to the same conclusion: that the case for declaratory relief is
dismissible. As enumerated by Justice Regalado in his "Remedial Law Compendium", the
requisites of an action for declaratory relief are:

(a) The subject matter of the controversy must be a deed, will, contract or other written instrument,
statute, executive order or regulation, or ordinance;
(b) The terms of said documents and the validity thereof are doubtful and require judicial
construction;

(c) There must have been no breach of the documents in question;

(d) There must be an actual justiciable controversy or the "ripening seeds" of one between persons
whose interests are adverse;

(e) The issue must be ripe for judicial determination; and

(f) Adequate relief is not available through other means or other forms of action or proceeding.

In Tolentino vs. Board of Accountancy, et al, 90 Phil. 83, 88, the Supreme Court ratiocinated the
requisites of justiciability of an action for declaratory relief by saying that the court must be
"satisfied that an actual controversy, or the ripening seeds of one, exists between parties, all of
whom are sui juris and before the court, and that the declaration sought will be a practical help in
ending the controversy."

The petition must show "an active antagonistic assertion of a legal right on one side and a denial
thereof on the other concerning a real, and not a mere theoretical question or issue. The question
is whether the facts alleged a substantial controversy between parties having adverse legal
interests, of sufficient immediacy and reality to warrant the issuance of a declaratory relief.
In GSISEA and GSISSU vs. Hon. Alvendia etc. and GSIS, 108 Phil. 505, the Supreme Court ruled
a declaratory relief improper or unnecessary when it appears to be a moot case, since it seeks to
get a judgment on a pretended controversy, when in reality there is none. In Kawasaki Port Service
Corporation vs. Amores, 199 SCRA 230, citing Dy Poco vs. Commissioner of Immigration, et al.,
16 SCRA 618, the rule was stated: "where a declaratory judgment as to a disputed fact would be
determinative of issues rather than a construction of definite stated rights, statuses and other
relations, commonly expressed in a written instrument, the case is not one for declaratory
judgment."

Indeed, in its true light, the present petition for declaratory relief seems to be no more than a request
for an advisory opinion to which courts in this and other jurisdiction have cast a definite aversion.
The ordinances being assailed are appropriation ordinances. The passage of the ordinances were
pursuant to the public purpose of constructing market stalls. For the exercise of judicial review,
the governmental act being challenged must have had an adverse effect on the person challenging
it, and the person challenging the act, must have "standing" to challenge, i.e., in the categorical
and succinct language of Justice Laurel, he must have a "personal and substantial interest in the
case such that he has sustained, or will sustain, direct injury as a result of its enforcement."
Standing is a special concern in constitutional law because in some cases suits are brought not by
parties who have been personally injured by the operation of a law or by official action taken, but
by concerned citizens, taxpayers or voters who actually sue in the public interest. Hence the
question in standing is whether such parties have "alleged such a personal stake in the outcome of
the controversy as to assure that concrete adverseness which sharpens the presentation of issues
upon which the court largely depends for illumination of difficult constitutional questions.
A careful analysis of the records of the case at bar would disclose that petitioners-appellants have
suffered no wrong under the terms of the ordinances being assailed – and, naturally need no relief
in the form they now seek to obtain. Judicial exercise cannot be exercised in vacuo. The policy of
the courts is to avoid ruling on a constitutional question and to presume that the acts of the political
departments are valid in the absence of a clear and unmistakable showing to the contrary. To doubt
is to sustain. The issue is not the ordinances themselves, but the award of the market stalls to the
private respondents on the strength of the contracts individually executed by them with Mayor
Cafe. To reiterate, a person who is not a party to a contract cannot file a petition for declaratory
relief and seek judicial interpretation of such contract (Atlas Consolidated Mining Corp. vs. Court
of Appeals, 182 SCRA 166). Not having established their locus standi, we see no error committed
by the court a quo warranting reversal of the appealed decision.

With the foregoing, the assailed Decision of Branch 4, Regional Trial Court of Panabo Davao
dated 26 November 1990 in Sp. Civil Action No. 89-1 is hereby AFFIRMED.

SO ORDERED.20

Thus, both the RTC and the CA dismissed the case on the ground of petitioner’s lack of legal
standing and the parties’ agreement to be bound by the decision in CA G.R. SP. No. 20424.

The issues to be resolved are the following:

(1) whether the parties were bound by the outcome in CA G.R. SP. No. 20424;

(2) whether petitioner had the legal standing to bring the petition for declaratory relief;

(3) whether Resolution Nos. 7 and 49 were unconstitutional; and

(4) whether petitioner should be held liable for damages.

Locus Standi and the

Constitutionality Issue

We will first consider the second issue. The petition for declaratory relief challenged the
constitutionality of the subject resolutions. There is an unbending rule that courts will not assume
jurisdiction over a constitutional question unless the following requisites are satisfied: (1) there
must be an actual case calling for the exercise of judicial review; (2) the question before the Court
must be ripe for adjudication; (3) the person challenging the validity of the act must have standing
to do so; (4) the question of constitutionality must have been raised at the earliest opportunity, and
(5) the issue of constitutionality must be the very lis mota of the case.21

Legal standing or locus standi is a party’s personal and substantial interest in a case such that he
has sustained or will sustain direct injury as a result of the governmental act being challenged. It
calls for more than just a generalized grievance. The term "interest" means a material interest, an
interest in issue affected by the decree, as distinguished from mere interest in the question
involved, or a mere incidental interest.22 Unless a person’s constitutional rights are adversely
affected by the statute or ordinance, he has no legal standing.

The CA held that petitioner had no standing to challenge the two resolutions/ordinances because
he suffered no wrong under their terms. It also concluded that "the issue (was) not the ordinances
themselves but the award of the market stalls to the private respondents on the strength of the
contracts individually executed by them with Mayor Cafe." Consequently, it ruled that petitioner,
who was not a party to the lease contracts, had no standing to file the petition for declaratory relief
and seek judicial interpretation of the agreements.

We do not agree. Petitioner brought the petition in his capacity as taxpayer of the Municipality of
Panabo, Davao del Norte23 and not in his personal capacity. He was questioning the official acts
of the public respondents in passing the ordinances and entering into the lease contracts with
private respondents. A taxpayer need not be a party to the contract to challenge its validity.24 Atlas
Consolidated Mining & Development Corporation v. Court of Appeals25 cited by the CA does not
apply because it involved contracts between two private parties.

Parties suing as taxpayers must specifically prove sufficient interest in preventing the illegal
expenditure of

money raised by taxation.26 The expenditure of public funds by an officer of the State for the
purpose of executing an unconstitutional act constitutes a misapplication of such

funds.27 The resolutions being assailed were appropriations ordinances. Petitioner alleged that
these ordinances were "passed for the business, occupation, enjoyment and benefit of private
respondents"28 (that is, allegedly for the private benefit of respondents) because even before they
were passed, respondent Mayor Cafe and private respondents had already entered into lease
contracts for the construction and award of the market stalls.29 Private respondents admitted they
deposited P40,000 each with the municipal treasurer, which amounts were made available to the
municipality during the construction of the stalls. The deposits, however, were needed to ensure
the speedy completion of the stalls after the public market was gutted by a series of fires. 30 Thus,
the award of the stalls was necessarily limited only to those who advanced their personal funds for
their construction.31

Petitioner did not seasonably allege his interest in preventing the illegal expenditure of public
funds or the specific injury to him as a result of the enforcement of the questioned resolutions and
contracts. It was only in the "Remark to Comment" he filed in this Court did he first assert that "he
(was) willing to engage in business and (was) interested to occupy a market stall."32 Such claim
was obviously an afterthought.

Be that as it may, we have on several occasions relaxed the application of these rules on legal
standing:

In not a few cases, the Court has liberalized the locus standi requirement when a petition raises an
issue of transcendental significance or paramount importance to the people. Recently, after holding
that the IBP had no locus standi to bring the suit, the Court in IBP v. Zamora nevertheless
entertained the Petition therein. It noted that "the IBP has advanced constitutional issues which
deserve the attention of this Court in view of their seriousness, novelty and weight as precedents."33

―oOo―

Objections to a taxpayer's suit for lack of sufficient personality, standing or interest are procedural
matters. Considering the importance to the public of a suit assailing the constitutionality of a tax
law, and in keeping with the Court's duty, specially explicated in the 1987 Constitution, to
determine whether or not the other branches of the Government have kept themselves within the
limits of the Constitution and the laws and that they have not abused the discretion given to them,
the Supreme Court may brush aside technicalities of procedure and take cognizance of the suit.34

―oOo―

There being no doctrinal definition of transcendental importance, the following determinants


formulated by former Supreme Court Justice Florentino P. Feliciano are instructive: (1) the
character of the funds or other assets involved in the case; (2) the presence of a clear case of
disregard of a constitutional or statutory prohibition by the public respondent agency or
instrumentality of the government; and (3) the lack of any other party with a more direct and
specific interest in raising the questions being raised.35

But, even if we disregard petitioner’s lack of legal standing, this petition must still fail. The subject
resolutions/ordinances appropriated a total of P2,280,000 for the construction of the public market
stalls. Petitioner alleges that these ordinances were discriminatory because, even prior to their
enactment, a decision had already been made to award the market stalls to the private respondents
who deposited P40,000 each and who were either friends or relatives of the public respondents.
Petitioner asserts that "there (was) no publication or invitation to the public that this contract (was)
available to all who (were) interested to own a stall and (were) willing to
depositP40,000."36 Respondents, however, counter that the "public respondents’ act of entering
into this agreement was authorized by the Sangguniang Bayan of Panabo per Resolution No. 180
dated October 10, 1988"37 and that "all the people interested were invited to participate in investing
their savings."38

We note that the foregoing was a disputed fact which the courts below did not resolve because the
case was dismissed on the basis of petitioner’s lack of legal standing. Nevertheless, petitioner
failed to prove the subject ordinances and agreements to be discriminatory. Considering that he
was asking this Court to nullify the acts of the local political department of Panabo, Davao del
Norte, he should have clearly established that such ordinances operated unfairly against those who
were not notified and who were thus not given the opportunity to make their deposits. His
unsubstantiated allegation that the public was not notified did not suffice. Furthermore, there was
the time-honored presumption of regularity of official duty, absent any showing to the
contrary.39 And this is not to mention that:

The policy of the courts is to avoid ruling on constitutional questions and to presume that the acts
of the political departments are valid, absent a clear and unmistakable showing to the contrary. To
doubt is to sustain. This presumption is based on the doctrine of separation of powers. This means
that the measure had first been carefully studied by the legislative and executive departments and
found to be in accord with the Constitution before it was finally enacted and approved.40

Therefore, since petitioner had no locus standi to

question the ordinances, there is no need for us to discuss the constitutionality of said enactments.

Were the Parties Bound by the

Outcome in CA G.R. SP. No. 20424?

Adverting to the first issue, we observe that petitioner was the one who wanted the parties to await
the decision of the Supreme Court in UDK Case No. 9948 since the facts and issues in that case
were similar to this. Petitioner, having expressly agreed to be bound by our decision in the
aforementioned case, should be reined in by the dismissal order we issued, now final and
executory. In addition to the fact that nothing prohibits parties from committing to be bound by
the results of another case, courts may take judicial notice of a judgment in another case as long
as the parties give

their consent or do not object.41 As opined by Justice Edgardo L. Paras:

A court will take judicial notice of its own acts and records in the same case, of facts established
in prior proceedings in the same case, of the authenticity of its own records of another case between
the same parties, of the files of related cases in the same court, and of public records on file in the
same court. In addition, judicial notice will be taken of the record, pleadings or judgment of a case
in another court between the same parties or involving one of the same parties, as well as of the
record of another case between different parties in the same court.42

Damages

Finally, on the issue of damages, petitioner asserts that he impleaded the 57 respondents in good
faith since the award of the stalls to them was made during the pendency of the action. 43 Private
respondents refute this assertion and argue that petitioner filed this action in bad faith and with the
intention of harassing them inasmuch as he had already filed CA G.R. SP. No. 20424 even before
then.44 The RTC, affirmed by the CA, held that petitioner should pay attorney’s fees "for
unnecessarily dragging into Court the 57 private respondents who (were) bonafide businessmen
and stall holders in the public market of Panabo."45

We do not agree that petitioner should be held liable for damages. It is not sound public policy to
put a premium on the right to litigate where such right is exercised in good faith, albeit
erroneously.46 The alleged bad faith of petitioner was never established. The special circumstances
in Article 2208 of the Civil Code justifying the award of attorney’s fees are not present in this case.

WHEREFORE, the decision of the Court of Appeals in CA-G.R. CV No. 35082 is


hereby AFFIRMED with theMODIFICATION that the award of attorney's fees to private
respondents is deleted.
Costs against petitioner.

SO ORDERED.

G.R. No. 127316 October 12, 2000

LIGHT RAIL TRANSIT AUTHORITY, petitioner,


vs.
CENTRAL BOARD OF ASSESSMENT APPEALS, BOARD OF ASSESSMENT APPEALS
OF MANILA and the CITY ASSESSOR OF MANILA, respondents.

DECISION

PANGANIBAN, J.:

The Light Rail Transit Authority and the Metro Transit Organization function as service-oriented
business entities, which provide valuable transportation facilities to the paying public. In the
absence, however, of any express grant of exemption in their favor, they are subject to the payment
of real property taxes.

The Case

In the Petition for Review before us, the Light Rail Transit Authority (LRTA) challenges the
November 15, 1996 Decision1 of the Court of Appeals (CA) in CA-GR SP No. 38137, which
disposed as follows:

"WHEREFORE, premises considered, the appealed decision (dated October 15, 1994) of the
Central Board of Assessment Appeals is hereby AFFIRMED, with costs against the petitioner."2

The affirmed ruling of the Central Board of Assessment Appeals (CBAA) upheld the June 26,
1992 Resolution of the Board of Assessment Appeals of Manila, which had declared petitioner's
carriageways and passenger terminals as improvements subject to real property taxes.

The Facts

The undisputed facts are quoted by the Court of Appeals (CA) from the CBAA ruling, as follows:3

"1. The LRTA is a government-owned and controlled corporation created and organized
under Executive Order No. 603, dated July 12, 1980 'x x x primarily responsible for the
construction, operation, maintenance and/or lease of light rail transit system in the
Philippines, giving due regard to the [reasonable requirements] of the public transportation
of the country' (LRTA vs. The Hon. Commission on Audit, GR No. No. 88365);

"2. x x x [B]y reason of x x x Executive Order 603, LRTA acquired real properties x x x
constructed structural improvements, such as buildings, carriageways, passenger terminal
stations, and installed various kinds of machinery and equipment and facilities for the
purpose of its operations;

"3. x x x [F]or x x x an effective maintenance, operation and management, it entered into


a Contract of Management with the Meralco Transit Organization (METRO) in which the
latter undertook to manage, operate and maintain the Light Rail Transit System owned by
the LRTA subject to the specific stipulations contained in said agreement, including
payments of a management fee and real property taxes (Add'l Exhibit "I", Records)

"4. That it commenced its operations in 1984, and that sometime that year, Respondent-
Appellee City Assessor of Manila assessed the real properties of [petitioner], consisting of
lands, buildings, carriageways and passenger terminal stations, machinery and equipment
which he considered real propert[y] under the Real Property Tax Code, to commence with
the year 1985;

"5. That [petitioner] paid its real property taxes on all its real property holdings, except the
carriageways and passenger terminal stations including the land where it is constructed on
the ground that the same are not real properties under the Real Property Tax Code, and if
the same are real propert[y], these x x x are for public use/purpose, therefore, exempt from
realty taxation, which claim was denied by the Respondent-Appellee City Assessor of
Manila; and

"6. x x x [Petitioner], aggrieved by the action of the Respondent-Appellee City Assessor,


filed an appeal with the Local Board of Assessment Appeals of Manila x x x. Appellee,
herein, after due hearing, in its resolution dated June 26, 1992, denied [petitioner's] appeal,
and declared that carriageways and passenger terminal stations are improvements,
therefore, are real propert[y] under the Code, and not exempt from the payment of real
property tax.

"A motion for reconsideration filed by [petitioner] was likewise denied."

The CA Ruling

The Court of Appeals held that petitioner's carriageways and passenger terminal stations
constituted real property or improvements thereon and, as such, were taxable under the Real
Property Tax Code. The appellate court emphasized that such pieces of property did not fall under
any of the exemptions listed in Section 40 of the aforementioned law. The reason was that they
were not owned by the government or any government-owned corporation which, as such, was
exempt from the payment of real property taxes. True, the government owned the real property
upon which the carriageways and terminal stations were built. However, they were still taxable,
because beneficial use had been transferred to petitioner, a taxable entity.

The CA debunked the argument of petitioner that carriageways and terminals were intended for
public use. The former agreed, instead, with the CBAA. The CBAA had concluded that since
petitioner was not engaged in purely governmental or public service, the latter's endeavors were
proprietary. Indeed, petitioner was deemed as a profit-oriented endeavor, serving as it did, only
the paying public.

Hence, this Petition.4

The Issues

In its Memorandum,5 petitioner urges the Court to resolve the following matters:

"I

The Honorable Court of Appeals erred in not holding that the carriageways and terminal
stations of petitioner are not improvements for purposes of the Real Property Tax Code.

"II

The Honorable Court of Appeals erred in not holding that being attached to national roads
owned by the national government, subject carriageways and terminal stations should be
considered property of the national government.

"III

The Honorable Court of Appeals erred in not holding that payment of charges or fares in
the operation of the light rail transit system does not alter the nature of the subject
carriageways and terminal stations as devoted for public use.

"IV

The Honorable Court of Appeals erred in failing to consider the view advanced by the
Department of Finance, which takes charge of the overall collection of taxes, that subject
carriageways and terminal stations are not subject to realty taxes.

"V

The Honorable Court of Appeals erred in failing to consider that payment of the realty
taxes assessed is not warranted and should the legality of the questioned assessment be
upheld, the amount of the realty taxes assessed would far exceed the annual earnings of
petitioner, a government corporation."

The foregoing all point to one main issue: whether petitioner's carriageways and passenger
terminal stations are subject to real property taxes.

The Court's Ruling

The Petition has no merit.


Main Issue:
May Real Property Taxes be Assessed and Collected?

The Real Property Tax Code,6 the law in force at the time of the assailed assessment in 1984,
mandated that "there shall be levied, assessed and collected in all provinces, cities and
municipalities an annual ad valorem tax on real property such as lands, buildings, machinery and
other improvements affixed or attached to real property not hereinafter specifically exempted."7

Petitioner does not dispute that its subject carriageways and stations may be considered real
property under Article 415 of the Civil Code. However, it resolutely argues that the same are
improvements, not of its properties, but of the government-owned national roads to which they are
immovably attached. They are thus not taxable as improvements under the Real Property Tax
Code. In essence, it contends that to impose a tax on the carriageways and terminal stations would
be to impose taxes on public roads.

The argument does not persuade. We quote with approval the solicitor general's astute comment
on this matter:

"There is no point in clarifying the concept of industrial accession to determine the nature of the
property when what is fundamentally important for purposes of tax classification is to determine
the character of the property subject [to] tax. The character of tax as a property tax must be
determined by its incidents, and form the natural and legal effect thereof. It is irrelevant to associate
the carriageways and/or the passenger terminals as accessory improvements when the view of
taxability is focused on the character of the property. The latter situation is not a novel issue as it
has already been resolved by this Honorable Court in the case of City of Manila vs. IAC (GR No.
71159, November 15, 1989) wherein it was held:

'The New Civil Code divides the properties into property for public and patrimonial property (Art.
423), and further enumerates the property for public use as provincial road, city streets, municipal
streets, squares, fountains, public waters, public works for public service paid for by said
[provinces], cities or municipalities; all other property is patrimonial without prejudice to
provisions of special laws. (Art. 424, Province of Zamboanga v. City of Zamboanga, 22 SCRA
1334 [1968])

xxx

'...while the following are corporate or proprietary property in character, viz: 'municipal water
works, slaughter houses, markets, stables, bathing establishments, wharves, ferries and fisheries.'
Maintenance of parks, golf courses, cemeteries and airports, among others, are also recognized as
municipal or city activities of a proprietary character (Dept. of Treasury v. City of Evansville; 60
NE 2nd 952)'

"The foregoing enumeration in law does not specify or include carriageway or passenger terminals
as inclusive of properties strictly for public use to exempt petitioner's properties from taxes.
Precisely, the properties of petitioner are not exclusively considered as public roads being
improvements placed upon the public road, and this separability nature of the structure in itself
physically distinguishes it from a public road. Considering further that carriageways or passenger
terminals are elevated structures which are not freely accessible to the public, viz-a-viz roads
which are public improvements openly utilized by the public, the former are entirely different from
the latter.

"The character of petitioner's property, be it an improvements as otherwise distinguished by


petitioner, needs no further classification when the law already classified it as patrimonial property
that can be subject to tax. This is in line with the old ruling that if the public works is not for such
free public service, it is not within the purview of the first paragraph of Art. 424 if the New Civil
Code."8

Though the creation of the LRTA was impelled by public service -- to provide mass transportation
to alleviate the traffic and transportation situation in Metro Manila -- its operation undeniably
partakes of ordinary business. Petitioner is clothed with corporate status and corporate powers in
the furtherance of its proprietary objectives.9Indeed, it operates much like any private corporation
engaged in the mass transport industry. Given that it is engaged in a service-oriented commercial
endeavor, its carriageways and terminal stations are patrimonial property subject to tax,
notwithstanding its claim of being a government-owned or controlled corporation.

True, petitioner's carriageways and terminal stations are anchored, at certain points, on public
roads. However, it must be emphasized that these structures do not form part of such roads, since
the former have been constructedover the latter in such a way that the flow of vehicular traffic
would not be impeded. These carriageways and terminal stations serve a function different from
that of the public roads. The former are part and parcel of the light rail transit (LRT) system which,
unlike the latter, are not open to use by the general public. The carriageways are accessible only
to the LRT trains, while the terminal stations have been built for the convenience of LRTA itself
and its customers who pay the required fare.

Basis of Assessment Is Actual Use of Real Property

Under the Real Property Tax Code, real property is classified for assessment purposes on the basis
of actual use,10which is defined as "the purpose for which the property is principally or
predominantly utilized by the person in possession of the property."11

Petitioner argues that it merely operates and maintains the LRT system, and that the actual users
of the carriageways and terminal stations are the commuting public. It adds that the public-use
character of the LRT is not negated by the fact that revenue is obtained from the latter's operations.

We do not agree. Unlike public roads which are open for use by everyone, the LRT is accessible
only to those who pay the required fare. It is thus apparent that petitioner does not exist solely for
public service, and that the LRT carriageways and terminal stations are not exclusively for public
use. Although petitioner is a public utility, it is nonetheless profit-earning. It actually uses those
carriageways and terminal stations in its public utility business and earns money therefrom.

Petitioner Not Exempt from Payment of Real Property Taxes


In any event, there is another legal justification for upholding the assailed CA
Decision.1âwphi1 Under the Real Property Tax Code, real property "owned by the Republic of the
Philippines or any of its political subdivisions and any government-owned or controlled
corporation so exempt by its charter, provided, however, that this exemption shall not apply to real
property of the abovenamed entities the beneficial use of which has been granted, for consideration
or otherwise, to a taxable person."12

Executive Order No. 603, the charter of petitioner, does not provide for any real estate tax
exemption in its favor. Its exemption is limited to direct and indirect taxes, duties or fees in
connection with the importation of equipment not locally available, as the following provision
shows:

"ARTICLE 4
TAX AND DUTY EXEMPTIONS

Sec. 8. Equipment, Machineries, Spare Parts and Other Accessories and Materials. - The
importation of equipment, machineries, spare parts, accessories and other materials, including
supplies and services, used directly in the operations of the Light Rails Transit System, not
obtainable locally on favorable terms, out of any funds of the authority including, as stated in
Section 7 above, proceeds from foreign loans credits or indebtedness, shall likewise be exempted
from all direct and indirect taxes, customs duties, fees, imposts, tariff duties, compensating taxes,
wharfage fees and other charges and restrictions, the provisions of existing laws to the contrary
notwithstanding."

Even granting that the national government indeed owns the carriageways and terminal stations,
the exemption would not apply because their beneficial use has been granted to petitioner, a taxable
entity.

Taxation is the rule and exemption is the exception. Any claim for tax exemption is strictly
construed against the claimant.13 LRTA has not shown its eligibility for exemption; hence, it is
subject to the tax.

WHEREFORE, the Petition is hereby DENIED and the assailed Decision of the Court of
Appeals AFFIRMED. Costs against the petitioner.

SO ORDERED.

G.R. No. 120082 September 11, 1996

MACTAN CEBU INTERNATIONAL AIRPORT AUTHORITY, petitioner,


vs.
HON. FERDINAND J. MARCOS, in his capacity as the Presiding Judge of the Regional
Trial Court, Branch 20, Cebu City, THE CITY OF CEBU, represented by its Mayor HON.
TOMAS R. OSMEÑA, and EUSTAQUIO B. CESA, respondents.
DAVIDE, JR., J.:

For review under Rule 45 of the Rules of Court on a pure question of law are the decision
of 22 March 1995 1of the Regional Trial Court (RTC) of Cebu City, Branch 20, dismissing
the petition for declaratory relief in Civil Case No. CEB-16900 entitled "Mactan Cebu
International Airport Authority vs. City of Cebu", and its order of 4, May 1995 2denying
the motion to reconsider the decision.

We resolved to give due course to this petition for its raises issues dwelling on the scope
of the taxing power of local government-owned and controlled corporations.

The uncontradicted factual antecedents are summarized in the instant petition as follows:

Petitioner Mactan Cebu International Airport Authority (MCIAA) was created by


virtue of Republic Act No. 6958, mandated to "principally undertake the
economical, efficient and effective control, management and supervision of the
Mactan International Airport in the Province of Cebu and the Lahug Airport in
Cebu City, . . . and such other Airports as may be established in the Province of
Cebu . . . (Sec. 3, RA 6958). It is also mandated to:

a) encourage, promote and develop international and


domestic air traffic in the Central Visayas and
Mindanao regions as a means of making the regions
centers of international trade and tourism, and
accelerating the development of the means of
transportation and communication in the country;
and

b) upgrade the services and facilities of the airports


and to formulate internationally acceptable standards
of airport accommodation and service.

Since the time of its creation, petitioner MCIAA enjoyed the privilege of exemption
from payment of realty taxes in accordance with Section 14 of its Charter.

Sec. 14. Tax Exemptions. — The authority shall be exempt from


realty taxes imposed by the National Government or any of its
political subdivisions, agencies and instrumentalities . . .

On October 11, 1994, however, Mr. Eustaquio B. Cesa, Officer-in-Charge, Office


of the Treasurer of the City of Cebu, demanded payment for realty taxes on several
parcels of land belonging to the petitioner (Lot Nos. 913-G, 743, 88 SWO, 948-A,
989-A, 474, 109(931), I-M, 918, 919, 913-F, 941, 942, 947, 77 Psd., 746 and 991-
A), located at Barrio Apas and Barrio Kasambagan, Lahug, Cebu City, in the total
amount of P2,229,078.79.
Petitioner objected to such demand for payment as baseless and unjustified,
claiming in its favor the aforecited Section 14 of RA 6958 which exempt it from
payment of realty taxes. It was also asserted that it is an instrumentality of the
government performing governmental functions, citing section 133 of the Local
Government Code of 1991 which puts limitations on the taxing powers of local
government units:

Sec. 133. Common Limitations on the Taxing Powers of Local


Government Units. — Unless otherwise provided herein, the
exercise of the taxing powers of provinces, cities, municipalities,
and barangay shall not extend to the levy of the following:

a) . . .

xxx xxx xxx

o) Taxes, fees or charges of any kind on the National


Government, its agencies and instrumentalities, and
local government units. (Emphasis supplied)

Respondent City refused to cancel and set aside petitioner's realty tax account,
insisting that the MCIAA is a government-controlled corporation whose tax
exemption privilege has been withdrawn by virtue of Sections 193 and 234 of the
Local Governmental Code that took effect on January 1, 1992:

Sec. 193. Withdrawal of Tax Exemption Privilege. — Unless otherwise provided in


this Code, tax exemptions or incentives granted to, or presently enjoyed by all
persons whether natural or juridical,including government-owned or controlled
corporations, except local water districts, cooperatives duly registered under RA
No. 6938, non-stock, and non-profit hospitals and educational institutions, are
hereby withdrawn upon the effectivity of this Code. (Emphasis supplied)

xxx xxx xxx

Sec. 234. Exemptions from Real Property taxes. — . . .

(a) . . .

xxx xxx xxx

(c) . . .

Except as provided herein, any exemption from payment of real


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

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

Respondent City, however, asserted that MACIAA is not an instrumentality of the


government but merely a government-owned corporation performing proprietary
functions As such, all exemptions previously granted to it were deemed withdrawn
by operation of law, as provided under Sections 193 and 234 of the Local
Government Code when it took effect on January 1, 1992. 3

The petition for declaratory relief was docketed as Civil Case No. CEB-16900.

In its decision of 22 March 1995, 4 the trial court dismissed the petition in light of its
findings, to wit:

A close reading of the New Local Government Code of 1991 or RA 7160 provides
the express cancellation and withdrawal of exemption of taxes by government
owned and controlled corporation per Sections after the effectivity of said Code on
January 1, 1992, to wit: [proceeds to quote Sections 193 and 234]

Petitioners claimed that its real properties assessed by respondent City Government
of Cebu are exempted from paying realty taxes in view of the exemption granted
under RA 6958 to pay the same (citing Section 14 of RA 6958).

However, RA 7160 expressly provides that "All general and special laws, acts, city
charters, decress [sic], executive orders, proclamations and administrative
regulations, or part or parts thereof which are inconsistent with any of the
provisions of this Code are hereby repealed or modified accordingly." ([f], Section
534, RA 7160).

With that repealing clause in RA 7160, it is safe to infer and state that the tax
exemption provided for in RA 6958 creating petitioner had been expressly repealed
by the provisions of the New Local Government Code of 1991.
So that petitioner in this case has to pay the assessed realty tax of its properties
effective after January 1, 1992 until the present.

This Court's ruling finds expression to give impetus and meaning to the overall
objectives of the New Local Government Code of 1991, RA 7160. "It is hereby
declared the policy of the State that the territorial and political subdivisions of the
State shall enjoy genuine and meaningful local autonomy to enable them to attain
their fullest development as self-reliant communities and make them more effective
partners in the attainment of national goals. Towards this end, the State shall
provide for a more responsive and accountable local government structure
instituted through a system of decentralization whereby local government units
shall be given more powers, authority, responsibilities, and resources. The process
of decentralization shall proceed from the national government to the local
government units. . . . 5

Its motion for reconsideration having been denied by the trial court in its 4 May 1995 order,
the petitioner filed the instant petition based on the following assignment of errors:

I RESPONDENT JUDGE ERRED IN FAILING TO RULE THAT


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

II RESPONDENT JUDGE ERRED IN RULING THAT


PETITIONER IS LIABLE TO PAY REAL PROPERTY TAXES
TO THE CITY OF CEBU.

Anent the first assigned error, the petitioner asserts that although it is a government-owned
or controlled corporation it is mandated to perform functions in the same category as an
instrumentality of Government. An instrumentality of Government is one created to
perform governmental functions primarily to promote certain aspects of the economic life
of the people. 6 Considering its task "not merely to efficiently operate and manage the
Mactan-Cebu International Airport, but more importantly, to carry out the Government
policies of promoting and developing the Central Visayas and Mindanao regions as centers
of international trade and tourism, and accelerating the development of the means of
transportation and communication in the country," 7 and that it is an attached agency of the
Department of Transportation and Communication (DOTC), 8 the petitioner "may stand in
[sic] the same footing as an agency or instrumentality of the national government." Hence,
its tax exemption privilege under Section 14 of its Charter "cannot be considered
withdrawn with the passage of the Local Government Code of 1991 (hereinafter LGC)
because Section 133 thereof specifically states that the taxing powers of local government
units shall not extend to the levy of taxes of fees or charges of any kind on the national
government its agencies and instrumentalities."
As to the second assigned error, the petitioner contends that being an instrumentality of the
National Government, respondent City of Cebu has no power nor authority to impose realty
taxes upon it in accordance with the aforesaid Section 133 of the LGC, as explained
in Basco vs. Philippine Amusement and Gaming Corporation; 9

Local governments have no power to tax instrumentalities of the National


Government. PAGCOR is a government owned or controlled corporation with an
original character, PD 1869. All its shares of stock are owned by the National
Government. . . .

PAGCOR has a dual role, to operate and regulate gambling casinos. The latter joke
is governmental, which places it in the category of an agency or instrumentality of
the Government. Being an instrumentality of the Government, PAGCOR should be
and actually is exempt from local taxes. Otherwise, its operation might be
burdened, impeded or subjected to control by a mere Local government.

The states have no power by taxation or otherwise, to retard, impede, burden or in


any manner control the operation of constitutional laws enacted by Congress to
carry into execution the powers vested in the federal government. (McCulloch v.
Maryland, 4 Wheat 316, 4 L Ed. 579).

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

Justice Holmes, speaking for the Supreme Court, make references to the entire
absence of power on the part of the States to touch, in that way (taxation) at least,
the instrumentalities of the United States (Johnson v. Maryland, 254 US 51) and it
can be agreed that no state or political subdivision can regulate a federal
instrumentality in such a way as to prevent it from consummating its federal
responsibilities, or even to seriously burden it in the accomplishment of them.
(Antieau Modern Constitutional Law, Vol. 2, p. 140)

Otherwise mere creature of the State can defeat National policies thru extermination
of what local authorities may perceive to be undesirable activities or enterprise
using the power to tax as "a toll for regulation" (U.S. v. Sanchez, 340 US 42). The
power to tax which was called by Justice Marshall as the "power to destroy"
(McCulloch v. Maryland, supra) cannot be allowed to defeat an instrumentality or
creation of the very entity which has the inherent power to wield it. (Emphasis
supplied)

It then concludes that the respondent Judge "cannot therefore correctly say that the
questioned provisions of the Code do not contain any distinction between a governmental
function as against one performing merely proprietary ones such that the exemption
privilege withdrawn under the said Code would apply to allgovernment corporations." For
it is clear from Section 133, in relation to Section 234, of the LGC that the legislature meant
to exclude instrumentalities of the national government from the taxing power of the local
government units.

In its comment respondent City of Cebu alleges that as local a government unit and a
political subdivision, it has the power to impose, levy, assess, and collect taxes within its
jurisdiction. Such power is guaranteed by the Constitution 10 and enhanced further by the
LGC. While it may be true that under its Charter the petitioner was exempt from the
payment of realty taxes, 11 this exemption was withdrawn by Section 234 of the LGC. In
response to the petitioner's claim that such exemption was not repealed because being an
instrumentality of the National Government, Section 133 of the LGC prohibits local
government units from imposing taxes, fees, or charges of any kind on it, respondent City
of Cebu points out that the petitioner is likewise a government-owned corporation, and
Section 234 thereof does not distinguish between government-owned corporation, and
Section 234 thereof does not distinguish between government-owned corporation, and
Section 234 thereof does not distinguish between government-owned or controlled
corporations performing governmental and purely proprietary functions. Respondent city
of Cebu urges this the Manila International Airport Authority is a governmental-owned
corporation, 12 and to reject the application of Basco because it was "promulgated . . .
before the enactment and the singing into law of R.A. No. 7160," and was not, therefore,
decided "in the light of the spirit and intention of the framers of the said law.

As a general rule, the power to tax is an incident of sovereignty and is unlimited in its
range, acknowledging in its very nature no limits, so that security against its abuse is to be
found only in the responsibility of the legislature which imposes the tax on the constituency
who are to pay it. Nevertheless, effective limitations thereon may be imposed by the people
through their Constitutions. 13 Our Constitution, for instance, provides that the rule of
taxation shall be uniform and equitable and Congress shall evolve a progressive system of
taxation. 14So potent indeed is the power that it was once opined that "the power to tax
involves the power to destroy." 15 Verily, taxation is a destructive power which interferes
with the personal and property for the support of the government. Accordingly, tax statutes
must be construed strictly against the government and liberally in favor of the
taxpayer. 16But since taxes are what we pay for civilized society, 17 or are the lifeblood of
the nation, the law frowns against exemptions from taxation and statutes granting tax
exemptions are thus construed strictissimi juris against the taxpayers and liberally in favor
of the taxing authority. 18 A claim of exemption from tax payment must be clearly shown
and based on language in the law too plain to be mistaken. 19 Elsewise stated, taxation is
the rule, exemption therefrom is the exception. 20 However, if the grantee of the exemption
is a political subdivision or instrumentality, the rigid rule of construction does not apply
because the practical effect of the exemption is merely to reduce the amount of money that
has to be handled by the government in the course of its operations. 21

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

There can be no question that under Section 14 of R.A. No. 6958 the petitioner is exempt
from the payment of realty taxes imposed by the National Government or any of its political
subdivisions, agencies, and instrumentalities. Nevertheless, since taxation is the rule and
exemption therefrom the exception, the exemption may thus be withdrawn at the pleasure
of the taxing authority. The only exception to this rule is where the exemption was granted
to private parties based on material consideration of a mutual nature, which then becomes
contractual and is thus covered by the non-impairment clause of the Constitution. 23

The LGC, enacted pursuant to Section 3, Article X of the constitution provides for the
exercise by local government units of their power to tax, the scope thereof or its limitations,
and the exemption from taxation.

Section 133 of the LGC prescribes the common limitations on the taxing powers of local
government units as follows:

Sec. 133. Common Limitations on the Taxing Power of Local Government Units.
— Unless otherwise provided herein, the exercise of the taxing powers of
provinces, cities, municipalities, and barangays shall not extend to the levy of the
following:

(a) Income tax, except when levied on banks and other financial
institutions;

(b) Documentary stamp tax;

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


acquisitions mortis causa, except as otherwise provided herein

(d) Customs duties, registration fees of vessels and wharfage on


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

(e) Taxes, fees and charges and other imposition upon goods carried
into or out of, or passing through, the territorial jurisdictions of local
government units in the guise or charges for wharfages, tolls for
bridges or otherwise, or other taxes, fees or charges in any form
whatsoever upon such goods or merchandise;

(f) Taxes fees or charges on agricultural and aquatic products when


sold by marginal farmers or fishermen;
(g) Taxes on business enterprise certified to be the Board of
Investment as pioneer or non-pioneer for a period of six (6) and four
(4) years, respectively from the date of registration;

(h) Excise taxes on articles enumerated under the National Internal


Revenue Code, as amended, and taxes, fees or charges on petroleum
products;

(i) Percentage or value added tax (VAT) on sales, barters or


exchanges or similar transactions on goods or services except as
otherwise provided herein;

(j) Taxes on the gross receipts of transportation contractor and


person engage in the transportation of passengers of freight by hire
and common carriers by air, land, or water, except as provided in
this code;

(k) Taxes on premiums paid by ways reinsurance or retrocession;

(l) Taxes, fees, or charges for the registration of motor vehicles and
for the issuance of all kinds of licenses or permits for the driving of
thereof, except, tricycles;

(m) Taxes, fees, or other charges on Philippine product actually


exported, except as otherwise provided herein;

(n) Taxes, fees, or charges, on Countryside and Barangay Business


Enterprise and Cooperatives duly registered under R.A. No. 6810
and Republic Act Numbered Sixty nine hundred thirty-eight (R.A.
No. 6938) otherwise known as the "Cooperative Code of the
Philippines; and

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


NATIONAL GOVERNMENT, ITS AGENCIES AND
INSTRUMENTALITIES, AND LOCAL GOVERNMENT UNITS.
(emphasis supplied)

Needless to say the last item (item o) is pertinent in this case. The "taxes, fees or charges"
referred to are "of any kind", hence they include all of these, unless otherwise provided by
the LGC. The term "taxes" is well understood so as to need no further elaboration,
especially in the light of the above enumeration. The term "fees" means charges fixed by
law or Ordinance for the regulation or inspection of business activity, 24 while "charges"
are pecuniary liabilities such as rents or fees against person or property. 25

Among the "taxes" enumerated in the LGC is real property tax, which is governed by
Section 232. It reads as follows:
Sec. 232. Power to Levy Real Property Tax. — A province or city or a municipality
within the Metropolitan Manila Area may levy on an annual ad valorem tax on real
property such as land, building, machinery and other improvements not hereafter
specifically exempted.

Section 234 of LGC provides for the exemptions from payment of real property taxes and
withdraws previous exemptions therefrom granted to natural and juridical persons,
including government owned and controlled corporations, except as provided therein. It
provides:

Sec. 234. Exemptions from Real Property Tax. — The following are exempted from
payment of the real property tax:

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


of its political subdivisions except when the beneficial use thereof
had been granted, for reconsideration or otherwise, to a taxable
person;

(b) Charitable institutions, churches, parsonages or convents


appurtenants thereto, mosques nonprofits or religious cemeteries
and all lands, building and improvements actually, directly, and
exclusively used for religious charitable or educational purposes;

(c) All machineries and equipment that are actually, directly and
exclusively used by local water districts and government-owned or
controlled corporations engaged in the supply and distribution of
water and/or generation and transmission of electric power;

(d) All real property owned by duly registered cooperatives as


provided for under R.A. No. 6938; and;

(e) Machinery and equipment used for pollution control and


environmental protection.

Except as provided herein, any exemptions from payment of real


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

These exemptions are based on the ownership, character, and use of the property. Thus;

(a) Ownership Exemptions. Exemptions from real property taxes on


the basis of ownership are real properties owned by: (i) the Republic,
(ii) a province, (iii) a city, (iv) a municipality, (v) a barangay, and
(vi) registered cooperatives.
(b) Character Exemptions. Exempted from real property taxes on
the basis of their character are: (i) charitable institutions, (ii) houses
and temples of prayer like churches, parsonages or convents
appurtenant thereto, mosques, and (iii) non profit or religious
cemeteries.

(c) Usage exemptions. Exempted from real property taxes on the


basis of the actual, direct and exclusive use to which they are
devoted are: (i) all lands buildings and improvements which are
actually, directed and exclusively used for religious, charitable or
educational purpose; (ii) all machineries and equipment actually,
directly and exclusively used or by local water districts or by
government-owned or controlled corporations engaged in the supply
and distribution of water and/or generation and transmission of
electric power; and (iii) all machinery and equipment used for
pollution control and environmental protection.

To help provide a healthy environment in the midst of the modernization of the


country, all machinery and equipment for pollution control and environmental
protection may not be taxed by local governments.

2. Other Exemptions Withdrawn. All other exemptions previously


granted to natural or juridical persons including government-owned
or controlled corporations are withdrawn upon the effectivity of the
Code. 26

Section 193 of the LGC is the general provision on withdrawal of tax exemption privileges.
It provides:

Sec. 193. Withdrawal of Tax Exemption Privileges. — Unless otherwise provided


in this code, tax exemptions or incentives granted to or presently enjoyed by all
persons, whether natural or juridical, including government-owned, or controlled
corporations, except local water districts, cooperatives duly registered under R.A.
6938, non stock and non profit hospitals and educational constitutions, are hereby
withdrawn upon the effectivity of this Code.

On the other hand, the LGC authorizes local government units to grant tax exemption
privileges. Thus, Section 192 thereof provides:

Sec. 192. Authority to Grant Tax Exemption Privileges. — Local government units
may, through ordinances duly approved, grant tax exemptions, incentives or reliefs
under such terms and conditions as they may deem necessary.

The foregoing sections of the LGC speaks of: (a) the limitations on the taxing powers of
local government units and the exceptions to such limitations; and (b) the rule on tax
exemptions and the exceptions thereto. The use of exceptions of provisos in these section,
as shown by the following clauses:

(1) "unless otherwise provided herein" in the opening paragraph of


Section 133;

(2) "Unless otherwise provided in this Code" in section 193;

(3) "not hereafter specifically exempted" in Section 232; and

(4) "Except as provided herein" in the last paragraph of Section 234

initially hampers a ready understanding of the sections. Note, too, that the aforementioned
clause in section 133 seems to be inaccurately worded. Instead of the clause "unless
otherwise provided herein," with the "herein" to mean, of course, the section, it should have
used the clause "unless otherwise provided in this Code." The former results in absurdity
since the section itself enumerates what are beyond the taxing powers of local government
units and, where exceptions were intended, the exceptions were explicitly indicated in the
text. For instance, in item (a) which excepts the income taxes "when livied on banks and
other financial institutions", item (d) which excepts "wharfage on wharves constructed and
maintained by the local government until concerned"; and item (1) which excepts taxes,
fees, and charges for the registration and issuance of license or permits for the driving of
"tricycles". It may also be observed that within the body itself of the section, there are
exceptions which can be found only in other parts of the LGC, but the section
interchangeably uses therein the clause "except as otherwise provided herein" as in items
(c) and (i), or the clause "except as otherwise provided herein" as in items (c) and (i), or
the clause "excepts as provided in this Code" in item (j). These clauses would be obviously
unnecessary or mere surplus-ages if the opening clause of the section were" "Unless
otherwise provided in this Code" instead of "Unless otherwise provided herein". In any
event, even if the latter is used, since under Section 232 local government units have the
power to levy real property tax, except those exempted therefrom under Section 234, then
Section 232 must be deemed to qualify Section 133.

Thus, reading together Section 133, 232 and 234 of the LGC, we conclude that as a general
rule, as laid down in Section 133 the taxing powers of local government units cannot extend
to the levy of inter alia, "taxes, fees, and charges of any kind of the National Government,
its agencies and instrumentalties, and local government units"; however, pursuant to
Section 232, provinces, cities, municipalities in the Metropolitan Manila Area may impose
the real property tax except on, inter alia, "real property owned by the Republic of the
Philippines or any of its political subdivisions except when the beneficial used thereof has
been granted, for consideration or otherwise, to a taxable person", as provided in item (a)
of the first paragraph of Section 234.

As to tax exemptions or incentives granted to or presently enjoyed by natural or juridical


persons, including government-owned and controlled corporations, Section 193 of the
LGC prescribes the general rule, viz., they are withdrawn upon the effectivity of the LGC,
except upon the effectivity of the LGC, except those granted to local water districts,
cooperatives duly registered under R.A. No. 6938, non stock and non-profit hospitals and
educational institutions, and unless otherwise provided in the LGC. The latter proviso
could refer to Section 234, which enumerates the properties exempt from real property tax.
But the last paragraph of Section 234 further qualifies the retention of the exemption in so
far as the real property taxes are concerned by limiting the retention only to those
enumerated there-in; all others not included in the enumeration lost the privilege upon the
effectivity of the LGC. Moreover, even as the real property is owned by the Republic of
the Philippines, or any of its political subdivisions covered by item (a) of the first paragraph
of Section 234, the exemption is withdrawn if the beneficial use of such property has been
granted to taxable person for consideration or otherwise.

Since the last paragraph of Section 234 unequivocally withdrew, upon the effectivity of the
LGC, exemptions from real property taxes granted to natural or juridical persons, including
government-owned or controlled corporations, except as provided in the said section, and
the petitioner is, undoubtedly, a government-owned corporation, it necessarily follows that
its exemption from such tax granted it in Section 14 of its charter, R.A. No. 6958, has been
withdrawn. Any claim to the contrary can only be justified if the petitioner can seek refuge
under any of the exceptions provided in Section 234, but not under Section 133, as it now
asserts, since, as shown above, the said section is qualified by Section 232 and 234.

In short, the petitioner can no longer invoke the general rule in Section 133 that the taxing
powers of the local government units cannot extend to the levy of:

(o) taxes, fees, or charges of any kind on the National Government,


its agencies, or instrumentalities, and local government units.

I must show that the parcels of land in question, which are real property, are any one of
those enumerated in Section 234, either by virtue of ownership, character, or use of the
property. Most likely, it could only be the first, but not under any explicit provision of the
said section, for one exists. In light of the petitioner's theory that it is an "instrumentality
of the Government", it could only be within be first item of the first paragraph of the section
by expanding the scope of the terms Republic of the Philippines" to embrace . . . . .
."instrumentalities" and "agencies" or expediency we quote:

(a) real property owned by the Republic of the Philippines, or any


of the Philippines, or any of its political subdivisions except when
the beneficial use thereof has been granted, for consideration or
otherwise, to a taxable person.

This view does not persuade us. In the first place, the petitioner's claim that it is an
instrumentality of the Government is based on Section 133(o), which expressly mentions
the word "instrumentalities"; and in the second place it fails to consider the fact that the
legislature used the phrase "National Government, its agencies and instrumentalities" "in
Section 133(o),but only the phrase "Republic of the Philippines or any of its political
subdivision "in Section 234(a).
The terms "Republic of the Philippines" and "National Government" are not
interchangeable. The former is boarder and synonymous with "Government of the Republic
of the Philippines" which the Administrative Code of the 1987 defines as the "corporate
governmental entity though which the functions of the government are exercised through
at the Philippines, including, saves as the contrary appears from the context, the various
arms through which political authority is made effective in the Philippines, whether
pertaining to the autonomous reason, the provincial, city, municipal or barangay
subdivision or other forms of local government." 27 These autonomous regions, provincial,
city, municipal or barangay subdivisions" are the political subdivision. 28

On the other hand, "National Government" refers "to the entire machinery of the central
government, as distinguished from the different forms of local Governments." 29 The
National Government then is composed of the three great departments the executive, the
legislative and the judicial. 30

An "agency" of the Government refers to "any of the various units of the Government,
including a department, bureau, office instrumentality, or government-owned or controlled
corporation, or a local government or a distinct unit therein;" 31 while an "instrumentality"
refers to "any agency of the National Government, not integrated within the department
framework, vested with special functions or jurisdiction by law, endowed with some if not
all corporate powers, administering special funds, and enjoying operational autonomy;
usually through a charter. This term includes regulatory agencies, chartered institutions and
government-owned and controlled corporations". 32

If Section 234(a) intended to extend the exception therein to the withdrawal of the
exemption from payment of real property taxes under the last sentence of the said section
to the agencies and instrumentalities of the National Government mentioned in Section
133(o), then it should have restated the wording of the latter. Yet, it did not Moreover, that
Congress did not wish to expand the scope of the exemption in Section 234(a) to include
real property owned by other instrumentalities or agencies of the government including
government-owned and controlled corporations is further borne out by the fact that the
source of this exemption is Section 40(a) of P.D. No. 646, otherwise known as the Real
Property Tax Code, which reads:

Sec 40. Exemption from Real Property Tax. — The exemption shall be as follows:

(a) Real property owned by the Republic of the


Philippines or any of its political subdivisions and
any government-owned or controlled corporations so
exempt by is charter: Provided, however, that this
exemption shall not apply to real property of the
above mentioned entities the beneficial use of which
has been granted, for consideration or otherwise, to a
taxable person.
Note that as a reproduced in Section 234(a), the phrase "and any government-owned or
controlled corporation so exempt by its charter" was excluded. The justification for this
restricted exemption in Section 234(a) seems obvious: to limit further tax exemption
privileges, specially in light of the general provision on withdrawal of exemption from
payment of real property taxes in the last paragraph of property taxes in the last paragraph
of Section 234. These policy considerations are consistent with the State policy to ensure
autonomy to local governments 33 and the objective of the LGC that they enjoy genuine
and meaningful local autonomy to enable them to attain their fullest development as self-
reliant communities and make them effective partners in the attainment of national
goals. 34 The power to tax is the most effective instrument to raise needed revenues to
finance and support myriad activities of local government units for the delivery of basic
services essential to the promotion of the general welfare and the enhancement of peace,
progress, and prosperity of the people. It may also be relevant to recall that the original
reasons for the withdrawal of tax exemption privileges granted to government-owned and
controlled corporations and all other units of government were that such privilege resulted
in serious tax base erosion and distortions in the tax treatment of similarly situated
enterprises, and there was a need for this entities to share in the requirements of the
development, fiscal or otherwise, by paying the taxes and other charges due from them. 35

The crucial issues then to be addressed are: (a) whether the parcels of land in question
belong to the Republic of the Philippines whose beneficial use has been granted to the
petitioner, and (b) whether the petitioner is a "taxable person".

Section 15 of the petitioner's Charter provides:

Sec. 15. Transfer of Existing Facilities and Intangible Assets. — All existing public
airport facilities, runways, lands, buildings and other properties, movable or
immovable, belonging to or presently administered by the airports, and all assets,
powers, rights, interests and privileges relating on airport works, or air operations,
including all equipment which are necessary for the operations of air navigation,
acrodrome control towers, crash, fire, and rescue facilities are hereby transferred to
the Authority: Provided however, that the operations control of all equipment
necessary for the operation of radio aids to air navigation, airways communication,
the approach control office, and the area control center shall be retained by the Air
Transportation Office. No equipment, however, shall be removed by the Air
Transportation Office from Mactan without the concurrence of the authority. The
authority may assist in the maintenance of the Air Transportation Office equipment.

The "airports" referred to are the "Lahug Air Port" in Cebu City and the "Mactan
International AirPort in the Province of Cebu", 36 which belonged to the Republic of the
Philippines, then under the Air Transportation Office (ATO). 37

It may be reasonable to assume that the term "lands" refer to "lands" in Cebu City then
administered by the Lahug Air Port and includes the parcels of land the respondent City of
Cebu seeks to levy on for real property taxes. This section involves a "transfer" of the
"lands" among other things, to the petitioner and not just the transfer of the beneficial use
thereof, with the ownership being retained by the Republic of the Philippines.

This "transfer" is actually an absolute conveyance of the ownership thereof because the
petitioner's authorized capital stock consists of, inter alia "the value of such real estate
owned and/or administered by the airports." 38 Hence, the petitioner is now the owner of
the land in question and the exception in Section 234(c) of the LGC is inapplicable.

Moreover, the petitioner cannot claim that it was never a "taxable person" under its Charter.
It was only exempted from the payment of real property taxes. The grant of the privilege
only in respect of this tax is conclusive proof of the legislative intent to make it a taxable
person subject to all taxes, except real property tax.

Finally, even if the petitioner was originally not a taxable person for purposes of real
property tax, in light of the forgoing disquisitions, it had already become even if it be
conceded to be an "agency" or "instrumentality" of the Government, a taxable person for
such purpose in view of the withdrawal in the last paragraph of Section 234 of exemptions
from the payment of real property taxes, which, as earlier adverted to, applies to the
petitioner.

Accordingly, the position taken by the petitioner is untenable. Reliance on Basco


vs. Philippine Amusement and Gaming Corporation 39 is unavailing since it was decided
before the effectivity of the LGC. Besides, nothing can prevent Congress from decreeing
that even instrumentalities or agencies of the government performing governmental
functions may be subject to tax. Where it is done precisely to fulfill a constitutional
mandate and national policy, no one can doubt its wisdom.

WHEREFORE, the instant petition is DENIED. The challenged decision and order of the
Regional Trial Court of Cebu, Branch 20, in Civil Case No. CEB-16900 are AFFIRMED.

No pronouncement as to costs.

SO ORDERED.

G.R. No. 155650 July 20, 2006

MANILA INTERNATIONAL AIRPORT AUTHORITY, petitioner,


vs.
COURT OF APPEALS, CITY OF PARAÑAQUE, CITY MAYOR OF PARAÑAQUE,
SANGGUNIANG PANGLUNGSOD NG PARAÑAQUE, CITY ASSESSOR OF
PARAÑAQUE, and CITY TREASURER OF PARAÑAQUE, respondents.

DECISION

CARPIO, J.:
The Antecedents

Petitioner Manila International Airport Authority (MIAA) operates the Ninoy Aquino
International Airport (NAIA) Complex in Parañaque City under Executive Order No. 903,
otherwise known as the Revised Charter of the Manila International Airport Authority ("MIAA
Charter"). Executive Order No. 903 was issued on 21 July 1983 by then President Ferdinand E.
Marcos. Subsequently, Executive Order Nos. 9091 and 2982 amended the MIAA Charter.

As operator of the international airport, MIAA administers the land, improvements and equipment
within the NAIA Complex. The MIAA Charter transferred to MIAA approximately 600 hectares
of land,3 including the runways and buildings ("Airport Lands and Buildings") then under the
Bureau of Air Transportation.4 The MIAA Charter further provides that no portion of the land
transferred to MIAA shall be disposed of through sale or any other mode unless specifically
approved by the President of the Philippines.5

On 21 March 1997, the Office of the Government Corporate Counsel (OGCC) issued Opinion No.
061. The OGCC opined that the Local Government Code of 1991 withdrew the exemption from
real estate tax granted to MIAA under Section 21 of the MIAA Charter. Thus, MIAA negotiated
with respondent City of Parañaque to pay the real estate tax imposed by the City. MIAA then paid
some of the real estate tax already due.

On 28 June 2001, MIAA received Final Notices of Real Estate Tax Delinquency from the City of
Parañaque for the taxable years 1992 to 2001. MIAA's real estate tax delinquency is broken down
as follows:

TAX TAXABLE
TAX DUE PENALTY TOTAL
DECLARATION YEAR
E-016-01370 1992-2001 19,558,160.00 11,201,083.20 30,789,243.20
E-016-01374 1992-2001 111,689,424.90 68,149,479.59 179,838,904.49
E-016-01375 1992-2001 20,276,058.00 12,371,832.00 32,647,890.00
E-016-01376 1992-2001 58,144,028.00 35,477,712.00 93,621,740.00
E-016-01377 1992-2001 18,134,614.65 11,065,188.59 29,199,803.24
E-016-01378 1992-2001 111,107,950.40 67,794,681.59 178,902,631.99
E-016-01379 1992-2001 4,322,340.00 2,637,360.00 6,959,700.00
E-016-01380 1992-2001 7,776,436.00 4,744,944.00 12,521,380.00
*E-016-013-85 1998-2001 6,444,810.00 2,900,164.50 9,344,974.50
*E-016-01387 1998-2001 34,876,800.00 5,694,560.00 50,571,360.00
*E-016-01396 1998-2001 75,240.00 33,858.00 109,098.00
GRAND TOTAL P392,435,861.95 P232,070,863.47 P 624,506,725.42

1992-1997 RPT was paid on Dec. 24, 1997 as per O.R.#9476102 for P4,207,028.75

#9476101 for P28,676,480.00


#9476103 for P49,115.006

On 17 July 2001, the City of Parañaque, through its City Treasurer, issued notices of levy and
warrants of levy on the Airport Lands and Buildings. The Mayor of the City of Parañaque
threatened to sell at public auction the Airport Lands and Buildings should MIAA fail to pay the
real estate tax delinquency. MIAA thus sought a clarification of OGCC Opinion No. 061.

On 9 August 2001, the OGCC issued Opinion No. 147 clarifying OGCC Opinion No. 061. The
OGCC pointed out that Section 206 of the Local Government Code requires persons exempt from
real estate tax to show proof of exemption. The OGCC opined that Section 21 of the MIAA Charter
is the proof that MIAA is exempt from real estate tax.

On 1 October 2001, MIAA filed with the Court of Appeals an original petition for prohibition and
injunction, with prayer for preliminary injunction or temporary restraining order. The petition
sought to restrain the City of Parañaque from imposing real estate tax on, levying against, and
auctioning for public sale the Airport Lands and Buildings. The petition was docketed as CA-G.R.
SP No. 66878.

On 5 October 2001, the Court of Appeals dismissed the petition because MIAA filed it beyond the
60-day reglementary period. The Court of Appeals also denied on 27 September 2002 MIAA's
motion for reconsideration and supplemental motion for reconsideration. Hence, MIAA filed on 5
December 2002 the present petition for review.7

Meanwhile, in January 2003, the City of Parañaque posted notices of auction sale at the Barangay
Halls of Barangays Vitalez, Sto. Niño, and Tambo, Parañaque City; in the public market of
Barangay La Huerta; and in the main lobby of the Parañaque City Hall. The City of Parañaque
published the notices in the 3 and 10 January 2003 issues of the Philippine Daily Inquirer, a
newspaper of general circulation in the Philippines. The notices announced the public auction sale
of the Airport Lands and Buildings to the highest bidder on 7 February 2003, 10:00 a.m., at the
Legislative Session Hall Building of Parañaque City.

A day before the public auction, or on 6 February 2003, at 5:10 p.m., MIAA filed before this Court
an Urgent Ex-Parte and Reiteratory Motion for the Issuance of a Temporary Restraining Order.
The motion sought to restrain respondents — the City of Parañaque, City Mayor of
Parañaque, Sangguniang Panglungsod ng Parañaque, City Treasurer of Parañaque, and the City
Assessor of Parañaque ("respondents") — from auctioning the Airport Lands and Buildings.

On 7 February 2003, this Court issued a temporary restraining order (TRO) effective immediately.
The Court ordered respondents to cease and desist from selling at public auction the Airport Lands
and Buildings. Respondents received the TRO on the same day that the Court issued it. However,
respondents received the TRO only at 1:25 p.m. or three hours after the conclusion of the public
auction.

On 10 February 2003, this Court issued a Resolution confirming nunc pro tunc the TRO.
On 29 March 2005, the Court heard the parties in oral arguments. In compliance with the directive
issued during the hearing, MIAA, respondent City of Parañaque, and the Solicitor General
subsequently submitted their respective Memoranda.

MIAA admits that the MIAA Charter has placed the title to the Airport Lands and Buildings in the
name of MIAA. However, MIAA points out that it cannot claim ownership over these properties
since the real owner of the Airport Lands and Buildings is the Republic of the Philippines. The
MIAA Charter mandates MIAA to devote the Airport Lands and Buildings for the benefit of the
general public. Since the Airport Lands and Buildings are devoted to public use and public service,
the ownership of these properties remains with the State. The Airport Lands and Buildings are thus
inalienable and are not subject to real estate tax by local governments.

MIAA also points out that Section 21 of the MIAA Charter specifically exempts MIAA from the
payment of real estate tax. MIAA insists that it is also exempt from real estate tax under Section
234 of the Local Government Code because the Airport Lands and Buildings are owned by the
Republic. To justify the exemption, MIAA invokes the principle that the government cannot tax
itself. MIAA points out that the reason for tax exemption of public property is that its taxation
would not inure to any public advantage, since in such a case the tax debtor is also the tax creditor.

Respondents invoke Section 193 of the Local Government Code, which expressly withdrew the
tax exemption privileges of "government-owned and-controlled corporations" upon the
effectivity of the Local Government Code. Respondents also argue that a basic rule of statutory
construction is that the express mention of one person, thing, or act excludes all others. An
international airport is not among the exceptions mentioned in Section 193 of the Local
Government Code. Thus, respondents assert that MIAA cannot claim that the Airport Lands and
Buildings are exempt from real estate tax.

Respondents also cite the ruling of this Court in Mactan International Airport v. Marcos8 where
we held that the Local Government Code has withdrawn the exemption from real estate tax granted
to international airports. Respondents further argue that since MIAA has already paid some of the
real estate tax assessments, it is now estopped from claiming that the Airport Lands and Buildings
are exempt from real estate tax.

The Issue

This petition raises the threshold issue of whether the Airport Lands and Buildings of MIAA are
exempt from real estate tax under existing laws. If so exempt, then the real estate tax assessments
issued by the City of Parañaque, and all proceedings taken pursuant to such assessments, are void.
In such event, the other issues raised in this petition become moot.

The Court's Ruling

We rule that MIAA's Airport Lands and Buildings are exempt from real estate tax imposed by
local governments.
First, MIAA is not a government-owned or controlled corporation but an instrumentality of the
National Government and thus exempt from local taxation. Second, the real properties of MIAA
are owned by the Republic of the Philippines and thus exempt from real estate tax.

1. MIAA is Not a Government-Owned or Controlled Corporation

Respondents argue that MIAA, being a government-owned or controlled corporation, is not


exempt from real estate tax. Respondents claim that the deletion of the phrase "any government-
owned or controlled so exempt by its charter" in Section 234(e) of the Local Government Code
withdrew the real estate tax exemption of government-owned or controlled corporations. The
deleted phrase appeared in Section 40(a) of the 1974 Real Property Tax Code enumerating the
entities exempt from real estate tax.

There is no dispute that a government-owned or controlled corporation is not exempt from real
estate tax. However, MIAA is not a government-owned or controlled corporation. Section 2(13)
of the Introductory Provisions of the Administrative Code of 1987 defines a government-owned
or controlled corporation as follows:

SEC. 2. General Terms Defined. – x x x x

(13) Government-owned or controlled corporation refers to any agency organized as a


stock or non-stock corporation, vested with functions relating to public needs whether
governmental or proprietary in nature, and owned by the Government directly or through
its instrumentalities either wholly, or, where applicable as in the case of stock corporations,
to the extent of at least fifty-one (51) percent of its capital stock: x x x. (Emphasis supplied)

A government-owned or controlled corporation must be "organized as a stock or non-stock


corporation." MIAA is not organized as a stock or non-stock corporation. MIAA is not a stock
corporation because it has no capital stock divided into shares. MIAA has no stockholders or
voting shares. Section 10 of the MIAA Charter9 provides:

SECTION 10. Capital. — The capital of the Authority to be contributed by the National
Government shall be increased from Two and One-half Billion (P2,500,000,000.00) Pesos
to Ten Billion (P10,000,000,000.00) Pesos to consist of:

(a) The value of fixed assets including airport facilities, runways and equipment and such
other properties, movable and immovable[,] which may be contributed by the National
Government or transferred by it from any of its agencies, the valuation of which shall be
determined jointly with the Department of Budget and Management and the Commission
on Audit on the date of such contribution or transfer after making due allowances for
depreciation and other deductions taking into account the loans and other liabilities of the
Authority at the time of the takeover of the assets and other properties;

(b) That the amount of P605 million as of December 31, 1986 representing about seventy
percentum (70%) of the unremitted share of the National Government from 1983 to 1986
to be remitted to the National Treasury as provided for in Section 11 of E. O. No. 903 as
amended, shall be converted into the equity of the National Government in the Authority.
Thereafter, the Government contribution to the capital of the Authority shall be provided
in the General Appropriations Act.

Clearly, under its Charter, MIAA does not have capital stock that is divided into shares.

Section 3 of the Corporation Code10 defines a stock corporation as one whose "capital stock is
divided into shares and x x x authorized to distribute to the holders of such shares dividends
x x x." MIAA has capital but it is not divided into shares of stock. MIAA has no stockholders or
voting shares. Hence, MIAA is not a stock corporation.

MIAA is also not a non-stock corporation because it has no members. Section 87 of the
Corporation Code defines a non-stock corporation as "one where no part of its income is
distributable as dividends to its members, trustees or officers." A non-stock corporation must have
members. Even if we assume that the Government is considered as the sole member of MIAA, this
will not make MIAA a non-stock corporation. Non-stock corporations cannot distribute any part
of their income to their members. Section 11 of the MIAA Charter mandates MIAA to remit 20%
of its annual gross operating income to the National Treasury.11 This prevents MIAA from
qualifying as a non-stock corporation.

Section 88 of the Corporation Code provides that non-stock corporations are "organized for
charitable, religious, educational, professional, cultural, recreational, fraternal, literary, scientific,
social, civil service, or similar purposes, like trade, industry, agriculture and like chambers."
MIAA is not organized for any of these purposes. MIAA, a public utility, is organized to operate
an international and domestic airport for public use.

Since MIAA is neither a stock nor a non-stock corporation, MIAA does not qualify as a
government-owned or controlled corporation. What then is the legal status of MIAA within the
National Government?

MIAA is a government instrumentality vested with corporate powers to perform efficiently its
governmental functions. MIAA is like any other government instrumentality, the only difference
is that MIAA is vested with corporate powers. Section 2(10) of the Introductory Provisions of the
Administrative Code defines a government "instrumentality" as follows:

SEC. 2. General Terms Defined. –– x x x x

(10) Instrumentality refers to any agency of the National Government, not integrated
within the department framework, vested with special functions or jurisdiction by
law, endowed with some if not all corporate powers, administering special funds, and
enjoying operational autonomy, usually through a charter. x x x (Emphasis supplied)

When the law vests in a government instrumentality corporate powers, the instrumentality does
not become a corporation. Unless the government instrumentality is organized as a stock or non-
stock corporation, it remains a government instrumentality exercising not only governmental but
also corporate powers. Thus, MIAA exercises the governmental powers of eminent
domain,12 police authority13 and the levying of fees and charges.14 At the same time, MIAA
exercises "all the powers of a corporation under the Corporation Law, insofar as these powers are
not inconsistent with the provisions of this Executive Order."15

Likewise, when the law makes a government instrumentality operationally autonomous, the
instrumentality remains part of the National Government machinery although not integrated with
the department framework. The MIAA Charter expressly states that transforming MIAA into a
"separate and autonomous body"16 will make its operation more "financially viable."17

Many government instrumentalities are vested with corporate powers but they do not become stock
or non-stock corporations, which is a necessary condition before an agency or instrumentality is
deemed a government-owned or controlled corporation. Examples are the Mactan International
Airport Authority, the Philippine Ports Authority, the University of the Philippines and Bangko
Sentral ng Pilipinas. All these government instrumentalities exercise corporate powers but they
are not organized as stock or non-stock corporations as required by Section 2(13) of the
Introductory Provisions of the Administrative Code. These government instrumentalities are
sometimes loosely called government corporate entities. However, they are not government-
owned or controlled corporations in the strict sense as understood under the Administrative Code,
which is the governing law defining the legal relationship and status of government entities.

A government instrumentality like MIAA falls under Section 133(o) of the Local Government
Code, which states:

SEC. 133. Common Limitations on the Taxing Powers of Local Government Units.
– Unless otherwise provided herein, the exercise of the taxing powers of provinces,
cities, municipalities, and barangays shall not extend to the levy of the following:

xxxx

(o) Taxes, fees or charges of any kind on the National Government, its agencies and
instrumentalitiesand local government units.(Emphasis and underscoring supplied)

Section 133(o) recognizes the basic principle that local governments cannot tax the national
government, which historically merely delegated to local governments the power to tax. While the
1987 Constitution now includes taxation as one of the powers of local governments, local
governments may only exercise such power "subject to such guidelines and limitations as the
Congress may provide."18

When local governments invoke the power to tax on national government instrumentalities, such
power is construed strictly against local governments. The rule is that a tax is never presumed and
there must be clear language in the law imposing the tax. Any doubt whether a person, article or
activity is taxable is resolved against taxation. This rule applies with greater force when local
governments seek to tax national government instrumentalities.

Another rule is that a tax exemption is strictly construed against the taxpayer claiming the
exemption. However, when Congress grants an exemption to a national government
instrumentality from local taxation, such exemption is construed liberally in favor of the national
government instrumentality. As this Court declared in Maceda v. Macaraig, Jr.:

The reason for the rule does not apply in the case of exemptions running to the benefit of
the government itself or its agencies. In such case the practical effect of an exemption is
merely to reduce the amount of money that has to be handled by government in the course
of its operations. For these reasons, provisions granting exemptions to government
agencies may be construed liberally, in favor of non tax-liability of such agencies.19

There is, moreover, no point in national and local governments taxing each other, unless a sound
and compelling policy requires such transfer of public funds from one government pocket to
another.

There is also no reason for local governments to tax national government instrumentalities for
rendering essential public services to inhabitants of local governments. The only exception is
when the legislature clearly intended to tax government instrumentalities for the delivery of
essential public services for sound and compelling policy considerations. There must be
express language in the law empowering local governments to tax national government
instrumentalities. Any doubt whether such power exists is resolved against local governments.

Thus, Section 133 of the Local Government Code states that "unless otherwise provided" in the
Code, local governments cannot tax national government instrumentalities. As this Court held
in Basco v. Philippine Amusements and Gaming Corporation:

The states have no power by taxation or otherwise, to retard, impede, burden or in


any manner control the operation of constitutional laws enacted by Congress to
carry into execution the powers vested in the federal government. (MC Culloch v.
Maryland, 4 Wheat 316, 4 L Ed. 579)

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

"Justice Holmes, speaking for the Supreme Court, made reference to the entire
absence of power on the part of the States to touch, in that way (taxation) at least,
the instrumentalities of the United States (Johnson v. Maryland, 254 US 51) and it
can be agreed that no state or political subdivision can regulate a federal
instrumentality in such a way as to prevent it from consummating its federal
responsibilities, or even to seriously burden it in the accomplishment of them."
(Antieau, Modern Constitutional Law, Vol. 2, p. 140, emphasis supplied)

Otherwise, mere creatures of the State can defeat National policies thru extermination of
what local authorities may perceive to be undesirable activities or enterprise using the
power to tax as "a tool for regulation" (U.S. v. Sanchez, 340 US 42).
The power to tax which was called by Justice Marshall as the "power to destroy" (Mc
Culloch v. Maryland, supra) cannot be allowed to defeat an instrumentality or creation of
the very entity which has the inherent power to wield it. 20

2. Airport Lands and Buildings of MIAA are Owned by the Republic

a. Airport Lands and Buildings are of Public Dominion

The Airport Lands and Buildings of MIAA are property of public dominion and therefore owned
by the State or the Republic of the Philippines. The Civil Code provides:

ARTICLE 419. Property is either of public dominion or of private ownership.

ARTICLE 420. The following things are property of public dominion:

(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and
bridges constructed by the State, banks, shores, roadsteads, and others of similar
character;

(2) Those which belong to the State, without being for public use, and are intended for
some public service or for the development of the national wealth. (Emphasis supplied)

ARTICLE 421. All other property of the State, which is not of the character stated in the
preceding article, is patrimonial property.

ARTICLE 422. Property of public dominion, when no longer intended for public use or for
public service, shall form part of the patrimonial property of the State.

No one can dispute that properties of public dominion mentioned in Article 420 of the Civil Code,
like "roads, canals, rivers, torrents, ports and bridges constructed by the State," are owned
by the State. The term "ports" includes seaports and airports. The MIAA Airport Lands and
Buildings constitute a "port" constructed by the State. Under Article 420 of the Civil Code, the
MIAA Airport Lands and Buildings are properties of public dominion and thus owned by the State
or the Republic of the Philippines.

The Airport Lands and Buildings are devoted to public use because they are used by the public
for international and domestic travel and transportation. The fact that the MIAA collects
terminal fees and other charges from the public does not remove the character of the Airport Lands
and Buildings as properties for public use. The operation by the government of a tollway does not
change the character of the road as one for public use. Someone must pay for the maintenance of
the road, either the public indirectly through the taxes they pay the government, or only those
among the public who actually use the road through the toll fees they pay upon using the road. The
tollway system is even a more efficient and equitable manner of taxing the public for the
maintenance of public roads.
The charging of fees to the public does not determine the character of the property whether it is of
public dominion or not. Article 420 of the Civil Code defines property of public dominion as one
"intended for public use." Even if the government collects toll fees, the road is still "intended for
public use" if anyone can use the road under the same terms and conditions as the rest of the public.
The charging of fees, the limitation on the kind of vehicles that can use the road, the speed
restrictions and other conditions for the use of the road do not affect the public character of the
road.

The terminal fees MIAA charges to passengers, as well as the landing fees MIAA charges to
airlines, constitute the bulk of the income that maintains the operations of MIAA. The collection
of such fees does not change the character of MIAA as an airport for public use. Such fees are
often termed user's tax. This means taxing those among the public who actually use a public facility
instead of taxing all the public including those who never use the particular public facility. A user's
tax is more equitable — a principle of taxation mandated in the 1987 Constitution.21

The Airport Lands and Buildings of MIAA, which its Charter calls the "principal airport of the
Philippines for both international and domestic air traffic,"22 are properties of public dominion
because they are intended for public use.As properties of public dominion, they indisputably
belong to the State or the Republic of the Philippines.

b. Airport Lands and Buildings are Outside the Commerce of Man

The Airport Lands and Buildings of MIAA are devoted to public use and thus are properties of
public dominion. As properties of public dominion, the Airport Lands and Buildings are
outside the commerce of man. The Court has ruled repeatedly that properties of public dominion
are outside the commerce of man. As early as 1915, this Court already ruled in Municipality of
Cavite v. Rojas that properties devoted to public use are outside the commerce of man, thus:

According to article 344 of the Civil Code: "Property for public use in provinces and in
towns comprises the provincial and town roads, the squares, streets, fountains, and public
waters, the promenades, and public works of general service supported by said towns or
provinces."

The said Plaza Soledad being a promenade for public use, the municipal council of Cavite
could not in 1907 withdraw or exclude from public use a portion thereof in order to lease
it for the sole benefit of the defendant Hilaria Rojas. In leasing a portion of said plaza or
public place to the defendant for private use the plaintiff municipality exceeded its
authority in the exercise of its powers by executing a contract over a thing of which it could
not dispose, nor is it empowered so to do.

The Civil Code, article 1271, prescribes that everything which is not outside the commerce
of man may be the object of a contract, and plazas and streets are outside of this
commerce, as was decided by the supreme court of Spain in its decision of February 12,
1895, which says: "Communal things that cannot be sold because they are by their
very nature outside of commerce are those for public use, such as the plazas, streets,
common lands, rivers, fountains, etc." (Emphasis supplied) 23
Again in Espiritu v. Municipal Council, the Court declared that properties of public dominion are
outside the commerce of man:

xxx Town plazas are properties of public dominion, to be devoted to public use and to be
made available to the public in general. They are outside the commerce of man and
cannot be disposed of or even leased by the municipality to private parties. While in case
of war or during an emergency, town plazas may be occupied temporarily by private
individuals, as was done and as was tolerated by the Municipality of Pozorrubio, when the
emergency has ceased, said temporary occupation or use must also cease, and the town
officials should see to it that the town plazas should ever be kept open to the public and
free from encumbrances or illegal private constructions.24 (Emphasis supplied)

The Court has also ruled that property of public dominion, being outside the commerce of man,
cannot be the subject of an auction sale.25

Properties of public dominion, being for public use, are not subject to levy, encumbrance or
disposition through public or private sale. Any encumbrance, levy on execution or auction sale of
any property of public dominion is void for being contrary to public policy. Essential public
services will stop if properties of public dominion are subject to encumbrances, foreclosures and
auction sale. This will happen if the City of Parañaque can foreclose and compel the auction sale
of the 600-hectare runway of the MIAA for non-payment of real estate tax.

Before MIAA can encumber26 the Airport Lands and Buildings, the President must first withdraw
from public usethe Airport Lands and Buildings. Sections 83 and 88 of the Public Land Law or
Commonwealth Act No. 141, which "remains to this day the existing general law governing the
classification and disposition of lands of the public domain other than timber and mineral
lands,"27 provide:

SECTION 83. Upon the recommendation of the Secretary of Agriculture and Natural
Resources, the President may designate by proclamation any tract or tracts of land of the
public domain as reservations for the use of the Republic of the Philippines or of any of its
branches, or of the inhabitants thereof, in accordance with regulations prescribed for this
purposes, or for quasi-public uses or purposes when the public interest requires it, including
reservations for highways, rights of way for railroads, hydraulic power sites, irrigation
systems, communal pastures or lequas communales, public parks, public quarries, public
fishponds, working men's village and other improvements for the public benefit.

SECTION 88. The tract or tracts of land reserved under the provisions of Section
eighty-three shall benon-alienable and shall not be subject to occupation, entry, sale,
lease, or other disposition until again declared alienable under the provisions of this
Act or by proclamation of the President. (Emphasis and underscoring supplied)

Thus, unless the President issues a proclamation withdrawing the Airport Lands and Buildings
from public use, these properties remain properties of public dominion and are inalienable. Since
the Airport Lands and Buildings are inalienable in their present status as properties of public
dominion, they are not subject to levy on execution or foreclosure sale. As long as the Airport
Lands and Buildings are reserved for public use, their ownership remains with the State or the
Republic of the Philippines.

The authority of the President to reserve lands of the public domain for public use, and to withdraw
such public use, is reiterated in Section 14, Chapter 4, Title I, Book III of the Administrative Code
of 1987, which states:

SEC. 14. Power to Reserve Lands of the Public and Private Domain of the Government.
— (1) The President shall have the power to reserve for settlement or public use, and
for specific public purposes, any of the lands of the public domain, the use of which is
not otherwise directed by law. The reserved land shall thereafter remain subject to
the specific public purpose indicated until otherwise provided by law or
proclamation;

x x x x. (Emphasis supplied)

There is no question, therefore, that unless the Airport Lands and Buildings are withdrawn by law
or presidential proclamation from public use, they are properties of public dominion, owned by
the Republic and outside the commerce of man.

c. MIAA is a Mere Trustee of the Republic

MIAA is merely holding title to the Airport Lands and Buildings in trust for the Republic. Section
48, Chapter 12, Book I of the Administrative Code allows instrumentalities like MIAA to hold
title to real properties owned by the Republic, thus:

SEC. 48. Official Authorized to Convey Real Property. — Whenever real property of the
Government is authorized by law to be conveyed, the deed of conveyance shall be executed
in behalf of the government by the following:

(1) For property belonging to and titled in the name of the Republic of the Philippines, by
the President, unless the authority therefor is expressly vested by law in another officer.

(2) For property belonging to the Republic of the Philippines but titled in the name of
any political subdivision or of any corporate agency or instrumentality, by the
executive head of the agency or instrumentality. (Emphasis supplied)

In MIAA's case, its status as a mere trustee of the Airport Lands and Buildings is clearer because
even its executive head cannot sign the deed of conveyance on behalf of the Republic. Only the
President of the Republic can sign such deed of conveyance.28

d. Transfer to MIAA was Meant to Implement a Reorganization

The MIAA Charter, which is a law, transferred to MIAA the title to the Airport Lands and
Buildings from the Bureau of Air Transportation of the Department of Transportation and
Communications. The MIAA Charter provides:
SECTION 3. Creation of the Manila International Airport Authority. — x x x x

The land where the Airport is presently located as well as the surrounding land area
of approximately six hundred hectares, are hereby transferred, conveyed and
assigned to the ownership and administration of the Authority, subject to existing
rights, if any. The Bureau of Lands and other appropriate government agencies shall
undertake an actual survey of the area transferred within one year from the promulgation
of this Executive Order and the corresponding title to be issued in the name of the
Authority. Any portion thereof shall not be disposed through sale or through any other
mode unless specifically approved by the President of the Philippines. (Emphasis
supplied)

SECTION 22. Transfer of Existing Facilities and Intangible Assets. — All existing public
airport facilities, runways, lands, buildings and other property, movable or
immovable, belonging to the Airport, and all assets, powers, rights, interests and
privileges belonging to the Bureau of Air Transportation relating to airport works or air
operations, including all equipment which are necessary for the operation of crash fire and
rescue facilities, are hereby transferred to the Authority. (Emphasis supplied)

SECTION 25. Abolition of the Manila International Airport as a Division in the Bureau of
Air Transportation and Transitory Provisions. — The Manila International Airport
including the Manila Domestic Airport as a division under the Bureau of Air Transportation
is hereby abolished.

x x x x.

The MIAA Charter transferred the Airport Lands and Buildings to MIAA without the Republic
receiving cash, promissory notes or even stock since MIAA is not a stock corporation.

The whereas clauses of the MIAA Charter explain the rationale for the transfer of the Airport
Lands and Buildings to MIAA, thus:

WHEREAS, the Manila International Airport as the principal airport of the Philippines for
both international and domestic air traffic, is required to provide standards of airport
accommodation and service comparable with the best airports in the world;

WHEREAS, domestic and other terminals, general aviation and other facilities, have to be
upgraded to meet the current and future air traffic and other demands of aviation in Metro
Manila;

WHEREAS, a management and organization study has indicated that the objectives of
providing high standards of accommodation and service within the context of a
financially viable operation, will best be achieved by a separate and autonomous
body; and
WHEREAS, under Presidential Decree No. 1416, as amended by Presidential Decree No.
1772, the President of the Philippines is given continuing authority to reorganize the
National Government, which authority includes the creation of new entities, agencies
and instrumentalities of the Government[.] (Emphasis supplied)

The transfer of the Airport Lands and Buildings from the Bureau of Air Transportation to MIAA
was not meant to transfer beneficial ownership of these assets from the Republic to MIAA. The
purpose was merely to reorganize a division in the Bureau of Air Transportation into a
separate and autonomous body. The Republic remains the beneficial owner of the Airport Lands
and Buildings. MIAA itself is owned solely by the Republic. No party claims any ownership rights
over MIAA's assets adverse to the Republic.

The MIAA Charter expressly provides that the Airport Lands and Buildings "shall not be disposed
through sale or through any other mode unless specifically approved by the President of the
Philippines." This only means that the Republic retained the beneficial ownership of the Airport
Lands and Buildings because under Article 428 of the Civil Code, only the "owner has the right to
x x x dispose of a thing." Since MIAA cannot dispose of the Airport Lands and Buildings, MIAA
does not own the Airport Lands and Buildings.

At any time, the President can transfer back to the Republic title to the Airport Lands and Buildings
without the Republic paying MIAA any consideration. Under Section 3 of the MIAA Charter, the
President is the only one who can authorize the sale or disposition of the Airport Lands and
Buildings. This only confirms that the Airport Lands and Buildings belong to the Republic.

e. Real Property Owned by the Republic is Not Taxable

Section 234(a) of the Local Government Code exempts from real estate tax any "[r]eal property
owned by the Republic of the Philippines." Section 234(a) provides:

SEC. 234. Exemptions from Real Property Tax. — The following are exempted from
payment of the real property tax:

(a) Real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been granted, for
consideration or otherwise, to a taxable person;

x x x. (Emphasis supplied)

This exemption should be read in relation with Section 133(o) of the same Code, which prohibits
local governments from imposing "[t]axes, fees or charges of any kind on the National
Government, its agencies and instrumentalitiesx x x." The real properties owned by the Republic
are titled either in the name of the Republic itself or in the name of agencies or instrumentalities
of the National Government. The Administrative Code allows real property owned by the Republic
to be titled in the name of agencies or instrumentalities of the national government. Such real
properties remain owned by the Republic and continue to be exempt from real estate tax.
The Republic may grant the beneficial use of its real property to an agency or instrumentality of
the national government. This happens when title of the real property is transferred to an agency
or instrumentality even as the Republic remains the owner of the real property. Such arrangement
does not result in the loss of the tax exemption. Section 234(a) of the Local Government Code
states that real property owned by the Republic loses its tax exemption only if the "beneficial use
thereof has been granted, for consideration or otherwise, to a taxable person." MIAA, as a
government instrumentality, is not a taxable person under Section 133(o) of the Local Government
Code. Thus, even if we assume that the Republic has granted to MIAA the beneficial use of the
Airport Lands and Buildings, such fact does not make these real properties subject to real estate
tax.

However, portions of the Airport Lands and Buildings that MIAA leases to private entities are not
exempt from real estate tax. For example, the land area occupied by hangars that MIAA leases to
private corporations is subject to real estate tax. In such a case, MIAA has granted the beneficial
use of such land area for a consideration to ataxable person and therefore such land area is subject
to real estate tax. In Lung Center of the Philippines v. Quezon City, the Court ruled:

Accordingly, we hold that the portions of the land leased to private entities as well as those
parts of the hospital leased to private individuals are not exempt from such taxes. On the
other hand, the portions of the land occupied by the hospital and portions of the hospital
used for its patients, whether paying or non-paying, are exempt from real property taxes.29

3. Refutation of Arguments of Minority

The minority asserts that the MIAA is not exempt from real estate tax because Section 193 of the
Local Government Code of 1991 withdrew the tax exemption of "all persons, whether natural
or juridical" upon the effectivity of the Code. Section 193 provides:

SEC. 193. Withdrawal of Tax Exemption Privileges – Unless otherwise provided in this
Code, tax exemptions or incentives granted to, or presently enjoyed by all persons,
whether natural or juridical, including government-owned or controlled corporations,
except local water districts, cooperatives duly registered under R.A. No. 6938, non-stock
and non-profit hospitals and educational institutions are hereby withdrawn upon effectivity
of this Code. (Emphasis supplied)

The minority states that MIAA is indisputably a juridical person. The minority argues that since
the Local Government Code withdrew the tax exemption of all juridical persons, then MIAA is
not exempt from real estate tax. Thus, the minority declares:

It is evident from the quoted provisions of the Local Government Code that the
withdrawn exemptions from realty tax cover not just GOCCs, but all persons. To
repeat, the provisions lay down the explicit proposition that the withdrawal of realty tax
exemption applies to all persons. The reference to or the inclusion of GOCCs is only
clarificatory or illustrative of the explicit provision.
The term "All persons" encompasses the two classes of persons recognized under our
laws, natural and juridical persons. Obviously, MIAA is not a natural person. Thus,
the determinative test is not just whether MIAA is a GOCC, but whether MIAA is a
juridical person at all. (Emphasis and underscoring in the original)

The minority posits that the "determinative test" whether MIAA is exempt from local taxation is
its status — whether MIAA is a juridical person or not. The minority also insists that "Sections
193 and 234 may be examined in isolation from Section 133(o) to ascertain MIAA's claim of
exemption."

The argument of the minority is fatally flawed. Section 193 of the Local Government Code
expressly withdrew the tax exemption of all juridical persons "[u]nless otherwise provided in
this Code." Now, Section 133(o) of the Local Government Code expressly provides otherwise,
specifically prohibiting local governments from imposing any kind of tax on national government
instrumentalities. Section 133(o) states:

SEC. 133. Common Limitations on the Taxing Powers of Local Government Units. –
Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities,
municipalities, and barangays shall not extend to the levy of the following:

xxxx

(o) Taxes, fees or charges of any kinds on the National Government, its agencies and
instrumentalities, and local government units. (Emphasis and underscoring supplied)

By express mandate of the Local Government Code, local governments cannot impose any kind
of tax on national government instrumentalities like the MIAA. Local governments are devoid of
power to tax the national government, its agencies and instrumentalities. The taxing powers of
local governments do not extend to the national government, its agencies and instrumentalities,
"[u]nless otherwise provided in this Code" as stated in the saving clause of Section 133. The saving
clause refers to Section 234(a) on the exception to the exemption from real estate tax of real
property owned by the Republic.

The minority, however, theorizes that unless exempted in Section 193 itself, all juridical persons
are subject to tax by local governments. The minority insists that the juridical persons exempt from
local taxation are limited to the three classes of entities specifically enumerated as exempt in
Section 193. Thus, the minority states:

x x x Under Section 193, the exemption is limited to (a) local water districts; (b)
cooperatives duly registered under Republic Act No. 6938; and (c) non-stock and non-
profit hospitals and educational institutions. It would be belaboring the obvious why the
MIAA does not fall within any of the exempt entities under Section 193. (Emphasis
supplied)

The minority's theory directly contradicts and completely negates Section 133(o) of the Local
Government Code. This theory will result in gross absurdities. It will make the national
government, which itself is a juridical person, subject to tax by local governments since the
national government is not included in the enumeration of exempt entities in Section 193. Under
this theory, local governments can impose any kind of local tax, and not only real estate tax, on
the national government.

Under the minority's theory, many national government instrumentalities with juridical
personalities will also be subject to any kind of local tax, and not only real estate tax. Some of the
national government instrumentalities vested by law with juridical personalities are: Bangko
Sentral ng Pilipinas,30 Philippine Rice Research Institute,31Laguna Lake

Development Authority,32 Fisheries Development Authority,33 Bases Conversion Development


Authority,34Philippine Ports Authority,35 Cagayan de Oro Port Authority,36 San Fernando Port
Authority,37 Cebu Port Authority,38 and Philippine National Railways.39

The minority's theory violates Section 133(o) of the Local Government Code which expressly
prohibits local governments from imposing any kind of tax on national government
instrumentalities. Section 133(o) does not distinguish between national government
instrumentalities with or without juridical personalities. Where the law does not distinguish, courts
should not distinguish. Thus, Section 133(o) applies to all national government instrumentalities,
with or without juridical personalities. The determinative test whether MIAA is exempt from local
taxation is not whether MIAA is a juridical person, but whether it is a national government
instrumentality under Section 133(o) of the Local Government Code. Section 133(o) is the specific
provision of law prohibiting local governments from imposing any kind of tax on the national
government, its agencies and instrumentalities.

Section 133 of the Local Government Code starts with the saving clause "[u]nless otherwise
provided in this Code." This means that unless the Local Government Code grants an express
authorization, local governments have no power to tax the national government, its agencies and
instrumentalities. Clearly, the rule is local governments have no power to tax the national
government, its agencies and instrumentalities. As an exception to this rule, local governments
may tax the national government, its agencies and instrumentalities only if the Local Government
Code expressly so provides.

The saving clause in Section 133 refers to the exception to the exemption in Section 234(a) of the
Code, which makes the national government subject to real estate tax when it gives the beneficial
use of its real properties to a taxable entity. Section 234(a) of the Local Government Code
provides:

SEC. 234. Exemptions from Real Property Tax – The following are exempted from
payment of the real property tax:

(a) Real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been granted, for consideration or
otherwise, to a taxable person.

x x x. (Emphasis supplied)
Under Section 234(a), real property owned by the Republic is exempt from real estate tax. The
exception to this exemption is when the government gives the beneficial use of the real property
to a taxable entity.

The exception to the exemption in Section 234(a) is the only instance when the national
government, its agencies and instrumentalities are subject to any kind of tax by local governments.
The exception to the exemption applies only to real estate tax and not to any other tax. The
justification for the exception to the exemption is that the real property, although owned by the
Republic, is not devoted to public use or public service but devoted to the private gain of a taxable
person.

The minority also argues that since Section 133 precedes Section 193 and 234 of the Local
Government Code, the later provisions prevail over Section 133. Thus, the minority asserts:

x x x Moreover, sequentially Section 133 antecedes Section 193 and 234. Following an
accepted rule of construction, in case of conflict the subsequent provisions should prevail.
Therefore, MIAA, as a juridical person, is subject to real property taxes, the general
exemptions attaching to instrumentalities under Section 133(o) of the Local Government
Code being qualified by Sections 193 and 234 of the same law. (Emphasis supplied)

The minority assumes that there is an irreconcilable conflict between Section 133 on one hand,
and Sections 193 and 234 on the other. No one has urged that there is such a conflict, much less
has any one presenteda persuasive argument that there is such a conflict. The minority's assumption
of an irreconcilable conflict in the statutory provisions is an egregious error for two reasons.

First, there is no conflict whatsoever between Sections 133 and 193 because Section 193 expressly
admits its subordination to other provisions of the Code when Section 193 states "[u]nless
otherwise provided in this Code." By its own words, Section 193 admits the superiority of other
provisions of the Local Government Code that limit the exercise of the taxing power in Section
193. When a provision of law grants a power but withholds such power on certain matters, there
is no conflict between the grant of power and the withholding of power. The grantee of the power
simply cannot exercise the power on matters withheld from its power.

Second, Section 133 is entitled "Common Limitations on the Taxing Powers of Local Government
Units." Section 133 limits the grant to local governments of the power to tax, and not merely the
exercise of a delegated power to tax. Section 133 states that the taxing powers of local governments
"shall not extend to the levy" of any kind of tax on the national government, its agencies and
instrumentalities. There is no clearer limitation on the taxing power than this.

Since Section 133 prescribes the "common limitations" on the taxing powers of local governments,
Section 133 logically prevails over Section 193 which grants local governments such taxing
powers. By their very meaning and purpose, the "common limitations" on the taxing power prevail
over the grant or exercise of the taxing power. If the taxing power of local governments in Section
193 prevails over the limitations on such taxing power in Section 133, then local governments can
impose any kind of tax on the national government, its agencies and instrumentalities — a gross
absurdity.
Local governments have no power to tax the national government, its agencies and
instrumentalities, except as otherwise provided in the Local Government Code pursuant to the
saving clause in Section 133 stating "[u]nless otherwise provided in this Code." This exception —
which is an exception to the exemption of the Republic from real estate tax imposed by local
governments — refers to Section 234(a) of the Code. The exception to the exemption in Section
234(a) subjects real property owned by the Republic, whether titled in the name of the national
government, its agencies or instrumentalities, to real estate tax if the beneficial use of such property
is given to a taxable entity.

The minority also claims that the definition in the Administrative Code of the phrase "government-
owned or controlled corporation" is not controlling. The minority points out that Section 2 of the
Introductory Provisions of the Administrative Code admits that its definitions are not controlling
when it provides:

SEC. 2. General Terms Defined. — Unless the specific words of the text, or the context as
a whole, or a particular statute, shall require a different meaning:

xxxx

The minority then concludes that reliance on the Administrative Code definition is "flawed."

The minority's argument is a non sequitur. True, Section 2 of the Administrative Code recognizes
that a statute may require a different meaning than that defined in the Administrative Code.
However, this does not automatically mean that the definition in the Administrative Code does not
apply to the Local Government Code. Section 2 of the Administrative Code clearly states that
"unless the specific words x x x of a particular statute shall require a different meaning," the
definition in Section 2 of the Administrative Code shall apply. Thus, unless there is specific
language in the Local Government Code defining the phrase "government-owned or controlled
corporation" differently from the definition in the Administrative Code, the definition in the
Administrative Code prevails.

The minority does not point to any provision in the Local Government Code defining the phrase
"government-owned or controlled corporation" differently from the definition in the
Administrative Code. Indeed, there is none. The Local Government Code is silent on the definition
of the phrase "government-owned or controlled corporation." The Administrative Code, however,
expressly defines the phrase "government-owned or controlled corporation." The inescapable
conclusion is that the Administrative Code definition of the phrase "government-owned or
controlled corporation" applies to the Local Government Code.

The third whereas clause of the Administrative Code states that the Code "incorporates in a unified
document the major structural, functional and procedural principles and rules of governance."
Thus, the Administrative Code is the governing law defining the status and relationship of
government departments, bureaus, offices, agencies and instrumentalities. Unless a statute
expressly provides for a different status and relationship for a specific government unit or entity,
the provisions of the Administrative Code prevail.
The minority also contends that the phrase "government-owned or controlled corporation" should
apply only to corporations organized under the Corporation Code, the general incorporation law,
and not to corporations created by special charters. The minority sees no reason why government
corporations with special charters should have a capital stock. Thus, the minority declares:

I submit that the definition of "government-owned or controlled corporations" under the


Administrative Code refer to those corporations owned by the government or its
instrumentalities which are created not by legislative enactment, but formed and organized
under the Corporation Code through registration with the Securities and Exchange
Commission. In short, these are GOCCs without original charters.

xxxx

It might as well be worth pointing out that there is no point in requiring a capital structure
for GOCCs whose full ownership is limited by its charter to the State or Republic. Such
GOCCs are not empowered to declare dividends or alienate their capital shares.

The contention of the minority is seriously flawed. It is not in accord with the Constitution and
existing legislations. It will also result in gross absurdities.

First, the Administrative Code definition of the phrase "government-owned or controlled


corporation" does not distinguish between one incorporated under the Corporation Code or under
a special charter. Where the law does not distinguish, courts should not distinguish.

Second, Congress has created through special charters several government-owned corporations
organized as stock corporations. Prime examples are the Land Bank of the Philippines and the
Development Bank of the Philippines. The special charter40 of the Land Bank of the Philippines
provides:

SECTION 81. Capital. — The authorized capital stock of the Bank shall be nine billion
pesos, divided into seven hundred and eighty million common shares with a par value of
ten pesos each, which shall be fully subscribed by the Government, and one hundred and
twenty million preferred shares with a par value of ten pesos each, which shall be issued in
accordance with the provisions of Sections seventy-seven and eighty-three of this Code.
(Emphasis supplied)

Likewise, the special charter41 of the Development Bank of the Philippines provides:

SECTION 7. Authorized Capital Stock – Par value. — The capital stock of the Bank shall
be Five Billion Pesos to be divided into Fifty Million common shares with par value of
P100 per share. These shares are available for subscription by the National Government.
Upon the effectivity of this Charter, the National Government shall subscribe to Twenty-
Five Million common shares of stock worth Two Billion Five Hundred Million which shall
be deemed paid for by the Government with the net asset values of the Bank remaining
after the transfer of assets and liabilities as provided in Section 30 hereof. (Emphasis
supplied)
Other government-owned corporations organized as stock corporations under their special charters
are the Philippine Crop Insurance Corporation,42 Philippine International Trading
Corporation,43 and the Philippine National Bank44 before it was reorganized as a stock corporation
under the Corporation Code. All these government-owned corporations organized under special
charters as stock corporations are subject to real estate tax on real properties owned by them. To
rule that they are not government-owned or controlled corporations because they are not registered
with the Securities and Exchange Commission would remove them from the reach of Section 234
of the Local Government Code, thus exempting them from real estate tax.

Third, the government-owned or controlled corporations created through special charters are those
that meet the two conditions prescribed in Section 16, Article XII of the Constitution. The first
condition is that the government-owned or controlled corporation must be established for the
common good. The second condition is that the government-owned or controlled corporation must
meet the test of economic viability. Section 16, Article XII of the 1987 Constitution provides:

SEC. 16. The Congress shall not, except by general law, provide for the formation,
organization, or regulation of private corporations. Government-owned or controlled
corporations may be created or established by special charters in the interest of the common
good and subject to the test of economic viability. (Emphasis and underscoring supplied)

The Constitution expressly authorizes the legislature to create "government-owned or controlled


corporations" through special charters only if these entities are required to meet the twin conditions
of common good and economic viability. In other words, Congress has no power to create
government-owned or controlled corporations with special charters unless they are made to
comply with the two conditions of common good and economic viability. The test of economic
viability applies only to government-owned or controlled corporations that perform economic or
commercial activities and need to compete in the market place. Being essentially economic
vehicles of the State for the common good — meaning for economic development purposes —
these government-owned or controlled corporations with special charters are usually organized as
stock corporations just like ordinary private corporations.

In contrast, government instrumentalities vested with corporate powers and performing


governmental or public functions need not meet the test of economic viability. These
instrumentalities perform essential public services for the common good, services that every
modern State must provide its citizens. These instrumentalities need not be economically viable
since the government may even subsidize their entire operations. These instrumentalities are not
the "government-owned or controlled corporations" referred to in Section 16, Article XII of the
1987 Constitution.

Thus, the Constitution imposes no limitation when the legislature creates government
instrumentalities vested with corporate powers but performing essential governmental or public
functions. Congress has plenary authority to create government instrumentalities vested with
corporate powers provided these instrumentalities perform essential government functions or
public services. However, when the legislature creates through special charters corporations that
perform economic or commercial activities, such entities — known as "government-owned or
controlled corporations" — must meet the test of economic viability because they compete in the
market place.

This is the situation of the Land Bank of the Philippines and the Development Bank of the
Philippines and similar government-owned or controlled corporations, which derive their income
to meet operating expenses solely from commercial transactions in competition with the private
sector. The intent of the Constitution is to prevent the creation of government-owned or controlled
corporations that cannot survive on their own in the market place and thus merely drain the public
coffers.

Commissioner Blas F. Ople, proponent of the test of economic viability, explained to the
Constitutional Commission the purpose of this test, as follows:

MR. OPLE: Madam President, the reason for this concern is really that when the
government creates a corporation, there is a sense in which this corporation becomes
exempt from the test of economic performance. We know what happened in the past. If a
government corporation loses, then it makes its claim upon the taxpayers' money through
new equity infusions from the government and what is always invoked is the common
good. That is the reason why this year, out of a budget of P115 billion for the entire
government, about P28 billion of this will go into equity infusions to support a few
government financial institutions. And this is all taxpayers' money which could have been
relocated to agrarian reform, to social services like health and education, to augment the
salaries of grossly underpaid public employees. And yet this is all going down the drain.

Therefore, when we insert the phrase "ECONOMIC VIABILITY" together with the
"common good," this becomes a restraint on future enthusiasts for state capitalism to
excuse themselves from the responsibility of meeting the market test so that they become
viable. And so, Madam President, I reiterate, for the committee's consideration and I am
glad that I am joined in this proposal by Commissioner Foz, the insertion of the standard
of "ECONOMIC VIABILITY OR THE ECONOMIC TEST," together with the common
good.45

Father Joaquin G. Bernas, a leading member of the Constitutional Commission, explains in his
textbook The 1987 Constitution of the Republic of the Philippines: A Commentary:

The second sentence was added by the 1986 Constitutional Commission. The significant
addition, however, is the phrase "in the interest of the common good and subject to the test
of economic viability." The addition includes the ideas that they must show capacity to
function efficiently in business and that they should not go into activities which the private
sector can do better. Moreover, economic viability is more than financial viability but also
includes capability to make profit and generate benefits not quantifiable in financial
terms.46(Emphasis supplied)

Clearly, the test of economic viability does not apply to government entities vested with corporate
powers and performing essential public services. The State is obligated to render essential public
services regardless of the economic viability of providing such service. The non-economic
viability of rendering such essential public service does not excuse the State from withholding
such essential services from the public.

However, government-owned or controlled corporations with special charters, organized


essentially for economic or commercial objectives, must meet the test of economic viability. These
are the government-owned or controlled corporations that are usually organized under their special
charters as stock corporations, like the Land Bank of the Philippines and the Development Bank
of the Philippines. These are the government-owned or controlled corporations, along with
government-owned or controlled corporations organized under the Corporation Code, that fall
under the definition of "government-owned or controlled corporations" in Section 2(10) of the
Administrative Code.

The MIAA need not meet the test of economic viability because the legislature did not create
MIAA to compete in the market place. MIAA does not compete in the market place because there
is no competing international airport operated by the private sector. MIAA performs an essential
public service as the primary domestic and international airport of the Philippines. The operation
of an international airport requires the presence of personnel from the following government
agencies:

1. The Bureau of Immigration and Deportation, to document the arrival and departure of
passengers, screening out those without visas or travel documents, or those with hold
departure orders;

2. The Bureau of Customs, to collect import duties or enforce the ban on prohibited
importations;

3. The quarantine office of the Department of Health, to enforce health measures against
the spread of infectious diseases into the country;

4. The Department of Agriculture, to enforce measures against the spread of plant and
animal diseases into the country;

5. The Aviation Security Command of the Philippine National Police, to prevent the entry
of terrorists and the escape of criminals, as well as to secure the airport premises from
terrorist attack or seizure;

6. The Air Traffic Office of the Department of Transportation and Communications, to


authorize aircraft to enter or leave Philippine airspace, as well as to land on, or take off
from, the airport; and

7. The MIAA, to provide the proper premises — such as runway and buildings — for the
government personnel, passengers, and airlines, and to manage the airport operations.

All these agencies of government perform government functions essential to the operation of an
international airport.
MIAA performs an essential public service that every modern State must provide its citizens.
MIAA derives its revenues principally from the mandatory fees and charges MIAA imposes on
passengers and airlines. The terminal fees that MIAA charges every passenger are regulatory or
administrative fees47 and not income from commercial transactions.

MIAA falls under the definition of a government instrumentality under Section 2(10) of the
Introductory Provisions of the Administrative Code, which provides:

SEC. 2. General Terms Defined. – x x x x

(10) Instrumentality refers to any agency of the National Government, not integrated within
the department framework, vested with special functions or jurisdiction by law, endowed
with some if not all corporate powers, administering special funds, and enjoying
operational autonomy, usually through a charter. x x x (Emphasis supplied)

The fact alone that MIAA is endowed with corporate powers does not make MIAA a government-
owned or controlled corporation. Without a change in its capital structure, MIAA remains a
government instrumentality under Section 2(10) of the Introductory Provisions of the
Administrative Code. More importantly, as long as MIAA renders essential public services, it need
not comply with the test of economic viability. Thus, MIAA is outside the scope of the phrase
"government-owned or controlled corporations" under Section 16, Article XII of the 1987
Constitution.

The minority belittles the use in the Local Government Code of the phrase "government-owned or
controlled corporation" as merely "clarificatory or illustrative." This is fatal. The 1987 Constitution
prescribes explicit conditions for the creation of "government-owned or controlled corporations."
The Administrative Code defines what constitutes a "government-owned or controlled
corporation." To belittle this phrase as "clarificatory or illustrative" is grave error.

To summarize, MIAA is not a government-owned or controlled corporation under Section 2(13)


of the Introductory Provisions of the Administrative Code because it is not organized as a stock or
non-stock corporation. Neither is MIAA a government-owned or controlled corporation under
Section 16, Article XII of the 1987 Constitution because MIAA is not required to meet the test of
economic viability. MIAA is a government instrumentality vested with corporate powers and
performing essential public services pursuant to Section 2(10) of the Introductory Provisions of
the Administrative Code. As a government instrumentality, MIAA is not subject to any kind of tax
by local governments under Section 133(o) of the Local Government Code. The exception to the
exemption in Section 234(a) does not apply to MIAA because MIAA is not a taxable entity under
the Local Government Code. Such exception applies only if the beneficial use of real property
owned by the Republic is given to a taxable entity.

Finally, the Airport Lands and Buildings of MIAA are properties devoted to public use and thus
are properties of public dominion. Properties of public dominion are owned by the State or the
Republic. Article 420 of the Civil Code provides:

Art. 420. The following things are property of public dominion:


(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and bridges
constructed by the State, banks, shores, roadsteads, and others of similar character;

(2) Those which belong to the State, without being for public use, and are intended for
some public service or for the development of the national wealth. (Emphasis supplied)

The term "ports x x x constructed by the State" includes airports and seaports. The Airport Lands
and Buildings of MIAA are intended for public use, and at the very least intended for public
service. Whether intended for public use or public service, the Airport Lands and Buildings are
properties of public dominion. As properties of public dominion, the Airport Lands and Buildings
are owned by the Republic and thus exempt from real estate tax under Section 234(a) of the Local
Government Code.

4. Conclusion

Under Section 2(10) and (13) of the Introductory Provisions of the Administrative Code, which
governs the legal relation and status of government units, agencies and offices within the entire
government machinery, MIAA is a government instrumentality and not a government-owned or
controlled corporation. Under Section 133(o) of the Local Government Code, MIAA as a
government instrumentality is not a taxable person because it is not subject to "[t]axes, fees or
charges of any kind" by local governments. The only exception is when MIAA leases its real
property to a "taxable person" as provided in Section 234(a) of the Local Government Code, in
which case the specific real property leased becomes subject to real estate tax. Thus, only portions
of the Airport Lands and Buildings leased to taxable persons like private parties are subject to real
estate tax by the City of Parañaque.

Under Article 420 of the Civil Code, the Airport Lands and Buildings of MIAA, being devoted to
public use, are properties of public dominion and thus owned by the State or the Republic of the
Philippines. Article 420 specifically mentions "ports x x x constructed by the State," which
includes public airports and seaports, as properties of public dominion and owned by the Republic.
As properties of public dominion owned by the Republic, there is no doubt whatsoever that the
Airport Lands and Buildings are expressly exempt from real estate tax under Section 234(a) of the
Local Government Code. This Court has also repeatedly ruled that properties of public dominion
are not subject to execution or foreclosure sale.

WHEREFORE, we GRANT the petition. We SET ASIDE the assailed Resolutions of the Court
of Appeals of 5 October 2001 and 27 September 2002 in CA-G.R. SP No. 66878.
We DECLARE the Airport Lands and Buildings of the Manila International Airport
Authority EXEMPT from the real estate tax imposed by the City of Parañaque. We
declare VOID all the real estate tax assessments, including the final notices of real estate tax
delinquencies, issued by the City of Parañaque on the Airport Lands and Buildings of the Manila
International Airport Authority, except for the portions that the Manila International Airport
Authority has leased to private parties. We also declare VOID the assailed auction sale, and all its
effects, of the Airport Lands and Buildings of the Manila International Airport Authority.

No costs.
SO ORDERED.

G.R. No. 163072 April 2, 2009

MANILA INTERNATIONAL AIRPORT AUTHORITY, Petitioner,


vs.
CITY OF PASAY, SANGGUNIANG PANGLUNGSOD NG PASAY, CITY MAYOR OF
PASAY, CITY TREASURER OF PASAY, and CITY ASSESSOR OF PASAY, Respondents.

DECISION

CARPIO, J.:

This is a petition for review on certiorari1 of the Decision2 dated 30 October 2002 and the
Resolution dated 19 March 2004 of the Court of Appeals in CA-G.R. SP No. 67416.

The Facts

Petitioner Manila International Airport Authority (MIAA) operates and administers the Ninoy
Aquino International Airport (NAIA) Complex under Executive Order No. 903 (EO
903),3 otherwise known as the Revised Charter of the Manila International Airport Authority. EO
903 was issued on 21 July 1983 by then President Ferdinand E. Marcos. Under Sections 34 and
225 of EO 903, approximately 600 hectares of land, including the runways, the airport tower, and
other airport buildings, were transferred to MIAA. The NAIA Complex is located along the border
between Pasay City and Parañaque City.

On 28 August 2001, MIAA received Final Notices of Real Property Tax Delinquency from the
City of Pasay for the taxable years 1992 to 2001. MIAA’s real property tax delinquency for its real
properties located in NAIA Complex, Ninoy Aquino Avenue, Pasay City (NAIA Pasay properties)
is tabulated as follows:

TAX DECLA- TAXABLE


TAX DUE PENALTY TOTAL
RATION YEAR
A7-183-08346 1997-2001 243,522,855.00 123,351,728.18 366,874,583.18
A7-183-05224 1992-2001 113,582,466.00 71,159,414.98 184,741,880.98
A7-191-00843 1992-2001 54,454,800.00 34,115,932.20 88,570,732.20
A7-191-00140 1992-2001 1,632,960.00 1,023,049.44 2,656,009.44
A7-191-00139 1992-2001 6,068,448.00 3,801,882.85 9,870,330.85
A7-183-05409 1992-2001 59,129,520.00 37,044,644.28 96,174,164.28
A7-183-05410 1992-2001 20,619,720.00 12,918,254.58 33,537,974.58
A7-183-05413 1992-2001 7,908,240.00 4,954,512.36 12,862,752.36
A7-183-05412 1992-2001 18,441,981.20 11,553,901.13 29,995,882.33
A7-183-05411 1992-2001 109,946,736.00 68,881,630.13 178,828,366.13
A7-183-05245 1992-2001 7,440,000.00 4,661,160.00 12,101,160.00
GRAND TOTAL P642,747,726.20 P373,466,110.13 P1,016,213,836.33

On 24 August 2001, the City of Pasay, through its City Treasurer, issued notices of levy and
warrants of levy for the NAIA Pasay properties. MIAA received the notices and warrants of levy
on 28 August 2001. Thereafter, the City Mayor of Pasay threatened to sell at public auction the
NAIA Pasay properties if the delinquent real property taxes remain unpaid.

On 29 October 2001, MIAA filed with the Court of Appeals a petition for prohibition and
injunction with prayer for preliminary injunction or temporary restraining order. The petition
sought to enjoin the City of Pasay from imposing real property taxes on, levying against, and
auctioning for public sale the NAIA Pasay properties.

On 30 October 2002, the Court of Appeals dismissed the petition and upheld the power of the City
of Pasay to impose and collect realty taxes on the NAIA Pasay properties. MIAA filed a motion
for reconsideration, which the Court of Appeals denied. Hence, this petition.

The Court of Appeals’ Ruling

The Court of Appeals held that Sections 193 and 234 of Republic Act No. 7160 or the Local
Government Code, which took effect on 1 January 1992, withdrew the exemption from payment
of real property taxes granted to natural or juridical persons, including government-owned or
controlled corporations, except local water districts, cooperatives duly registered under Republic
Act No. 6938, non-stock and non-profit hospitals and educational institutions. Since MIAA is a
government-owned corporation, it follows that its tax exemption under Section 21 of EO 903 has
been withdrawn upon the effectivity of the Local Government Code.

The Issue

The issue raised in this petition is whether the NAIA Pasay properties of MIAA are exempt from
real property tax.

The Court’s Ruling

The petition is meritorious.

In ruling that MIAA is not exempt from paying real property tax, the Court of Appeals cited
Sections 193 and 234 of the Local Government Code which read:

SECTION 193. Withdrawal of Tax Exemption Privileges. – Unless otherwise provided in this
Code, tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural
or juridical, including government-owned or controlled corporations, except local water districts,
cooperatives duly registered under R.A. No. 6938, non-stock and non-profit hospitals and
educational institutions, are hereby withdrawn upon the effectivity of this Code.

SECTION 234. Exemptions from Real Property Tax. – The following are exempted from payment
of the real property tax:

(a) Real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been granted, for consideration or
otherwise to a taxable person;

(b) Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques,


non-profit or religious cemeteries and all lands, buildings and improvements actually,
directly, and exclusively used for religious, charitable or educational purposes;

(c) All machineries and equipment that are actually, directly and exclusively used by local
water districts and government owned or controlled corporations engaged in the supply
and distribution of water and/or generation and transmission of electric power;

(d) All real property owned by duly registered cooperatives as provided for under R.A. No.
6938; and

(e) Machinery and equipment used for pollution control and environment protection.

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

The Court of Appeals held that as a government-owned corporation, MIAA’s tax exemption under
Section 21 of EO 903 has already been withdrawn upon the effectivity of the Local Government
Code in 1992.

In Manila International Airport Authority v. Court of Appeals6 (2006 MIAA case), this Court
already resolved the issue of whether the airport lands and buildings of MIAA are exempt from
tax under existing laws. The 2006 MIAA case originated from a petition for prohibition and
injunction which MIAA filed with the Court of Appeals, seeking to restrain the City of Parañaque
from imposing real property tax on, levying against, and auctioning for public sale the airport lands
and buildings located in Parañaque City. The only difference between the 2006 MIAA case and
this case is that the 2006 MIAA case involved airport lands and buildings located in Parañaque
City while this case involved airport lands and buildings located in Pasay City. The 2006 MIAA
case and this case raised the same threshold issue: whether the local government can impose real
property tax on the airport lands, consisting mostly of the runways, as well as the airport buildings,
of MIAA. In the 2006 MIAA case, this Court held:

To summarize, MIAA is not a government-owned or controlled corporation under Section 2(13)


of the Introductory Provisions of the Administrative Code because it is not organized as a stock or
non-stock corporation. Neither is MIAA a government-owned or controlled corporation under
Section 16, Article XII of the 1987 Constitution because MIAA is not required to meet the test of
economic viability. MIAA is a government instrumentality vested with corporate powers and
performing essential public services pursuant to Section 2(10) of the Introductory Provisions of
the Administrative Code. As a government instrumentality, MIAA is not subject to any kind of tax
by local governments under Section 133(o) of the Local Government Code. The exception to the
exemption in Section 234(a) does not apply to MIAA because MIAA is not a taxable entity under
the Local Government Code. Such exception applies only if the beneficial use of real property
owned by the Republic is given to a taxable entity.

Finally, the Airport Lands and Buildings of MIAA are properties devoted to public use and thus
are properties of public dominion. Properties of public dominion are owned by the State or the
Republic. Article 420 of the Civil Code provides:

Art. 420. The following things are property of public dominion:

(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and
bridges constructed by the State, banks, shores, roadsteads, and others of similar
character;

(2) Those which belong to the State, without being for public use, and are intended for
some public serviceor for the development of the national wealth.

The term "ports x x x constructed by the State" includes airports and seaports. The Airport Lands
and Buildings of MIAA are intended for public use, and at the very least intended for public
service. Whether intended for public use or public service, the Airport Lands and Buildings
are properties of public dominion. As properties of public dominion, the Airport Lands and
Buildings are owned by the Republic and thus exempt from real estate tax under Section 234(a) of
the Local Government Code.7 (Emphasis in the original)

The definition of "instrumentality" under Section 2(10) of the Introductory Provisions of the
Administrative Code of 1987 uses the phrase "includes x x x government-owned or controlled
corporations" which means that a government "instrumentality" may or may not be a "government-
owned or controlled corporation." Obviously, the term government "instrumentality"
is broader than the term "government-owned or controlled corporation." Section 2(10) provides:

SEC. 2. General Terms Defined.– x x x

(10) Instrumentality refers to any agency of the national Government, not integrated within the
department framework, vested with special functions or jurisdiction by law, endowed with some
if not all corporate powers, administering special funds, and enjoying operational autonomy,
usually through a charter. This term includes regulatory agencies, chartered institutions and
government-owned or controlled corporations.

The term "government-owned or controlled corporation" has a separate definition under Section
2(13)8 of the Introductory Provisions of the Administrative Code of 1987:
SEC. 2. General Terms Defined.– x x x

(13) Government-owned or controlled corporation refers to any agency organized as a stock or


non-stock corporation, vested with functions relating to public needs whether governmental or
proprietary in nature, and owned by the Government directly or through its instrumentalities either
wholly, or, where applicable as in the case of stock corporations, to the extent of at least fifty-one
(51) percent of its capital stock: Provided, That government-owned or controlled corporations may
further be categorized by the department of Budget, the Civil Service Commission, and the
Commission on Audit for the purpose of the exercise and discharge of their respective powers,
functions and responsibilities with respect to such corporations.

The fact that two terms have separate definitions means that while a government "instrumentality"
may include a "government-owned or controlled corporation," there may be a government
"instrumentality" that will not qualify as a "government-owned or controlled corporation."

A close scrutiny of the definition of "government-owned or controlled corporation" in Section


2(13) will show that MIAA would not fall under such definition. MIAA is a government
"instrumentality" that does not qualify as a "government-owned or controlled corporation."
As explained in the 2006 MIAA case:

A government-owned or controlled corporation must be "organized as a stock or non-stock


corporation." MIAA is not organized as a stock or non-stock corporation. MIAA is not a stock
corporation because it has no capital stock divided into shares. MIAA has no stockholders or voting
shares. x x x

Section 3 of the Corporation Code defines a stock corporation as one whose "capital stock is
divided into shares and x x x authorized to distribute to the holders of such shares dividends x x
x." MIAA has capital but it is not divided into shares of stock. MIAA has no stockholders or voting
shares. Hence, MIAA is not a stock corporation.

xxx

MIAA is also not a non-stock corporation because it has no members. Section 87 of the
Corporation Code defines a non-stock corporation as "one where no part of its income is
distributable as dividends to its members, trustees or officers." A non-stock corporation must have
members. Even if we assume that the Government is considered as the sole member of MIAA, this
will not make MIAA a non-stock corporation. Non-stock corporations cannot distribute any part
of their income to their members. Section 11 of the MIAA Charter mandates MIAA to remit 20%
of its annual gross operating income to the National Treasury. This prevents MIAA from
qualifying as a non-stock corporation.

Section 88 of the Corporation Code provides that non-stock corporations are "organized for
charitable, religious, educational, professional, cultural, recreational, fraternal, literary, scientific,
social, civil service, or similar purposes, like trade, industry, agriculture and like chambers."
MIAA is not organized for any of these purposes. MIAA, a public utility, is organized to operate
an international and domestic airport for public use.
Since MIAA is neither a stock nor a non-stock corporation, MIAA does not qualify as a
government-owned or controlled corporation. What then is the legal status of MIAA within the
National Government?

MIAA is a government instrumentality vested with corporate powers to perform efficiently its
governmental functions. MIAA is like any other government instrumentality, the only difference
is that MIAA is vested with corporate powers. x x x

When the law vests in a government instrumentality corporate powers, the instrumentality does
not become a corporation. Unless the government instrumentality is organized as a stock or non-
stock corporation, it remains a government instrumentality exercising not only governmental but
also corporate powers. Thus, MIAA exercises the governmental powers of eminent domain, police
authority and the levying of fees and charges. At the same time, MIAA exercises "all the powers
of a corporation under the Corporation Law, insofar as these powers are not inconsistent with the
provisions of this Executive Order."9

Thus, MIAA is not a government-owned or controlled corporation but a government


instrumentality which is exempt from any kind of tax from the local governments. Indeed, the
exercise of the taxing power of local government units is subject to the limitations enumerated in
Section 133 of the Local Government Code.10 Under Section 133(o)11 of the Local Government
Code, local government units have no power to tax instrumentalities of the national government
like the MIAA. Hence, MIAA is not liable to pay real property tax for the NAIA Pasay properties.

Furthermore, the airport lands and buildings of MIAA are properties of public dominion intended
for public use, and as such are exempt from real property tax under Section 234(a) of the Local
Government Code. However, under the same provision, if MIAA leases its real property to a
taxable person, the specific property leased becomes subject to real property tax. 12 In this case,
only those portions of the NAIA Pasay properties which are leased to taxable persons like private
parties are subject to real property tax by the City of Pasay.

WHEREFORE, we GRANT the petition. We SET ASIDE the Decision dated 30 October 2002
and the Resolution dated 19 March 2004 of the Court of Appeals in CA-G.R. SP No. 67416.
We DECLARE the NAIA Pasay properties of the Manila International Airport
Authority EXEMPT from real property tax imposed by the City of Pasay. We declare VOID all
the real property tax assessments, including the final notices of real property tax delinquencies,
issued by the City of Pasay on the NAIA Pasay properties of the Manila International Airport
Authority, except for the portions that the Manila International Airport Authority has leased to
private parties.

No costs.

SO ORDERED.

G.R. No. 137377 December 18, 2001


COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
MARUBENI CORPORATION, respondent.

PUNO, J.:

In this petition for review, the Commissioner of Internal Revenue assails the decision dated
January 15, 1999 of the Court of Appeals in CA-G.R. SP No. 42518 which affirmed the decision
dated July 29, 1996 of the Court of Tax Appeals in CTA Case No. 4109. The tax court ordered the
Commissioner of Internal Revenue to desist from collecting the 1985 deficiency income, branch
profit remittance and contractor's taxes from Marubeni Corporation after finding the latter to have
properly availed of the tax amnesty under Executive Orders Nos. 41 and 64, as amended.

Respondent Marubeni Corporation is a foreign corporation organized and existing under the laws
of Japan. It is engaged in general import and export trading, financing and the construction
business. It is duly registered to engage in such business in the Philippines and maintains a branch
office in Manila.

Sometime in November 1985, petitioner Commissioner of Internal Revenue issued a letter of


authority to examine the books of accounts of the Manila branch office of respondent corporation
for the fiscal year ending March 1985. In the course of the examination, petitioner found
respondent to have undeclared income from two (2) contracts in the Philippines, both of which
were completed in 1984. One of the contracts was with the National Development Company
(NDC) in connection with the construction and installation of a wharf/port complex at the Leyte
Industrial Development Estate in the municipality of Isabel, province of Leyte. The other contract
was with the Philippine Phosphate Fertilizer Corporation (Philphos) for the construction of an
ammonia storage complex also at the Leyte Industrial Development Estate.

On March 1, 1986, petitioner's revenue examiners recommended an assessment for deficiency


income, branch profit remittance, contractor's and commercial broker's taxes. Respondent
questioned this assessment in a letter dated June 5, 1986.

On August 27, 1986, respondent corporation received a letter dated August 15, 1986 from
petitioner assessing respondent several deficiency taxes. The assessed deficiency internal revenue
taxes, inclusive of surcharge and interest, were as follows:

I. DEFICIENCY INCOME TAX


FY ended March 31, 1985
Undeclared gross income (Philphos and
NDC construction projects) P967,269,811.14
Less: Cost and expenses (50%) 483,634,905.57
Net undeclared income 483,634,905.57
Income tax due thereon 169,272,217.00
Add: 50% surcharge 84,636,108.50
20% int. p.a.fr. 7-15-85 to 8-15-
86 36,675,646.90
TOTAL AMOUNT DUE P290,583,972.40
II. DEFICIENCY BRANCH PROFIT REMITTANCE
TAX
FY ended March 31, 1985
Undeclared gross income from Philphos
and NDC construction projects P483,634,905.57
Less: Income tax thereon 169,272,217.00
Amount subject to Tax 314,362,688.57
Tax due thereon 47,154,403.00
Add: 50% surcharge 23,577,201.50
20% int. p.a.fr. 4-26-85 to 8-15-
86 12,305,360.66
TOTAL AMOUNT DUE P83,036,965.16
III. DEFICIENCY CONTRACTOR'S TAX
FY ended March 31, 1985
Undeclared gross receipts/gross income
from Philphos and NDC construction
projects P967,269,811.14
Contractor's tax due thereon (4%) 38,690,792.00
50% surcharge for non-
Add: declaration 19,345,396.00
20% surcharge for late payment 9,672,698.00
Sub-total 67,708,886.00
20% int. p.a.fr. 4-21-85 to 8-15-
Add: 86 17,854,739.46
TOTAL AMOUNT DUE P85,563,625.46
IV. DEFICIENCY COMMERCIAL BROKER'S TAX
FY ended March 31, 1985
Undeclared share from commission
income
(denominated as "subsidy from Home
Office") P24,683,114.50
Tax due thereon 1,628,569.00
50% surcharge for non-
Add: declaration 814,284.50
20% surcharge for late payment 407,142.25
Sub-total 2,849,995.75
20% int. p.a.fr. 4-21-85 to 8-15-
Add: 86 751,539.98
TOTAL AMOUNT DUE P3,600,535.68

The 50% surcharge was imposed for your client's failure to report for tax purposes the aforesaid
taxable revenues while the 25% surcharge was imposed because of your client's failure to pay on
time the above deficiency percentage taxes.

xxx xxx xxx"1

Petitioner found that the NDC and Philphos contracts were made on a "turn-key" basis and that
the gross income from the two projects amounted to P967,269,811.14. Each contract was for a
piece of work and since the projects called for the construction and installation of facilities in the
Philippines, the entire income therefrom constituted income from Philippine sources, hence,
subject to internal revenue taxes. The assessment letter further stated that the same was petitioner's
final decision and that if respondent disagreed with it, respondent may file an appeal with the Court
of Tax Appeals within thirty (30) days from receipt of the assessment.

On September 26, 1986, respondent filed two (2) petitions for review with the Court of Tax
Appeals. The first petition, CTA Case No. 4109, questioned the deficiency income, branch profit
remittance and contractor's tax assessments in petitioner's assessment letter. The second, CTA
Case No. 4110, questioned the deficiency commercial broker's assessment in the same letter.

Earlier, on August 2, 1986, Executive Order (E.O.) No. 412 declaring a one-time amnesty covering
unpaid income taxes for the years 1981 to 1985 was issued. Under this E.O., a taxpayer who wished
to avail of the income tax amnesty should, on or before October 31, 1986: (a) file a sworn statement
declaring his net worth as of December 31, 1985; (b) file a certified true copy of his statement
declaring his net worth as of December 31, 1980 on record with the Bureau of Internal Revenue
(BIR), or if no such record exists, file a statement of said net worth subject to verification by the
BIR; and (c) file a return and pay a tax equivalent to ten per cent (10%) of the increase in net worth
from December 31, 1980 to December 31, 1985.

In accordance with the terms of E.O. No. 41, respondent filed its tax amnesty return dated October
30, 1986 and attached thereto its sworn statement of assets and liabilities and net worth as of Fiscal
Year (FY) 1981 and FY 1986. The return was received by the BIR on November 3, 1986 and
respondent paid the amount of P2,891,273.00 equivalent to ten percent (10%) of its net worth
increase between 1981 and 1986.

The period of the amnesty in E.O. No. 41 was later extended from October 31, 1986 to December
5, 1986 by E.O. No. 54 dated November 4, 1986.

On November 17, 1986, the scope and coverage of E.O. No. 41 was expanded by Executive Order
(E.O.) No. 64. In addition to the income tax amnesty granted by E.O. No. 41 for the years 1981 to
1985, E.O. No. 64 3 included estate and donor's taxes under Title III and the tax on business under
Chapter II, Title V of the National Internal Revenue Code, also covering the years 1981 to 1985.
E.O. No. 64 further provided that the immunities and privileges under E.O. No. 41 were extended
to the foregoing tax liabilities, and the period within which the taxpayer could avail of the amnesty
was extended to December 15, 1986. Those taxpayers who already filed their amnesty return under
E.O. No. 41, as amended, could avail themselves of the benefits, immunities and privileges under
the new E.O. by filing an amended return and paying an additional 5% on the increase in net worth
to cover business, estate and donor's tax liabilities.

The period of amnesty under E.O. No. 64 was extended to January 31, 1987 by E.O No. 95 dated
December 17, 1986.

On December 15, 1986, respondent filed a supplemental tax amnesty return under the benefit of
E.O. No. 64 and paid a further amount of P1,445,637.00 to the BIR equivalent to five percent (5%)
of the increase of its net worth between 1981 and 1986.

On July 29, 1996, almost ten (10) years after filing of the case, the Court of Tax Appeals rendered
a decision in CTA Case No. 4109. The tax court found that respondent had properly availed of the
tax amnesty under E.O. Nos. 41 and 64 and declared the deficiency taxes subject of said case as
deemed cancelled and withdrawn. The Court of Tax Appeals disposed of as follows:

"WHEREFORE, the respondent Commissioner of Internal Revenue is hereby ORDERED


to DESIST from collecting the 1985 deficiency taxes it had assessed against petitioner and
the same are deemed considered [sic] CANCELLED and WITHDRAWN by reason of the
proper availment by petitioner of the amnesty under Executive Order No. 41, as amended."4

Petitioner challenged the decision of the tax court by filing CA-G.R. SP No. 42518 with the Court
of Appeals.

On January 15, 1999, the Court of Appeals dismissed the petition and affirmed the decision of the
Court of Tax Appeals. Hence, this recourse.

Before us, petitioner raises the following issues:

"(1) Whether or not the Court of Appeals erred in affirming the Decision of the Court of
Tax Appeals which ruled that herein respondent's deficiency tax liabilities were
extinguished upon respondent's availment of tax amnesty under Executive Orders Nos. 41
and 64.

(2) Whether or not respondent is liable to pay the income, branch profit remittance, and
contractor's taxes assessed by petitioner."5

The main controversy in this case lies in the interpretation of the exception to the amnesty coverage
of E.O. Nos. 41 and 64. There are three (3) types of taxes involved herein — income tax, branch
profit remittance tax and contractor's tax. These taxes are covered by the amnesties granted by
E.O. Nos. 41 and 64. Petitioner claims, however, that respondent is disqualified from availing of
the said amnesties because the latter falls under the exception in Section 4 (b) of E.O. No. 41.
Section 4 of E.O. No. 41 enumerates which taxpayers cannot avail of the amnesty granted
thereunder, viz:

"Sec. 4. Exceptions. — The following taxpayers may not avail themselves of the amnesty
herein granted:

a) Those falling under the provisions of Executive Order Nos. 1, 2 and 14;

b) Those with income tax cases already filed in Court as of the effectivity hereof;

c) Those with criminal cases involving violations of the income tax law already filed in
court as of the effectivity hereof;

d) Those that have withholding tax liabilities under the National Internal Revenue Code,
as amended, insofar as the said liabilities are concerned;

e) Those with tax cases pending investigation by the Bureau of Internal Revenue as of the
effectivity hereof as a result of information furnished under Section 316 of the National
Internal Revenue Code, as amended;

f) Those with pending cases involving unexplained or unlawfully acquired wealth before
the Sandiganbayan;

g) Those liable under Title Seven, Chapter Three (Frauds, Illegal Exactions and
Transactions) and Chapter Four (Malversation of Public Funds and Property) of the
Revised Penal Code, as amended."

Petitioner argues that at the time respondent filed for income tax amnesty on October 30, 1986,
CTA Case No. 4109 had already been filed and was pending; before the Court of Tax Appeals.
Respondent therefore fell under the exception in Section 4 (b) of E.O. No. 41.

Petitioner's claim cannot be sustained. Section 4 (b) of E.O. No. 41 is very clear and unambiguous.
It excepts from income tax amnesty those taxpayers "with income tax cases already filed in court
as of the effectivity hereof." The point of reference is the date of effectivity of E.O. No. 41. The
filing of income tax cases in court must have been made before and as of the date of effectivity of
E.O. No. 41. Thus, for a taxpayer not to be disqualified under Section 4 (b) there must have been
no income tax cases filed in court against him when E.O. No. 41 took effect. This is regardless of
when the taxpayer filed for income tax amnesty, provided of course he files it on or before the
deadline for filing.

E.O. No. 41 took effect on August 22, 1986. CTA Case No. 4109 questioning the 1985 deficiency
income, branch profit remittance and contractor's tax assessments was filed by respondent with the
Court of Tax Appeals on September 26, 1986. When E.O. No. 41 became effective on August 22,
1986, CTA Case No. 4109 had not yet been filed in court. Respondent corporation did not fall
under the said exception in Section 4 (b), hence, respondent was not disqualified from availing of
the amnesty for income tax under E.O. No. 41.
The same ruling also applies to the deficiency branch profit remittance tax assessment. A branch
profit remittance tax is defined and imposed in Section 24 (b) (2) (ii), Title II, Chapter III of the
National Internal Revenue Code.6 In the tax code, this tax falls under Title II on Income Tax. It is
a tax on income. Respondent therefore did not fall under the exception in Section 4 (b) when it
filed for amnesty of its deficiency branch profit remittance tax assessment.

The difficulty herein is with respect to the contractor's tax assessment and respondent's availment
of the amnesty under E.O. No. 64. E.O. No. 64 expanded the coverage of E.O. No. 41 by including
estate and donor's taxes and tax on business. Estate and donor's taxes fall under Title III of the Tax
Code while business taxes fall under Chapter II, Title V of the same. The contractor's tax is
provided in Section 205, Chapter II, Title V of the Tax Code; it is defined and imposed under the
title on business taxes, and is therefore a tax on business.7

When E.O. No. 64 took effect on November 17, 1986, it did not provide for exceptions to the
coverage of the amnesty for business, estate and donor's taxes. Instead, Section 8 of E.O. No. 64
provided that:

"Section 8. The provisions of Executive Orders Nos. 41 and 54 which are not contrary to
or inconsistent with this amendatory Executive Order shall remain in full force and effect."

By virtue of Section 8 as afore-quoted, the provisions of E.O. No. 41 not contrary to or inconsistent
with the amendatory act were reenacted in E.O. No. 64. Thus, Section 4 of E.O. No. 41 on the
exceptions to amnesty coverage also applied to E.O. No. 64. With respect to Section 4 (b) in
particular, this provision excepts from tax amnesty coverage a taxpayer who has "income tax cases
already filed in court as of the effectivity hereof." As to what Executive Order the exception refers
to, respondent argues that because of the words "income" and "hereof," they refer to Executive
Order No. 41.8

In view of the amendment introduced by E.O. No. 64, Section 4 (b) cannot be construed to refer
to E.O. No. 41 and its date of effectivity. The general rule is that an amendatory act operates
prospectively.9 While an amendment is generally construed as becoming a part of the original act
as if it had always been contained therein,10 it may not be given a retroactive effect unless it is so
provided expressly or by necessary implication and no vested right or obligations of contract are
thereby impaired.11

There is nothing in E.O. No. 64 that provides that it should retroact to the date of effectivity of
E.O. No. 41, the original issuance. Neither is it necessarily implied from E.O. No. 64 that it or any
of its provisions should apply retroactively. Executive Order No. 64 is a substantive amendment
of E.O. No. 41. It does not merely change provisions in E.O. No. 41. It supplements the original
act by adding other taxes not covered in the first.12 It has been held that where a statute amending
a tax law is silent as to whether it operates retroactively, the amendment will not be given a
retroactive effect so as to subject to tax past transactions not subject to tax under the original
act.13 In an amendatory act, every case of doubt must be resolved against its retroactive effect.14

Moreover, E.O. Nos. 41 and 64 are tax amnesty issuances. A tax amnesty is a general pardon or
intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty
of evasion or violation of a revenue or tax law.15 It partakes of an absolute forgiveness or waiver
by the government of its right to collect what is due it and to give tax evaders who wish to relent
a chance to start with a clean slate.16 A tax amnesty, much like a tax exemption, is never favored
nor presumed in law.17 If granted, the terms of the amnesty, like that of a tax exemption, must be
construed strictly against the taxpayer and liberally in favor of the taxing authority.18 For the right
of taxation is inherent in government. The State cannot strip itself of the most essential power of
taxation by doubtful words. He who claims an exemption (or an amnesty) from the common burden
must justify his claim by the clearest grant of organic or state law. It cannot be allowed to exist
upon a vague implication. If a doubt arises as to the intent of the legislature, that doubt must be
resolved in favor of the state.19

In the instant case, the vagueness in Section 4 (b) brought about by E.O. No. 64 should therefore
be construed strictly against the taxpayer. The term "income tax cases" should be read as to refer
to estate and donor's taxes and taxes on business while the word "hereof," to E.O. No. 64. Since
Executive Order No. 64 took effect on November 17, 1986, consequently, insofar as the taxes in
E.O. No. 64 are concerned, the date of effectivity referred to in Section 4 (b) of E.O. No. 41 should
be November 17, 1986.

Respondent filed CTA Case No. 4109 on September 26, 1986. When E.O. No. 64 took effect on
November 17, 1986, CTA Case No. 4109 was already filed and pending in court. By the time
respondent filed its supplementary tax amnesty return on December 15, 1986, respondent already
fell under the exception in Section 4 (b) of E.O. Nos. 41 and 64 and was disqualified from availing
of the business tax amnesty granted therein.

It is respondent's other argument that assuming it did not validly avail of the amnesty under the
two Executive Orders, it is still not liable for the deficiency contractor's tax because the income
from the projects came from the "Offshore Portion" of the contracts. The two contracts were
divided into two parts, i.e., the Onshore Portion and the Offshore Portion. All materials and
equipment in the contract under the "Offshore Portion" were manufactured and completed in
Japan, not in the Philippines, and are therefore not subject to Philippine taxes.

Before going into respondent's arguments, it is necessary to discuss the background of the two
contracts, examine their pertinent provisions and implementation.

The NDC and Philphos are two government corporations. In 1980, the NDC, as the corporate
investment arm of the Philippine Government, established the Philphos to engage in the large-
scale manufacture of phosphatic fertilizer for the local and foreign markets.20 The Philphos plant
complex which was envisioned to be the largest phosphatic fertilizer operation in Asia, and among
the largest in the world, covered an area of 180 hectares within the 435-hectare Leyte Industrial
Development Estate in the municipality of Isabel, province of Leyte.

In 1982, the NDC opened for public bidding a project to construct and install a modern, reliable,
efficient and integrated wharf/port complex at the Leyte Industrial Development Estate. The
wharf/port complex was intended to be one of the major facilities for the industrial plants at the
Leyte Industrial Development Estate. It was to be specifically adapted to the site for the handling
of phosphate rock, bagged or bulk fertilizer products, liquid materials and other products of
Philphos, the Philippine Associated Smelting and Refining Corporation (Pasar),21 and other
industrial plants within the Estate. The bidding was participated in by Marubeni Head Office in
Japan.

Marubeni, Japan pre-qualified and on March 22, 1982, the NDC and respondent entered into an
agreement entitled "Turn-Key Contract for Leyte Industrial Estate Port Development Project
Between National Development Company and Marubeni Corporation."22 The Port Development
Project would consist of a wharf, berths, causeways, mechanical and liquids unloading and loading
systems, fuel oil depot, utilities systems, storage and service buildings, offsite facilities, harbor
service vessels, navigational aid system, fire-fighting system, area lighting, mobile equipment,
spare parts and other related facilities.23 The scope of the works under the contract covered turn-
key supply, which included grants of licenses and the transfer of technology and know-how,24 and:

". . . the design and engineering, supply and delivery, construction, erection and
installation, supervision, direction and control of testing and commissioning of the Wharf-
Port Complex as set forth in Annex I of this Contract, as well as the coordination of tie-ins
at boundaries and schedule of the use of a part or the whole of the Wharf/Port Complex
through the Owner, with the design and construction of other facilities around the site. The
scope of works shall also include any activity, work and supply necessary for, incidental
to or appropriate under present international industrial port practice, for the timely and
successful implementation of the object of this Contract, whether or not expressly referred
to in the abovementioned Annex I."25

The contract price for the wharf/port complex was ¥12,790,389,000.00 and P44,327,940.00. In the
contract, the price in Japanese currency was broken down into two portions: (1) the Japanese Yen
Portion I; (2) the Japanese Yen Portion II, while the price in Philippine currency was referred to
as the Philippine Pesos Portion. The Japanese Yen Portions I and II were financed in two (2) ways:
(a) by yen credit loan provided by the Overseas Economic Cooperation Fund (OECF); and (b) by
supplier's credit in favor of Marubeni from the Export-Import Bank of Japan. The OECF is a Fund
under the Ministry of Finance of Japan extended by the Japanese government as assistance to
foreign governments to promote economic development.26 The OECF extended to the Philippine
Government a loan of ¥7,560,000,000.00 for the Leyte Industrial Estate Port Development Project
and authorized the NDC to implement the same.27 The other type of financing is an indirect type
where the supplier, i.e., Marubeni, obtained a loan from the Export-Import Bank of Japan to
advance payment to its sub-contractors.28

Under the financing schemes, the Japanese Yen Portions I and II and the Philippine Pesos Portion
were further broken down and subdivided according to the materials, equipment and services
rendered on the project. The price breakdown and the corresponding materials, equipment and
services were contained in a list attached as Annex III to the contract.29

A few months after execution of the NDC contract, Philphos opened for public bidding a project
to construct and install two ammonia storage tanks in Isabel. Like the NDC contract, it was
Marubeni Head Office in Japan that participated in and won the bidding. Thus, on May 2, 1982,
Philphos and respondent corporation entered into an agreement entitled "Turn-Key Contract for
Ammonia Storage Complex Between Philippine Phosphate Fertilizer Corporation and Marubeni
Corporation."30 The object of the contract was to establish and place in operating condition a
modern, reliable, efficient and integrated ammonia storage complex adapted to the site for the
receipt and storage of liquid anhydrous ammonia31 and for the delivery of ammonia to an
integrated fertilizer plant adjacent to the storage complex and to vessels at the dock.32 The storage
complex was to consist of ammonia storage tanks, refrigeration system, ship unloading system,
transfer pumps, ammonia heating system, fire-fighting system, area lighting, spare parts, and other
related facilities.33 The scope of the works required for the completion of the ammonia storage
complex covered the supply, including grants of licenses and transfer of technology and know-
how,34 and:

". . . the design and engineering, supply and delivery, construction, erection and
installation, supervision, direction and control of testing and commissioning of the
Ammonia Storage Complex as set forth in Annex I of this Contract, as well as the
coordination of tie-ins at boundaries and schedule of the use of a part or the whole of the
Ammonia Storage Complex through the Owner with the design and construction of other
facilities at and around the Site. The scope of works shall also include any activity, work
and supply necessary for, incidental to or appropriate under present international industrial
practice, for the timely and successful implementation of the object of this Contract,
whether or not expressly referred to in the abovementioned Annex I."35

The contract price for the project was ¥3,255,751,000.00 and P17,406,000.00. Like the NDC
contract, the price was divided into three portions. The price in Japanese currency was broken
down into the Japanese Yen Portion I and Japanese Yen Portion II while the price in Philippine
currency was classified as the Philippine Pesos Portion. Both Japanese Yen Portions I and II were
financed by supplier's credit from the Export-Import Bank of Japan. The price stated in the three
portions were further broken down into the corresponding materials, equipment and services
required for the project and their individual prices. Like the NDC contract, the breakdown in the
Philphos contract is contained in a list attached to the latter as Annex III.36

The division of the price into Japanese Yen Portions I and II and the Philippine Pesos Portion
under the two contracts corresponds to the two parts into which the contracts were classified —
the Foreign Offshore Portion and the Philippine Onshore Portion. In both contracts, the Japanese
Yen Portion I corresponds to the Foreign Offshore Portion.37 Japanese Yen Portion II and the
Philippine Pesos Portion correspond to the Philippine Onshore Portion.38

Under the Philippine Onshore Portion, respondent does not deny its liability for the contractor's
tax on the income from the two projects. In fact respondent claims, which petitioner has not denied,
that the income it derived from the Onshore Portion of the two projects had been declared for tax
purposes and the taxes thereon already paid to the Philippine government.39 It is with regard to the
gross receipts from the Foreign Offshore Portion of the two contracts that the liabilities involved
in the assessments subject of this case arose. Petitioner argues that since the two agreements are
turn-key,40 they call for the supply of both materials and services to the client, they are contracts
for a piece of work and are indivisible. The situs of the two projects is in the Philippines, and the
materials provided and services rendered were all done and completed within the territorial
jurisdiction of the Philippines.41Accordingly, respondent's entire receipts from the contracts,
including its receipts from the Offshore Portion, constitute income from Philippine sources. The
total gross receipts covering both labor and materials should be subjected to contractor's tax in
accordance with the ruling in Commissioner of Internal Revenue v. Engineering Equipment &
Supply Co.42

A contractor's tax is imposed in the National Internal Revenue Code (NIRC) as follows:

"Sec. 205. Contractors, proprietors or operators of dockyards, and others. —A


contractor's tax of four percent of the gross receipts is hereby imposed on proprietors or
operators of the following business establishments and/or persons engaged in the business
of selling or rendering the following services for a fee or compensation:

(a) General engineering, general building and specialty contractors, as defined in


Republic Act No. 4566;

xxx xxx xxx

(q) Other independent contractors. The term "independent contractors" includes


persons (juridical or natural) not enumerated above (but not including individuals
subject to the occupation tax under the Local Tax Code) whose activity consists
essentially of the sale of all kinds of services for a fee regardless of whether or not
the performance of the service calls for the exercise or use of the physical or mental
faculties of such contractors or their employees. It does not include regional or area
headquarters established in the Philippines by multinational corporations, including
their alien executives, and which headquarters do not earn or derive income from
the Philippines and which act as supervisory, communications and coordinating
centers for their affiliates, subsidiaries or branches in the Asia-Pacific Region.

xxx xxx xxx43

Under the afore-quoted provision, an independent contractor is a person whose activity consists
essentially of the sale of all kinds of services for a fee, regardless of whether or not the performance
of the service calls for the exercise or use of the physical or mental faculties of such contractors or
their employees. The word "contractor" refers to a person who, in the pursuit of independent
business, undertakes to do a specific job or piece of work for other persons, using his own means
and methods without submitting himself to control as to the petty details.44

A contractor's tax is a tax imposed upon the privilege of engaging in business. 45 It is generally in
the nature of an excise tax on the exercise of a privilege of selling services or labor rather than a
sale on products;46 and is directly collectible from the person exercising the privilege.47 Being an
excise tax, it can be levied by the taxing authority only when the acts, privileges or business are
done or performed within the jurisdiction of said authority.48 Like property taxes, it cannot be
imposed on an occupation or privilege outside the taxing district.49

In the case at bar, it is undisputed that respondent was an independent contractor under the terms
of the two subject contracts. Respondent, however, argues that the work therein were not all
performed in the Philippines because some of them were completed in Japan in accordance with
the provisions of the contracts.

An examination of Annex III to the two contracts reveals that the materials and equipment to be
made and the works and services to be performed by respondent are indeed classified into two.
The first part, entitled "Breakdown of Japanese Yen Portion I" provides:

"Japanese Yen Portion I of the Contract Price has been subdivided according to discrete
portions of materials and equipment which will be shipped to Leyte as units and lots. This
subdivision of price is to be used by owner to verify invoice for Progress Payments under
Article 19.2.1 of the Contract. The agreed subdivision of Japanese Yen Portion I is as
follows:

xxx xxx xxx50

The subdivision of Japanese Yen Portion I covers materials and equipment while Japanese Yen
Portion II and the Philippine Pesos Portion enumerate other materials and equipment and the
construction and installation work on the project. In other words, the supplies for the project are
listed under Portion I while labor and other supplies are listed under Portion II and the Philippine
Pesos Portion. Mr. Takeshi Hojo, then General Manager of the Industrial Plant Section II of the
Industrial Plant Department of Marubeni Corporation in Japan who supervised the implementation
of the two projects, testified that all the machines and equipment listed under Japanese Yen Portion
I in Annex III were manufactured in Japan.51 The machines and equipment were designed,
engineered and fabricated by Japanese firms sub-contracted by Marubeni from the list of sub-
contractors in the technical appendices to each contract.52 Marubeni sub-contracted a majority of
the equipment and supplies to Kawasaki Steel Corporation which did the design, fabrication,
engineering and manufacture thereof;53 Yashima & Co. Ltd. which manufactured the mobile
equipment; Bridgestone which provided the rubber fenders of the mobile equipment;54 and B.S.
Japan for the supply of radio equipment.55 The engineering and design works made by Kawasaki
Steel Corporation included the lay-out of the plant facility and calculation of the design in
accordance with the specifications given by respondent.56 All sub-contractors and manufacturers
are Japanese corporations and are based in Japan and all engineering and design works were
performed in that country.57

The materials and equipment under Portion I of the NDC Port Project is primarily composed of
two (2) sets of ship unloader and loader; several boats and mobile equipment.58 The ship unloader
unloads bags or bulk products from the ship to the port while the ship loader loads products from
the port to the ship. The unloader and loader are big steel structures on top of each is a large crane
and a compartment for operation of the crane. Two sets of these equipment were completely
manufactured in Japan according to the specifications of the project. After manufacture, they were
rolled on to a barge and transported to Isabel, Leyte.59 Upon reaching Isabel, the unloader and
loader were rolled off the barge and pulled to the pier to the spot where they were installed.60 Their
installation simply consisted of bolting them onto the pier.61

Like the ship unloader and loader, the three tugboats and a line boat were completely manufactured
in Japan. The boats sailed to Isabel on their own power. The mobile equipment, consisting of three
to four sets of tractors, cranes and dozers, trailers and forklifts, were also manufactured and
completed in Japan. They were loaded on to a shipping vessel and unloaded at the Isabel Port.
These pieces of equipment were all on wheels and self-propelled. Once unloaded at the port, they
were ready to be driven and perform what they were designed to do.62

In addition to the foregoing, there are other items listed in Japanese Yen Portion I in Annex III to
the NDC contract. These other items consist of supplies and materials for five (5) berths, two (2)
roads, a causeway, a warehouse, a transit shed, an administration building and a security building.
Most of the materials consist of steel sheets, steel pipes, channels and beams and other steel
structures, navigational and communication as well as electrical equipment.63

In connection with the Philphos contract, the major pieces of equipment supplied by respondent
were the ammonia storage tanks and refrigeration units.64 The steel plates for the tank were
manufactured and cut in Japan according to drawings and specifications and then shipped to Isabel.
Once there, respondent's employees put the steel plates together to form the storage tank. As to the
refrigeration units, they were completed and assembled in Japan and thereafter shipped to Isabel.
The units were simply installed there. 65 Annex III to the Philphos contract lists down under the
Japanese Yen Portion I the materials for the ammonia storage tank, incidental equipment, piping
facilities, electrical and instrumental apparatus, foundation material and spare parts.

All the materials and equipment transported to the Philippines were inspected and tested in Japan
prior to shipment in accordance with the terms of the contracts.66 The inspection was made by
representatives of respondent corporation, of NDC and Philphos. NDC, in fact, contracted the
services of a private consultancy firm to verify the correctness of the tests on the machines and
equipment67 while Philphos sent a representative to Japan to inspect the storage equipment.68

The sub-contractors of the materials and equipment under Japanese Yen Portion I were all paid by
respondent in Japan. In his deposition upon oral examination, Kenjiro Yamakawa, formerly the
Assistant General Manager and Manager of the Steel Plant Marketing Department, Engineering &
Construction Division, Kawasaki Steel Corporation, testified that the equipment and supplies for
the two projects provided by Kawasaki under Japanese Yen Portion I were paid by Marubeni in
Japan. Receipts for such payments were duly issued by Kawasaki in Japanese and
English.69 Yashima & Co. Ltd. and B.S. Japan were likewise paid by Marubeni in Japan.70

Between Marubeni and the two Philippine corporations, payments for all materials and equipment
under Japanese Yen Portion I were made to Marubeni by NDC and Philphos also in Japan. The
NDC, through the Philippine National Bank, established letters of credit in favor of respondent
through the Bank of Tokyo. The letters of credit were financed by letters of commitment issued
by the OECF with the Bank of Tokyo. The Bank of Tokyo, upon respondent's submission of
pertinent documents, released the amount in the letters of credit in favor of respondent and credited
the amount therein to respondent's account within the same bank.71

Clearly, the service of "design and engineering, supply and delivery, construction, erection and
installation, supervision, direction and control of testing and commissioning, coordination. . . "72 of
the two projects involved two taxing jurisdictions. These acts occurred in two countries — Japan
and the Philippines. While the construction and installation work were completed within the
Philippines, the evidence is clear that some pieces of equipment and supplies were completely
designed and engineered in Japan. The two sets of ship unloader and loader, the boats and mobile
equipment for the NDC project and the ammonia storage tanks and refrigeration units were made
and completed in Japan. They were already finished products when shipped to the Philippines. The
other construction supplies listed under the Offshore Portion such as the steel sheets, pipes and
structures, electrical and instrumental apparatus, these were not finished products when shipped to
the Philippines. They, however, were likewise fabricated and manufactured by the sub-contractors
in Japan. All services for the design, fabrication, engineering and manufacture of the materials and
equipment under Japanese Yen Portion I were made and completed in Japan. These services were
rendered outside the taxing jurisdiction of the Philippines and are therefore not subject to
contractor's tax.

Contrary to petitioner's claim, the case of Commissioner of Internal Revenue v. Engineering


Equipment & Supply Co73 is not in point. In that case, the Court found that Engineering Equipment,
although an independent contractor, was not engaged in the manufacture of air conditioning units
in the Philippines. Engineering Equipment designed, supplied and installed centralized air-
conditioning systems for clients who contracted its services. Engineering, however, did not
manufacture all the materials for the air-conditioning system. It imported some items for the
system it designed and installed.74 The issues in that case dealt with services performed within the
local taxing jurisdiction. There was no foreign element involved in the supply of materials and
services.

With the foregoing discussion, it is unnecessary to discuss the other issues raised by the parties.

IN VIEW WHEREOF, the petition is denied. The decision in CA-G.R. SP No. 42518 is affirmed.

SO ORDERED.