EN BANC
to the Court En Banc was denied by minute Resolution of September
[G.R. No. 153690. February 15, 2011.]
DAVID LU, petitioner, vs. PATERNO LU YM, SR., PATERNO LU
YM, JR., VICTOR LU YM, JOHN LU YM, KELLY LU YM, and LUDO
& LUYM DEVELOPMENT CORPORATION, respondents.
[G.R. No. 157381. February 15, 2011.]
PATERNO LU YM, SR., PATERNO LU YM, JR., VICTOR LU YM,
JOHN LU YM, KELLY LU YM, and LUDO & LUYM DEVELOPMENT
CORPORATION, petitioners, vs. DAVID LU, respondent.
[G.R. No. 170889. February 15, 2011.]
JOHN LU YM and LUDO & LUYM DEVELOPMENT CORPORATION,
petitioners, vs. THE HONORABLE COURT OF APPEALS OF CEBU
CITY (FORMER TWENTIETH DIVISION), DAVID LU, ROSA GO,
SILVANO LUDO & CL CORPORATION, respondents.
RESOLUTION
CARPIO MORALES, J p:
By Decision of August 26, 2008, the Court 1 unanimously disposed of
the three present petitions as follows:
WHEREFORE, premises considered, the petitions in G.R. Nos.
153690 and 157381 are DENIED for being moot and academic; while
the petition in G.R. No. 170889 is DISMISSED for lack of merit.
Consequently, the Status Quo Order dated January 23, 2006 is
hereby LIFTED.
The Court of Appeals is DIRECTED to proceed with CA-G.R. CV No.
81163 and to resolve the same with dispatch.
SO ORDERED[,] 2
which Decision was, on motion for reconsideration, the Court voting
4-1, 3 reversed by Resolution of August 4, 2009, the dispositive
portion of which reads:
WHEREFORE, in view of the foregoing, the Motion for
Reconsideration filed by John Lu Ym and Ludo & LuYm Development
Corporation is GRANTED. The Decision of this Court dated August
26, 2008 is RECONSIDERED and SET ASIDE. The Complaint in
SRC Case No. 021-CEB, now on appeal with the Court of Appeals in
CA-G.R. CV No. 81163, is DISMISSED.
All interlocutory matters challenged in these consolidated petitions are
DENIED for being moot and academic.
SO ORDERED. 4 TDcAaH
David Lu's Motion for Reconsideration and Motion to Refer Resolution
23, 2009.
Following his receipt on October 19, 2009 of the minute Resolution,
David Lu personally filed on October 30, 2009 a Second Motion for
Reconsideration and Motion to Refer Resolution to the Court En Banc.
On even date, he filed through registered mail an "Amended Second
Motion for Reconsideration and Motion to Refer Resolution to the
Court En Banc." And on November 3, 2009, he filed a "Motion for
Leave to File [a] Motion for Clarification[, and the] Second Motion for
Reconsideration and Motion to Refer Resolution to the Court En
Banc." He later also filed a "Supplement to Second Motion for
Reconsideration with Motion to Dismiss" dated January 6, 2010.
John Lu Ym and Ludo & Luym Development Corporation (LLDC),
meanwhile, filed with leave a Motion 5 for the Issuance of an Entry of
Judgment of February 2, 2010, which merited an Opposition from
David Lu.
In compliance with the Court's Resolution of January 11, 2010, Kelly
Lu Ym, Victor Lu Ym and Paterno Lu Ym, Jr. filed a
Comment/Opposition of March 20, 2010, while John Lu Ym and LLDC
filed a Consolidated Comment of March 25, 2010, a Supplement
thereto of April 20, 2010, and a Manifestation of May 24, 2010.
The present cases were later referred to the Court en banc by
Resolution of October 20, 2010.
Brief Statement of the Antecedents
The three consolidated cases stemmed from the complaint for
"Declaration of Nullity of Share Issue, Receivership and Dissolution"
filed on August 14, 2000 before the Regional Trial Court (RTC) of
Cebu City by David Lu, et al. against Paterno Lu Ym, Sr. and sons (Lu
Ym father and sons) and LLDC.
By Decision of March 1, 2004, Branch 12 of the RTC ruled in favor of
David et al. by annulling the issuance of the shares of stock
subscribed and paid by Lu Ym father and sons at less than par value,
and ordering the dissolution and asset liquidation of LLDC. The
appeal of the trial court's Decision remains pending with the appellate
court in CA-G.R. CV No. 81163.
Several incidents arising from the complaint reached the Court
through the present three petitions.
In G.R. No. 153690 wherein David, et al. assailed the appellate court's
resolutions dismissing their complaint for its incomplete signatory in
the certificate of non-forum shopping and consequently annulling the
placing of the subject corporation under receivership pendente lite,
the Court, by Decision of August 26, 2008, found the issue to have
been mooted by the admission by the trial court of David et al.'s
Amended Complaint, filed by them pursuant to the trial court's order
to conform to the requirements of the Interim Rules of Procedure
Governing Intra-Corporate Controversies. jur2005
Since an amended pleading supersedes the pleading that it amends,
the original complaint of David, et al. was deemed withdrawn from the
records.
The Court noted in G.R. No. 153690 that both parties admitted the
mootness of the issue and that the trial court had already rendered a
decision on the merits of the case. It added that the Amended
Complaint stands since Lu Ym father and sons availed of an improper
mode (via an Urgent Motion filed with this Court) to assail the
admission of the Amended Complaint.
In G.R. No. 157381 wherein Lu Ym father and sons challenged the
appellate court's resolution restraining the trial court from proceeding
with their motion to lift the receivership order which was filed during
the pendency of G.R. No. 153690, the Court, by Decision of August
26, 2008 resolved that the issue was mooted by the amendment of
the complaint and by the trial court's decision on the merits. The
motion having been filed ancillary to the main action, which main
action was already decided on the merits by the trial court, the Court
held that there was nothing more to enjoin.
G.R. No. 170889 involved the denial by the appellate court of Lu Ym
father and sons' application in CA-G.R. CV No. 81163 for a writ of
preliminary injunction. By August 26, 2008 Decision, the Court
dismissed the petition after finding no merit on their argument —
which they raised for the first time in their motion for reconsideration
before the appellate court — of lack of jurisdiction for non-payment of
the correct RTC docket fees.
As reflected early on, the Court, in a turnaround, by Resolution of
August 4, 2009, reconsidered its position on the matter of docket fees.
It ruled that the trial court did not acquire jurisdiction over the case for
David Lu, et al.'s failure to pay the correct docket fees, hence, all
interlocutory matters and incidents subject of the present petitions
must consequently be denied.
Taking Cognizance of the Present Incidents
The Internal Rules of the Supreme Court (IRSC) states that the Court
en banc shall act on the following matters and cases:
(a) cases in which the constitutionality or validity of any treaty,
international or executive agreement, law, executive order,
presidential decree, proclamation, order, instruction, ordinance, or
regulation is in question;
(b) criminal cases in which the appealed decision imposes the death
penalty or reclusion perpetua;
(c) cases raising novel questions of law;
(d) cases affecting ambassadors, other public ministers, and consuls;
(e) cases involving decisions, resolutions, and orders of the Civil
Service Commission, the Commission on Elections, and the
Commission on Audit;
(f) cases where the penalty recommended or imposed is the dismissal
of a judge, the disbarment of a lawyer, the suspension of any of them
for a period of more than one year, or a fine exceeding forty thousand
pesos;
(g) cases covered by the preceding paragraph and involving the
reinstatement in the judiciary of a dismissed judge, the reinstatement
of a lawyer in the roll of attorneys, or the lifting of a judge's suspension
or a lawyer's suspension from the practice of law; DHIETc
(h) cases involving the discipline of a Member of the Court, or a
Presiding Justice, or any Associate Justice of the collegial appellate
court;
(i) cases where a doctrine or principle laid down by the Court en banc
or by a Division my be modified or reversed;
(j) cases involving conflicting decisions of two or more divisions;
(k) cases where three votes in a Division cannot be obtained;
(l)Division cases where the subject matter has a huge financial impact
on businesses or affects the welfare of a community;
(m) Subject to Section 11 (b) of this rule, other division cases that, in
the opinion of at least three Members of the Division who are voting
and present, are appropriate for transfer to the Court en banc;
(n) cases that the Court en banc deems of sufficient importance to
merit its attention; and
(o) all matters involving policy decisions in the administrative
supervision of all courts and their personnel. 6 (underscoring
supplied)
The enumeration is an amalgamation of SC Circular No. 2-89
(February 7, 1989), as amended by En Banc Resolution of November
18, 1993, and the amplifications introduced by Resolution of January
18, 2000 in A.M. No. 99-12-08-SC with respect to administrative
cases and matters.
The present cases fall under at least three types of cases for
consideration by the Court En Banc. At least three members of the
Court's Second Division (to which the present cases were transferred,
7 they being assigned to a Member thereof) found, by Resolution of
October 20, 2010, that the cases were appropriate for referral-transfer
to the Court En Banc which subsequently accepted 8 the referral in
view of the sufficiently important reason to resolve all doubts on the
validity of the challenged resolutions as they appear to modify or
reverse doctrines or principles of law.
In Firestone Ceramics v. Court of Appeals, 9 the Court treated the
consolidated cases as En Banc cases and set the therein petitioners'
motion for oral argument, after finding that the cases were of sufficient
importance to merit the Court En Banc's attention. It ruled that the
Court's action is a legitimate and valid exercise of its residual power.
10
In Limketkai Sons Milling, Inc. v. Court of Appeals, the Court
conceded that it is not infallible. Should any error of judgment be
perceived, it does not blindly adhere to such error, and the parties
adversely affected thereby are not precluded from seeking relief
therefrom, by way of a motion for reconsideration. In this jurisdiction,
rectification of an error, more than anything else, is of paramount
importance. cTEICD
xxx xxx xxx
It bears stressing that where, as in the present case, the Court En
Banc entertains a case for its resolution and disposition, it does so
without implying that the Division of origin is incapable of rendering
objective and fair justice. The action of the Court simply means that
the nature of the cases calls for en banc attention and consideration.
Neither can it be concluded that the Court has taken undue advantage
of sheer voting strength. It was merely guided by the well-studied
finding and sustainable opinion of the majority of its actual
membership — that, indeed, subject cases are of sufficient
importance meriting the action and decision of the whole Court. It is,
of course, beyond cavil that all the members of this highest Court of
the land are always embued with the noblest of intentions in
interpreting and applying the germane provisions of law,
jurisprudence, rules and Resolutions of the Court — to the end that
public interest be duly safeguarded and rule of law be observed. 11
It is argued that the assailed Resolutions in the present cases have
already become final, 12 since a second motion for reconsideration is
prohibited except for extraordinarily persuasive reasons and only
upon express leave first obtained; 13 and that once a judgment attains
finality, it thereby becomes immutable and unalterable, however
unjust the result of error may appear.
The contention, however, misses an important point. The doctrine of
immutability of decisions applies only to final and executory decisions.
Since the present cases may involve a modification or reversal of a
Court-ordained doctrine or principle, the judgment rendered by the
Special Third Division may be considered unconstitutional, hence, it
can never become final. It finds mooring in the deliberations of the
framers of the Constitution:
On proposed Section 3(4), Commissioner Natividad asked what the
effect would be of a decision that violates the proviso that "no doctrine
or principle of law laid down by the court in a decision rendered en
banc or in division may be modified or reversed except by the court
en banc." The answer given was that such a decision would be invalid.
Following up, Father Bernas asked whether the decision, if not
challenged, could become final and binding at least on the parties.
Romulo answered that, since such a decision would be in excess of
jurisdiction, the decision on the case could be reopened anytime. 14
(emphasis and underscoring supplied)
A decision rendered by a Division of this Court in violation of this
constitutional provision would be in excess of jurisdiction and,
therefore, invalid. 15 Any entry of judgment may thus be said to be
"inefficacious" 16 since the decision is void for being unconstitutional.
While it is true that the Court en banc exercises no appellate
jurisdiction over its Divisions, Justice Minerva Gonzaga-Reyes opined
in Firestone and concededly recognized that "[t]he only constraint is
that any doctrine or principle of law laid down by the Court, either
rendered en banc or in division, may be overturned or reversed only
by the Court sitting en banc." 17
That a judgment must become final at some definite point at the risk
of occasional error cannot be appreciated in a case that embroils not
only a general allegation of "occasional error" but also a serious
accusation of a violation of the Constitution, viz., that doctrines or
principles of law were modified or reversed by the Court's Special
Third Division August 4, 2009 Resolution. TAcSaC
The law allows a determination at first impression that a doctrine or
principle laid down by the court en banc or in division may be modified
or reversed in a case which would warrant a referral to the Court En
Banc. The use of the word "may" instead of "shall" connotes
probability, not certainty, of modification or reversal of a doctrine, as
may be deemed by the Court. Ultimately, it is the entire Court which
shall decide on the acceptance of the referral and, if so, "to reconcile
any seeming conflict, to reverse or modify an earlier decision, and to
declare the Court's doctrine." 18
The Court has the power and prerogative to suspend its own rules
and to exempt a case from their operation if and when justice requires
it, 19 as in the present circumstance where movant filed a motion for
leave after the prompt submission of a second motion for
reconsideration but, nonetheless, still within 15 days from receipt of
the last assailed resolution.
Well-entrenched doctrines or principles of law that went astray need
to be steered back to their proper course. Specifically, as David Lu
correctly points out, it is necessary to reconcile and declare the legal
doctrines regarding actions that are incapable of pecuniary
estimation, application of estoppel by laches in raising an objection of
lack of jurisdiction, and whether bad faith can be deduced from the
erroneous annotation of lis pendens.
Upon a considered, thorough reexamination, the Court grants David
Lu's Motion for Reconsideration. The assailed Resolutions of August
4, 2009 and September 23, 2009, which turn turtle settled doctrines,
must be overturned. The Court thus reinstates the August 26, 2008
Decision wherein a three-tiered approach was utilized to analyze the
issue on docket fees:
In the instant case, however, we cannot grant the dismissal prayed for
because of the following reasons: First, the case instituted before the
RTC is one incapable of pecuniary estimation. Hence, the correct
docket fees were paid. Second, John and LLDC are estopped from
questioning the jurisdiction of the trial court because of their active
participation in the proceedings below, and because the issue of
payment of insufficient docket fees had been belatedly raised before
the Court of Appeals, i.e., only in their motion for reconsideration.
Lastly, assuming that the docket fees paid were truly inadequate, the
mistake was committed by the Clerk of Court who assessed the same
and not imputable to David; and as to the deficiency, if any, the same
may instead be considered a lien on the judgment that may thereafter
be rendered. 20 (italics in the original; emphasis and underscoring
supplied)
The Value of the Subject Matter Cannot be Estimated
On the claim that the complaint had for its objective the nullification of
the issuance of 600,000 shares of stock of LLDC, the real value of
which based on underlying real estate values, as alleged in the
complaint, stands at P1,087,055,105, the Court's assailed August 4,
2009 Resolution found: cCTaSH
Upon deeper reflection, we find that the movants' [Lu Ym father &
sons] claim has merit. The 600,000 shares of stock were, indeed,
properties in litigation. They were the subject matter of the complaint,
and the relief prayed for entailed the nullification of the transfer thereof
and their return to LLDC. David, et al., are minority shareholders of
the corporation who claim to have been prejudiced by the sale of the
shares of stock to the Lu Ym father and sons. Thus, to the extent of
the damage or injury they allegedly have suffered from this sale of the
shares of stock, the action they filed can be characterized as one
capable of pecuniary estimation. The shares of stock have a definite
value, which was declared by plaintiffs [David Lu, et al.] themselves
in their complaint. Accordingly, the docket fees should have been
computed based on this amount. This is clear from the following
version of Rule 141, Section 7, which was in effect at the time the
complaint was filed[.] 21 (emphasis and underscoring supplied)
The said Resolution added that the value of the 600,000 shares of
stock, which are the properties in litigation, should be the basis for the
computation of the filing fees. It bears noting, however, that David, et
al. are not claiming to own these shares. They do not claim to be the
owners thereof entitled to be the transferees of the shares of stock.
The mention of the real value of the shares of stock, over which David,
et al. do not, it bears emphasis, interpose a claim of right to recovery,
is merely narrative or descriptive in order to emphasize the inequitable
price at which the transfer was effected.
The assailed August 4, 2009 Resolution also stated that "to the extent
of the damage or injury [David, et al.] allegedly have suffered from this
sale," the action "can be characterized as one capable of pecuniary
estimation." The Resolution does not, however, explore the value of
the extent of the damage or injury. Could it be the pro rata decrease
(e.g., from 20% to 15%) of the percentage shareholding of David, et
al. vis-Ã -vis to the whole?
Whatever property, real or personal, that would be distributed to the
stockholders would be a mere consequence of the main action. In the
end, in the event LLDC is dissolved, David, et al. would not be getting
the value of the 600,000 shares, but only the value of their minority
number of shares, which are theirs to begin with.
The complaint filed by David, et al. is one for declaration of nullity of
share issuance. The main relief prayed for both in the original
complaint and the amended complaint is the same, that is, to declare
null and void the issuance of 600,000 unsubscribed and unissued
shares to Lu Ym father and sons, et al. for a price of 1/18 of their real
value, for being inequitable, having been done in breach of director's
fiduciary's duty to stockholders, in violation of the minority
stockholders' rights, and with unjust enrichment.
As judiciously discussed in the Court's August 26, 2008 Decision, the
test in determining whether the subject matter of an action is
incapable of pecuniary estimation is by ascertaining the nature of the
principal action or remedy sought. It explained:
. . . To be sure, the annulment of the shares, the dissolution of the
corporation and the appointment of receivers/management committee
are actions which do not consist in the recovery of a sum of money.
If, in the end, a sum of money or real property would be recovered, it
would simply be the consequence of such principal action. Therefore,
the case before the RTC was incapable of pecuniary estimation. 22
(italics in the original, emphasis and underscoring supplied) HcACTE
Actions which the Court has recognized as being incapable of
pecuniary estimation include legality of conveyances. In a case
involving annulment of contract, the Court found it to be one which
cannot be estimated:
Petitioners argue that an action for annulment or rescission of a
contract of sale of real property is a real action and, therefore, the
amount of the docket fees to be paid by private respondent should be
based either on the assessed value of the property, subject matter of
the action, or its estimated value as alleged in the complaint, pursuant
to the last paragraph of §7(b) of Rule 141, as amended by the
Resolution of the Court dated September 12, 1990. Since private
respondents alleged that the land, in which they claimed an interest
as heirs, had been sold for P4,378,000.00 to petitioners, this amount
should be considered the estimated value of the land for the purpose
of determining the docket fees.
On the other hand, private respondents counter that an action for
annulment or rescission of a contract of sale of real property is
incapable of pecuniary estimation and, so, the docket fees should be
the fixed amount of P400.00 in Rule 141, §7(b)(1). In support of their
argument, they cite the cases of Lapitan v. Scandia, Inc. and Bautista
v. Lim. In Lapitan this Court, in an opinion by Justice J.B.L. Reyes,
held:
A review of the jurisprudence of this Court indicates that in
determining whether an action is one the subject matter of which is
not capable of pecuniary estimation, this Court has adopted the
criterion of first ascertaining the nature of the principal action or
remedy sought. If it is primarily for the recovery of a sum of money,
the claim is considered capable of pecuniary estimation, and whether
jurisdiction is in the municipal courts or in the courts of first instance
would depend on the amount of the claim. However, where the basic
issue is something other than the right to recover a sum of money, or
where the money claim is purely incidental to, or a consequence of,
the principal relief sought, like in suits to have the defendant perform
his part of the contract (specific performance) and in actions for
support, or for annulment of a judgment or to foreclose a mortgage,
this Court has considered such actions as cases where the subject of
the litigation may not be estimated in terms of money, and are
cognizable exclusively by courts of first instance. The rationale of the
rule is plainly that the second class cases, besides the determination
of damages, demand an inquiry into other factors which the law has
deemed to be more within the competence of courts of first instance,
which were the lowest courts of record at the time that the first organic
laws of the Judiciary were enacted allocating jurisdiction (Act 136 of
the Philippine Commission of June 11, 1901).
Actions for specific performance of contracts have been expressly
pronounced to be exclusively cognizable by courts of first instance:
De Jesus vs. Judge Garcia, L-26816, February 28, 1967;
Manufacturer's Distributors, Inc. vs. Yu Siu Liong, L-21285, April 29,
1966. And no cogent reason appears, and none is here advanced by
the parties, why an action for rescission (or resolution) should be
differently treated, a "rescission" being a counterpart, so to speak, of
"specific performance". In both cases, the court would certainly have
to undertake an investigation into facts that would justify one act or
the other. No award for damages may be had in an action for
rescission without first conducting an inquiry into matters which would
justify the setting aside of a contract, in the same manner that courts
of first instance would have to make findings of fact and law in actions
not capable of pecuniary estimation expressly held to be so by this
Court, arising from issues like those raised in Arroz v. Alojado, et al.,
L-22153, March 31, 1967 (the legality or illegality of the conveyance
sought for and the determination of the validity of the money deposit
made); De Ursua v. Pelayo, L-13285, April 18, 1950 (validity of a
judgment); Bunayog v. Tunas, L-12707, December 23, 1959 (validity
of a mortgage); Baito v. Sarmiento, L-13105, August 25, 1960 (the
relations of the parties, the right to support created by the relation,
etc., in actions for support), De Rivera, et al. v. Halili, L-15159,
September 30, 1963 (the validity or nullity of documents upon which
claims are predicated). Issues of the same nature may be raised by a
party against whom an action for rescission has been brought, or by
the plaintiff himself. It is, therefore, difficult to see why a prayer for
damages in an action for rescission should be taken as the basis for
concluding such action as one capable of pecuniary estimation — a
prayer which must be included in the main action if plaintiff is to be
compensated for what he may have suffered as a result of the breach
committed by defendant, and not later on precluded from recovering
damages by the rule against splitting a cause of action and
discouraging multiplicity of suits. 23 (emphasis and underscoring
supplied) ScTIAH
IN FINE, the Court holds that David Lu, et al.'s complaint is one
incapable of pecuniary estimation, hence, the correct docket fees
were paid. The Court thus proceeds to tackle the arguments on
estoppel and lien, mindful that the succeeding discussions rest merely
on a contrary assumption, viz., that there was deficient payment.
Estoppel Has Set In
Assuming arguendo that the docket fees were insufficiently paid, the
doctrine of estoppel already applies.
The assailed August 4, 2009 Resolution cited Vargas v. Caminas 24
on the non-applicability of the Tijam doctrine where the issue of
jurisdiction was, in fact, raised before the trial court rendered its
decision. Thus the Resolution explained:
Next, the Lu Ym father and sons filed a motion for the lifting of the
receivership order, which the trial court had issued in the interim.
David, et al., brought the matter up to the CA even before the trial
court could resolve the motion. Thereafter, David, at al., filed their
Motion to Admit Complaint to Conform to the Interim Rules Governing
Intra-Corporate Controversies. It was at this point that the Lu Ym
father and sons raised the question of the amount of filing fees paid.
They also raised this point again in the CA when they appealed the
trial court's decision in the case below.
We find that, in the circumstances, the Lu Ym father and sons are not
estopped from challenging the jurisdiction of the trial court. They
raised the insufficiency of the docket fees before the trial court
rendered judgment and continuously maintained their position even
on appeal to the CA. Although the manner of challenge was erroneous
— they should have addressed this issue directly to the trial court
instead of the OCA — they should not be deemed to have waived
their right to assail the jurisdiction of the trial court. 25 (emphasis and
underscoring supplied)
Lu Ym father and sons did not raise the issue before the trial court.
The narration of facts in the Court's original decision shows that Lu
Ym father and sons merely inquired from the Clerk of Court on the
amount of paid docket fees on January 23, 2004. They thereafter still
"speculat[ed] on the fortune of litigation." 26 Thirty-seven days later or
on March 1, 2004 the trial court rendered its decision adverse to them.
Meanwhile, Lu Ym father and sons attempted to verify the matter of
docket fees from the Office of the Court Administrator (OCA). In their
Application for the issuance a writ of preliminary injunction filed with
the Court of Appeals, they still failed to question the amount of docket
fees paid by David Lu, et al. It was only in their Motion for
Reconsideration of the denial by the appellate court of their
application for injunctive writ that they raised such issue. ADcEST
Lu Ym father and sons' further inquiry from the OCA cannot redeem
them. A mere inquiry from an improper office at that, could not, by any
stretch, be considered as an act of having raised the jurisdictional
question prior to the rendition of the trial court's decision. In one case,
it was held:
Here it is beyond dispute that respondents paid the full amount of
docket fees as assessed by the Clerk of Court of the Regional Trial
Court of Malolos, Bulacan, Branch 17, where they filed the complaint.
If petitioners believed that the assessment was incorrect, they should
have questioned it before the trial court. Instead, petitioners belatedly
question the alleged underpayment of docket fees through this
petition, attempting to support their position with the opinion and
certification of the Clerk of Court of another judicial region. Needless
to state, such certification has no bearing on the instant case. 27
(italics in the original; emphasis and underscoring in the original)
The inequity resulting from the abrogation of the whole proceedings
at this late stage when the decision subsequently rendered was
adverse to the father and sons is precisely the evil being avoided by
the equitable principle of estoppel.
No Intent to Defraud the Government
Assuming arguendo that the docket fees paid were insufficient, there
is no proof of bad faith to warrant a dismissal of the complaint, hence,
the following doctrine applies:
. . . In Sun Insurance Office, Ltd., (SIOL) v. Asuncion, this Court ruled
that the filing of the complaint or appropriate initiatory pleading and
the payment of the prescribed docket fee vest a trial court with
jurisdiction over the subject matter or nature of the action. If the
amount of docket fees paid is insufficient considering the amount of
the claim, the clerk of court of the lower court involved or his duly
authorized deputy has the responsibility of making a deficiency
assessment. The party filing the case will be required to pay the
deficiency, but jurisdiction is not automatically lost. 28 (underscoring
supplied)
The assailed Resolution of August 4, 2009 held, however, that the
above-quoted doctrine does not apply since there was intent to
defraud the government, citing one attendant circumstance — the
annotation of notices of lis pendens on real properties owned by
LLDC. It deduced:
From the foregoing, it is clear that a notice of lis pendens is availed of
mainly in real actions. Hence, when David, et al., sought the
annotation of notices of lis pendens on the titles of LLDC, they
acknowledged that the complaint they had filed affected a title to or a
right to possession of real properties. At the very least, they must have
been fully aware that the docket fees would be based on the value of
the realties involved. Their silence or inaction to point this out to the
Clerk of Court who computed their docket fees, therefore, becomes
highly suspect, and thus, sufficient for this Court to conclude that they
have crossed beyond the threshold of good faith and into the area of
fraud. Clearly, there was an effort to defraud the government in
avoiding to pay the correct docket fees. Consequently, the trial court
did not acquire jurisdiction over the case. 29
All findings of fraud should begin the exposition with the presumption
of good faith. The inquiry is not whether there was good faith on the
part of David, et al., but whether there was bad faith on their part.
The erroneous annotation of a notice of lis pendens does not negate
good faith. The overzealousness of a party in protecting pendente lite
his perceived interest, inchoate or otherwise, in the corporation's
properties from depletion or dissipation, should not be lightly equated
to bad faith. aEcSIH
That notices of lis pendens were erroneously annotated on the titles
does not have the effect of changing the nature of the action. The
aggrieved party is not left without a remedy, for they can move to
cancel the annotations. The assailed August 4, 2009 Resolution,
however, deemed such act as an acknowledgement that the case
they filed was a real action, concerning as it indirectly does the
corporate realties, the titles of which were allegedly annotated. This
conclusion does not help much in ascertaining the filing fees because
the value of these real properties and the value of the 600,000 shares
of stock are different.
Further, good faith can be gathered from the series of amendments
on the provisions on filing fees, that the Court was even prompted to
make a clarification.
When David Lu, et al. filed the Complaint on August 14, 2000 or five
days after the effectivity of the Securities Regulation Code or Republic
Act No. 8799, 30 the then Section 7 of Rule 141 was the applicable
provision, without any restricted reference to paragraphs (a) and (b) 1
& 3 or paragraph (a) alone. Said section then provided:
SEC. 7. Clerks of Regional Trial Courts. —
(a) For filing an action or a permissive counterclaim or money claim
against an estate not based on judgment, or for filing with leave of
court a third-party, fourth-party, etc. complaint, or a complaint in
intervention, and for all clerical services in the same, if the total sum
claimed, exclusive of interest, or the stated value of the property in
litigation, is:
xxx xxx xxx
(b) For filing:
1. Actions where the value of the subject
matter cannot be estimatedxxx
2. Special civil actions except judicial
foreclosure of mortgage which shall be governed
by paragraph (a) abovexxx
3. All other actions not involving propertyxxx
In a real action, the assessed value of the property, or if there is none,
the estimated value thereof shall be alleged by the claimant and shall
be the basis in computing the fees.
xxx xxx xxx 31 (emphasis supplied)
The Court, by Resolution of September 4, 2001 in A. M. No. 00-8-10-
SC, 32 clarified the matter of legal fees to be collected in cases
formerly cognizable by the Securities and Exchange Commission
following their transfer to the RTC.
Clarification has been sought on the legal fees to be collected and the
period of appeal applicable in cases formerly cognizable by the
Securities and Exchange Commission. It appears that the Interim
Rules of Procedure on Corporate Rehabilitation and the Interim Rules
of Procedure for Intra-Corporate Controversies do not provide the
basis for the assessment of filing fees and the period of appeal in
cases transferred from the Securities and Exchange Commission to
particular Regional Trial Courts. DEIHAa
The nature of the above mentioned cases should first be ascertained.
Section 3(a), Rule 1 of the 1997 Rules of Civil Procedure defines civil
action as one by which a party sues another for the enforcement or
protection of a right, or the prevention or redress of a wrong. It further
states that a civil action may either be ordinary or special, both being
governed by the rules for ordinary civil actions subject to the special
rules prescribed for special civil actions. Section 3(c) of the same
Rule, defines a special proceeding as a remedy by which a party
seeks to establish a status, a right, or a particular fact.
Applying these definitions, the cases covered by the Interim Rules for
Intra-Corporate Controversies should be considered as ordinary civil
actions. These cases either seek the recovery of damages/property
or specific performance of an act against a party for the violation or
protection of a right. These cases are:
(1) Devices or schemes employed by, or any act of, the board of
directors, business associates, officers or partners, amounting to
fraud or misrepresentation which may be detrimental to the interest of
the public and/or of the stockholders, partners, or members of any
corporation, partnership, or association;
(2) Controversies arising out of intra-corporate, partnership, or
association relations, between and among stockholders, members or
associates; and between, any or all of them and the corporation,
partnership, or association of which they are stockholders, members
or associates, respectively;
(3) Controversies in the election or appointment of directors, trustees,
officers, or managers of corporations, partnerships, or associations;
(4) Derivative suits; and
(5) Inspection of corporate books.
On the other hand, a petition for rehabilitation, the procedure for which
is provided in the Interim Rules of Procedure on Corporate Recovery,
should be considered as a special proceeding. It is one that seeks to
establish the status of a party or a particular fact. As provided in
section 1, Rule 4 of the Interim Rules on Corporate Recovery, the
status or fact sought to be established is the inability of the corporate
debtor to pay its debts when they fall due so that a rehabilitation plan,
containing the formula for the successful recovery of the corporation,
may be approved in the end. It does not seek a relief from an injury
caused by another party.
Section 7 of Rule 141 (Legal Fees) of the Revised Rules of Court lays
the amount of filing fees to be assessed for actions or proceedings
filed with the Regional Trial Court. Section 7(a) and (b) apply to
ordinary civil actions while 7(d) and (g) apply to special proceedings.

In fine, the basis for computing the filing fees in intra-corporate cases
shall be section 7(a) and (b) l & 3 of Rule 141. For petitions for
rehabilitation, section 7(d) shall be applied. (emphasis and
underscoring supplied) EHTIcD

The new Section 21(k) of Rule 141 of the Rules of Court, as amended
by A.M. No. 04-2-04-SC 33 (July 20, 2004), expressly provides that
"[f]or petitions for insolvency or other cases involving intra-corporate
controversies, the fees prescribed under Section 7(a) shall apply."
Notatu dignum is that paragraph (b) 1 & 3 of Section 7 thereof was
omitted from the reference. Said paragraph 34 refers to docket fees
for filing "[a]ctions where the value of the subject matter cannot be
estimated" and "all other actions not involving property."

By referring the computation of such docket fees to paragraph (a)

only, it denotes that an intra-corporate controversy always involves a
property in litigation, the value of which is always the basis for
computing the applicable filing fees. The latest amendments seem to
imply that there can be no case of intra-corporate controversy where
the value of the subject matter cannot be estimated. Even one for a
mere inspection of corporate books.

If the complaint were filed today, one could safely find refuge in the
express phraseology of Section 21 (k) of Rule 141 that paragraph (a)
alone applies.

In the present case, however, the original Complaint was filed on

August 14, 2000 during which time Section 7, without qualification,
was the applicable provision. Even the Amended Complaint was filed
on March 31, 2003 during which time the applicable rule expressed
that paragraphs (a) and (b) l & 3 shall be the basis for computing the
filing fees in intra-corporate cases, recognizing that there could be an
intra-corporate controversy where the value of the subject matter
cannot be estimated, such as an action for inspection of corporate
books. The immediate illustration shows that no mistake can even be
attributed to the RTC clerk of court in the assessment of the docket
fees.

Finally, assuming there was deficiency in paying the docket fees and
assuming further that there was a mistake in computation, the
deficiency may be considered a lien on the judgment that may be
rendered, there being no established intent to defraud the
government.

WHEREFORE, the assailed Resolutions of August 4, 2009 and

September 23, 2009 are REVERSED and SET ASIDE. The Court's
Decision of August 26, 2008 is REINSTATED.

The Court of Appeals is DIRECTED to resume the proceedings and

resolve the remaining issues with utmost dispatch in CA-G.R. CV No.
81163.

SO ORDERED.

Corona, C.J., Carpio, Velasco, Jr., Leonardo-de Castro, Brion, Del

Castillo, Abad, Villarama, Jr., Perez, Mendoza and Sereno, JJ.,
concur.

Nachura, J., dissenting.

Peralta, J., separate concurring.

Bersamin, concurring.

||| (Lu v. Lu Ym, Sr., G.R. No. 153690, 157381, 170889 (Resolution),
[February 15, 2011], 658 PHIL 156-222)
EN BANC
[G.R. No. 198756. January 13, 2015.]
BANCO DE ORO, BANK OF COMMERCE, CHINA BANKING
CORPORATION, METROPOLITAN BANK & TRUST COMPANY,
PHILIPPINE BANK OF COMMUNICATIONS, PHILIPPINE
NATIONAL BANK, PHILIPPINE VETERANS BANK AND PLANTERS
DEVELOPMENT BANK, petitioners, RIZAL COMMERCIAL
BANKING CORPORATION AND RCBC CAPITAL CORPORATION,
petitioners-intervenors, CAUCUS OF DEVELOPMENT NGO
NETWORKS, petitioner-intervenor, vs. REPUBLIC OF THE
PHILIPPINES, THE COMMISSIONER OF INTERNAL REVENUE,
BUREAU OF INTERNAL REVENUE, SECRETARY OF FINANCE,
DEPARTMENT OF FINANCE, THE NATIONAL TREASURER AND
BUREAU OF TREASURY, respondents.
DECISION
LEONEN, J p:
The case involves the proper tax treatment of the discount or interest
income arising from the P35 billion worth of 10-year zero-coupon
treasury bonds issued by the Bureau of Treasury on October 18, 2001
(denominated as the Poverty Eradication and Alleviation Certificates
or the PEACe Bonds by the Caucus of Development NGO Networks).
On October 7, 2011, the Commissioner of Internal Revenue issued
BIR Ruling No. 370-2011 1 (2011 BIR Ruling), declaring that the
PEACe Bonds being deposit substitutes are subject to the 20% final
withholding tax. Pursuant to this ruling, the Secretary of Finance
directed the Bureau of Treasury to withhold a 20% final tax from the
face value of the PEACe Bonds upon their payment at maturity on
October 18, 2011.
This is a petition for certiorari, prohibition and/or mandamus 2 filed by
petitioners under Rule 65 of the Rules of Court seeking to:
a. ANNUL Respondent BIR's Ruling No. 370-2011 dated 7 October
2011 [and] other related rulings issued by BIR of similar tenor and
import, for being unconstitutional and for having been issued without
jurisdiction or with grave abuse of discretion amounting to lack or
excess of jurisdiction. . .;
b. PROHIBIT Respondents, particularly the BTr, from withholding or
collecting the 20% FWT from the payment of the face value of the
Government Bonds upon their maturity;
c. COMMAND Respondents, particularly the BTr, to pay the full
amount of the face value of the Government Bonds upon maturity. . .;
and
d. SECURE a temporary restraining order (TRO), and subsequently a
writ of preliminary injunction, enjoining Respondents, particularly the
BIR and the BTr, from withholding or collecting 20% FWT on the
Government Bonds and the respondent BIR from enforcing the
assailed 2011 BIR Ruling, as well as other related rulings issued by
the BIR of similar tenor and import, pending the resolution by [the
court] of the merits of [the] Petition. 3
Factual background
By letter 4 dated March 23, 2001, the Caucus of Development NGO
Networks (CODE-NGO) "with the assistance of its financial advisors,
Rizal Commercial Banking Corp. ("RCBC"), RCBC Capital Corp.
("RCBC Capital"), CAPEX Finance and Investment Corp. ("CAPEX")
and SEED Capital Ventures, Inc. (SEED)," 5 requested an approval
from the Department of Finance for the issuance by the Bureau of
Treasury of 10-year zero-coupon Treasury Certificates (T-notes). 6
The T-notes would initially be purchased by a special purpose vehicle
on behalf of CODE-NGO, repackaged and sold at a premium to
investors as the PEACe Bonds. 7 The net proceeds from the sale of
the Bonds "will be used to endow a permanent fund (Hanapbuhay®
Fund) to finance meritorious activities and projects of accredited non-
government organizations (NGOs) throughout the country." 8
Prior to and around the time of the proposal of CODE-NGO, other
proposals for the issuance of zero-coupon bonds were also presented
by banks and financial institutions, such as First Metro Investment
Corporation (proposal dated March 1, 2001), 9 International
Exchange Bank (proposal dated July 27, 2000), 10 Security Bank
Corporation and SB Capital Investment Corporation (proposal dated
July 25, 2001), 11 and ATR-Kim Eng Fixed Income, Inc. (proposal
dated August 25, 1999). 12 "[B]oth the proposals of First Metro
Investment Corp. and ATR-Kim Eng Fixed Income indicate that the
interest income or discount earned on the proposed zero-coupon
bonds would be subject to the prevailing withholding tax." 13
A zero-coupon bond is a bond bought at a price substantially lower
than its face value (or at a deep discount), with the face value repaid
at the time of maturity. 14 It does not make periodic interest payments,
or have so-called "coupons," hence the term zero-coupon bond. 15
However, the discount to face value constitutes the return to the
bondholder. 16
On May 31, 2001, the Bureau of Internal Revenue, in reply to CODE-
NGO's letters dated May 10, 15, and 25, 2001, issued BIR Ruling No.
020-2001 17 on the tax treatment of the proposed PEACe Bonds. BIR
Ruling No. 020-2001, signed by then Commissioner of Internal
Revenue René G. Bañez confirmed that the PEACe Bonds would not
be classified as deposit substitutes and would not be subject to the
corresponding withholding tax:
Thus, to be classified as "deposit substitutes", the borrowing of funds
must be obtained from twenty (20) or more individuals or corporate
lenders at any one time. In the light of your representation that the
PEACe Bonds will be issued only to one entity, i.e., Code NGO, the
same shall not be considered as "deposit substitutes" falling within the
purview of the above definition. Hence, the withholding tax on deposit
substitutes will not apply. 18 (Emphasis supplied) EDSAac
The tax treatment of the proposed PEACe Bonds in BIR Ruling No.
020-2001 was subsequently reiterated in BIR Ruling No. 035-2001 19
dated August 16, 2001 and BIR Ruling No. DA-175-01 20 dated
September 29, 2001 (collectively, the 2001 Rulings). In sum, these
rulings pronounced that to be able to determine whether the financial
assets, i.e., debt instruments and securities are deposit substitutes,
the "20 or more individual or corporate lenders" rule must apply.
Moreover, the determination of the phrase "at any one time" for
purposes of determining the "20 or more lenders" is to be determined
at the time of the original issuance. Such being the case, the PEACe
Bonds were not to be treated as deposit substitutes.
Meanwhile, in the memorandum 21 dated July 4, 2001, Former
Treasurer Eduardo Sergio G. Edeza (Former Treasurer Edeza)
questioned the propriety of issuing the bonds directly to a special
purpose vehicle considering that the latter was not a Government
Securities Eligible Dealer (GSED). 22 Former Treasurer Edeza
recommended that the issuance of the Bonds "be done through the
ADAPS" 23 and that CODE-NGO "should get a GSED to bid in [sic]
its behalf." 24
Subsequently, in the notice to all GSEDs entitled Public Offering of
Treasury Bonds 25 (Public Offering) dated October 9, 2001, the
Bureau of Treasury announced that "P30.0B worth of 10-year Zero[-
]Coupon Bonds [would] be auctioned on October 16, 2001[.]" 26 The
notice stated that the Bonds "shall be issued to not more than 19
buyers/lenders hence, the necessity of a manual auction for this
maiden issue." 27 It also required the GSEDs to submit their bids not
later than 12 noon on auction date and to disclose in their bid
submissions the names of the institutions bidding through them to
ensure strict compliance with the 19 lender limit. 28 Lastly, it stated
that "the issue being limited to 19 lenders and while taxable shall not
be subject to the 20% final withholding [tax]." 29
On October 12, 2001, the Bureau of Treasury released a memo 30 on
the "Formula for the Zero-Coupon Bond." The memo stated in part
that the formula (in determining the purchase price and settlement
amount) "is only applicable to the zeroes that are not subject to the
20% final withholding due to the 19 buyer/lender limit." 31
A day before the auction date or on October 15, 2001, the Bureau of
Treasury issued the "Auction Guidelines for the 10-year Zero-Coupon
Treasury Bond to be Issued on October 16, 2001" (Auction
Guidelines). 32 The Auction Guidelines reiterated that the Bonds to
be auctioned are "[n]ot subject to 20% withholding tax as the issue will
be limited to a maximum of 19 lenders in the primary market (pursuant
to BIR Revenue Regulation No. 020 2001)." 33 The Auction
Guidelines, for the first time, also stated that the Bonds are "[e]ligible
as liquidity reserves (pursuant to MB Resolution No. 1545 dated 27
September 2001)[.]" 34
On October 16, 2001, the Bureau of Treasury held an auction for the
10-year zero-coupon bonds. 35 Also on the same date, the Bureau of
Treasury issued another memorandum 36 quoting excerpts of the
ruling issued by the Bureau of Internal Revenue concerning the
Bonds' exemption from 20% final withholding tax and the opinion of
the Monetary Board on reserve eligibility. 37
During the auction, there were 45 bids from 15 GSEDs. 38 The
bidding range was very wide, from as low as 12.248% to as high as
18.000%. 39 Nonetheless, the Bureau of Treasury accepted the
auction results. 40 The cut-off was at 12.75%. 41
After the auction, RCBC which participated on behalf of CODE-NGO
was declared as the winning bidder having tendered the lowest bids.
42 Accordingly, on October 18, 2001, the Bureau of Treasury issued
P35 billion worth of Bonds at yield-to-maturity of 12.75% to RCBC for
approximately P10.17 billion, 43 resulting in a discount of
approximately P24.83 billion.
Also on October 16, 2001, RCBC Capital entered into an underwriting
agreement 44 with CODE-NGO, whereby RCBC Capital was
appointed as the Issue Manager and Lead Underwriter for the offering
of the PEACe Bonds. 45 RCBC Capital agreed to underwrite 46 on a
firm basis the offering, distribution and sale of the P35 billion Bonds
at the price of P11,995,513,716.51. 47 In Section 7 (r) of the
underwriting agreement, CODE-NGO represented that "[a]ll income
derived from the Bonds, inclusive of premium on redemption and
gains on the trading of the same, are exempt from all forms of taxation
as confirmed by Bureau of Internal Revenue (BIR) letter rulings dated
31 May 2001 and 16 August 2001, respectively." 48
RCBC Capital sold the Government Bonds in the secondary market
for an issue price of P11,995,513,716.51. Petitioners purchased the
PEACe Bonds on different dates. 49
BIR rulings
On October 7, 2011, "the BIR issued the assailed 2011 BIR Ruling
imposing a 20% FWT on the Government Bonds and directing the BTr
to withhold said final tax at the maturity thereof, [allegedly without]
consultation with Petitioners as bondholders, and without conducting
any hearing." 50
"It appears that the assailed 2011 BIR Ruling was issued in response
to a query of the Secretary of Finance on the proper tax treatment of
the discount or interest income derived from the Government Bonds."
51 The Bureau of Internal Revenue, citing three (3) of its rulings
rendered in 2004 and 2005, namely: BIR Ruling No. 007-04 52 dated
July 16, 2004; BIR Ruling No. DA-491-04 53 dated September 13,
2004; and BIR Ruling No. 008-05 54 dated July 28, 2005, declared
the following: cSCADE
The Php24.3 billion discount on the issuance of the PEACe Bonds
should be subject to 20% Final Tax on interest income from deposit
substitutes. It is now settled that all treasury bonds (including PEACe
Bonds), regardless of the number of purchasers/lenders at the time of
origination/issuance are considered deposit substitutes. In the case of
zero-coupon bonds, the discount (i.e., difference between face value
and purchase price/discounted value of the bond) is treated as
interest income of the purchaser/holder. Thus, the Php24.3 interest
income should have been properly subject to the 20% Final Tax as
provided in Section 27(D)(1) of the Tax Code of 1997. . . .
xxx xxx xxx
However, at the time of the issuance of the PEACe Bonds in 2001,
the BTr was not able to collect the final tax on the discount/interest
income realized by RCBC as a result of the 2001 Rulings.
Subsequently, the issuance of BIR Ruling No. 007-04 dated July 16,
2004 effectively modifies and supersedes the 2001 Rulings by stating
that the [1997] Tax Code is clear that the "term public means
borrowing from twenty (20) or more individual or corporate lenders at
any one time." The word "any" plainly indicates that the period
contemplated is the entire term of the bond, and not merely the point
of origination or issuance. . . . Thus, by taking the PEACe bonds out
of the ambit of deposits [sic] substitutes and exempting it from the
20% Final Tax, an exemption in favour of the PEACe Bonds was
created when no such exemption is found in the law. 55
On October 11, 2011, a "Memo for Trading Participants No. 58-2011
was issued by the Philippine Dealing System Holdings Corporation
and Subsidiaries ("PDS Group"). The Memo provides that in view of
the pronouncement of the DOF and the BIR on the applicability of the
20% FWT on the Government Bonds, no transfer of the same shall
be allowed to be recorded in the Registry of Scripless Securities
("ROSS") from 12 October 2011 until the redemption payment date
on 18 October 2011. Thus, the bondholders of record appearing on
the ROSS as of 18 October 2011, which include the Petitioners, shall
be treated by the BTr as the beneficial owners of such securities for
the relevant [tax] payments to be imposed thereon." 56
On October 17, 2011, replying to an urgent query from the Bureau of
Treasury, the Bureau of Internal Revenue issued BIR Ruling No. DA
378-2011 57 clarifying that the final withholding tax due on the
discount or interest earned on the PEACe Bonds should "be imposed
and withheld not only on RCBC/CODE NGO but also [on] 'all
subsequent holders of the Bonds.'" 58
On October 17, 2011, petitioners filed a petition for certiorari,
prohibition, and/or mandamus (with urgent application for a temporary
restraining order and/or writ of preliminary injunction) 59 before this
court.
On October 18, 2011, this court issued a temporary restraining order
(TRO) 60 "enjoining the implementation of BIR Ruling No. 370-2011
against the [PEACe Bonds,] . . . subject to the condition that the 20%
final withholding tax on interest income therefrom shall be withheld by
the petitioner banks and placed in escrow pending resolution of [the]
petition." 61
On October 28, 2011, RCBC and RCBC Capital filed a motion for
leave of court to intervene and to admit petition-in-intervention 62
dated October 27, 2011, which was granted by this court on
November 15, 2011. 63
Meanwhile, on November 9, 2011, petitioners filed their
"Manifestation with Urgent Ex Parte Motion to Direct Respondents to
Comply with the TRO." 64 They alleged that on the same day that the
temporary restraining order was issued, the Bureau of Treasury paid
to petitioners and other bondholders the amounts representing the
face value of the Bonds, net however of the amounts corresponding
to the 20% final withholding tax on interest income, and that the
Bureau of Treasury refused to release the amounts corresponding to
the 20% final withholding tax. 65
On November 15, 2011, this court directed respondents to: "(1)
SHOW CAUSE why they failed to comply with the October 18, 2011
resolution; and (2) COMPLY with the Court's resolution in order that
petitioners may place the corresponding funds in escrow pending
resolution of the petition." 66
On the same day, CODE-NGO filed a motion for leave to intervene
(and to admit attached petition-in-intervention with comment on the
petition-in-intervention of RCBC and RCBC Capital). 67 The motion
was granted by this court on November 22, 2011. 68
On December 1, 2011, public respondents filed their compliance. 69
They explained that: 1) "the implementation of [BIR Ruling No. 370-
2011], which has already been performed on October 18, 2011 with
the withholding of the 20% final withholding tax on the face value of
the PEACe bonds, is already fait accompli . . . when the Resolution
and TRO were served to and received by respondents BTr and
National Treasurer [on October 19, 2011]"; 70 and 2) the withheld
amount has ipso facto become public funds and cannot be disbursed
or released to petitioners without congressional appropriation. 71
Respondents further aver that "[i]nasmuch as the . . . TRO has already
become moot . . . the condition attached to it, i.e., 'that the 20% final
withholding tax on interest income therefrom shall be withheld by the
banks and placed in escrow . . .' has also been rendered moot[.]" 72
On December 6, 2011, this court noted respondents' compliance. 73
On February 22, 2012, respondents filed their consolidated comment
74 on the petitions-in-intervention filed by RCBC and RCBC Capital
and CODE-NGO. aTIAES
On November 27, 2012, petitioners filed their "Manifestation with
Urgent Reiterative Motion (To Direct Respondents to Comply with the
Temporary Restraining Order)." 75
On December 4, 2012, this court: (a) noted petitioners' manifestation
with urgent reiterative motion (to direct respondents to comply with
the temporary restraining order); and (b) required respondents to
comment thereon. 76
Respondents' comment 77 was filed on April 15, 2013, and petitioners
filed their reply 78 on June 5, 2013.
Issues
The main issues to be resolved are:
I. Whether the PEACe Bonds are "deposit substitutes" and thus
subject to 20% final withholding tax under the 1997 National Internal
Revenue Code. Related to this question is the interpretation of the
phrase "borrowing from twenty (20) or more individual or corporate
lenders at any one time" under Section 22 (Y) of the 1997 National
Internal Revenue Code, particularly on whether the reckoning of the
20 lenders includes trading of the bonds in the secondary market; and
II. If the PEACe Bonds are considered "deposit substitutes," whether
the government or the Bureau of Internal Revenue is estopped from
imposing and/or collecting the 20% final withholding tax from the face
value of these Bonds
a. Will the imposition of the 20% final withholding tax violate the non-
impairment clause of the Constitution?
b. Will it constitute a deprivation of property without due process of
law?
c. Will it violate Section 245 of the 1997 National Internal Revenue
Code on non-retroactivity of rulings? TCIDSa
Arguments of petitioners, RCBC and RCBC
Capital, and CODE-NGO
Petitioners argue that "[a]s the issuer of the Government Bonds acting
through the BTr, the Government is obligated . . . to pay the face value
amount of PhP35 Billion upon maturity without any deduction
whatsoever." 79 They add that "the Government cannot impair the
efficacy of the [Bonds] by arbitrarily, oppressively and unreasonably
imposing the withholding of 20% FWT upon the [Bonds] a mere
eleven (11) days before maturity and after several, consistent
categorical declarations that such bonds are exempt from the 20%
FWT, without violating due process" 80 and the constitutional principle
on non-impairment of contracts. 81 Petitioners aver that at the time
they purchased the Bonds, they had the right to expect that they would
receive the full face value of the Bonds upon maturity, in view of the
2001 BIR Rulings. 82 "[R]egardless of whether or not the 2001 BIR
Rulings are correct, the fact remains that [they] relied [on] good faith
thereon." 83
At any rate, petitioners insist that the PEACe Bonds are not deposit
substitutes as defined under Section 22 (Y) of the 1997 National
Internal Revenue Code because there was only one lender (RCBC)
to whom the Bureau of Treasury issued the Bonds. 84 They allege
that the 2004, 2005, and 2011 BIR Rulings "erroneously interpreted
that the number of investors that participate in the 'secondary market'
is the determining factor in reckoning the existence or non-existence
of twenty (20) or more individual or corporate lenders." 85
Furthermore, they contend that the Bureau of Internal Revenue
unduly expanded the definition of deposit substitutes under Section
22 of the 1997 National Internal Revenue Code in concluding that "the
mere issuance of government debt instruments and securities is
deemed as falling within the coverage of 'deposit substitutes[.]'" 86
Thus, "[t]he 2011 BIR Ruling clearly amount[ed] to an unauthorized
act of administrative legislation[.]" 87
Petitioners further argue that their income from the Bonds is a "trading
gain," which is exempt from income tax. 88 They insist that "[t]hey are
not lenders whose income is considered as 'interest income or yield'
subject to the 20% FWT under Section 27 (D) (1) of the [1997 National
Internal Revenue Code]" 89 because they "acquired the Government
Bonds in the secondary or tertiary market." 90
Even assuming without admitting that the Government Bonds are
deposit substitutes, petitioners argue that the collection of the final tax
was barred by prescription. 91 They point out that under Section 7 of
DOF Department Order No. 141-95, 92 the final withholding tax
"should have been withheld at the time of their issuance[.]" 93 Also,
under Section 203 of the 1997 National Internal Revenue Code,
"internal revenue taxes, such as the final tax, [should] be assessed
within three (3) years after the last day prescribed by law for the filing
of the return." 94
Moreover, petitioners contend that the retroactive application of the
2011 BIR Ruling without prior notice to them was in violation of their
property rights, 95 their constitutional right to due process 96 as well
as Section 246 of the 1997 National Internal Revenue Code on non-
retroactivity of rulings. 97 Allegedly, it would also have "an adverse
effect of colossal magnitude on the investors, both local and foreign,
the Philippine capital market, and most importantly, the country's
standing in the international commercial community." 98 Petitioners
explained that "unless enjoined, the government's threatened refusal
to pay the full value of the Government Bonds will negatively impact
on the image of the country in terms of protection for property rights
(including financial assets), degree of legal protection for lender's
rights, and strength of investor protection." 99 They cited the country's
ranking in the World Economic Forum: 75th in the world in its 2011-
2012 Global Competitiveness Index, 111th out of 142 countries
worldwide and 2nd to the last among ASEAN countries in terms of
Strength of Investor Protection, and 105th worldwide and last among
ASEAN countries in terms of Property Rights Index and Legal Rights
Index. 100 It would also allegedly "send a reverberating message to
the whole world that there is no certainty, predictability, and stability
of financial transactions in the capital markets[.]" 101 "[T]he integrity
of Government-issued bonds and notes will be greatly shattered and
the credit of the Philippine Government will suffer" 102 if the sudden
turnaround of the government will be allowed, 103 and it will reinforce
"investors' perception that the level of regulatory risk for contracts
entered into by the Philippine Government is high," 104 thus resulting
in higher interest rate for government-issued debt instruments and
lowered credit rating. 105
Petitioners-intervenors RCBC and RCBC Capital contend that
respondent Commissioner of Internal Revenue "gravely and seriously
abused her discretion in the exercise of her rule-making power" 106
when she issued the assailed 2011 BIR Ruling which ruled that "all
treasury bonds are 'deposit substitutes' regardless of the number of
lenders, in clear disregard of the requirement of twenty (20) or more
lenders mandated under the NIRC." 107 They argue that "[b]y her
blanket and arbitrary classification of treasury bonds as deposit
substitutes, respondent CIR not only amended and expanded the
NIRC,but effectively imposed a new tax on privately-placed treasury
bonds." 108 Petitioners-intervenors RCBC and RCBC Capital further
argue that the 2011 BIR Ruling will cause substantial impairment of
their vested rights 109 under the Bonds since the ruling imposes new
conditions by "subjecting the PEACe Bonds to the twenty percent
(20%) final withholding tax notwithstanding the fact that the terms and
conditions thereof as previously represented by the Government,
through respondents BTr and BIR, expressly state that it is not subject
to final withholding tax upon their maturity." 110 They added that "[t]he
exemption from the twenty percent (20%) final withholding tax [was]
the primary inducement and principal consideration for [their]
participat[ion] in the auction and underwriting of the PEACe Bonds."
111 TAIDHa
Like petitioners, petitioners-intervenors RCBC and RCBC Capital also
contend that respondent Commissioner of Internal Revenue violated
their rights to due process when she arbitrarily issued the 2011 BIR
Ruling without prior notice and hearing, and the oppressive timing of
such ruling deprived them of the opportunity to challenge the same.
112
Assuming the 20% final withholding tax was due on the PEACe
Bonds, petitioners-intervenors RCBC and RCBC Capital claim that
respondents Bureau of Treasury and CODE-NGO should be held
liable "as [these] parties explicitly represented . . . that the said bonds
are exempt from the final withholding tax." 113
Finally, petitioners-intervenors RCBC and RCBC Capital argue that
"the implementation of the [2011 assailed BIR Ruling and BIR Ruling
No. DA 378-2011] will have pernicious effects on the integrity of
existing securities, which is contrary to the State policies of stabilizing
the financial system and of developing capital markets." 114
For its part, CODE-NGO argues that: (a) the 2011 BIR Ruling and BIR
Ruling No. DA 378-2011 are "invalid because they contravene
Section 22 (Y) of the 1997 [NIRC] when the said rulings disregarded
the applicability of the '20 or more lender' rule to government debt
instruments"[;] 115 (b) "when [it] sold the PEACe Bonds in the
secondary market instead of holding them until maturity, [it] derived .
. . long-term trading gain[s], not interest income, which [are] exempt .
. . under Section 32 (B) (7) (g) of the 1997 NIRC"[;] 116 (c) "the tax
exemption privilege relating to the issuance of the PEACe Bonds
partakes of a contractual commitment granted by the Government in
exchange for a valid and material consideration [i.e., the issue price
paid and savings in borrowing cost derived by the Government,] thus
protected by the non-impairment clause of the 1987 Constitution"[;]
117 and (d) the 2004, 2005, and 2011 BIR Rulings "did not validly
revoke the 2001 BIR Rulings since no notice of revocation was issued
to [it], RCBC and [RCBC Capital] and petitioners[-bondholders], nor
was there any BIR administrative guidance issued and published[.]"
118 CODE-NGO additionally argues that impleading it in a Rule 65
petition was improper because: (a) it involves determination of a
factual question; 119 and (b) it is premature and states no cause of
action as it amounts to an anticipatory third-party claim. 120
Arguments of respondents
Respondents argue that petitioners' direct resort to this court to
challenge the 2011 BIR Ruling violates the doctrines of exhaustion of
administrative remedies and hierarchy of courts, resulting in a lack of
cause of action that justifies the dismissal of the petition. 121
According to them, "the jurisdiction to review the rulings of the
[Commissioner of Internal Revenue], after the aggrieved party
exhausted the administrative remedies, pertains to the Court of Tax
Appeals." 122 They point out that "a case similar to the present
Petition was [in fact] filed with the CTA on October 13, 2011[,]
[docketed as] CTA Case No. 8351 [and] entitled, 'Rizal Commercial
Banking Corporation and RCBC Capital Corporation vs.
Commissioner of Internal Revenue, et al.'" 123
Respondents further take issue on the timeliness of the filing of the
petition and petitions-in-intervention. 124 They argue that under the
guise of mainly assailing the 2011 BIR Ruling, petitioners are
indirectly attacking the 2004 and 2005 BIR Rulings, of which the
attack is legally prohibited, and the petition insofar as it seeks to nullify
the 2004 and 2005 BIR Rulings was filed way out of time pursuant to
Rule 65, Section 4. 125
Respondents contend that the discount/interest income derived from
the PEACe Bonds is not a trading gain but interest income subject to
income tax. 126 They explain that "[w]ith the payment of the PhP35
Billion proceeds on maturity of the PEACe Bonds, Petitioners receive
an amount of money equivalent to about PhP24.8 Billion as payment
for interest. Such interest is clearly an income of the Petitioners
considering that the same is a flow of wealth and not merely a return
of capital — the capital initially invested in the Bonds being
approximately PhP10.2 Billion[.]" 127
Maintaining that the imposition of the 20% final withholding tax on the
PEACe Bonds does not constitute an impairment of the obligations of
contract, respondents aver that: "The BTr has no power to
contractually grant a tax exemption in favour of Petitioners thus the
2001 BIR Rulings cannot be considered a material term of the
Bonds"[;] 128 "[t]here has been no change in the laws governing the
taxability of interest income from deposit substitutes and said laws are
read into every contract"[;] 129 "[t]he assailed BIR Rulings merely
interpret the term "deposit substitute" in accordance with the letter and
spirit of the Tax Code"[;] 130 "[t]he withholding of the 20% FWT does
not result in a default by the Government as the latter performed its
obligations to the bondholders in full"[;] 131 and "[i]f there was a
breach of contract or a misrepresentation it was between
RCBC/CODE-NGO/RCBC Cap and the succeeding purchasers of the
PEACe Bonds." 132
Similarly, respondents counter that the withholding of "[t]he 20% final issuing injunctions to restrain the collection of any national internal
withholding tax on the PEACe Bonds does not amount to a deprivation revenue tax imposed by the Tax Code." 152
of property without due process of law." 133 Their imposition of the
20% final withholding tax is not arbitrary because they were only
performing a duty imposed by law; 134 "[t]he 2011 BIR Ruling is an
interpretative rule which merely interprets the meaning of deposit Summary of arguments
substitutes [and upheld] the earlier construction given to the term by
the 2004 and 2005 BIR Rulings." 135 Hence, respondents argue that In sum, petitioners and petitioners-intervenors, namely, RCBC, RCBC
"there was no need to observe the requirements of notice, hearing, Capital, and CODE-NGO argue that:
and publication[.]" 136 TCaADS

1. The 2011 BIR Ruling is ultra vires because it is contrary to the 1997
Nonetheless, respondents add that "there is every reason to believe National Internal Revenue Code when it declared that all government
that Petitioners — all major financial institutions equipped with both debt instruments are deposit substitutes regardless of the 20-lender
internal and external accounting and compliance departments as well rule; and
as access to both internal and external legal counsel; actively involved
in industry organizations such as the Bankers Association of the
Philippines and the Capital Market Development Council; all actively 2. The 2011 BIR Ruling cannot be applied retroactively because:
taking part in the regular and special debt issuances of the BTr and
indeed regularly proposing products for issue by BTr — had actual
notice of the 2004 and 2005 BIR Rulings." 137 Allegedly, "the sudden
and drastic drop — including virtually zero trading for extended a) It will violate the contract clause;
periods of six months to almost a year — in the trading volume of the
PEACe Bonds after the release of BIR Ruling No. 007-04 on July 16,
2004 tend to indicate that market participants, including the
Petitioners herein, were aware of the ruling and its consequences for • It constitutes a unilateral amendment of a material term (tax exempt
the PEACe Bonds." 138 status) in the Bonds, represented by the government as an
inducement and important consideration for the purchase of the
Bonds;

Moreover, they contend that the assailed 2011 BIR Ruling is a valid
exercise of the Commissioner of Internal Revenue's rule-making
power; 139 that it and the 2004 and 2005 BIR Rulings did not unduly b) It constitutes deprivation of property without due process because
expand the definition of deposit substitutes by creating an there was no prior notice to bondholders and hearing and publication;
unwarranted exception to the requirement of having 20 or more
lenders/purchasers; 140 and the word "any" in Section 22 (Y) of the
National Internal Revenue Code plainly indicates that the period
contemplated is the entire term of the bond and not merely the point c) It violates the rule on non-retroactivity under the 1997 National
of origination or issuance. 141 Internal Revenue Code;

Respondents further argue that a retroactive application of the 2011 d) It violates the constitutional provision on supporting activities of
BIR Ruling will not unjustifiably prejudice petitioners. 142 "[W]ith or non-government organizations and development of the capital
market; and
without the 2011 BIR Ruling, Petitioners would be liable to pay a 20%
final withholding tax just the same because the PEACe Bonds in their
possession are legally in the nature of deposit substitutes subject to a
20% final withholding tax under the NIRC." 143 Section 7 of DOF e) The assessment had already prescribed. TASCDI
Department Order No. 141-95 also provides that income derived from
Treasury bonds is subject to the 20% final withholding tax. 144
"[W]hile revenue regulations as a general rule have no retroactive
effect, if the revocation is due to the fact that the regulation is Respondents counter that:
erroneous or contrary to law, such revocation shall have retroactive
operation as to affect past transactions, because a wrong construction
of the law cannot give rise to a vested right that can be invoked by a
taxpayer." 145 1) Respondent Commissioner of Internal Revenue did not act with
grave abuse of discretion in issuing the challenged 2011 BIR Ruling:

Finally, respondents submit that "there are a number of variables and

factors affecting a capital market." 146 "[C]apital market itself is a. The 2011 BIR Ruling, being an interpretative rule, was issued by
inherently unstable." 147 Thus, "[p]etitioners' argument that the 20% virtue of the Commissioner of Internal Revenue's power to interpret
final withholding tax . . . will wreak havoc on the financial stability of the provisions of the 1997 National Internal Revenue Code and other
the country is a mere supposition that is not a justiciable issue." 148 tax laws;

On the prayer for the temporary restraining order, respondents argue b. Commissioner of Internal Revenue merely restates and confirms
that this order "could no longer be implemented [because] the acts the interpretations contained in previously issued BIR Ruling Nos.
sought to be enjoined are already fait accompli." 149 They add that 007-2004, DA-491-04, and 008-05, which have already effectively
"to disburse the funds withheld to the Petitioners at this time would abandoned or revoked the 2001 BIR Rulings;
violate Section 29[,] Article VI of the Constitution prohibiting 'money
being paid out of the Treasury except in pursuance of an appropriation
made by law[.]'" 150 "The remedy of petitioners is to claim a tax refund
c. Commissioner of Internal Revenue is not bound by his or her
under Section 204 (c) of the Tax Code should their position be upheld
predecessor's rulings especially when the latter's rulings are not in
by the Honorable Court." 151
harmony with the law; and

Respondents also argue that "the implementation of the TRO would

d. The wrong construction of the law that the 2001 BIR Rulings have
violate Section 218 of the Tax Code in relation to Section 11 of
perpetrated cannot give rise to a vested right. Therefore, the 2011 BIR
Republic Act No. 1125 (as amended by Section 9 of Republic Act No.
Ruling can be given retroactive effect.
9282) which prohibits courts, except the Court of Tax Appeals, from
2) Rule 65 can be resorted to only if there is no appeal or any plain,
speedy, and adequate remedy in the ordinary course of law:
a. Petitioners had the basic remedy of filing a claim for refund of the
20% final withholding tax they allege to have been wrongfully
collected; and
b. Non-observance of the doctrine of exhaustion of administrative
remedies and of hierarchy of courts.
Court's ruling
Procedural Issues
Non-exhaustion of
administrative remedies proper
Under Section 4 of the 1997 National Internal Revenue Code,
interpretative rulings are reviewable by the Secretary of Finance.
SEC. 4. Power of the Commissioner to Interpret Tax Laws and to
Decide Tax Cases. — The power to interpret the provisions of this
Code and other tax laws shall be under the exclusive and original
jurisdiction of the Commissioner, subject to review by the Secretary of
Finance. (Emphasis supplied)
Thus, it was held that "[i]f superior administrative officers [can] grant
the relief prayed for, [then] special civil actions are generally not
entertained." 153 The remedy within the administrative machinery
must be resorted to first and pursued to its appropriate conclusion
before the court's judicial power can be sought. 154
Nonetheless, jurisprudence allows certain exceptions to the rule on
exhaustion of administrative remedies:
[The doctrine of exhaustion of administrative remedies] is a relative
one and its flexibility is called upon by the peculiarity and uniqueness
of the factual and circumstantial settings of a case. Hence, it is
disregarded (1) when there is a violation of due process, (2) when the
issue involved is purely a legal question, 155 (3) when the
administrative action is patently illegal amounting to lack or excess of
jurisdiction, (4) when there is estoppel on the part of the administrative
agency concerned, (5) when there is irreparable injury, (6) when the
respondent is a department secretary whose acts as an alter ego of
the President bears the implied and assumed approval of the latter,
(7) when to require exhaustion of administrative remedies would be
unreasonable, (8) when it would amount to a nullification of a claim,
(9) when the subject matter is a private land in land case proceedings,
(10) when the rule does not provide a plain, speedy and adequate
remedy, (11) when there are circumstances indicating the urgency of
judicial intervention. 156 (Emphasis supplied, citations omitted)
The exceptions under (2) and (11) are present in this case. The
question involved is purely legal, namely: (a) the interpretation of the
20-lender rule in the definition of the terms public and deposit
substitutes under the 1997 National Internal Revenue Code; and (b)
whether the imposition of the 20% final withholding tax on the PEACe
Bonds upon maturity violates the constitutional provisions on non-
impairment of contracts and due process. Judicial intervention is
likewise urgent with the impending maturity of the PEACe Bonds on
October 18, 2011.
The rule on exhaustion of administrative remedies also finds no
application when the exhaustion will result in an exercise in futility.
157
In this case, an appeal to the Secretary of Finance from the
questioned 2011 BIR Ruling would be a futile exercise because it was
upon the request of the Secretary of Finance that the 2011 BIR Ruling
was issued by the Bureau of Internal Revenue. It appears that the
Secretary of Finance adopted the Commissioner of Internal
Revenue's opinions as his own. 158 This position was in fact
confirmed in the letter 159 dated October 10, 2011 where he ordered
the Bureau of Treasury to withhold the amount corresponding to the
20% final withholding tax on the interest or discounts allegedly due
from the bondholders on the strength of the 2011 BIR Ruling.
Doctrine on hierarchy of courts
We agree with respondents that the jurisdiction to review the rulings
of the Commissioner of Internal Revenue pertains to the Court of Tax
Appeals. The questioned BIR Ruling Nos. 370-2011 and DA 378-2011
were issued in connection with the implementation of the 1997
National Internal Revenue Code on the taxability of the interest
income from zero-coupon bonds issued by the government.
Under Republic Act No. 1125 (An Act Creating the Court of Tax
Appeals), as amended by Republic Act No. 9282, 160 such rulings of
the Commissioner of Internal Revenue are appealable to that court,
thus:
SEC. 7. Jurisdiction. — The CTA shall exercise:
a. Exclusive appellate jurisdiction to review by appeal, as herein
provided:
1. Decisions of the Commissioner of Internal Revenue in cases
involving disputed assessments, refunds of internal revenue taxes,
fees or other charges, penalties in relation thereto, or other matters
arising under the National Internal Revenue or other laws
administered by the Bureau of Internal Revenue;
xxx xxx xxx
SEC. 11. Who May Appeal; Mode of Appeal; Effect of Appeal. — Any
party adversely affected by a decision, ruling or inaction of the
Commissioner of Internal Revenue, the Commissioner of Customs,
the Secretary of Finance, the Secretary of Trade and Industry or the
Secretary of Agriculture or the Central Board of Assessment Appeals
or the Regional Trial Courts may file an appeal with the CTA within
thirty (30) days after the receipt of such decision or ruling or after the
expiration of the period fixed by law for action as referred to in Section
7(a)(2) herein. TaDSCA
xxx xxx xxx
SEC. 18. Appeal to the Court of Tax Appeals En Banc. — No civil
proceeding involving matters arising under the National Internal
Revenue Code, the Tariff and Customs Code or the Local
Government Code shall be maintained, except as herein provided,
until and unless an appeal has been previously filed with the CTA and
disposed of in accordance with the provisions of this Act.
In Commissioner of Internal Revenue v. Leal, 161 citing Rodriguez
Blaquera, 162 this court emphasized the jurisdiction of the Court of
Tax Appeals over rulings of the Bureau of Internal Revenue, thus:
While the Court of Appeals correctly took cognizance of the petition
for certiorari, however, let it be stressed that the jurisdiction to review
the rulings of the Commissioner of Internal Revenue pertains to the
Court of Tax Appeals, not to the RTC.
The questioned RMO No. 15-91 and RMC No. 43-91 are actually
rulings or opinions of the Commissioner implementing the Tax Code
on the taxability of pawnshops. . . .
xxx xxx xxx
Such revenue orders were issued pursuant to petitioner's powers
under Section 245 of the Tax Code,which states:
"SEC. 245. Authority of the Secretary of Finance to promulgate rules
and regulations. — The Secretary of Finance, upon recommendation
of the Commissioner, shall promulgate all needful rules and
regulations for the effective enforcement of the provisions of this
Code.
The authority of the Secretary of Finance to determine articles similar
or analogous to those subject to a rate of sales tax under certain
category enumerated in Sections 163 and 165 of this Code shall be
without prejudice to the power of the Commissioner of Internal
Revenue to make rulings or opinions in connection with the
implementation of the provisions of internal revenue laws, including
ruling on the classification of articles of sales and similar purposes."
(Emphasis in the original)
xxx xxx xxx
The Court, in Rodriguez, etc. vs. Blaquera, etc., ruled:
"Plaintiff maintains that this is not an appeal from a ruling of the
Collector of Internal Revenue, but merely an attempt to nullify General
Circular No. V-148, which does not adjudicate or settle any
controversy, and that, accordingly, this case is not within the
jurisdiction of the Court of Tax Appeals.
We find no merit in this pretense. General Circular No. V-148 directs
the officers charged with the collection of taxes and license fees to
adhere strictly to the interpretation given by the defendant to the
statutory provisions abovementioned, as set forth in the Circular. The
same incorporates, therefore, a decision of the Collector of Internal
Revenue (now Commissioner of Internal Revenue) on the manner of
enforcement of the said statute, the administration of which is
entrusted by law to the Bureau of Internal Revenue. As such, it comes
within the purview of Republic Act No. 1125, Section 7 of which
provides that the Court of Tax Appeals 'shall exercise exclusive
appellate jurisdiction to review by appeal . . . decisions of the Collector
of Internal Revenue in . . . matters arising under the National Internal
Revenue Code or other law or part of the law administered by the
Bureau of Internal Revenue. '" 163
In exceptional cases, however, this court entertained direct recourse
to it when "dictated by public welfare and the advancement of public
policy, or demanded by the broader interest of justice, or the orders
complained of were found to be patent nullities, or the appeal was
considered as clearly an inappropriate remedy." 164
In Philippine Rural Electric Cooperatives Association, Inc.
(PHILRECA) v. The Secretary, Department of Interior and Local
Government, 165 this court noted that the petition for prohibition was
filed directly before it "in disregard of the rule on hierarchy of courts.
However, [this court] opt[ed] to take primary jurisdiction over the . . .
petition and decide the same on its merits in view of the significant
constitutional issues raised by the parties dealing with the tax
treatment of cooperatives under existing laws and in the interest of
speedy justice and prompt disposition of the matter." 166
Here, the nature and importance of the issues raised 167 to the
investment and banking industry with regard to a definitive declaration
of whether government debt instruments are deposit substitutes
under existing laws, and the novelty thereof, constitute exceptional
and compelling circumstances to justify resort to this court in the first
instance. SHEIDC
The tax provision on deposit substitutes affects not only the PEACe
Bonds but also any other financial instrument or product that may be
issued and traded in the market. Due to the changing positions of the
Bureau of Internal Revenue on this issue, there is a need for a final
ruling from this court to stabilize the expectations in the financial
market.
Finally, non-compliance with the rules on exhaustion of administrative
remedies and hierarchy of courts had been rendered moot by this
court's issuance of the temporary restraining order enjoining the
implementation of the 2011 BIR Ruling. The temporary restraining
order effectively recognized the urgency and necessity of direct resort
to this court.
Substantive issues
Tax treatment of deposit
substitutes
Under Sections 24 (B) (1), 27 (D) (1), and 28 (A) (7) of the 1997
National Internal Revenue Code, a final withholding tax at the rate of
20% is imposed on interest on any currency bank deposit and yield or
any other monetary benefit from deposit substitutes and from trust
funds and similar arrangements. These provisions read:
SEC. 24. Income Tax Rates. —
xxx xxx xxx
(B) Rate of Tax on Certain Passive Income.
(1) Interests, Royalties, Prizes, and Other Winnings. — A final tax at
the rate of twenty percent (20%) is hereby imposed upon the amount
of interest from any currency bank deposit and yield or any other
monetary benefit from deposit substitutes and from trust funds and
similar arrangements; . . . Provided, further, That interest income from
long-term deposit or investment in the form of savings, common or
individual trust funds, deposit substitutes, investment management
accounts and other investments evidenced by certificates in such form
prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt
from the tax imposed under this Subsection: Provided, finally, That
should the holder of the certificate pre-terminate the deposit or
investment before the fifth (5th) year, a final tax shall be imposed on
the entire income and shall be deducted and withheld by the
depository bank from the proceeds of the long-term deposit or
investment certificate based on the remaining maturity thereof:
Four (4) years to less than five (5) years — 5%;
Three (3) years to less than four (4) years — 12%; and
Less than three (3) years — 20%. (Emphasis supplied)
SEC. 27. Rates of Income Tax on Domestic Corporations. —
xxx xxx xxx
(D) Rates of Tax on Certain Passive Incomes. —
(1) Interest from Deposits and Yield or any other Monetary Benefit
from Deposit Substitutes and from Trust Funds and Similar
Arrangements, and Royalties. — A final tax at the rate of twenty
percent (20%) is hereby imposed upon the amount of interest on
currency bank deposit and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar arrangements
received by domestic corporations, and royalties, derived from
sources within the Philippines: Provided, however, That interest
income derived by a domestic corporation from a depository bank
under the expanded foreign currency deposit system shall be subject
to a final income tax at the rate of seven and one-half percent (7 1/2%)
of such interest income. (Emphasis supplied)
SEC. 28. Rates of Income Tax on Foreign Corporations. —
(A) Tax on Resident Foreign Corporations. —
xxx xxx xxx
(7) Tax on Certain Incomes Received by a Resident Foreign
Corporation. —
(a) Interest from Deposits and Yield or any other Monetary Benefit
from Deposit Substitutes, Trust Funds and Similar Arrangements and
Royalties. — Interest from any currency bank deposit and yield or any
other monetary benefit from deposit substitutes and from trust funds
and similar arrangements and royalties derived from sources within
the Philippines shall be subject to a final income tax at the rate of
twenty percent (20%) of such interest: Provided, however, That
interest income derived by a resident foreign corporation from a
depository bank under the expanded foreign currency deposit system
shall be subject to a final income tax at the rate of seven and one-half
percent (7 1/2%) of such interest income. (Emphasis supplied)
aDECHI
This tax treatment of interest from bank deposits and yield from
deposit substitutes was first introduced in the 1977 National Internal
Revenue Code through Presidential Decree No. 1739 168 issued in
1980. Later, Presidential Decree No. 1959, effective on October 15,
1984, formally added the definition of deposit substitutes, viz.:
(y) 'Deposit substitutes' shall mean an alternative form of obtaining
funds from the public, other than deposits, through the issuance,
endorsement, or acceptance of debt instruments for the borrower's
own account, for the purpose of relending or purchasing of
receivables and other obligations, or financing their own needs or the
needs of their agent or dealer. These promissory notes, repurchase
agreements, certificates of assignment or participation and similar
instrument with recourse as may be authorized by the Central Bank
of the Philippines, for banks and non-bank financial intermediaries or
by the Securities and Exchange Commission of the Philippines for
commercial, industrial, finance companies and either non-financial
companies: Provided, however, that only debt instruments issued for
inter-bank call loans to cover deficiency in reserves against deposit
liabilities including those between or among banks and quasi-banks
shall not be considered as deposit substitute debt instruments.
(Emphasis supplied)
Revenue Regulations No. 17-84, issued to implement Presidential
Decree No. 1959, adopted verbatim the same definition and
specifically identified the following borrowings as "deposit
substitutes":
SECTION 2. Definitions of Terms. — . . .
(h) "Deposit substitutes" shall mean —
xxx xxx xxx
(a) All interbank borrowings by or among banks and non-bank
financial institutions authorized to engage in quasi-banking functions
evidenced by deposit substitutes instruments, except interbank call
loans to cover deficiency in reserves against deposit liabilities as
evidenced by interbank loan advice or repayment transfer tickets.
(b) All borrowings of the national and local government and its
instrumentalities including the Central Bank of the Philippines,
evidenced by debt instruments denoted as treasury bonds, bills,
notes, certificates of indebtedness and similar instruments.
(c) All borrowings of banks, non-bank financial intermediaries, finance
companies, investment companies, trust companies, including the
trust department of banks and investment houses, evidenced by
deposit substitutes instruments. (Emphasis supplied)
The definition of deposit substitutes was amended under the 1997
National Internal Revenue Code with the addition of the qualifying
phrase for public — borrowing from 20 or more individual or corporate
lenders at any one time. Under Section 22 (Y), deposit substitute is
defined thus:
SEC. 22. Definitions. — When used in this Title:
xxx xxx xxx
(Y) The term 'deposit substitutes' shall mean an alternative form of
obtaining funds from the public (the term 'public' means borrowing
from twenty (20) or more individual or corporate lenders at any one
time) other than deposits, through the issuance, endorsement, or
acceptance of debt instruments for the borrower's own account, for
the purpose of relending or purchasing of receivables and other
obligations, or financing their own needs or the needs of their agent
or dealer. These instruments may include, but need not be limited to,
bankers' acceptances, promissory notes, repurchase agreements,
including reverse repurchase agreements entered into by and
between the Bangko Sentral ng Pilipinas (BSP) and any authorized
agent bank, certificates of assignment or participation and similar
instruments with recourse: Provided, however, That debt instruments
issued for interbank call loans with maturity of not more than five (5)
days to cover deficiency in reserves against deposit liabilities,
including those between or among banks and quasi-banks, shall not
be considered as deposit substitute debt instruments. (Emphasis
supplied)
Under the 1997 National Internal Revenue Code, Congress
specifically defined "public" to mean "twenty (20) or more individual or
corporate lenders at any one time." Hence, the number of lenders is
determinative of whether a debt instrument should be considered a
deposit substitute and consequently subject to the 20% final
withholding tax.
20-lender rule
Petitioners contend that "there [is] only one (1) lender (i.e., RCBC) to
whom the BTr issued the Government Bonds." 169 On the other hand,
respondents theorize that the word "any" "indicates that the period
contemplated is the entire term of the bond and not merely the point
of origination or issuance[,]" 170 such that if the debt instruments
"were subsequently sold in secondary markets and so on, in such a
way that twenty (20) or more buyers eventually own the instruments,
then it becomes indubitable that funds would be obtained from the
"public" as defined in Section 22 (Y) of the NIRC." 171 Indeed, in the
context of the financial market, the words "at any one time" create an
ambiguity. aTCADc
Financial markets
Financial markets provide the channel through which funds from the
surplus units (households and business firms that have savings or
excess funds) flow to the deficit units (mainly business firms and
government that need funds to finance their operations or growth).
They bring suppliers and users of funds together and provide the
means by which the lenders transform their funds into financial assets,
and the borrowers receive these funds now considered as their
financial liabilities. The transfer of funds is represented by a security,
such as stocks and bonds. Fund suppliers earn a return on their
investment; the return is necessary to ensure that funds are supplied
to the financial markets. 172
"The financial markets that facilitate the transfer of debt securities are
commonly classified by the maturity of the securities[,]" 173 namely:
(1) the money market, which facilitates the flow of short-term funds
(with maturities of one year or less); and (2) the capital market, which
facilitates the flow of long-term funds (with maturities of more than one
year). 174
Whether referring to money market securities or capital market
securities, transactions occur either in the primary market or in the
secondary market. 175 "Primary markets facilitate the issuance of
new securities. Secondary markets facilitate the trading of existing
securities, which allows for a change in the ownership of the
securities." 176 The transactions in primary markets exist between
issuers and investors, while secondary market transactions exist
among investors. 177
"Over time, the system of financial markets has evolved from simple
to more complex ways of carrying out financial transactions." 178 Still,
all systems perform one basic function: the quick mobilization of
money from the lenders/investors to the borrowers. 179
Fund transfers are accomplished in three ways: (1) direct finance; (2)
semidirect finance; and (3) indirect finance. 180
With direct financing, the "borrower and lender meet each other and
exchange funds in return for financial assets" 181 (e.g., purchasing
bonds directly from the company issuing them). This method provides
certain limitations such as: (a) "both borrower and lender must desire
to exchange the same amount of funds at the same time"[;] 182 and
(b) "both lender and borrower must frequently incur substantial
information costs simply to find each other." 183
In semidirect financing, a securities broker or dealer brings surplus
and deficit units together, thereby reducing information costs. 184 A
broker 185 is "an individual or financial institution who provides
information concerning possible purchases and sales of securities.
Either a buyer or a seller of securities may contact a broker, whose
job is simply to bring buyers and sellers together." 186 A dealer 187
"also serves as a middleman between buyers and sellers, but the
dealer actually acquires the seller's securities in the hope of selling
them at a later time at a more favorable price." 188 Frequently, "a
dealer will split up a large issue of primary securities into smaller units
affordable by . . . buyers . . . and thereby expand the flow of savings
into investment." 189 In semidirect financing, "[t]he ultimate lender still
winds up holding the borrower's securities, and therefore the lender
must be willing to accept the risk, liquidity, and maturity characteristics
of the borrower's [debt security]. There still must be a fundamental
coincidence of wants and needs between [lenders and borrowers] for
semidirect financial transactions to take place." 190
"The limitations of both direct and semidirect finance stimulated the
development of indirect financial transactions, carried out with the
help of financial intermediaries" 191 or financial institutions, like
banks, investment banks, finance companies, insurance companies,
and mutual funds. 192 Financial intermediaries accept funds from
surplus units and channel the funds to deficit units. 193 "Depository
institutions [such as banks] accept deposits from surplus units and
provide credit to deficit units through loans and purchase of [debt]
securities." 194 Nondepository institutions, like mutual funds, issue
securities of their own (usually in smaller and affordable
denominations) to surplus units and at the same time purchase debt
securities of deficit units. 195 "By pooling the resources of [small
savers, a financial intermediary] can service the credit needs of large
firms simultaneously." 196
The financial market, therefore, is an agglomeration of financial
transactions in securities performed by market participants that works
to transfer the funds from the surplus units (or investors/lenders) to
those who need them (deficit units or borrowers).
Meaning of "at any one time"
Thus, from the point of view of the financial market, the phrase "at any
one time" for purposes of determining the "20 or more lenders" would
mean every transaction executed in the primary or secondary market
in connection with the purchase or sale of securities.
For example, where the financial assets involved are government
securities like bonds, the reckoning of "20 or more lenders/investors"
is made at any transaction in connection with the purchase or sale of
the Government Bonds, such as: AcaEDC
1. Issuance by the Bureau of Treasury of the bonds to GSEDs in the
primary market;
2. Sale and distribution by GSEDs to various lenders/investors in the
secondary market;
3. Subsequent sale or trading by a bondholder to another
lender/investor in the secondary market usually through a broker or
dealer; or
4. Sale by a financial intermediary-bondholder of its participation
interests in the bonds to individual or corporate lenders in the
secondary market.
When, through any of the foregoing transactions, funds are
simultaneously obtained from 20 or more lenders/investors, there is
deemed to be a public borrowing and the bonds at that point in time
are deemed deposit substitutes. Consequently, the seller is required
to withhold the 20% final withholding tax on the imputed interest
income from the bonds.
For debt instruments that are
not deposit substitutes, regular
income tax applies
It must be emphasized, however, that debt instruments that do not
qualify as deposit substitutes under the 1997 National Internal
Revenue Code are subject to the regular income tax.
The phrase "all income derived from whatever source" in Chapter VI,
Computation of Gross Income, Section 32 (A) of the 1997 National
Internal Revenue Code discloses a legislative policy to include all
income not expressly exempted as within the class of taxable income
under our laws.
"The definition of gross income is broad enough to include all passive
incomes subject to specific tax rates or final taxes." 197 Hence,
interest income from deposit substitutes are necessarily part of
taxable income. "However, since these passive incomes are already
subject to different rates and taxed finally at source, they are no longer
included in the computation of gross income, which determines
taxable income." 198 "Stated otherwise . . . if there were no
withholding tax system in place in this country, this 20 percent portion
of the 'passive' income of [creditors/lenders] would actually be paid to
the [creditors/lenders] and then remitted by them to the government
in payment of their income tax." 199
This court, in Chamber of Real Estate and Builders' Associations, Inc.
v. Romulo, 200 explained the rationale behind the withholding tax
system:
The withholding [of tax at source] was devised for three primary
reasons: first, to provide the taxpayer a convenient manner to meet
his probable income tax liability; second, to ensure the collection of
income tax which can otherwise be lost or substantially reduced
through failure to file the corresponding returns[;] and third, to improve
the government's cash flow. This results in administrative savings,
prompt and efficient collection of taxes, prevention of delinquencies
and reduction of governmental effort to collect taxes through more
complicated means and remedies. 201 (Citations omitted)
"The application of the withholdings system to interest on bank
deposits or yield from deposit substitutes is essentially to maximize
and expedite the collection of income taxes by requiring its payment
at the source." 202
Hence, when there are 20 or more lenders/investors in a transaction
for a specific bond issue, the seller is required to withhold the 20%
final income tax on the imputed interest income from the bonds.
Interest income v. gains from sale or redemption
The interest income earned from bonds is not synonymous with the
"gains" contemplated under Section 32 (B) (7) (g) 203 of the 1997
National Internal Revenue Code, which exempts gains derived from
trading, redemption, or retirement of long-term securities from
ordinary income tax.
The term "gain" as used in Section 32 (B) (7) (g) does not include
interest, which represents forbearance for the use of money. Gains
from sale or exchange or retirement of bonds or other certificate of
indebtedness fall within the general category of "gains derived from
dealings in property" under Section 32 (A) (3), while interest from
bonds or other certificate of indebtedness falls within the category of
"interests" under Section 32 (A) (4). 204 The use of the term "gains
from sale" in Section 32 (B) (7) (g) shows the intent of Congress not
to include interest as referred under Sections 24, 25, 27, and 28 in the
exemption. 205
Hence, the "gains" contemplated in Section 32 (B) (7) (g) refers to: (1)
gain realized from the trading of the bonds before their maturity date,
which is the difference between the selling price of the bonds in the
secondary market and the price at which the bonds were purchased
by the seller; and (2) gain realized by the last holder of the bonds
when the bonds are redeemed at maturity, which is the difference
between the proceeds from the retirement of the bonds and the price
at which such last holder acquired the bonds. For discounted
instruments, like the zero-coupon bonds, the trading gain shall be the
excess of the selling price over the book value or accreted value
(original issue price plus accumulated discount from the time of
purchase up to the time of sale) of the instruments. 206 SDcITH
The Bureau of Internal
Revenue rulings
The Bureau of Internal Revenue's interpretation as expressed in the
three 2001 BIR Rulings is not consistent with law. 207 Its
interpretation of "at any one time" to mean at the point of origination
alone is unduly restrictive.
BIR Ruling No. 370-2011 is likewise erroneous insofar as it stated
(relying on the 2004 and 2005 BIR Rulings) that "all treasury bonds .
. . regardless of the number of purchasers/lenders at the time of
origination/issuance are considered deposit substitutes." 208 Being
the subject of this petition, it is, thus, declared void because it
completely disregarded the 20 or more lender rule added by Congress
in the 1997 National Internal Revenue Code. It also created a
distinction for government debt instruments as against those issued
by private corporations when there was none in the law.
Tax statutes must be reasonably construed as to give effect to the
whole act. Their constituent provisions must be read together,
endeavoring to make every part effective, harmonious, and sensible.
209 That construction which will leave every word operative will be
favored over one that leaves some word, clause, or sentence
meaningless and insignificant. 210
It may be granted that the interpretation of the Commissioner of
Internal Revenue in charge of executing the 1997 National Internal
Revenue Code is an authoritative construction of great weight, but the
principle is not absolute and may be overcome by strong reasons to
the contrary. If through a misapprehension of law an officer has issued
an erroneous interpretation, the error must be corrected when the true
construction is ascertained.
In Philippine Bank of Communications v. Commissioner of Internal
Revenue, 211 this court upheld the nullification of Revenue
Memorandum Circular (RMC) No. 7-85 issued by the Acting
Commissioner of Internal Revenue because it was contrary to the
express provision of Section 230 of the 1977 National Internal
Revenue Code and, hence, "[cannot] be given weight for to do so
would, in effect, amend the statute." 212 Thus:
When the Acting Commissioner of Internal Revenue issued RMC 7-
85, changing the prescriptive period of two years to ten years on
claims of excess quarterly income tax payments, such circular created
a clear inconsistency with the provision of Sec. 230 of 1977 NIRC. In
so doing, the BIR did not simply interpret the law; rather it legislated
guidelines contrary to the statute passed by Congress.
It bears repeating that Revenue memorandum-circulars are
considered administrative rulings (in the sense of more specific and
less general interpretations of tax laws) which are issued from time to
time by the Commissioner of Internal Revenue. It is widely accepted
that the interpretation placed upon a statute by the executive officers,
whose duty is to enforce it, is entitled to great respect by the courts.
Nevertheless, such interpretation is not conclusive and will be ignored
if judicially found to be erroneous. Thus, courts will not countenance
administrative issuances that override, instead of remaining
consistent and in harmony with, the law they seek to apply and
implement. 213 (Citations omitted)
This court further held that "[a] memorandum-circular of a bureau
head could not operate to vest a taxpayer with a shield against judicial
action [because] there are no vested rights to speak of respecting a
wrong construction of the law by the administrative officials and such
wrong interpretation could not place the Government in estoppel to
correct or overrule the same." 214
In Commissioner of Internal Revenue v. Michel J. Lhuillier Pawnshop,
Inc., 215 this court nullified Revenue Memorandum Order (RMO) No.
15-91 and RMC No. 43-91, which imposed a 5% lending investor's
tax on pawnshops. 216 It was held that "the [Commissioner] cannot,
in the exercise of [its interpretative] power, issue administrative rulings
or circulars not consistent with the law sought to be applied. Indeed,
administrative issuances must not override, supplant or modify the
law, but must remain consistent with the law they intend to carry out.
Only Congress can repeal or amend the law." 217
In Misamis Oriental Association of Coco Traders, Inc. v. Department
of Finance Secretary, 218 this court stated that the Commissioner of
Internal Revenue is not bound by the ruling of his predecessors, 219
but, to the contrary, the overruling of decisions is inherent in the
interpretation of laws:
[I]n considering a legislative rule a court is free to make three inquiries:
(i) whether the rule is within the delegated authority of the
administrative agency; (ii) whether it is reasonable; and (iii) whether it
was issued pursuant to proper procedure. But the court is not free to
substitute its judgment as to the desirability or wisdom of the rule for
the legislative body, by its delegation of administrative judgment, has
committed those questions to administrative judgments and not to
judicial judgments. In the case of an interpretative rule, the inquiry is
not into the validity but into the correctness or propriety of the rule. As
a matter of power a court, when confronted with an interpretative rule,
is free to (i) give the force of law to the rule; (ii) go to the opposite
extreme and substitute its judgment; or (iii) give some intermediate
degree of authoritative weight to the interpretative rule.
In the case at bar, we find no reason for holding that respondent
Commissioner erred in not considering copra as an "agricultural food
product" within the meaning of § 103(b) of the NIRC. As the Solicitor
General contends, "copra per se is not food, that is, it is not intended
for human consumption. Simply stated, nobody eats copra for food."
That previous Commissioners considered it so, is not reason for
holding that the present interpretation is wrong. The Commissioner of
Internal Revenue is not bound by the ruling of his predecessors. To
the contrary, the overruling of decisions is inherent in the
interpretation of laws. 220 (Emphasis supplied, citations omitted)
TAIEcS
Tax treatment of income
derived from the PEACe Bonds
The transactions executed for the sale of the PEACe Bonds are:
1. The issuance of the P35 billion Bonds by the Bureau of Treasury to
RCBC/CODE-NGO at P10.2 billion; and
2. The sale and distribution by RCBC Capital (underwriter) on behalf
of CODE-NGO of the PEACe Bonds to undisclosed investors at
P11.996 billion.
It may seem that there was only one lender — RCBC on behalf of
CODE-NGO — to whom the PEACe Bonds were issued at the time of
origination. However, a reading of the underwriting agreement 221
and RCBC term sheet 222 reveals that the settlement dates for the
sale and distribution by RCBC Capital (as underwriter for CODE-
NGO) of the PEACe Bonds to various undisclosed investors at a
purchase price of approximately P11.996 would fall on the same day,
October 18, 2001, when the PEACe Bonds were supposedly issued
to CODE-NGO/RCBC. In reality, therefore, the entire P10.2 billion
borrowing received by the Bureau of Treasury in exchange for the P35
billion worth of PEACe Bonds was sourced directly from the
undisclosed number of investors to whom RCBC Capital/CODE-NGO
distributed the PEACe Bonds — all at the time of origination or
issuance. At this point, however, we do not know as to how many
investors the PEACe Bonds were sold to by RCBC Capital.
Should there have been a simultaneous sale to 20 or more
lenders/investors, the PEACe Bonds are deemed deposit substitutes
within the meaning of Section 22 (Y) of the 1997 National Internal
Revenue Code and RCBC Capital/CODE-NGO would have been
obliged to pay the 20% final withholding tax on the interest or discount
from the PEACe Bonds. Further, the obligation to withhold the 20%
final tax on the corresponding interest from the PEACe Bonds would
likewise be required of any lender/investor had the latter turned
around and sold said PEACe Bonds, whether in whole or part,
simultaneously to 20 or more lenders or investors.
We note, however, that under Section 24 223 of the 1997 National
Internal Revenue Code, interest income received by individuals from
long-term deposits or investments with a holding period of not less
than five (5) years is exempt from the final tax.
Thus, should the PEACe Bonds be found to be within the coverage of
deposit substitutes, the proper procedure was for the Bureau of
Treasury to pay the face value of the PEACe Bonds to the
bondholders and for the Bureau of Internal Revenue to collect the
unpaid final withholding tax directly from RCBC Capital/CODE-NGO,
or any lender or investor if such be the case, as the withholding
agents.
The collection of tax is not
barred by prescription
The three (3)-year prescriptive period under Section 203 of the 1997
National Internal Revenue Code to assess and collect internal
revenue taxes is extended to 10 years in cases of (1) fraudulent
returns; (2) false returns with intent to evade tax; and (3) failure to file
a return, to be computed from the time of discovery of the falsity, fraud,
or omission. Section 203 states:
SEC. 203. Period of Limitation Upon Assessment and Collection. —
Except as provided in Section 222, internal revenue taxes shall be
assessed within three (3) years after the last day prescribed by law
for the filing of the return, and no proceeding in court without
assessment for the collection of such taxes shall be begun after the
expiration of such period: Provided, That in a case where a return is
filed beyond the period prescribed by law, the three (3)-year period
shall be counted from the day the return was filed. For purposes of
this Section, a return filed before the last day prescribed by law for the
filing thereof shall be considered as filed on such last day. (Emphasis
supplied)
xxx xxx xxx
SEC. 222. Exceptions as to Period of Limitation of Assessment and
Collection of Taxes. —
(a) In the case of a false or fraudulent return with intent to evade tax
or of failure to file a return, the tax may be assessed, or a proceeding
in court for the collection of such tax may be filed without assessment,
at any time within ten (10) years after the discovery of the falsity, fraud
or omission: Provided, That in a fraud assessment which has become
final and executory, the fact of fraud shall be judicially taken
cognizance of in the civil or criminal action for the collection thereof.
Thus, should it be found that RCBC Capital/CODE-NGO sold the
PEACe Bonds to 20 or more lenders/investors, the Bureau of Internal
Revenue may still collect the unpaid tax from RCBC Capital/CODE-
NGO within 10 years after the discovery of the omission.
In view of the foregoing, there is no need to pass upon the other issues
raised by petitioners and petitioners-intervenors. TEaADS
The temporary restraining order enjoins the entire implementation of
the 2011 BIR Ruling that constitutes both the withholding and
remittance of the 20% final withholding tax to the Bureau of Internal
Revenue. Even though the Bureau of Treasury had already withheld
the 20% final withholding tax 237 when it received the temporary
restraining order, it had yet to remit the monies it withheld to the
Bureau of Internal Revenue, a remittance which was due only on
November 10, 2011. 238 The act enjoined by the temporary
restraining order had not yet been fully satisfied and was still
continuing.

Reiterative motion on the temporary restraining order
Respondents' withholding of the
20% final withholding tax on
October 18, 2011 was justified
Under the Rules of Court, court orders are required to be "served upon
the parties affected." 224 Moreover, service may be made personally
or by mail. 225 And, "[p]ersonal service is complete upon actual
delivery [of the order.]" 226 This court's temporary restraining order
was received only on October 19, 2011, or a day after the PEACe
Bonds had matured and the 20% final withholding tax on the interest
income from the same was withheld.
Under DOF-DBM Joint Circular No. 1-2000A 239 dated July 31, 2001
which prescribes to national government agencies such as the Bureau
of Treasury the procedure for the remittance of all taxes it withheld to
the Bureau of Internal Revenue, a national agency shall file before the
Bureau of Internal Revenue a Tax Remittance Advice (TRA)
supported by withholding tax returns on or before the 10th day of the
following month after the said taxes had been withheld. 240 The
Bureau of Internal Revenue shall transmit an original copy of the TRA
to the Bureau of Treasury, 241 which shall be the basis for recording
the remittance of the tax collection. 242 The Bureau of Internal
Revenue will then record the amount of taxes reflected in the TRA as
tax collection in the Journal of Tax Remittance by government
agencies based on its copies of the TRA. 243 Respondents did not
submit any withholding tax return or TRA to prove that the 20% final
withholding tax was indeed remitted by the Bureau of Treasury to the
Bureau of Internal Revenue on October 18, 2011.

Respondent Bureau of Treasury's Journal Entry Voucher No. 11-10-

10395 244 dated October 18, 2011 submitted to this court
Publication of news reports in the print and broadcast media, as well shows: AacSTE
as on the internet, is not a recognized mode of service of pleadings,
court orders, or processes. Moreover, the news reports 227 cited by Account
Debit Amount Credit Amount
petitioners were posted minutes before the close of office hours or Code
late in the evening of October 18, 2011, and they did not give the exact
contents of the temporary restraining order.
Bonds Payable-
442-360 35,000,000,000.00
L/T, Dom-Zero
"[O]ne cannot be punished for violating an injunction or an order for
an injunction unless it is shown that such injunction or order was
served on him personally or that he had notice of the issuance or
making of such injunction or order." 228 Coupon T/Bonds

At any rate, "[i]n case of doubt, a withholding agent may always (Peace Bonds) —
protect himself or herself by withholding the tax due" 229 and return 10 yr
the amount of the tax withheld should it be finally determined that the
income paid is not subject to withholding. 230 Hence, respondent
Bureau of Treasury was justified in withholding the amount Sinking Fund-
corresponding to the 20% final withholding tax from the proceeds of 198-001 30,033,792,203.59
Cash (BSF)
the PEACe Bonds, as it received this court's temporary restraining
order only on October 19, 2011, or the day after this tax had been Due to BIR 412-002 4,966,207,796.41
withheld.

To record
Respondents' retention of the redemption of
10yr Zero
amounts withheld is a defiance
coupon (Peace
of the temporary restraining Bond) net of the
20% final
order
withholding tax
Nonetheless, respondents' continued failure to release to petitioners
pursuant to BIR
the amount corresponding to the 20% final withholding tax in order
Ruling No.
that it may be placed in escrow as directed by this court constitutes a
defiance of this court's temporary restraining order. 231 TIDHCc 378-2011, value
date, October 18,
2011 per
The temporary restraining order is not moot. The acts sought to be
BTr letter
enjoined are not fait accompli. For an act to be considered fait
authority and BSP
accompli, the act must have already been fully accomplished and
Bank
consummated. 232 It must be irreversible, e.g., demolition of
properties, 233 service of the penalty of imprisonment, 234 and Statements.
hearings on cases. 235 When the act sought to be enjoined has not
yet been fully satisfied, and/or is still continuing in nature, 236 the
defense of fait accompli cannot prosper.
The foregoing journal entry, however, does not prove that the amount
of P4,966,207,796.41, representing the 20% final withholding tax on
the PEACe Bonds, was disbursed by it and remitted to the Bureau of
Internal Revenue on October 18, 2011. The entries merely show that
the monies corresponding to 20% final withholding tax was set aside
for remittance to the Bureau of Internal Revenue.
We recall the November 15, 2011 resolution issued by this court
directing respondents to "show cause why they failed to comply with
the [TRO]; and [to] comply with the [TRO] in order that petitioners may
place the corresponding funds in escrow pending resolution of the
petition." 245 The 20% final withholding tax was effectively placed in
custodia legis when this court ordered the deposit of the amount in
escrow. The Bureau of Treasury could still release the money withheld
to petitioners for the latter to place in escrow pursuant to this court's
directive. There was no legal obstacle to the release of the 20% final
withholding tax to petitioners.
Congressional appropriation is not required for the servicing of public
debts in view of the automatic appropriations clause embodied in
Presidential Decree Nos. 1177 and 1967.
Section 31 of Presidential Decree No. 1177 provides:
Section 31. Automatic Appropriations. — All expenditures for (a)
personnel retirement premiums, government service insurance, and
other similar fixed expenditures, (b) principal and interest on public
debt, (c) national government guarantees of obligations which are
drawn upon, are automatically appropriated: provided, that no
obligations shall be incurred or payments made from funds thus
automatically appropriated except as issued in the form of regular
budgetary allotments.
Section 1 of Presidential Decree No. 1967 states:
Section 1. There is hereby appropriated, out of any funds in the
National Treasury not otherwise appropriated, such amounts as may
be necessary to effect payments on foreign or domestic loans, or
foreign or domestic loans whereon creditors make a call on the direct
and indirect guarantee of the Republic of the Philippines, obtained by:
a. the Republic of the Philippines the proceeds of which were relent
to government-owned or controlled corporations and/or government
financial institutions;
b. government-owned or controlled corporations and/or government
financial institutions the proceeds of which were relent to public or
private institutions;
c. government-owned or controlled corporations and/or financial
institutions and guaranteed by the Republic of the Philippines;
d. other public or private institutions and guaranteed by government-
owned or controlled corporations and/or government financial
institutions.
The amount of P35 billion that includes the monies corresponding to
20% final withholding tax is a lawful and valid obligation of the
Republic under the Government Bonds. Since said obligation
represents a public debt, the release of the monies requires no
legislative appropriation.
Section 2 of Republic Act No. 245 likewise provides that the money to
be used for the payment of Government Bonds may be lawfully taken
from the continuing appropriation out of any monies in the National
Treasury and is not required to be the subject of another appropriation
legislation:
SEC. 2. The Secretary of Finance shall cause to be paid out of any
moneys in the National Treasury not otherwise appropriated, or from
any sinking funds provided for the purpose by law, any interest falling
due, or accruing, on any portion of the public debt authorized by law.
He shall also cause to be paid out of any such money, or from any
such sinking funds the principal amount of any obligations which have
matured, or which have been called for redemption or for which
redemption has been demanded in accordance with terms prescribed
by him prior to date of issue . . . In the case of interest-bearing
obligations, he shall pay not less than their face value; in the case of
obligations issued at a discount he shall pay the face value at maturity;
or if redeemed prior to maturity, such portion of the face value as is
prescribed by the terms and conditions under which such obligations
were originally issued. There are hereby appropriated as a continuing
appropriation out of any moneys in the National Treasury not
otherwise appropriated, such sums as may be necessary from time to
time to carry out the provisions of this section. The Secretary of
Finance shall transmit to Congress during the first month of each
regular session a detailed statement of all expenditures made under
this section during the calendar year immediately preceding.
Thus, DOF Department Order No. 141-95, as amended, states that
payment for Treasury bills and bonds shall be made through the
National Treasury's account with the Bangko Sentral ng Pilipinas, to
wit: SaTAED
Section 38. Demand Deposit Account. — The Treasurer of the
Philippines maintains a Demand Deposit Account with the Bangko
Sentral ng Pilipinas to which all proceeds from the sale of Treasury
Bills and Bonds under R.A. No. 245, as amended, shall be credited
and all payments for redemption of Treasury Bills and Bonds shall be
charged.
Regarding these legislative enactments ordaining an automatic
appropriations provision for debt servicing, this court has held:
Congress . . . deliberates or acts on the budget proposals of the
President, and Congress in the exercise of its own judgment and
wisdom formulates an appropriation act precisely following the
process established by the Constitution, which specifies that no
money may be paid from the Treasury except in accordance with an
appropriation made by law.
Debt service is not included in the General Appropriation Act, since
authorization therefor already exists under RA Nos. 4860 and 245, as
amended, and PD 1967. Precisely in the light of this subsisting
authorization as embodied in said Republic Acts and PD for debt
service, Congress does not concern itself with details for
implementation by the Executive, but largely with annual levels and
approval thereof upon due deliberations as part of the whole
obligation program for the year. Upon such approval, Congress has
spoken and cannot be said to have delegated its wisdom to the
Executive, on whose part lies the implementation or execution of the
legislative wisdom. 246 (Citation omitted)
Respondent Bureau of Treasury had the duty to obey the temporary
restraining order issued by this court, which remained in full force and
effect, until set aside, vacated, or modified. Its conduct finds no
justification and is reprehensible. 247
WHEREFORE, the petition for review and petitions-in-intervention are
GRANTED. BIR Ruling Nos. 370-2011 and DA 378-2011 are
NULLIFIED.

Furthermore, respondent Bureau of Treasury is REPRIMANDED for
its continued retention of the amount corresponding to the 20% final
withholding tax despite this court's directive in the temporary
restraining order and in the resolution dated November 15, 2011 to
deliver the amounts to the banks to be placed in escrow pending
resolution of this case.
Respondent Bureau of Treasury is hereby ORDERED to immediately
release and pay to the bondholders the amount corresponding to the
20% final withholding tax that it withheld on October 18, 2011.
Sereno, C.J., Velasco, Jr., Leonardo-de Castro, Peralta, Bersamin,
Del Castillo, Villarama, Jr., Perez, Mendoza, Reyes and Perlas-
Bernabe, JJ., concur.
Carpio, J., took no part, former law firm was a previous counsel to a
party.
Brion, * J., is on leave.
Jardeleza, J., took no part, prior acting Sol. Gen.
||| (Banco De Oro v. Republic, G.R. No. 198756, [January 13, 2015])
FACTS:
By letter dated March 23, 2011, the CODE-NGO with the
assistance of its financial advisers, RCBC, RCBC Capital, Capex
finance investment corporation (CAPEX) and Seed Capital Ventures,
Inc., (SEED), requested and approval from the Department of Finance
(DOF) for the issuance by the Bureau of Treasury (BTr) of 10- year
zero-coupon Treasury Certificates (T-Notes).
The t-notes would initially be purchased by a special purpose
vehicle on behalf of CODE-NGO, repackaged and sold at a premium
to investors as the PEACe Bonds.
The net proceeds from the sale of the bonds will be used to
endow a permanent fund (Hanapbuhay fund) to finance meritorious
activities and projects of accredited non-government organization
(NGOs) throughout the country.
Prior to and around the time of the proposal of CODE-NGO,
other proposals for the issuance of zero-coupon bonds were also
presented by banks and financial institutions. Both the proposal of
First Metro Investment Corp. and ATR-Kim Eng Fixed Income indicate
that the interest income or discount earned on the proposed zero-
coupon bonds would be subject to the prevailing withholding tax.
On May 31, 2001, the Bureau of Internal Revenue (BIR), in
reply to CODE-NGO’s Letters dated May 10,15 and 25, 2001, issued
BIR Ruling no. 020-2001 on the tax treatment of the proposed PEACe
bonds. It confirmed that the PEACe bonds would not be classified as
deposit substitutes and would not be subject to the corresponding
withholding tax:
To be classified as “Deposit Substitute:, the borrowing of funds must
be obtained from twenty (20) or more individuals or corporate lenders
at any one time. In the light of your representation that the PEACe
Bonds will be issued only to one entity, the same shall not be
considered as “deposit substitute” falling within the purview of the
above definition. Hence, the withholding tax on deposit substitute will
not apply.
The tax treatment of the proposed PEACe bonds was
subsequently reiterated in BIR Ruling no. 035-2001(2001) and BIR
Ruling No.DA-175-01 (2001). The determination of the phrase “at any
one time” for purposes of determining the “20 or more lenders” is to
be determined at the time of the original issuance.
Meanwhile, Former Treasurer Eduardo Sergio G. Edeza
questioned the propriety of issuing the bonds directly to a special
purpose vehicle considering that the latter was not a Government
Securities Eligible Dealer (GSED). Former Treasurer Edeza
recommended that the issuance of the Bonds “be done through the
Automated Debt Auction Processing System (ADAPS)” and that
CODE-NGO “should get a GSED to bid in its behalf.”
Subsequently, in the notice to all GSEDs entitled Public
Offering of Treasury Bonds, the Bureau of Treasury announced that
“P30.0B worth of 10-year Zero-Coupon Bonds would be auctioned.
The notice stated that the Bonds “shall be issued to not more than 19
buyers/lenders hence, the necessity of a manual auction for this
maiden issue.”
On October 16, 2001, the Bureau of Treasury held an auction
for the 10-year zero-coupon bonds. Also on the same date, the
Bureau of Treasury issued another memorandum quoting excerpts of
the ruling issued by the Bureau of Internal Revenue concerning the
Bonds’ exemption from 20% final withholding tax and the opinion of
the Monetary Board on reserve eligibility.
During the auction, there were 45 bids from 15 GSEDs. After
the auction, RCBC which participated on behalf of CODE-NGO was
declared as the winning bidder having tendered the lowest bids.
Accordingly, on October 18, 2001, the Bureau of Treasury issued P35
billion worth of Bonds at yield-to-maturity of 12.75% to RCBC for
approximately P10.17 billion, resulting in a discount of approximately
P24.83 billion.
Also on October 16, 2001, RCBC Capital entered into an underwriting
agreement with CODE-NGO, whereby RCBC Capital was appointed
as the Issue Manager and Lead Underwriter for the offering of the
PEACe Bonds. RCBC Capital agreed to underwrite on a firm basis
the offering, distribution and sale of the P35 billion Bonds at the price
of P11,995,513,716.51.47 In Section 7(r) of the underwriting
agreement, CODE-NGO represented that “all income derived from
the Bonds, inclusive of premium on redemption and gains on the
trading of the same, are exempt from all forms of taxation as
confirmed by BIR letter rulings.
RCBC Capital sold the Government Bonds in the secondary market
for an issue price of P11,995,513,716.51. Petitioners purchased the
PEACe Bonds on different dates.
BIR Ruling:
On October 7, 2011, “the BIR issued the assailed 2011 BIR
Ruling, in response to a query of the Secretary of Finance on the
proper tax treatment of the discount or interest income derived from
the Government Bonds, imposing a 20% FWT on the Government
Bonds and directing the BIR to withhold said final tax at the maturity
thereof, allegedly without consultation with Petitioners as
bondholders, and without conducting any hearing.”
The Php 24.3 billion discount on the issuance of the PEACe Bonds
should be subject to 20% Final Tax on interest income from deposit
substitutes. It is now settled that all treasury bonds including PEACe
Bonds, regardless of the number of purchasers/lenders at the time of
origination/issuance are considered deposit substitutes. In the case
of zero-coupon bonds, the discount (i.e. difference between face
value and purchase price/discounted value of the bond) is treated as
interest income of the purchaser/holder. Thus, the Php 24.3 interest
income should have been properly subject to the 20% Final Tax as
provided in Section 27(D)(1) of the Tax Code of 1997.
On October 17, 2011, replying to an urgent query from the BTr,
the BIR issued BIR Ruling No. DA 378-201157 clarifying that the final
withholding tax due on the discount or interest earned on the PEACe
Bonds should “be imposed and withheld not only on RCBC/CODE
NGO but also on ‘all subsequent holders of the Bonds.’”
Petitioners’ Actions
On October 17, 2011, petitioners filed a petition for certiorari,
prohibition, and/or mandamus with urgent application for a temporary
restraining order and/or writ of preliminary injunction before this court.
On October 18, 2011, the Supreme Court issued a temporary
restraining order (TRO) “enjoining the implementation of BIR Ruling
No. 370-2011 against the PEACe Bonds, subject to the condition that
the 20% final withholding tax on interest income therefrom shall be
withheld by the petitioner banks and placed in escrow pending
resolution of the petition.”
Meanwhile petitioners filed their “Manifestation with Urgent Ex Parte
Motion to Direct Respondents to comply with the TRO.” They alleged
that on the same day that the TRO was issued, the BTr paid to
petitioners and other bondholders the amounts representing the face
value of the Bonds, net however of the amounts corresponding to the
20% final withholding tax on interest income, and that the Bureau of
Treasury refused to release the amounts corresponding to the 20%
final withholding tax.
ISSUES:
1. Whether the PEACe Bonds are “deposit substitutes” and thus
subject to 20% final withholding tax under the 1997 National Internal
Revenue Code.
2. Interpretation of the phrase “borrowing from twenty (20) or more
individual or corporate lenders at any one time” under Section 22(Y)
of the 1997 National Internal Revenue Code
3. Whether the reckoning of the 20 lenders includes trading of the
bonds in the secondary market
4. If the PEACe Bonds are considered “deposit substitutes,” whether
the government or the Bureau of Internal Revenue is estopped from
imposing and/or collecting the 20% final withholding tax from the face
value of these Bonds
5. Will the imposition of the 20% final withholding tax violate the non-
impairment clause of the Constitution?
6. Will it constitute a deprivation of property without due process of
law?
7. Will it violate Section 245 of the 1997 National Internal Revenue
Code on non-retroactivity of rulings?
ARGUMENTS:
Petitioners; RCBC, RCBC Capital, and CODE-NGO
1. The Government cannot impair the efficacy of the Bonds by
arbitrarily, oppressively and unreasonably imposing the withholding of
20% FWT upon the Bonds a mere eleven (11) days before maturity
and after several, consistent categorical declarations that such bonds
are exempt from the 20% FWT, without violating due process and the
constitutional principle on non-impairment of contracts.
2. Petitioners insist that the PEACe Bonds are not deposit
substitutes as defined under Section 22(Y) of the 1997 National
Internal Revenue Code because there was only one lender (RCBC)
to whom the BTr issued the Bonds. They allege that the 2004, 2005,
and 2011 BIR Rulings “erroneously interpreted that the number of
investors that participate in the ‘secondary market’ is the determining
factor in reckoning the existence or non-existence of twenty (20) or
more individual or corporate lenders.”
3. They contend that the BIR unduly expanded the definition of
deposit substitutes under Section 22 of the 1997 National Internal
Revenue Code in concluding that “the mere issuance of government
debt instruments and securities is deemed as falling within the
coverage of ‘deposit substitutes. Thus, “the 2011 BIR Ruling clearly
amounted to an unauthorized act of administrative legislation.
4. Petitioners further argue that their income from the Bonds is a
“trading gain,” which is exempt from income tax. They insist that “they
are not lenders whose income is considered as ‘interest income or
yield’ subject to the 20% FWT under Section 27 (D)(1) of the 1997
National Internal Revenue Code” because they “acquired the
Government Bonds in the secondary or tertiary market.”
5. Even assuming without admitting that the Government Bonds are
deposit substitutes, petitioners argue that the collection of the final tax
was barred by prescription. They point out that under Section 7 of
DOF Department Order No. 141-95, the final withholding tax “should
have been withheld at the time of their issuance.” Also, under Section
203 of the 1997 National Internal Revenue Code, “internal revenue
taxes, such as the final tax, should be assessed within three (3) years
after the last day prescribed by law for the filing of the return.
6. Petitioners contend that the retroactive application of the 2011
BIR Ruling without prior notice to them was in violation of their
property rights, their constitutional right to due process as well as
Section 246 of the 1997 National Internal Revenue Code on non-
retroactivity of rulings. Allegedly, it would also have “an adverse effect
of colossal magnitude on the investors, both local and foreign, the
Philippine capital market, and most importantly, the country’s standing
in the international commercial community.”
7. Respondent Commissioner “gravely and seriously abused her
discretion in the exercise of her rule-making power” when she issued
the assailed 2011 BIR Ruling which ruled that “all treasury bonds are
‘deposit substitutes’ regardless of the number of lenders, in clear
disregard of the requirement of twenty (20) or more lenders mandated
under the NIRC.” They argue that “by her blanket and arbitrary
classification of treasury bonds as deposit substitutes, respondent
CIR not only amended and expanded the NIRC, but effectively
imposed a new tax on privately-placed treasury bonds.”
8. Petitioners-intervenors RCBC and RCBC Capital further argue
that the 2011 BIR Ruling will cause substantial impairment of their
vested rights under the Bonds since the ruling imposes new
conditions by “subjecting the PEACe Bonds to the twenty percent
(20%) final withholding tax notwithstanding the fact that the terms and
conditions thereof as previously represented by the Government,
through respondents BTr and BIR, expressly state that it is not subject
to final withholding tax upon their maturity.” They added that “[t]he
exemption from the twenty percent (20%) final withholding tax [was]
the primary inducement and principal consideration for [their]
participat[ion] in the auction and underwriting of the PEACe Bonds.”
9. Petitioners-intervenors RCBC and RCBC Capital argue that “the
implementation of the 2011 assailed BIR Ruling and BIR Ruling No.
DA 378-2011 will have pernicious effects on the integrity of existing
securities, which is contrary to the State policies of stabilizing the
financial system and of developing capital markets.”
10. “The tax exemption privilege relating to the issuance of the PEACe
Bonds partakes of a contractual commitment granted by the
Government in exchange for a valid and material consideration [i.e.,
the issue price paid and savings in borrowing cost derived by the
Government,] thus protected by the non-impairment clause of the
1987 Constitution”
Respondents
1. Respondents argue that petitioners’ direct resort to this court to
challenge the 2011 BIR Ruling violates the doctrines of exhaustion of
administrative remedies and hierarchy of courts, resulting in a lack of
cause of action that justifies the dismissal of the petition. According to
them, “the jurisdiction to review the rulings of the CIR, after the
aggrieved party exhausted the administrative remedies, pertains to
the Court of Tax Appeals.”
2. Respondents contend that the discount/interest income derived
from the PEACe Bonds is not a trading gain but interest income
subject to income tax. They explain that “with the payment of the
PhP35 Billion proceeds on maturity of the PEACe Bonds, Petitioners
receive an amount of money equivalent to about PhP24.8 Billion as
payment for interest. Such interest is clearly an income of the
Petitioners considering that the same is a flow of wealth and not
merely a return of capital – the capital initially invested in the Bonds
being approximately PhP10.2 Billion.
3. Maintaining that the imposition of the 20% final withholding tax on
the PEACe Bonds does not constitute an impairment of the
obligations of contract, respondents aver that: “The BTr has no power
to contractually grant a tax exemption in favor of Petitioners thus the
2001 BIR Rulings cannot be considered a material term of the Bonds”;
“there has been no change in the laws governing the taxability of
interest income from deposit substitutes and said laws are read into
every contract”; “the assailed BIR Rulings merely interpret the term
“deposit substitute” in accordance with the letter and spirit of the Tax
Code”; “the withholding of the 20% FWT does not result in a default
by the Government as the latter performed its obligations to the
bondholders in full”; and “if there was a breach of contract or a
misrepresentation it was between RCBC/CODE-NGO/RCBC Cap
and the succeeding purchasers of the PEACe Bonds.”
4. Similarly, respondents counter that the withholding of “the 20%
final withholding tax on the PEACe Bonds does not amount to a
deprivation of property without due process of law.” Their imposition
of the 20% final withholding tax is not arbitrary because they were only
performing a duty imposed by law; “the 2011 BIR Ruling is an
interpretative rule which merely interprets the meaning of deposit
substitutes and upheld the earlier construction given to the term by
the 2004 and 2005 BIR Rulings.” Hence, respondents argue that
“there was no need to observe the requirements of notice, hearing,
and publication.”
5. They contend that the assailed 2011 BIR Ruling is a valid exercise
of the Commissioner of Internal Revenue’s rule-making power; that it
and the 2004 and 2005 BIR Rulings did not unduly expand the
definition of deposit substitutes by creating an unwarranted exception
to the requirement of having 20 or more lenders/purchasers; and the
word “any” in Section 22(Y) of the National Internal Revenue Code
plainly indicates that the period contemplated is the entire term of the
bond and not merely the point of origination or issuance.
6. A retroactive application of the 2011 BIR Ruling will not
unjustifiably prejudice petitioners. “With or without the 2011 BIR
Ruling, Petitioners would be liable to pay a 20% final withholding tax
just the same because the PEACe Bonds in their possession are
legally in the nature of deposit substitutes subject to a 20% final
withholding tax under the NIRC.” Section 7 of DOF Department Order
No. 141-95 also provides that income derived from Treasury bonds is
subject to the 20% final withholding tax.144 “While revenue
regulations as a general rule have no retroactive effect, if the
revocation is due to the fact that the regulation is erroneous or
contrary to law, such revocation shall have retroactive operation as to
affect past transactions, because a wrong construction of the law
cannot give rise to a vested right that can be invoked by a taxpayer.”
7. Respondents submit that “there are a number of variables and
factors affecting a capital market.” “Capital market itself is inherently
unstable.” Thus, “petitioners’ argument that the 20% final withholding
tax. will wreak havoc on the financial stability of the country is a mere
supposition that is not a justiciable issue.”
8. On the prayer for the temporary restraining order, respondents
argue that this order “could no longer be implemented because the
acts sought to be enjoined are already fait accompli.” They add that
“to disburse the funds withheld to the Petitioners at this time would
violate Section 29, Article VI of the Constitution prohibiting ‘money
being paid out of the Treasury except in pursuance of an appropriation
made by law.” “The remedy of petitioners is to claim a tax refund
under Section 204(c) of the Tax Code should their position be upheld
by the Honorable Court.”
9. Respondents also argue that “the implementation of the TRO
would violate Section 218 of the Tax Code in relation to Section 11 of
Republic Act No. 1125 (as amended by Section 9 of Republic Act No.
9282) which prohibits courts, except the Court of Tax Appeals, from
issuing injunctions to restrain the collection of any national internal
revenue tax imposed by the Tax Code.”
SUPREME COURT’s RULING:
Non-exhaustion of administrative remedies proper
Under Section 4 of the 1997 National Internal Revenue Code,
interpretative rulings are reviewable by the Secretary of Finance.
Thus, it was held that “if superior administrative officers can grant the
relief prayed for, then special civil actions are generally not
entertained.” The remedy within the administrative machinery must be
resorted to first and pursued to its appropriate conclusion before the
court’s judicial power can be sought.
Nonetheless, jurisprudence allows certain exceptions to the rule on
exhaustion of administrative remedies. It is disregarded:
(1) When there is a violation of due process,
(2) When the issue involved is purely a legal question,
(3) When the administrative action is patently illegal amounting to lack
or excess of jurisdiction,
(4) When there is estoppel on the part of the administrative agency
concerned,
(5) When there is irreparable injury,
(6) When the respondent is a department secretary whose acts as an
alter ego of the President bears the implied and assumed approval of
the latter,
(7) When to require exhaustion of administrative remedies would be
unreasonable,
(8) When it would amount to a nullification of a claim,
(9) When the subject matter is a private land in land case
proceedings,
(10) When the rule does not provide a plain, speedy and
adequate remedy,
(11) When there are circumstances indicating the urgency
of judicial intervention.
The exceptions under (2) and (11) are present in this case. The
question involved is purely legal, namely:
(a) The interpretation of the 20-lender rule in the definition of the
terms public and deposit substitutes under the 1997 National Internal
Revenue Code; and
(b) Whether the imposition of the 20% final withholding tax on the
PEACe Bonds upon maturity violates the constitutional provisions on
non-impairment of contracts and due process.
Judicial intervention is likewise urgent with the impending maturity of
the PEACe Bonds on October 18, 2011. The rule on exhaustion of
administrative remedies also finds no application when the exhaustion
will result in an exercise in futility.
In this case, an appeal to the Secretary of Finance from the
questioned 2011 BIR Ruling would be a futile exercise because it was
upon the request of the Secretary of Finance that the 2011 BIR Ruling
was issued by the Bureau of Internal Revenue. It appears that the
Secretary of Finance adopted the Commissioner of Internal
Revenue’s opinions as his own. This position was in fact confirmed in
the letter dated October 10, 2011 where he ordered the Bureau of
Treasury to withhold the amount corresponding to the 20% final
withholding tax on the interest or discounts allegedly due from the
bondholders on the strength of the 2011 BIR Ruling.
Doctrine on hierarchy of courts
Under Republic Act No. 1125 (An Act Creating the Court of Tax
Appeals), as amended by Republic Act No. 9282,160 the jurisdiction
to review the rulings of the Commissioner of Internal Revenue
pertains to the Court of Tax Appeals. The questioned BIR Ruling Nos.
370-2011 and DA 378-2011 were issued in connection with the
implementation of the 1997 National Internal Revenue Code on the
taxability of the interest income from zero-coupon bonds issued by the
government.
In exceptional cases, however, the court entertained direct recourse
to it when “dictated by public welfare and the advancement of public
policy, or demanded by the broader interest of justice, or the orders
complained of were found to be patent nullities, or the appeal was
considered as clearly an inappropriate remedy.”
Here, the nature and importance of the issues raised to the investment
and banking industry with regard to a definitive declaration of whether
government debt instruments are deposit substitutes under existing
laws, and the novelty thereof, constitute exceptional and compelling
circumstances to justify resort to this court in the first instance.
The tax provision on deposit substitutes affects not only the PEACe
Bonds but also any other financial instrument or product that may be
issued and traded in the market. Due to the changing positions of the
Bureau of Internal Revenue on this issue, there is a need for a final
ruling from this court to stabilize the expectations in the financial
market.
Finally, non-compliance with the rules on exhaustion of administrative
remedies and hierarchy of courts had been rendered moot by this
court’s issuance of the temporary restraining order enjoining the
implementation of the 2011 BIR Ruling. The temporary restraining
order effectively recognized the urgency and necessity of direct resort
to this court.
Substantive issues
A. Tax treatment of deposit substitutes
Under Sections 24(B)(1), 27(D)(1), and 28(A)(7) of the 1997 National
Internal Revenue Code, a final withholding tax at the rate of 20% is
imposed on interest on any currency bank deposit and yield or any
other monetary benefit from deposit substitutes and from trust funds
and similar arrangements.
This tax treatment of interest from bank deposits and yield from
deposit substitutes was first introduced in the 1977 National Internal
Revenue Code through Presidential Decree No. 1739168 issued in
1980. Later, Presidential Decree No. 1959, effective on October 15,
1984, formally added the definition of deposit substitutes:
Deposit substitutes’ shall mean an alternative form of obtaining funds
from the public, other than deposits, through the issuance,
endorsement, or acceptance of debt instruments for the borrower's
own account, for the purpose of relending or purchasing of
receivables and other obligations, or financing their own needs or the
needs of their agent or dealer. These promissory notes, repurchase
agreements, certificates of assignment or participation and similar
instrument with recourse as may be authorized by the Central Bank
of the Philippines, for banks and non-bank financial intermediaries or
by the Securities and Exchange Commission of the Philippines for
commercial, industrial, finance companies and either non-financial
companies: Provided, however, that only debt instruments issued for
inter-bank call loans to cover deficiency in reserves against deposit
liabilities including those between or among banks and quasi-banks
shall not be cnsidered as deposit substitute debt instruments.
Revenue Regulations No. 17-84, issued to implement Presidential
Decree No. 1959, adopted verbatim the same definition and
specifically identified the following borrowings as “deposit
substitutes”;
1. All interbank borrowings by or among banks and non-bank
financial institutions authorized to engage in quasi-banking functions
evidenced by deposit substitutes instruments, except interbank call
loans to cover deficiency in reserves against deposit liabilities as
evidenced by interbank loan advice or repayment transfer tickets.
2. All borrowings of the national and local government and its
instrumentalities including the Central Bank of the Philippines,
evidenced by debt instruments denoted as treasury bonds, bills,
notes, certificates of indebtedness and similar instruments.
3. All borrowings of banks, non-bank financial intermediaries,
finance companies, investment companies, trust companies,
including the trust department of banks and investment houses,
evidenced by deposit substitutes instruments.
The definition of deposit substitutes was amended under the 1997
National Internal Revenue Code with the addition of the qualifying
phrase for public – borrowing from 20 or more individual or corporate
lenders at any one time. Under Section 22(Y), deposit substitute is
defined thus:
The term ‘deposit substitutes’ shall mean an alternative form of
obtaining funds from the public (the term 'public' means borrowing
from twenty (20) or more individual or corporate lenders at any one
time) other than deposits, through the issuance, endorsement, or
acceptance of debt instruments for the borrower’s own account, for
the purpose of relending or purchasing of receivables and other
obligations, or financing their own needs or the needs of their agent
or dealer. These instruments may include, but need not be limited to,
bankers’ acceptances, promissory notes, repurchase agreements,
including reverse repurchase agreements entered into by and
between the Bangko Sentral ng Pilipinas (BSP) and any authorized
agent bank, certificates of assignment or participation and similar
instruments with recourse: Provided, however, That debt instruments
issued for interbank call loans with maturity of not more than five (5)
days to cover deficiency in reserves against deposit liabilities,
including those between or among banks and quasi-banks, shall not
be considered as deposit substitute debt instruments.
B. Interpretation of the phrase “borrowing from twenty (20) or more
individual or corporate lenders at any one time” under Section 22(Y)
of the 1997 National Internal Revenue Code
Under the 1997 National Internal Revenue Code, Congress
specifically defined “public” to mean “twenty (20) or more individual or
corporate lenders at any one time.” Hence, the number of lenders is
determinative of whether a debt instrument should be considered a
deposit substitute and consequently subject to the 20% final
withholding tax.
Meaning of “at any one time”
From the point of view of the financial market, the phrase “at any one
time”, for purposes of determining the “20 or more lenders”, would
mean every transaction executed in the primary or secondary market,
in connection with the purchase or sale of securities.
For example, where the financial assets involved are government
securities like bonds, the reckoning of “20 or more lenders/investors”
is made at any transaction in connection with the purchase or sale of
the Government Bonds, such as:
· Issuance by the Bureau of Treasury of the bonds to GSEDs in
the primary market;
· Sale and distribution by GSEDs to various lenders/investors in
the secondary market;
· Subsequent sale or trading by a bondholder to another
lender/investor in the secondary market usually through a broker or
dealer; or
· Sale by a financial intermediary-bondholder of its participation
interests in the bonds to individual or corporate lenders in the
secondary market.
When, through any of the foregoing transactions, funds are
simultaneously obtained from 20 or more lenders/investors, there is
deemed to be a public borrowing and the bonds at that point in time
are deemed deposit substitutes. Consequently, the seller is required
to withhold the 20% final withholding tax on the imputed interest
income from the bonds.
For debt instruments that are not deposit substitutes, regular income
tax applies
It must be emphasized, however, that debt instruments that do not
qualify as deposit substitutes under the 1997 National Internal
Revenue Code are subject to the regular income tax.
The phrase “all income derived from whatever source” in Chapter VI,
Computation of Gross Income, Section 32(A) of the 1997 National
Internal Revenue Code discloses a legislative policy to include all
income not expressly exempted as within the class of taxable income
under our laws.
“The definition of gross income is broad enough to include all passive
incomes subject to specific tax rates or final taxes.”197 Hence,
interest income from deposit substitutes are necessarily part of
taxable income. “However, since these passive incomes are already
subject to different rates and taxed finally at source, they are no longer
included in the computation of gross income, which determines
taxable income.”198 “Stated otherwise . . . if there were no
withholding tax system in place in this country, this 20 percent portion
of the ‘passive’ income of [creditors/lenders] would actually be paid to
the [creditors/lenders] and then remitted by them to the government
in payment of their income tax.”199chanRoblesvirtualLawlibrary
This court, in Chamber of Real Estate and Builders’ Associations, Inc.
v. Romulo,200 explained the rationale behind the withholding tax
system:
The withholding [of tax at source] was devised for three primary
reasons: first, to provide the taxpayer a convenient manner to meet
his probable income tax liability; second, to ensure the collection of
income tax which can otherwise be lost or substantially reduced
through failure to file the corresponding returns[;] and third, to improve
the government’s cash flow. This results in administrative savings,
prompt and efficient collection of taxes, prevention of delinquencies
and reduction of governmental effort to collect taxes through more
complicated means and remedies.201 (Citations omitted)
“The application of the withholdings system to interest on bank
deposits or yield from deposit substitutes is essentially to maximize
and expedite the collection of income taxes by requiring its payment
at the source.”202chanRoblesvirtualLawlibrary
Hence, when there are 20 or more lenders/investors in a transaction
for a specific bond issue, the seller is required to withhold the 20%
final income tax on the imputed interest income from the bonds
C. Whether the reckoning of the 20 lenders includes trading of the
bonds in the secondary market
Financial markets
Financial markets provide the channel through which funds from the
surplus units (households and business firms that have savings or
excess funds) flow to the deficit units (mainly business firms and
government that need funds to finance their operations or growth).
They bring suppliers and users of funds together and provide the
means by which the lenders transform their funds into financial assets,
and the borrowers receive these funds now considered as their
financial liabilities. The transfer of funds is represented by a security,
such as stocks and bonds. Fund suppliers earn a return on their
investment; the return is necessary to ensure that funds are supplied
to the financial markets.
“The financial markets that facilitate the transfer of debt securities are
commonly classified by the maturity of the securities,” namely: (1) the
money market, which facilitates the flow of short-term funds (with
maturities of one year or less); and (2) the capital market, which
facilitates the flow of long-term funds (with maturities of more than one
year).
Whether referring to money market securities or capital market
securities, transactions occur either in the primary market or in the
secondary market. “Primary markets facilitate the issuance of new
securities. Secondary markets facilitate the trading of existing
securities, which allows for a change in the ownership of the
securities.” The transactions in primary markets exist between issuers
and investors, while secondary market transactions exist among
investors.
Fund transfers are accomplished in three ways: (1) direct finance; (2)
semi direct finance; and (3) indirect finance.
With direct financing, the “borrower and lender meet each other and
exchange funds in return for financial assets” (e.g., purchasing bonds
directly from the company issuing them). This method provides
certain limitations such as: (a) “both borrower and lender must desire
to exchange the same amount of funds at the same time”; and (b)
“both lender and borrower must frequently incur substantial
information costs simply to find each other.”
In semidirect financing, a securities broker or dealer brings surplus
and deficit units together, thereby reducing information costs. In
semidirect financing, “the ultimate lender still winds up holding the
borrower’s securities, and therefore the lender must be willing to
accept the risk, liquidity, and maturity characteristics of the borrower’s
debt security. There still must be a fundamental coincidence of wants
and needs between lenders and borrowers for semidirect financial
transactions to take place.”
“The limitations of both direct and semidirect finance stimulated the
development of indirect financial transactions, carried out with the
help of financial intermediaries” or financial institutions, like banks,
investment banks, finance companies, insurance companies, and
mutual funds. Financial intermediaries accept funds from surplus units
and channel the funds to deficit units. “Depository institutions such as
banks accept deposits from surplus units and provide credit to deficit
units through loans and purchase of debt securities.” Nondepository
institutions, like mutual funds, issue securities of their own (usually in
smaller and affordable denominations) to surplus units and at the
same time purchase debt securities of deficit units. “By pooling the
resources of small savers, a financial intermediary can service the
credit needs of large firms simultaneously.”
D. If the PEACe Bonds are considered “deposit substitutes,” whether
the government or the Bureau of Internal Revenue is estopped from
imposing and/or collecting the 20% final withholding tax from the face
value of these Bonds
E. Will the imposition of the 20% final withholding tax violate the non-
impairment clause of the Constitution?
F. Will it constitute a deprivation of property without due process of
law?
G. Will it violate Section 245 of the 1997 National Internal Revenue
Code on non-retroactivity of rulings? (the two rulings were declared
void)
H. Prescription
The collection of tax is not barred by prescription
The three (3)-year prescriptive period under Section 203 of the 1997
National Internal Revenue Code to assess and collect internal
revenue taxes is extended to 10 years in cases of:
(1) fraudulent returns;
(2) false returns with intent to evade tax; and
(3) failure to file a return, to be computed from the time of discovery
of the falsity, fraud, or omission
Thus, should it be found that RCBC Capital/CODE-NGO sold the
PEACe Bonds to 20 or more lenders/investors, the Bureau of Internal
Revenue may still collect the unpaid tax from RCBC Capital/CODE-
NGO within 10 years after the discovery of the omission.
I. Grave abuse of discretion by CIR
The Bureau of Internal Revenue rulings
The Bureau of Internal Revenue’s interpretation as expressed in the
three 2001 BIR Rulings is not consistent with law. Its interpretation of
“at any one time” to mean at the point of origination alone is unduly
restrictive.
BIR Ruling No. 370-2011 is likewise erroneous insofar as it stated
(relying on the 2004 and 2005 BIR Rulings) that “all treasury bonds
regardless of the number of purchasers/lenders at the time of
origination/issuance are considered deposit substitutes.” Being the
subject of this petition, it is, thus, declared void because it completely
disregarded the 20 or more lender rule added by Congress in the 1997
National Internal Revenue Code. It also created a distinction for
government debt instruments as against those issued by private
corporations when there was none in the law.
It may be granted that the interpretation of the Commissioner of
Internal Revenue in charge of executing the 1997 National Internal
Revenue Code is an authoritative construction of great weight, but the
principle is not absolute and may be overcome by strong reasons to
the contrary. If through a misapprehension of law an officer has
issued an erroneous interpretation, the error must be corrected when
the true construction is ascertained.
It bears repeating that Revenue memorandum-circulars are
considered administrative rulings (in the sense of more specific and
less general interpretations of tax laws) which are issued from time to
time by the Commissioner of Internal Revenue. It is widely accepted
that the interpretation placed upon a statute by the executive officers,
whose duty is to enforce it, is entitled to great respect by the courts.
Nevertheless, such interpretation is not conclusive and will be ignored
if judicially found to be erroneous. Thus, courts will not countenance
administrative issuances that override, instead of remaining
consistent and in harmony with, the law they seek to apply and
implement.
This court further held that “[a] memorandum-circular of a bureau
head could not operate to vest a taxpayer with a shield against judicial
action because there are no vested rights to speak of respecting a
wrong construction of the law by the administrative officials and such
wrong interpretation could not place the Government in estoppel to
correct or overrule the same.”
In Misamis Oriental Association of Coco Traders, Inc. v. Department
of Finance Secretary, this court stated that the Commissioner of
Internal Revenue is not bound by the ruling of his predecessors, but,
to the contrary, the overruling of decisions is inherent in the
interpretation of laws:
In considering a legislative rule a court is free to make three inquiries:
(i) Whether the rule is within the delegated authority of the
administrative agency;
(ii) Whether it is reasonable; and
(iii) Whether it was issued pursuant to proper procedure. But the
court is not free to substitute its judgment as to the desirability or
wisdom of the rule for the legislative body, by its delegation of
administrative judgment, has committed those questions to
administrative judgments and not to judicial judgments.
In the case of an interpretative rule, the inquiry is not into the validity
but into the correctness or propriety of the rule. As a matter of power
a court, when confronted with an interpretative rule, is free to
(i) Give the force of law to the rule;
(ii) Go to the opposite extreme and substitute its judgment; or
(iii) Give some intermediate degree of authoritative weight to the
interpretative rule.
J. Tax Refund
Interest income v. gains from sale or redemption
The interest income earned from bonds is not synonymous with the
“gains” contemplated under Section 32(B)(7)(g)203 of the 1997
National Internal Revenue Code, which exempts gains derived from
trading, redemption, or retirement of long-term securities from
ordinary income tax.
The term “gain” as used in Section 32(B)(7)(g) does not include
interest, which represents forbearance for the use of money. Gains
from sale or exchange or retirement of bonds or other certificate of
indebtedness fall within the general category of “gains derived from
dealings in property” under Section 32(A)(3), while interest from
bonds or other certificate of indebtedness falls within the category of
“interests” under Section 32(A)(4).204 The use of the term “gains
from sale” in Section 32(B)(7)(g) shows the intent of Congress not to
include interest as referred under Sections 24, 25, 27, and 28 in the
exemption.205chanRoblesvirtualLawlibrary
Hence, the “gains” contemplated in Section 32(B)(7)(g) refers to: (1)
gain realized from the trading of the bonds before their maturity date,
which is the difference between the selling price of the bonds in the
secondary market and the price at which the bonds were purchased
by the seller; and (2) gain realized by the last holder of the bonds
when the bonds are redeemed at maturity, which is the difference
between the proceeds from the retirement of the bonds and the price
at which such last holder acquired the bonds. For discounted
instruments, like the zero-coupon bonds, the trading gain shall be the
excess of the selling price over the book value or accreted value
(original issue price plus accumulated discount from the time of
purchase up to the time of sale) of the instruments.
Tax treatment of income derived from the PEACe Bonds
The transactions executed for the sale of the PEACe Bonds are:
The issuance of the P35 billion Bonds by the Bureau of Treasury to
RCBC/CODE-NGO at P10.2 billion; and
The sale and distribution by RCBC Capital (underwriter) on behalf of
CODE-NGO of the PEACe Bonds to undisclosed investors at P11.996
billion.
It may seem that there was only one lender — RCBC on behalf of
CODE-NGO — to whom the PEACe Bonds were issued at the time of
origination. However, a reading of the underwriting agreement221
and RCBC term sheet222 reveals that the settlement dates for the
sale and distribution by RCBC Capital (as underwriter for CODE-
NGO) of the PEACe Bonds to various undisclosed investors at a
purchase price of approximately P11.996 would fall on the same day,
October 18, 2001, when the PEACe Bonds were supposedly issued
to CODE-NGO/RCBC. In reality, therefore, the entire P10.2 billion
borrowing received by the Bureau of Treasury in exchange for the P35
billion worth of PEACe Bonds was sourced directly from the
undisclosed number of investors to whom RCBC Capital/CODE-NGO
distributed the PEACe Bonds — all at the time of origination or
issuance. At this point, however, we do not know as to how many
investors the PEACe Bonds were sold to by RCBC Capital.
Should there have been a simultaneous sale to 20 or more
lenders/investors, the PEACe Bonds are deemed deposit substitutes
within the meaning of Section 22(Y) of the 1997 National Internal
Revenue Code and RCBC Capital/CODE-NGO would have been
obliged to pay the 20% final withholding tax on the interest or discount
from the PEACe Bonds. Further, the obligation to withhold the 20%
final tax on the corresponding interest from the PEACe Bonds would
likewise be required of any lender/investor had the latter turned
around and sold said PEACe Bonds, whether in whole or part,
simultaneously to 20 or more lenders or investors.
We note, however, that under Section 24223 of the 1997 National
Internal Revenue Code, interest income received by individuals from
long-term deposits or investments with a holding period of not less
than five (5) years is exempt from the final tax.
Thus, should the PEACe Bonds be found to be within the coverage of
deposit substitutes, the proper procedure was for the Bureau of
Treasury to pay the face value of the PEACe Bonds to the
bondholders and for the Bureau of Internal Revenue to collect the
unpaid final withholding tax directly from RCBC Capital/CODE-NGO,
or any lender or investor if such be the case, as the withholding
agents.
Reiterative motion on the temporary restraining order
Respondents’ withholding of the
20% final withholding tax on
October 18, 2011 was justified
Under the Rules of Court, court orders are required to be “served upon
the parties affected.”224 Moreover, service may be made personally
or by mail.225 And, “[p]ersonal service is complete upon actual
delivery [of the order.]”226 This court’s temporary restraining order
was received only on October 19, 2011, or a day after the PEACe
Bonds had matured and the 20% final withholding tax on the interest
income from the same was withheld.
Publication of news reports in the print and broadcast media, as well
as on the internet, is not a recognized mode of service of pleadings,
court orders, or processes. Moreover, the news reports227 cited by
petitioners were posted minutes before the close of office hours or
late in the evening of October 18, 2011, and they did not give the exact
contents of the temporary restraining order.
“[O]ne cannot be punished for violating an injunction or an order for
an injunction unless it is shown that such injunction or order was
served on him personally or that he had notice of the issuance or
making of such injunction or order.”228chanRoblesvirtualLawlibrary
At any rate, “[i]n case of doubt, a withholding agent may always
protect himself or herself by withholding the tax due”229 and return
the amount of the tax withheld should it be finally determined that the
income paid is not subject to withholding.230 Hence, respondent
Bureau of Treasury was justified in withholding the amount
corresponding to the 20% final withholding tax from the proceeds of
the PEACe Bonds, as it received this court’s temporary restraining
order only on October 19, 2011, or the day after this tax had been
withheld.
Respondents’ retention of the amounts withheld is a defiance of the
temporary restraining order
Nonetheless, respondents’ continued failure to release to petitioners
the amount corresponding to the 20% final withholding tax in order
that it may be placed in escrow as directed by this court constitutes a
defiance of this court’s temporary restraining
order.231chanRoblesvirtualLawlibrary
The temporary restraining order is not moot. The acts sought to be
enjoined are not fait accompli. For an act to be considered fait
accompli, the act must have already been fully accomplished and
consummated. It must be irreversible, e.g., demolition of
properties,233 service of the penalty of imprisonment,234 and
hearings on cases.235 When the act sought to be enjoined has not
yet been fully satisfied, and/or is still continuing in nature,236 the
defense of fait accompli cannot prosper.
The temporary restraining order enjoins the entire implementation of
the 2011 BIR Ruling that constitutes both the withholding and
remittance of the 20% final withholding tax to the Bureau of Internal
Revenue. Even though the Bureau of Treasury had already withheld
the 20% final withholding tax237 when it received the temporary
restraining order, it had yet to remit the monies it withheld to the
Bureau of Internal Revenue, a remittance which was due only on
November 10, 2011.238 The act enjoined by the temporary
restraining order had not yet been fully satisfied and was still
continuing.
Under DOF-DBM Joint Circular No. 1-2000A239 dated July 31, 2001
which prescribes to national government agencies such as the Bureau
of Treasury the procedure for the remittance of all taxes it withheld to
the Bureau of Internal Revenue, a national agency shall file before the
Bureau of Internal Revenue a Tax Remittance Advice (TRA)
supported by withholding tax returns on or before the 10th day of the
following month after the said taxes had been withheld.240 The
Bureau of Internal Revenue shall transmit an original copy of the TRA
to the Bureau of Treasury,241 which shall be the basis for recording
the remittance of the tax collection.242 The Bureau of Internal
Revenue will then record the amount of taxes reflected in the TRA as
tax collection in the Journal of Tax Remittance by government
agencies based on its copies of the TRA.243 Respondents did not
submit any withholding tax return or TRA to prove that the 20% final
withholding tax was indeed remitted by the Bureau of Treasury to the
Bureau of Internal Revenue on October 18, 2011.
Respondent Bureau of Treasury’s Journal Entry Voucher No. 11-10-
10395244 dated October 18, 2011 submitted to this court shows:
Account Code
Debit Amount
Credit Amount
Bonds Payable-L/T, Dom-Zero
442-360
35,000,000,000.00
Coupon T/Bonds
(Peace Bonds) – 10 yr
Sinking Fund-Cash (BSF)
198-001
30,033,792,203.59
Due to BIR
412-002
4,966,207,796.41
To record redemption of 10yr Zero coupon (Peace Bond) net of the
20% final withholding tax pursuant to BIR Ruling No. 378-2011, value
date, October 18, 2011 per BTr letter authority and BSP Bank
Statements.
The foregoing journal entry, however, does not prove that the amount
of P4,966,207,796.41, representing the 20% final withholding tax on
the PEACe Bonds, was disbursed by it and remitted to the Bureau of
Internal Revenue on October 18, 2011. The entries merely show that
the monies corresponding to 20% final withholding tax was set aside
for remittance to the Bureau of Internal Revenue.
We recall the November 15, 2011 resolution issued by this court
directing respondents to “show cause why they failed to comply with
the [TRO]; and [to] comply with the [TRO] in order that petitioners may
place the corresponding funds in escrow pending resolution of the
petition.”245 The 20% final withholding tax was effectively placed in
custodia legis when this court ordered the deposit of the amount in
escrow. The Bureau of Treasury could still release the money
withheld to petitioners for the latter to place in escrow pursuant to this
court’s directive. There was no legal obstacle to the release of the
20% final withholding tax to petitioners.
Congressional appropriation is not required for the servicing of public
debts in view of the automatic appropriations clause embodied in
Presidential Decree Nos. 1177 and 1967.
Section 31 of Presidential Decree No. 1177 provides:
Section 31. Automatic Appropriations. All expenditures for (a)
personnel retirement premiums, government service insurance, and
other similar fixed expenditures, (b) principal and interest on public
debt, (c) national government guarantees of obligations which are
drawn upon, are automatically appropriated: provided, that no
obligations shall be incurred or payments made from funds thus
automatically appropriated except as issued in the form of regular
budgetary allotments.
Section 1 of Presidential Decree No. 1967 states:
Section 1. There is hereby appropriated, out of any funds in the
National Treasury not otherwise appropriated, such amounts as may
be necessary to effect payments on foreign or domestic loans, or
foreign or domestic loans whereon creditors make a call on the direct
and indirect guarantee of the Republic of the Philippines, obtained by:
a. the Republic of the Philippines the proceeds of which were relent
to government-owned or controlled corporations and/or government
financial institutions;
b. government-owned or controlled corporations and/or government
financial institutions the proceeds of which were relent to public or
private institutions;
c. government-owned or controlled corporations and/or financial
institutions and guaranteed by the Republic of the Philippines;
d. other public or private institutions and guaranteed by government-
owned or controlled corporations and/or government financial
institutions.
The amount of P35 billion that includes the monies corresponding to
20% final withholding tax is a lawful and valid obligation of the
Republic under the Government Bonds. Since said obligation
represents a public debt, the release of the monies requires no
legislative appropriation.
Section 2of Republic Act No. 245 likewise provides that the money to
be used for the payment of Government Bonds may be lawfully taken
from the continuing appropriation out of any monies in the National
Treasury and is not required to be the subject of another appropriation
legislation:
SEC. 2. The Secretary of Finance shall cause to be paid out of any
moneys in the National Treasury not otherwise appropriated, or from
any sinking funds provided for the purpose by law, any interest falling
due, or accruing, on any portion of the public debt authorized by law.
He shall also cause to be paid out of any such money, or from any
such sinking funds the principal amount of any obligations which have
matured, or which have been called for redemption or for which
redemption has been demanded in accordance with terms prescribed
by him prior to date of issue . . . In the case of interest-bearing
obligations, he shall pay not less than their face value; in the case of
obligations issued at a discount he shall pay the face value at maturity;
or if redeemed prior to maturity, such portion of the face value as is
prescribed by the terms and conditions under which such obligations
were originally issued. There are hereby appropriated as a continuing
appropriation out of any moneys in the National Treasury not
otherwise appropriated, such sums as may be necessary from time to
time to carry out the provisions of this section. The Secretary of
Finance shall transmit to Congress during the first month of each
regular session a detailed statement of all expenditures made under
this section during the calendar year immediately preceding.
Thus, DOF Department Order No. 141-95, as amended, states that
payment for Treasury bills and bonds shall be made through the
National Treasury’s account with the Bangko Sentral ng Pilipinas, to
wit:
Section 38. Demand Deposit Account. – The Treasurer of the
Philippines maintains a Demand Deposit Account with the Bangko
Sentral ng Pilipinas to which all proceeds from the sale of Treasury
Bills and Bonds under R.A. No. 245, as amended, shall be credited
and all payments for redemption of Treasury Bills and Bonds shall be
charged.
Regarding these legislative enactments ordaining an automatic
appropriations provision for debt servicing, this court has held:
Congress . . . deliberates or acts on the budget proposals of the
President, and Congress in the exercise of its own judgment and
wisdom formulates an appropriation act precisely following the
process established by the Constitution, which specifies that no
money may be paid from the Treasury except in accordance with an
appropriation made by law.
Debt service is not included in the General Appropriation Act, since
authorization therefor already exists under RA Nos. 4860 and 245, as
amended, and PD 1967. Precisely in the light of this subsisting
authorization as embodied in said Republic Acts and PD for debt
service, Congress does not concern itself with details for
implementation by the Executive, but largely with annual levels and
approval thereof upon due deliberations as part of the whole
obligation program for the year. Upon such approval, Congress has
spoken and cannot be said to have delegated its wisdom to the
Executive, on whose part lies the implementation or execution of the
legislative wisdom.246 (Citation omitted)

Respondent Bureau of Treasury had the duty to obey the temporary

restraining order issued by this court, which remained in full force and
effect, until set aside, vacated, or modified. Its conduct finds no
justification and is reprehensible.

WHEREFORE, the petition for review and petitions-in-intervention are

GRANTED. BIR Ruling Nos. 370-2011 and DA 378-2011 are
NULLIFIED.

Furthermore, respondent Bureau of Treasury is REPRIMANDED for

its continued retention of the amount corresponding to the 20% final
withholding tax despite this court’s directive in the temporary
restraining order and in the resolution dated November 15, 2011 to
deliver the amounts to the banks to be placed in escrow pending
resolution of this case.

Respondent Bureau of Treasury is hereby ORDERED to immediately

release and pay to the bondholders the amount corresponding to the
20% final withholding tax that it withheld on October 18, 2011.
EN BANC
[G.R. No. 218787. December 8, 2015.]
LEO Y. QUERUBIN, MARIA CORAZON M. AKOL, and AUGUSTO C.
LAGMAN, petitioners, vs. COMMISSION ON ELECTIONS EN BANC,
represented by Chairperson J. ANDRES D. BAUTISTA, and JOINT
VENTURE OF SMARTMATIC-TIM CORPORATION, TOTAL
INFORMATION MANAGEMENT CORPORATION, SMARTMATIC
INTERNATIONAL HOLDING B.V. and JARLTECH INTERNATIONAL
CORPORATION, represented by partner with biggest equity share,
SMARTMATIC-TIM CORPORATION, its general manager
ALASTAIR JOSEPH JAMES WELLS, Smartmatic Chairman LORD
MALLOCH-BROWN, Smartmatic-Asia Pacific President CESAR
FLORES, and any or all persons acting for and on behalf of the Joint
Venture, respondents.
DECISION
VELASCO, JR., J p:
Nature of the Case
Before the Court is a petition for certiorari or prohibition under Rule 64
of the Rules of Court, with prayer for injunctive relief, assailing the
validity and seeking to restrain the implementation of the Commission
on Elections (COMELEC) en banc's June 29, 2015 Decision 1 for
allegedly being repugnant to the provisions of Batas Pambansa Blg.
68 (BP 68), otherwise known as the Corporation Code of the
Philippines, and Republic Act No. 9184 (RA 9184) or the Government
Procurement Reform Act. HTcADC
The Facts
On October 27, 2014, the COMELEC en banc, through its Resolution
No. 14-0715, released the bidding documents for the "Two-Stage
Competitive Bidding for the Lease of Election Management System
(EMS) and Precinct-Based Optical Mark Reader (OMR) or Optical
Scan (OP-SCAN) System." 2 Specified in the published Invitation to
Bid 3 are the details for the lease with option to purchase, through
competitive public bidding, of twenty-three thousand (23,000) new
units of precinct-based OMRs or OP-SCAN Systems, with a total
Approved Budget for Contract of P2,503,518,000, 4 to be used in the
2016 National and Local Elections. 5 The COMELEC Bids and
Awards Committee (BAC) set the deadline for the submission by
interested parties of their eligibility requirements and initial technical
proposal on December 4, 2014. 6
The joint venture of Smartmatic-TIM Corporation (SMTC), Smartmatic
International Holding B.V., and Jarltech International Corporation
(collectively referred to as "Smartmatic JV") responded to the call and
submitted bid for the project on the scheduled date. Indra Sistemas,
S.A. (Indra) and MIRU Systems Co. Ltd. likewise signified their
interest in the project, but only Indra, aside from Smartmatic JV,
submitted its bid. 7
During the opening of the bids, Smartmatic JV, in a sworn certification,
informed the BAC that one of its partner corporations, SMTC, has a
pending application with the Securities and Exchange Commission
(SEC) to amend its Articles of Incorporation (AOI), attaching therein
all pending documents. 8 The amendments adopted as early as
November 12, 2014 were approved by the SEC on December 10,
2014. 9 On even date, Smartmatic JV and Indra participated in the
end-to-end testing of their initial technical proposals for the
procurement project before the BAC.
Upon evaluation of the submittals, the BAC, through its Resolution
No. 1 dated December 15, 2014, declared Smartmatic JV and Indra
eligible to participate in the second stage of the bidding process. 10
The BAC then issued a Notice requiring them to submit their Final
Revised Technical Tenders and Price proposals on February 25,
2015, to which the eligible participants complied. Finding that the joint
venture satisfied the requirements in the published Invitation to Bid,
Smartmatic JV, on March 26, 2015, was declared to have tendered a
complete and responsive Overall Summary of the Financial Proposal.
11 Meanwhile, Indra was disqualified for submitting a non-responsive
bid. 12
Subsequently, for purposes of post-qualification evaluation, the BAC
required Smartmatic JV to submit additional documents and a
prototype sample of its OMR. 13 The prototype was subjected to
testing to gauge its compliance with the requirements outlined in the
project's Terms of Reference (TOR). 14
After the conduct of post-qualification, the BAC, through Resolution
No. 9 dated May 5, 2015, disqualified Smartmatic JV on two grounds,
viz.: 15
1. Failure to submit valid AOI; and
2. The demo unit failed to meet the technical requirement that the
system shall be capable of writing all data/files, audit log, statistics
and ballot images simultaneously in at least two (2) data storages.
The ruling prompted Smartmatic JV to move for reconsideration. 16
In denying the motion, the BAC, through Resolution No. 10 17 dated
May 15, 2015, declared that Smartmatic JV complied with the
requirements of Sec. 23.1 (b) of the Revised Implementing Rules and
Regulations of RA 9184 (GPRA IRR), including the submission of a
valid AOI, but was nevertheless disqualified as it still failed to comply
with the technical requirements of the project. 18
Aggrieved, Smartmatic JV filed a Protest, 19 seeking permission to
conduct another technical demonstration of its SAES 1800 plus OMR
(OMR+), the OMR Smartmatic JV presented during the public bidding
before the COMELEC en banc. 20 Accordingly, on June 19, 2015,
Smartmatic JV was allowed to prove compliance with the technical
specifications for the second time, but this time before the electoral
tribunal's Technical Evaluation Committee (TEC). 21 This was
followed, on June 23, 2015, by another technical demonstration
before the Commission en banc at the Advanced Science and
Technology Institute (ASTI) at the University of the Philippines,
Diliman, Quezon City. 22
Ruling of the COMELEC en banc
Though initially finding that the OMR+'s ability to simultaneously write
data in two storage devices could not conclusively be established, 23
the TEC, upon the use of a Digital Storage Oscilloscope (DSO) during
the second demonstration, 24 determined that the OMR+ complied
with the requirements specified in the TOR. 25 Adopting the findings
of the TEC as embodied in its Final Report, the COMELEC en banc,
on June 29, 2015, promulgated the assailed Decision granting
Smartmatic JV's protest. The dispositive portion of the Decision reads:
26 aScITE
WHEREFORE, the instant Protest is hereby GRANTED. Accordingly,
the Commission hereby declares the Joint Venture of Smartmatic-TIM
Corporation, Total Information Management Corporation, Smartmatic
International Holding B.V., and Jarltech International Corporation, as
the bidder with the lowest calculated responsive bid in connection with
the public bidding for the lease with option to purchase of 23,000 new
units of precinct-based Optical Mark Reader or Optical Scan System
for use in the May 9, 2016 national and local elections. Corollarily, the
scheduled opening of financial proposal and eligibility documents for
the Second Round of Bidding is hereby CANCELLED, with specific
instruction for the Bids and Awards Committee to RETURN to the
prospective bidders their respective payments made for the purchase
of Bidding Documents pertaining to the Second Round of Bidding.
Let the Bids and Awards Committee implement this Decision.
SO ORDERED.
The seven-man commission was unanimous in holding that
Smartmatic JV's OMR+ sufficiently satisfied the technical
requirements itemized in the TOR, reproducing in the assailed
Decision, verbatim and with approbation, the entirety of the TEC's
Final Report, thusly: 27
This is to report on the result of the public test conducted on 23 June
of the claim of Smartmatic TIM (SMTT) that their proposed SAES
1800 (PCOS+) has the capability to write ballot images, audit logs,
and elections results on two separate storage (devices)
simultaneously.
Technical discussion, demonstrations, and design reviews were
conducted over two day period before the actual demonstration to the
Comelec En Banc. These reviews were conducted between SMTT
engineers and a team of embedded electronics design engineers from
the Advanced Science and Technology Institute of the Department of
Science and Technology.
Though these reviews are important to validate the behavior and
functionality of the PCOS+, the best way to validate the claim of SMTT
is to use a specialized test instrument connected to the actual
electrical inputs of both storage cards.
To visualize the electrical signals being sent to the memory cards, an
Agilent DSO7054A Digital Storage Oscilloscope (DSO) from ASTI
connected to the same data input line on two SD card adapters with
a micro SD card inside. This was done to simulate an actual SC card
and to make the DSO probe connections accessible and secure
without modifying anything in the PCOS+ hardware or software. . . .
During normal operation such as on Election day, when the PCOS+
is accepting ballots from voters, the PCOS+ is designated to write
data on both SD cards after the ballots has been determined to be
valid and the voter choices have been shown to the voter for
verification.
The data being written on the storage devices consist mainly of the
scanned ballots image of the front and back of the ballot at 200 dots
per inch in both the horizontal and vertical dimension with each dot
encoded into a 4 bit value corresponding to 16 shades of gray. The
other data saved on the storage device consists of the vote
interpretation and updates to the audit log. Each time that data is
written on the two storage device, the date is encrypted and a
verification step is done to check that identical data is written on both
devices. The entire write process lasts a few seconds for each ballot.
xxx xxx xxx
The DSO display the time dimension on the horizontal axis and the
electrical voltage in the vertical axis, the display is generated left to
right over time (earlier events are on the left). The yellow line on top
shows the electrical signal on the Data 2 pin of the main storage card
and the green line shows the electrical signal on the Data 2 pin of the
backup storage card. The orange dashed horizontal and vertical lines
are used for measuring the differences in time and voltage.
The vertical dashed line on the left marks the start of the data being
written on the main and backup storage card and the vertical dashed
line on the right marks the ends of the writing operation for one ballot.
The time difference in this case is about 2.616 seconds as shown near
the bottom left corner of the display. HEITAD
The yellow and green vertical lines in between the two vertical dashed
lines represent the digital ones and zeros being written on both
storage cards. The yellow and green traces are not exactly identical
because the main car also contains the operating system of the
PCOS+ and additional data operations are being performed on it.
Because the time scale is the same on both probes, we conclude that
the PCOS+ is writing on both cards simultaneously during this time
interval.
Notwithstanding Smartmatic JV's compliance with the technical
requirements in the TOR, Commissioner Luie Tito F. Guia (Guia)
would nonetheless dissent in part, questioning the sufficiency of the
documents submitted by the Smartmatic JV. 28 Taking their cue from
Commissioner Guia's dissent, petitioners now assail the June 29,
2015 Decision of the COMELEC through the instant recourse.
The Issues
Petitioners framed the issues in the extant case in the following wise:
29
A. Procedural Issues
I. WHETHER OR NOT THE PETITION IS THE PROPER REMEDIAL
VEHICLE TO ASSAIL THE SUBJECT DECISION OF THE
COMELEC EN BANC;
II. WHETHER OR NOT THE SUPREME COURT HAS THE RIGHT
AND DUTY TO ENTERTAIN THIS PETITION;
III. WHETHER OR NOT A JUSTICIABLE CASE OR CONTROVERSY
EXISTS;
IV. WHETHER OR NOT THE CASE OR CONTROVERSY IS RIPE
FOR JUDICIAL ADJUDICATION;
V. WHETHER OR NOT UNDER THE CIRCUMSTANCES, THE
RULE ON "HIERARCHY OF COURTS" MAY BE DISPENSED WITH;
VI. WHETHER OR NOT THE PETITIONERS POSSESS LOCUS
STANDI;
B. Substantive Issues
VII. WHETHER OR NOT THE COMELEC EN BANC ACTED WITH
GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR
EXCESS OF JURISDICTION IN GRANTING THE PROTEST AS
WELL AS IN DECLARING THE JOINT VENTURE OF
SMARTMATIC-TIM CORPORATION, TOTAL INFORMATION
MANAGEMENT CORPORATION, SMARTMATIC INTERNATIONAL
HOLDING B.V. AND JARLTECH INTERNATIONAL CORPORATION
AS THE BIDDER WITH THE LOWEST CALCULATED
RESPONSIVE BID IN CONNECTION WITH THE PUBLIC BIDDING
FOR THE LEASE WITH OPTION TO PURCHASE OF 23,000 NEW
UNITS OF PRECINCT-BASED OPTICAL MARK READER OR
OPTICAL SCAN SYSTEM FOR USE IN THE MAY 9, 2016
NATIONAL AND LOCAL ELECTIONS;
VIII. WHETHER OR NOT A WRIT OF PRELIMINARY INJUNCTION
OR TEMPORARY RESTRAINING ORDER SHOULD ISSUE.
In challenging the June 29, 2015 Decision, petitioners, filing as
taxpayers, alleged that the COMELEC en banc acted with grave
abuse of discretion amounting to lack or excess of jurisdiction in
declaring Smartmatic JV as the bidder with the lowest calculated
responsive bid. 30 According to petitioners, Smartmatic JV cannot be
declared eligible, even more so as the bidder with the lowest
calculated responsive bid, because one of its proponents, SMTC,
holding 46.5% of the shares of Smartmatic JV, no longer has a valid
corporate purpose as required under Sec. 14 of BP 68, which
pertinently reads:
Section 14. Contents of the articles of incorporation. — All
corporations organized under this code shall file with the Securities
and Exchange Commission articles of incorporation in any of the
official languages duly signed and acknowledged by all of the
incorporators, containing substantially the following matters, except
as otherwise prescribed by this Code or by special law: ATICcS
xxx xxx xxx
2. The specific purpose or purposes for which the corporation is being
incorporated. Where a corporation has more than one stated purpose,
the articles of incorporation shall state which is the primary purpose
and which is/are the secondary purpose or purposes: Provided, That
a non-stock corporation may not include a purpose which would
change or contradict its nature as such . . . .
As proof, petitioners cite the primary purpose of SMTC as stated in
the company's AOI, which was submitted to the COMELEC on
December 4, 2014 as part of the joint venture's eligibility documents.
To quote SMTC's primary purpose therein: 31
To do, perform and comply with all the obligations and responsibilities
of, and accord legal personality to, the joint venture of Total
Information Management Corporation ("TIM") and Smartmatic
International Corporation ("Smartmatic") arising under the Request for
Proposal and the Notice of Award issued by the Commission on
Elections ("COMELEC") for the automation of the 2010 national and
local elections ("Project"), including the leasing, selling, importing
and/or assembling of automated voting machines, computer software
and other computer services and/or otherwise deal in all kinds of
services to be used, offered or provided to the COMELEC for the
preparations and the conduct of the Project including project
management services. (emphasis added)
In concurrence with Commissioner Guia's opinion, petitioners argue
that the foregoing paragraph readily evinces that SMTC was created
solely for the automation of the 2010 National and Local Elections, not
for any other election. 32 Having already served its purpose, SMTC
no longer has authority to engage in business, so petitioners claim.
To allow SMTC then to have a hand in the succeeding elections would
be tolerating its performance of an ultra vires act.
Petitioners hasten to add that without a valid purpose, the company
could not have submitted a valid AOI, a procurement eligibility
requirement under Sec. 23.1 (b) of the IRR of RA 9184. For them, the
SEC's subsequent approval, on December 10, 2014, of the
amendments to SMTC's AOI cannot cure the partner corporation's
ineligibility because eligibility is determined at the time of the opening
of the bids, which, in this case, was conducted on December 4, 2014.
33
Finally, petitioners contend that SMTC misrepresented itself by
leading the BAC to believe that it may carry out the project despite its
limited corporate purpose, and by claiming that it is a Philippine
corporation when it is, allegedly, 100% foreign-owned. 34 They add
that misrepresentation is a ground for the procuring agency to
consider a bidder ineligible and disqualify it from obtaining an award
or contract. 35
In its Comment, 36 public respondent COMELEC, through the Office
of the Solicitor General (OSG), refuted the arguments of petitioners
on the main postulation that the sole issue raised before the
COMELEC en banc was limited to the technical aspect of the project.
37 According to the OSG, the sufficiency of the documents submitted
was already decided by the BAC on May 15, 2015 when it partially
granted Smartmatic JV's motion for reconsideration through BAC
Resolution No. 10. Anent the procedural issues, the OSG, in its bid to
have the case dismissed outright, questioned petitioners' locus standi
and failure to observe the hierarchy of courts. 38
Meanwhile, private respondents, in their Comment/Opposition, 39
countered that the BAC has thoroughly explained and laid down the
factual and legal basis behind its finding on Smartmatic JV's legal
capacity to participate as bidder in the project procurement; that the
issue on SMTC's AOI has been rendered moot by the SEC's
subsequent approval on December 10, 2014 of the AOI's amendment
broadening the company's primary purpose; 40 that SMTC's primary
purpose, as amended, now reads: 41
To sell, supply, lease, import, export, develop, assemble, repair and
deal with automated voting machines, canvassing equipment,
computer software, computer equipment and all other goods and
supplies, and/or to provide, render and deal in all kinds of services,
including project management services for the conduct of elections,
whether regular or special, in the Philippine(s) and to provide
Information and Communication Technology (ICT) goods and
services to private and government entities in the Philippines. TIADCc
that the alleged defect in SMTC's AOI is of no moment since neither
the law nor the bidding documents require a bidder to submit its AOI;
42 that even assuming for the sake of argument that SMTC's primary
purpose precludes it from further contracting for the automation of the
Philippine elections beyond 2010, its secondary purposes 43 and Sec.
42 of BP 68 44 authorize the company to do so; 45 and that the
COMELEC, in fact, has already dealt with SMTC numerous times
after the 2010 elections. 46
Private respondents would likewise debunk petitioners' allegation that
SMTC misrepresented its nationality. They argue that based on its
General Information Sheet (GIS), SMTC is a Filipino corporation, not
a foreign one as petitioners alleged. Moreover, what is only required
under RA 9184 is that the nationality of the joint venture be Filipino,
and not necessarily that of its individual proponents. 47 In any event,
so private respondents claim, the COMELEC, under the law, is not
prohibited from acquiring election equipment from foreign sources,
rendering SMTC and even Smartmatic JV's nationality immaterial. 48
Lastly, private respondents pray for the petition's outright dismissal,
following petitioner Akol and Lagman's alleged failure to comply with
the rules on verifications, on the submission of certifications against
forum-shopping, and on the efficient use of paper. 49
The Court's Ruling
The petition lacks merit.
Rule 64 is not applicable in assailing
the COMELEC en banc's Decision
granting Smartmatic JV's protest
In arguing for the propriety of the remedial vehicle chosen, petitioners
claim that under Rule 64, Sec. 2 of the Rules of Court, "[a] judgment
or final order or resolution of the Commission on Elections . . . may be
brought by the aggrieved party to the Supreme Court on certiorari
under Rule 65." 50 They postulate that the June 29, 2015 Decision of
the COMELEC en banc declaring Smartmatic JV as the eligible bidder
with the lowest calculated responsive bid is a "judgment" within the
contemplation of the rule, and is, therefore, a proper subject of a Rule
64 petition.
The argument fails to persuade.
a. Rule 64 does not cover rulings of the
COMELEC in the exercise of its
administrative powers
The rule cited by petitioners is an application of the constitutional
mandate requiring that, unless otherwise provided by law, the rulings
of the constitutional commissions shall be subject to review only by
the Supreme Court on certiorari. A reproduction of Article IX-A,
Section 7 of the 1987 Constitution is in order:
Section 7. Each Commission shall decide by a majority vote of all its
Members, any case or matter brought before it within sixty days from
the date of its submission for decision or resolution. A case or matter
is deemed submitted for decision or resolution upon the filing of the
last pleading, brief, or memorandum required by the rules of the
Commission or by the Commission itself. Unless otherwise provided
by this Constitution or by law, any decision, order, or ruling of each
Commission may be brought to the Supreme Court on certiorari by
the aggrieved party within thirty days from receipt of a copy thereof.
(emphasis added)
Though the provision appears unambiguous and unequivocal, the
Court has consistently held that the phrase "decision, order, or ruling"
of constitutional commissions, the COMELEC included, that may be
brought directly to the Supreme Court on certiorari is not all-
encompassing, and that it only relates to those rendered in the
commissions' exercise of adjudicatory or quasi-judicial powers. 51 In
the case of the COMELEC, this would limit the provision's coverage
to the decisions, orders, or rulings issued pursuant to its authority to
be the sole judge of generally all controversies and contests relating
to the elections, returns, and qualifications of elective offices. 52
Consequently, Rule 64, which complemented the procedural
requirement under Article IX-A, Section 7, should likewise be read in
the same sense — that of excluding from its coverage decisions,
rulings, and orders rendered by the COMELEC in the exercise of its
administrative functions. In such instances, a Rule 65 petition for
certiorari is the proper remedy. As held in Macabago v. COMELEC:
53 AIDSTE
[A] judgment or final order or resolution of the COMELEC may be
brought by the aggrieved party to this Court on certiorari under Rule
65, as amended, except as therein provided. We ruled in Elpidio M.
Salva, et al. vs. Hon. Roberto L. Makalintal, et al. (340 SCRA 506
(2000)) that Rule 64 of the Rules applies only to judgments or final
orders of the COMELEC in the exercise of its quasi-judicial functions.
The rule does not apply to interlocutory orders of the COMELEC in
the exercise of its quasi-judicial functions or to its administrative
orders. In this case, the assailed order of the COMELEC declaring
private respondents petition to be one for annulment of the elections
or for a declaration of a failure of elections in the municipality and
ordering the production of the original copies of the VRRs for the
technical examination is administrative in nature. Rule 64, a
procedural device for the review of final orders, resolutions or decision
of the COMELEC, does not foreclose recourse to this Court under
Rule 65 from administrative orders of said Commission issued in the
exercise of its administrative function.
As applied herein, recall that the instant petition revolves around the
issue on whether or not Smartmatic JV is eligible to participate in the
bidding process for the COMELEC's procurement of 23,000 units of
optical mark readers. The case does not stem from an election
controversy involving the election, qualification, or the returns of an
elective office. Rather, it pertains to the propriety of the polling
commission's conduct of the procurement process, and its initial
finding that Smartmatic JV is eligible to participate therein. It springs
from the COMELEC's compliance with the Constitutional directive to
enforce and administer all laws and regulations relative to the conduct
of an election. 54 Specifically, it arose from the electoral commission's
exercise of Sec. 12 of RA 8436, otherwise known as the Automated
Elections Law, as amended by RA 9369, 55 which authorized the
COMELEC "to procure, in accordance with existing laws, by
purchase, lease, rent or other forms of acquisition, supplies,
equipment, materials, software, facilities, and other services, from
local or foreign sources free from taxes and import duties, subject to
accounting and auditing rules and regulation."
The subject matter of Smartmatic JV's protest, therefore, does not
qualify as one necessitating the COMELEC's exercise of its
adjudicatory or quasi-judicial powers that could properly be the
subject of a Rule 64 petition, but is, in fact, administrative in nature.
Petitioners should then have sought redress via a petition for the
issuance of the extraordinary writ of certiorari under Rule 65 to assail
the COMELEC en banc's June 29, 2015 Decision granting the protest.
As a caveat, however, the writ will only lie upon showing that the
COMELEC acted capriciously or whimsically, with grave abuse of
discretion amounting to lack or excess of jurisdiction in issuing the
Decision, such as where the power is exercised in an arbitrary or
despotic manner by reason of passion or personal hostility. The abuse
of discretion must be so patent and gross as to amount to an evasion
of positive duty or to a virtual refusal to perform the duty enjoined or
to act at all in contemplation of law. 56 Mere abuse of discretion will
not suffice.
It goes without saying that petitioners' action, having been lodged
through an improper petition, is susceptible to outright dismissal. As
the Court held in Pates v. COMELEC, 57 a Rule 64 petition cannot
simply be equated to Rule 65 even if it expressly refers to the latter
rule. 58 The clear distinction between the instant petition and Pates,
however, is that in Pates, therein petitioner failed to present an
exceptional circumstance or any compelling reason that would have
warranted the liberal application of the Rules of Court. In stark
contrast, herein petitioners, as will later on be discussed, were able to
establish a meritorious case for the relaxation of the rules, relieving
them from the rigid application of procedural requirements. We
therefore treat the instant recourse as one filed not merely in relation
to, but under Rule 65.
This brings us now to the question on where the petition ought to have
been filed.
b. Jurisdiction of the RTC over rulings
of the head of the procuring entity
relating to procurement protests
Guilty of reiteration, the COMELEC en banc was not resolving an
election controversy when it resolved the protest, but was merely
performing its function to procure the necessary election
paraphernalia for the conduct of the 2016 National and Local
Elections. This power finds statutory basis in Sec. 12 of RA 8436, 59
as amended, which reads: AaCTcI
SEC. 12. Procurement of Equipment and Materials. — To achieve the
purpose of this Act, the Commission is authorized to procure, in
accordance with existing laws, by purchase, lease, rent or other forms
of acquisition, supplies, equipment, materials, software, facilities, and
other service, from local or foreign sources free from taxes and import
duties, subject to accounting and auditing rules and regulation. With
respect to the May 10, 2010 election and succeeding electoral
exercises, the system procured must have demonstrated capability
and been successfully used in a prior electoral exercise here or board.
Participation in the 2007 pilot exercise shall not be conclusive of the
system's fitness.
In determining the amount of any bid from a technology, software or
equipment supplier, the cost to the government of its deployment and
implementation shall be added to the bid price as integral thereto. The
value of any alternative use to which such technology, software or
equipment can be put for public use shall not be deducted from the
original face value of the said bid. (emphasis added)
In Pabillo v. COMELEC, 60 the Court held that the "existing laws"
adverted to in the provision is none other than RA 9184. The law is
designed to govern all cases of procurement of the national
government, its departments, bureaus, offices and agencies,
including state universities and colleges, government-owned and/or-
controlled corporations, government financial institutions and local
government units. 61 It mandates that as a general rule, all
government procurement must undergo competitive bidding 62 and
for purposes of conducting the bidding process, the procuring entity
convenes a BAC.
The BAC is tasked to oversee the entire procuring process, from
advertisement of the project to its eventual award. 63 It is the first to
rule on objections or complaints relating to the conduct of the bidding
process, subject to review by the head of the procuring entity via
protest. As outlined in RA 9184, the protest mechanism in
procurement processes is as follows:
ARTICLE XVII
PROTEST MECHANISM
Section 55. Protests on Decisions of the BAC. — Decisions of the
BAC in all stages of procurement may be protested to the head of the
procuring entity and shall be in writing. Decisions of the BAC may be
protested by filing a verified position paper and paying a non-
refundable protest fee. The amount of the protest fee and the periods
during which the protests may be filed and resolved shall be specified
in the IRR.
Section 56. Resolution of Protests. — The protest shall be resolved
strictly on the basis of records of the BAC. Up to a certain amount to
be specified in the IRR, the decisions of the Head of the Procuring
Entity shall be final.
Section 57. Non-interruption of the Bidding Process. — In no case
shall any protest taken from any decision treated in this Article stay or
delay the bidding process. Protests must first be resolved before any
award is made.
Section 58. Resort to Regular Courts; Certiorari. — Court action may
be resorted to only after the protests contemplated in this Article shall
have been completed. Cases that are filed in violation of the process
specified in this Article shall be dismissed for lack of jurisdiction. The
regional trial court shall have jurisdiction over final decision of the
head of the procuring entity. Court actions shall be governed by Rule
65 of the 1997 Rules of Civil Procedure.
This provision is without prejudice to any law conferring on the
Supreme court the sole jurisdiction to issue temporary restraining
orders and injunctions relating to Infrastructure Projects of
Government. (emphasis added) EcTCAD
Thus, under Sec. 58, the proper remedy to question the ruling of the
head of the procuring entity is through a Rule 65 petition for certiorari
with the Regional Trial Court (RTC). The term "procuring entity" is
defined under the RA 9184 as "any branch, department, office,
agency, or instrumentality of the government, including state
universities and colleges, government-owned and/or -controlled
corporations, government financial institutions, and local government
units procuring Goods, Consulting Services and Infrastructure
Projects." 64 This statutory definition makes no distinction as to
whether or not the procuring entity is a constitutional commission
under Article IX of the Constitution. It is broad enough to include the
COMELEC within the contemplation of the term. Hence, under the
law, grievances relating to the COMELEC rulings in protests over the
conduct of its project procurement should then be addressed to the
RTC.
The mandatory recourse to the RTC in the appeal process applicable
to COMELEC procurement project is not a novel development
introduced by RA 9184. Even prior to the advent of the government
procurement law, the requirement already finds jurisprudential
support in Filipinas Engineering and Machine Shop v. Ferrer, 65
wherein the Court expounded this way:
[I]t has been consistently held that it is the Supreme Court, not the
Court of First Instance, which has exclusive jurisdiction to review on
certiorari final decisions, orders or rulings of the COMELEC relative to
the conduct of elections and enforcement of election laws.
We are however, far from convince[d] that an order of the COMELEC
awarding a contract to a private party, as a result of its choice among
various proposals submitted in response to its invitation to bid comes
within the purview of a "final order" which is exclusively and directly
appealable to this court on certiorari. What is contemplated by the
term "final orders, rulings and decisions" of the COMELEC reviewable
by certiorari by the Supreme Court as provided by law are those
rendered in actions or proceedings before the COMELEC and taken
cognizance of by the said body in the exercise of its adjudicatory or
quasi-judicial powers.
xxx xxx xxx
[T]he order of the Commission granting the award to a bidder is not
an order rendered in a legal controversy before it wherein the parties
filed their respective pleadings and presented evidence after which
the questioned order was issued; and that this order of the
commission was issued pursuant to its authority to enter into contracts
in relation to election purposes. In short, the COMELEC resolution
awarding the contract in favor of Acme was not issued pursuant to its
quasi-judicial functions but merely as an incident of its inherent
administrative functions over the conduct of elections, and hence, the
said resolution may not be deemed as a "final order" reviewable by
certiorari by the Supreme Court. Being non-judicial in character, no
contempt may be imposed by the COMELEC from said order, and no
direct and exclusive appeal by certiorari to this Tribunal lie from such
order. Any question arising from said order may be well taken in an
ordinary civil action before the trial courts. (emphasis added)
Additionally, even if the Court treats the protest proceeding as part of
the procuring agency's adjudicatory function, the Court notes that
Sec. 58 of RA 9184 would nevertheless apply, and the RTC would still
have jurisdiction, pursuant to the proviso "unless otherwise provided
by law" as appearing in Article IX-A, Section 7 of the Constitution. In
this case, the pertinent law provides that insofar as rulings of the
COMELEC in procurement protests are concerned, said rulings can
be challenged through a Rule 65 certiorari with the RTC.
c. The protest mechanism under RA
9184 can only be availed of by a
losing bidder
Nevertheless, the application of Sec. 58 of RA 9184 has to be
qualified. It cannot, in all instances, be the proper remedy to question
the rulings of the heads of procuring entities in procurement protests.
As in the prior case of Roque v. COMELEC, 66 which similarly dealt
with COMELEC procurement of OMRs the Court held that only a
losing bidder would be aggrieved by, and ergo would have the
personality to challenge, the head of the procuring entity's ruling in the
protest. This is bolstered by the GPRA IRR, which fleshed out the
provisions of RA 9184 thusly:
RULE XVII — PROTEST MECHANISM
Section 55. Protests on Decisions of the BAC. —
55.1. Decisions of the BAC at any stage of the procurement process
may be questioned by filing a request for reconsideration within the
three (3) calendar days upon receipt of written notice or upon verbal
notification. The BAC shall decide on the request for reconsideration
within seven (7) calendar days from receipt thereof. HSAcaE
If a failed bidder signifies his intent to file a request for reconsideration,
the BAC shall keep the bid envelopes of the said failed bidder
unopened and/or duly sealed until such time that the request for
reconsideration has been resolved.
55.2. In the event that the request for reconsideration is denied,
decisions of the BAC may be protested in writing to the Head of the
Procuring Entity: Provided, however, That a prior request for
reconsideration should have been filed by the party concerned in
accordance with the preceding Section, and the same has been
resolved.
55.3. The protest must be filed within seven (7) calendar days from
receipt by the party concerned of the resolution of the BAC denying
its request for reconsideration. A protest may be made by filing a
verified position paper with the Head of the Procuring Entity
concerned, accompanied by the payment of a non-refundable protest
fee. The non-refundable protest fee shall be in an amount equivalent
to no less than one percent (1%) of the ABC.
55.4. The verified position paper shall contain the following
information:
a) The name of bidder;
b) The office address of the bidder;
c) The name of project/contract;
d) The implementing office/agency or procuring entity;
e) A brief statement of facts;
f) The issue to be resolved; and
g) Such other matters and information pertinent and relevant to the
proper resolution of the protest.
The position paper is verified by an affidavit that the affiant has read
and understood the contents thereof and that the allegations therein
are true and correct of his personal knowledge or based on authentic
records. An unverified position paper shall be considered unsigned,
produces no legal effect, and results to the outright dismissal of the
protest.
xxx xxx xxx
Section 58. Resort to Regular Courts; Certiorari.
58.1. Court action may be resorted to only after the protests
contemplated in this Rule shall have been completed, i.e., resolved
by the Head of the Procuring Entity with finality. The regional trial court
shall have jurisdiction over final decisions of the Head of the Procuring
Entity. Court actions shall be governed by Rule 65 of the 1997 Rules
of Civil Procedure. (emphasis added)
Evidently, the remedy of certiorari filed before the RTC under Sec. 58
of RA 9184 is intended as a continuation of the motion for
reconsideration filed before the BAC, and of the subsequent protest
filed with the head of the procuring entity. This is confirmed by the
condition sine qua non completion of the process under Rule XVII,
Secs. 55-57 of the GPRA IRR before recourse to the trial courts
become available.
It is obvious under Sec. 55.1 of Rule XVII that only a failed bidder can
turn the cogs of the protest mechanism by first moving for
reconsideration of the assailed BAC ruling. The party concerned, the
bidder adversely affected by the resolution of the motion, shall then
have seven (7) days to file a protest with the head of the procuring
entity. The pre-requisite that a protestant should likewise be a bidder
is emphasized by Sec. 55.4 which requires that the "name of the
bidder" and the "office address of the bidder" be indicated in its
position paper. Accordingly, only the bidder against whom the head of
the procuring entity ruled, if it would challenge the ruling any further,
is required to resort to filing a petition for certiorari before the trial
courts under Sec. 58. Ego, there is neither rhyme nor reason for
petitioners herein, who are non-participants in the procurement
project, to comply with the rules on protest under RA 9184, part and
parcel of which is the exclusivity of the jurisdiction of the RTC under
Sec. 58 thereof. Stated in the alternative, there is no legislative
enactment requiring petitioners to seek recourse first with the RTC to
question the COMELEC en banc's June 29, 2015 Decision. Thus, if
circumstances so warrant, direct resort to the Court will be allowed.
HESIcT
d. Hierarchy of courts and the
exceptions to the doctrine
The expanded concept of judicial power under Article VIII, Section 1
of the Constitution 67 includes the duty of the judiciary not only "to
settle actual controversies involving rights which are legally
demandable and enforceable" but also, as an instrument of checks
and balances, "to determine whether or not there has been a grave
abuse of discretion amounting to lack or excess of jurisdiction on the
part of any branch or instrumentality of the Government." 68 Under
Rule 65 of the Rules of Court, the special civil actions for certiorari
and prohibition are the available remedies for determining and
correcting such grave abuses of discretion.
The power is wielded not by the Court alone, but concurrently with the
Court of Appeals and the Regional Trial Courts, as provided by law.
With respect to the Court of Appeals, Section 9 (1) of Batas
Pambansa Blg. 129 (BP 129) gives the appellate court original
jurisdiction to issue, among others, a writ of certiorari, whether or not
in aid of its appellate jurisdiction. For the RTCs, the power to issue a
writ of certiorari, in the exercise of their original jurisdiction, is provided
under Section 21 of BP 129. 69 Additionally, the Court has already
held that the CTA, by constitutional mandate, is likewise vested with
jurisdiction to issue writs of certiorari. 70 So too has the
Sandiganbayan been vested with certiorari powers in aid of its
appellate jurisdiction. 71
Notwithstanding the non-exclusivity of the original jurisdiction over
applications for the issuance of writs of certiorari, however, the
doctrine of hierarchy of courts dictates that recourse must first be
made to the lower-ranked court exercising concurrent jurisdiction with
a higher court. 72 The rationale behind the principle is explained in
Bañez, Jr. v. Concepcion 73 in the following wise:
The Court must enjoin the observance of the policy on the hierarchy
of courts, and now affirms that the policy is not to be ignored without
serious consequences. The strictness of the policy is designed to
shield the Court from having to deal with causes that are also well
within the competence of the lower courts, and thus leave time to the
Court to deal with the more fundamental and more essential tasks that
the Constitution has assigned to it. The Court may act on petitions for
the extraordinary writs of certiorari, prohibition and mandamus only
when absolutely necessary or when serious and important reasons
exist to justify an exception to the policy.
Petitioners do not have the absolute and unrestrained freedom of
choice of the court to which an application for certiorari will be
directed. 74 Indeed, referral to the Supreme Court as the court of last
resort will simply be empty rhetoric if party-litigants are able to flout
judicial hierarchy at will. The Court reserves the direct invocation of its
jurisdiction only when there are special and important reasons clearly
and especially set out in the petition that would justify the same. 75
In the leading case of The Diocese of Bacolod v. Comelec, 76 the
Court enumerated the specific instances when direct resort to this
Court is allowed, to wit:
(a) When there are genuine issues of constitutionality that must be
addressed at the most immediate time;
(b) When the issues involved are of transcendental importance;
(c) Cases of first impression;
(d) When the constitutional issues raised are best decided by this
Court;
(e) When the time element presented in this case cannot be ignored;
(f) When the petition reviews the act of a constitutional organ;
(g) When there is no other plain, speedy, and adequate remedy in the
ordinary course of law;
(h) When public welfare and the advancement of public policy so
dictates, or when demanded by the broader interest of justice; caITAC
(i) When the orders complained of are patent nullities; and
(j) When appeal is considered as clearly an inappropriate remedy.
The Court finds the second and fifth, and sixth grounds applicable in
the case at bar. Much has already been said of the "compelling
significance and the transcending public importance" of the primordial
issue underpinning petitions that assail election automation contracts:
the success — and the far-reaching grim implications of the failure —
of the nationwide automation project. 77 So it is that the Court, in the
growing number of cases concerning government procurement of
election paraphernalia and services, has consistently exhibited
leniency and dispensed of procedural requirements for petitioners to
successfully lodge certiorari petitions. 78 Technicalities should not
stand in the way of resolving the substantive issues petitioners raised
herein. On this same ground of transcendental importance, the Court
may opt to treat the instant petition as one for certiorari under, not
merely in relation to, Rule 65.
As regards the fifth ground, the time element, it is sufficient to state
that with the 2016 polls visible in the horizon, the post-haste resolution
of this case becomes all the more imperative. It would be the height
of absurdity to require petitioners to undergo scrutiny through the lens
of the RTC first, considering that the acquisition of 23,000 OMRs
would, at the minimum, affect the clustering of precincts. Without the
finalized list of clustered precincts, the polling place for the registered
voters could not yet be ascertained. Needless to state, this would
impede the preparations for the conduct of the polls and its
unmitigated effects could very well lead to mass disenfranchisement
of voters.
Lastly, the sixth ground is indubitably applicable. The rulings of the
COMELEC, as a constitutional body, can immediately be reviewed by
the Court on proper petition. As quoted in The Diocese of Bacolod v.
COMELEC, 79 citing Albano v. Arranz, 80 "it is easy to realize the
chaos that would ensue if the Court of First Instance of each and every
province were [to] arrogate itself the power to disregard, suspend, or
contradict any order of the Commission on Elections: that
constitutional body would be speedily reduced to impotence."
In sum, there exist ample compelling reasons to justify the direct
resort to the Court as a departure from the doctrine of hierarchy of
courts not in relation to but under Rule 65 of the Rules of Court on
certiorari and prohibition, and to brush aside the procedural issues in
this case to focus on the substantive issues surrounding the
procurement of the 23,000 additional OMRs for the 2016 elections.
The submission of an AOI
is not an eligibility criterion
It bears stressing on the outset that no issue has been brought forth
questioning the technical capability of Smartmatic JV's OMR+.
Instead, the pivotal point to be resolved herein is whether or not the
COMELEC acted with grave abuse of discretion in declaring
Smartmatic JV eligible in spite of the alleged nullity of, or defect in,
SMTC's AOI.
Petitioner would first insist that the submission of an AOI is an
eligibility requirement that Smartmatic JV cannot be deemed to have
complied with. In addressing this assertion, a discussion of the
qualification process is apropos.
a. The submission of an AOI was not
a pre-qualification requirement
It is a basic tenet that except only in cases in which alternative
methods of procurement are allowed, all government procurement
shall be done by competitive bidding. This is initiated by the BAC,
which publishes an Invitation to Bid for contracts under competitive
bidding in order to ensure the widest possible dissemination thereof.
81
Answering the invitation, interested participants submit their bids
using the forms specified in the bidding documents in two (2) separate
sealed bid envelopes submitted simultaneously. The first contains the
technical component of the bid, including the eligibility requirements
under Section 23.1 of GPRA IRR, while the second contains the
financial component of the bid. 82
The BAC then sets out to determine the eligibility of the prospective
bidders based on their compliance with the eligibility requirements set
forth in the Invitation to Bid and their submission of the legal, technical
and financial documents required under RA 9184 and the GPRA IRR.
83 The first screening is done via the pre-qualification stage as
governed by Sec. 30.1 of RA 9184's IRR, which pertinently reads:
ICHDca
Section 30. Preliminary Examination of Bids. —
30.1. The BAC shall open the first bid envelopes of prospective
bidders in public to determine each bidder's compliance with the
documents required to be submitted for eligibility and for the technical
requirements, as prescribed in this IRR. For this purpose, the BAC
shall check the submitted documents of each bidder against a
checklist of required documents to ascertain if they are all present,
using a nondiscretionary "pass/fail" criterion, as stated in the
Instructions to Bidders. If a bidder submits the required document, it
shall be rated "passed" for that particular requirement. In this regard,
bids that fail to include any requirement or are incomplete or patently
insufficient shall be considered as "failed". Otherwise, the BAC shall
rate the said first bid envelope as "passed." (emphasis added)
For the procurement of highly technical goods wherein the two-stage
bidding process is employed, such as the subject of procurement in
this case, the same procedure for pre-qualification outlined above is
followed in the first stage, except that the technical specifications are
only in the form of performance criteria, and that the technical
proposals will not yet include price tenders. 84
Based on the rule, the BAC's function in determining the eligibility of
a bidder during pre-qualification is ministerial in the sense that it only
needs to countercheck the completeness and sufficiency of the
documents submitted by a bidder against a checklist of requirements.
It cannot, therefore, declare a bidder ineligible for failure to submit a
document which, in the first place, is not even required in the bid
documents.
Citing Sec. 23.1 (b) of the GPRA IRR, petitioners contend that an AOI
is one of such mandatory documentary requirements and that the
failure of a bidder to furnish the BAC a valid one would automatically
render the bidder ineligible.
We are not convinced.
Sec. 23 of the adverted GPRA IRR reads:
Section 23. Eligibility Requirements for the Procurement of Goods and
Infrastructure Projects.
23.1. For purposes of determining the eligibility of bidders using the
criteria stated in Section 23.5 of this IRR, only the following
documents shall be required by the BAC, using the forms prescribed
in the Bidding Documents:
a) Class "A" Documents
Legal Documents
i) Registration certificate from SEC, Department of Trade and Industry
(DTI) for sole proprietorship, or CDA for cooperatives, or any proof of
such registration as stated in the Bidding Documents.
ii) Mayor's permit issued by the city or municipality where the principal
place of business of the prospective bidder is located.
iii) Tax clearance per Executive Order 398, Series of 2005, as finally
reviewed and approved by the BIR.
Technical Documents
iv) Statement of the prospective bidder of all its ongoing government
and private contracts, including contracts awarded but not yet started,
if any, whether similar or not similar in nature and complexity to the
contract to be bid; and Statement identifying the bidder's single largest
completed contract similar to the contract to be bid, except under
conditions provided for in Section 23.5.1.3 of this IRR, within the
relevant period as provided in the Bidding Documents in the case of
goods. All of the above statements shall include all information
required in the PBDs prescribed by the GPPB.
v) In the case of procurement of infrastructure projects, a valid
Philippine Contractors Accreditation Board (PCAB) license and
registration for the type and cost of the contract to be bid. Financial
Documents.
vi) The prospective bidder's audited financial statements, showing,
among others, the prospective bidder's total and current assets and
liabilities, stamped "received" by the BIR or its duly accredited and
authorized institutions, for the preceding calendar year which should
not be earlier than two (2) years from the date of bid submission.
TCAScE
vii) The prospective bidder's computation for its Net Financial
Contracting Capacity (NFCC).
b) Class "B" Document
Valid joint venture agreement (JVA), in case the joint venture is
already in existence. In the absence of a JVA, duly notarized
statements from all the potential joint venture partners stating that
they will enter into and abide by the provisions of the JVA in the
instance that the bid is successful shall be included in the bid. Failure
to enter into a joint venture in the event of a contract award shall be
ground for the forfeiture of the bid security. Each partner of the joint
venture shall submit the legal eligibility documents. The submission of
technical and financial eligibility documents by any of the joint venture
partners constitutes compliance. (emphasis added)
Clearly, the quoted provisions, as couched, do not require the
submission of an AOI in order for a bidder to be declared eligible. The
requirement that bears the most resemblance is the submission by
each partner to the venture of a registration certificate issued by the
Securities and Exchange Commission, but compliance therewith was
never disputed by the petitioners. Moreover, it was never alleged that
Smartmatic JV was remiss in submitting a copy of its joint venture
agreement pursuant to Sec. 23.1 (b), which petitioners specifically
invoked.
It may be that the procuring entity has the option to additionally require
the submission of the bidders' respective AOIs in order to substantiate
the latter's claim of due registration with the government entities
concerned. However, a perusal of the bidding documents would
readily reveal that the procuring entity, the COMELEC in this case, did
not impose such a requirement. As can be gleaned in the Instruction
to Bidders, 85 only the following documents were required for
purposes of determining a bidder's eligibility:
12. Documents Comprising the Bid: Eligibility and Technical
Components
12.1. Unless otherwise indicated in the BDS, the first envelope shall
contain the following eligibility and technical documents:
(a) Eligibility Documents —
Class "A" Documents:
(i) Registration certificate from the Securities and Exchange
Commission (SEC), Department of Trade and Industry (DTI) for sole
proprietorships, and Cooperative Development Authority (CDA) for
cooperatives, or any proof of such registration as stated in the BDS;
(ii) Mayor's permit issued by the city or municipality where the principal
place of business of the prospective bidder is located;
(iii) Statement of all its ongoing and completed government and
private contracts within the period stated in the BDS, including
contracts awarded but not yet started, if any. The statement shall
include, for each contract, the following:
(iii.1) name of the contract;
(iii.2) date of the contract;
(iii.3) kinds of Goods;
(iii.4) amount of contract and value of outstanding contracts;
(iii.5) date of delivery; and
(iii.6) end user's acceptance or official receipt(s) issued for the
contract, if completed. cTDaEH
(iv) Audited financial statements, stamped "received" by the Bureau
of Internal Revenue (BIR) or its duly accredited and authorized
institutions, for the preceding calendar year, which should not be
earlier than two (2) years from the bid submission;
(v) NFCC computation or CLC in accordance with ITB Clause 5.5; and
(vi) Tax clearance per Executive Order 398, Series of 2005, as finally
reviewed and approved by the BIR. (Updated pursuant to GPPB
Resolution No. 21-2013 dated July 30, 2013)
Class "B" Document:
(vii) If applicable, the JVA in case the joint venture is already in
existence, or duly notarized statements from all the potential joint
venture partners stating that they will enter into and abide by the
provisions of the JVA in the instance that the bid is successful;
(viii) Social Security Clearance (SSS);
(ix) Department of Labor and Employment Clearance (DOLE);
(x) Court Clearance (Regional Trial Court) (emphasis omitted)
CLASS "A" DOCUMENTS
I. LEGAL DOCUMENTS:
(In case of a Joint Venture, each member of the JV shall
submit the
required Documents mentioned in Tabs "A", "B", "C" and
"I")
A. Registration Certificate Form
Securities and Exchange Commission from the Securities
and Exchange
Commission (SEC) for Corporation or Partnership; or its
equivalent
documents in case of foreign bidder.
Department of Trade and Industry (DTI) for sole
proprietorship; or its
equivalent documents in case of foreign bidder.
Cooperative Development Authority, for Cooperatives or its
equivalent
documents in case of foreign bidder.
B. Mayor's Permit issued by the city or municipality where the existence at the time of the submission and opening of bids,
principal place OR duly

of business of the prospective bidder is located or its notarized statements from all potential joint venture
equivalent document in partners stating that they

case of a foreign corporation. will enter into and abide by the provisions of the JVA if the
bid is

successful;
C. Tax Clearance per Executive Order 398, Series of 2005, as
finally reviewed

and approved by the BIR. IV.

OTHER DOCUMENTS

II. TECHNICAL DOCUMENTS

J. Conformity with the Schedule of Requirements and Initial

Technical
D. Statement of all ongoing and completed government and
private contracts, Proposal (approved TOR), as enumerated and specified in
Sections VI and
within the last six (6) years from the date of submission and
receipt of bids, VII of the Bidding Documents, using the prescribed form.

including contracts awarded but not yet started, if any, using

the prescribed
K. Certification from the Election Authority or Election
form. Please refer to Section VIII. Bidding Forms. Management Body that

the system has demonstrated capability and has been

successfully used in a
E. Statement of at least one similar completed largest contract
within six (6) prior electoral exercise here or abroad.

years from the date of the opening bids equivalent to at

least 50% of the
L. Omnibus Sworn Statement using the prescribed form in
ABC, using the prescribed form. Please refer to Section Section VIII.
VIII. Bidding Forms.

Even the furnished Schedule of Requirements 89 does not mandate

F. Bid security in the form, amount and validity in accordance the submission of an AOI: 90 cSaATC
with ITB Clause

18.
CORPORATION/

JOINT
III. FINANCIAL DOCUMENTS

SP/PARTNERSHIP
G. Audited financial statements, stamped received by the
Bureau of Internal VENTURE

Revenue (BIR) or its duly accredited and authorized REQUIREMENTS

institutions, for the
PASSED
preceding calendar year, which should not be earlier than
two (2) years from FAILED

bid submission; or equivalent documents in case of foreign PASSED

bidder, provided
FAILED
that the same is in accordance with International Financial
Reporting ...

Standards. ________

________

H. NFCC Computation in accordance with ITB clause 5. ________

________

TAB ELIGIBILITY DOCUMENTS

CLASS "B" ELIGIBILITY REQUIREMENTS ________

________

I. Valid Joint Venture Agreement (JVA), in case the Joint ________

Venture is already in
________
 1. LEGAL DOCUMENTS

________ for Cooperatives or any proof of

________

________

________

I. Class "A" Documents

________ such registration as stated in the

________

________

________

a. Original/Certified true copy of BDS;

Registration Certificate from the (In case of a JV, this requirement

Securities and Exchange must be complied with by all the

Commission (SEC), Department JV partners)

________

________

________

________

of Trade and Industry (DTI) for

b. Original/Certified true copy of valid

sole proprietorship, or Cooperative

and current Mayor's/Business Permit/

Development Authority (CDA)

License issued by the city or

 municipality where the principal

(In case of a JV, this requirement

place of business of the prospective

must be complied with by all the

bidder is located;

JV partners)

________

________

________

(In case of a JV, this requirement ________

2. TECHNICAL DOCUMENTS

________

________

must be complied with by all the ________

________

d. Sworn Statement of all its on-going

JV partners)

________

________

________ and completed government and

________

c. Original/Certified true copy of valid

private contracts within the last six

Tax Clearance per Executive Order

(6) years prior to the deadline for

398, Series of 2005

 the submission and opening of bids,

opening of bids, with a value of

including contracts awarded but not

FIFTY (50%) per cent of the ABC.

________

________

________

yet started, if any. The statement ________

f. The bid security (Payable to

shall include, for each of the

COMELEC) shall be in the

contract, the following: . . .

________

________ following amount: . . .

________ ________

________ ________

________

e. Sworn Statement of the bidder's ________

3. FINANCIAL DOCUMENTS

________

________

single largest contract completed ________

________

g. Audited Financial Statements

within six (6) YEARS prior to the

(AFS), stamped "received" by the

deadline for the submission and

Bureau of Internal Revenue (BIR)

 4. OTHERS

________

________

________

or its duly accredited and authorized ________

i. Conformity with Section VI:

institutions, for the preceding

Schedule of Requirements of the

calendar year . . .

________

________ Bidding Documents

________ ________

________ ________

h. NFCC computation which shall be ________

________

j. Conformity with Section VII.

based only on the current assets and

Technical Specifications of the

current liabilities submitted to the

Bidding Documents. If proposal

BIR, through Electronic Filing and

is the same with the initial

Payment System (EFPS)

________

________

________ technical requirements, just put

________
 COMPLY

________

________ of the IRR of RA 9184 and using

________

________

k. Certification from the Election

the form prescribed in Section VIII

Authority or Election management

of the Philippine bidding

Body that the system has

Documents. Shall include: . . .

________

________

________

demonstrated capability and has ________

been successfully used in a prior
Verily, based on Sec. 23.1 (b) of the GPRA IRR, the Instruction to
Bidders, the BDS, and the Checklist of Requirements, the non-
submission of an AOI is not fatal to a bidder's eligibility to contract the
project at hand. Thus, it cannot be considered as a ground for
declaring private respondents ineligible to participate in the bidding
process. To hold otherwise would mean allowing the BAC to consider
documents beyond the checklist of requirements, in contravention of
their non-discretionary duty under Sec. 30 (1) of the GPRA IRR.

b. Neither is the AOI a post-

qualification requirement

After the preliminary examination stage, the BAC opens, examines,

electoral exercise here or abroad.
evaluates and ranks all bids and prepares the Abstract of Bids which
________ contains, among others, the names of the bidders and their
corresponding calculated bid prices arranged from lowest to highest.
________ The objective of the bid evaluation is to identify the bid with the lowest
calculated price or the Lowest Calculated Bid. The Lowest Calculated
________ Bid shall then be subject to post-qualification to determine its
responsiveness to the eligibility and bid requirements. 91
________
During post-qualification, the procuring entity verifies, validates, and
ascertains all statements made and documents submitted by the
bidder with the lowest calculated or highest rated bid using a non-
l. OMNIBUS AFFIDAVIT in discretionary criteria as stated in the bidding documents. 92 If, after
post-qualification, the Lowest Calculated Bid is determined to be post-
qualified, it shall be considered the Lowest Calculated Responsive Bid
and the contract shall be awarded to the bidder. 93

To recall, the BAC, on December 15, 2014, declared that only

Smartmatic JV and Indra were eligible to participate in the second
stage of the bidding process. Of the two, only Smartmatic JV
submitted a complete and responsive Overall Summary of the
accordance with Section 25.2(a)(iv) Financial Proposal and was thus subjected to post-qualification
evaluation. Initially, the BAC post-disqualified Smartmatic JV for
allegedly failing to submit a valid AOI. It is this preliminary finding that
petitioners want reinstated.
We disagree.
Even on post-qualification, the submission of an AOI was not included
as an added requirement. The Instruction to Bidders pertinently
provides: 94
29. Post-Qualification
29.1. The Procuring Entity shall determine to its satisfaction whether
the Bidder that is evaluated as having submitted the Lowest
Calculated Bid (LCB) complies with and is responsive to all the
requirements and conditions specified in ITB Clauses 5, 12 and 13.
cHDAIS
xxx xxx xxx
29.3. The determination shall be based upon an examination of the
documentary evidence of the Bidder's qualifications submitted
pursuant to ITB Clauses 12 and 13, as well as other information as
the Procuring Entity deems necessary and appropriate, using a non-
discretionary "pass/fail" criterion. (emphasis added)
Clauses 12 and 13 of the Instruction to Bidders pertain to the eligibility
documents, technical documents, and the financial component of a
participant's bid. 95 Meanwhile, the Clause 5 adverted to is an
enumeration of persons or entities who may participate in the bidding.
96 Nowhere in these clauses does it appear that an AOI is a
mandatory requirement even for post-qualification. Even the BAC's
March 27, 2015 Notice addressed to Smartmatic JV supports this
finding: 97
. . . [F]or purposes of post-qualification proceedings, please submit
copies of the following documents to the Bid and Awards Committee
(BAC), through the BAC Secretariat, as stated in Clause 29.2 (a) of
Section III, Bid Data Sheet of the Bidding Documents, within three (3)
calendar days from receipt of this Notice:
a) Latest Income and Business Tax Returns. . . .
b) Certificate of PhilGEPS Registration.
c) ISO 9001:2008 Certification of the Optical Mark/reader or Optical
Scan manufacturer for OMR.
In addition, the following certifications must be submitted:
a) That all system requirements for customization as stated in the
Terms of Reference and RA 9369 shall be fully complied with, subject
to the application of applicable penalties for non-compliance; and
b) That it shall not demand for additional payment from COMELEC to
procure additional OMR system requirements during Project
Implementation for items that it may have overlooked in its Bid
Proposal.
The bidder is also required to submit the machines, including the
software and hardware, back-up power supply and other equipment
and peripherals necessary for the conduct of the testing during post-
qualification, including the prototype sample of the ballot box based
on what is required in the Terms of Reference (TOR) for the OMR on
April 6, 2015 as per instruction from the Technical Working Group
(TWG).
From the foregoing, the inescapable result is that mere failure to file
an AOI cannot automatically result in the bidder concerned being
declared ineligible, contrary to petitioners' claim.
Smartmatic JV may validly
undertake the project sought
to be procured
a. SMTC still has the authority to
conduct business even after the
conduct of the 2010 national and
local elections
A thorough reading of petitioners' contention, however, would show
that it is not only assailing Smartmatic JV's ineligibility based on the
alleged incompleteness of its documentary requirements (i.e., for non-
submission of a valid AOI), but also because they considered the
subject of the procurement beyond the ambit of SMTCs corporate
purpose. Petitioners postulate that SMTC's authority to conduct
business ceased upon fulfillment of its primary purpose stated in its
AOI — that of automating the 2010 National and Local Elections, and
this allegedly rendered SMTC's subsequent involvement in the
subject procurement project an ultra vires act.
Petitioners' myopic interpretation of SMTC's purpose is incorrect.
While it is true that SMTC's AOI made specific mention of the
automation of the 2010 National and Local Elections as its primary
purpose, it is erroneous to interpret this as meaning that the
corporation's authority to transact business will cease thereafter.
Indeed, the contractual relation between SMTC and the COMELEC
has been the subject of prior controversies that have reached the
Court, and We have on these occasions held that even beyond the
2010 election schedule, the parties remain to have subsisting rights
and obligations relative to the products and services supplied by
SMTC to the COMELEC for the conduct of the 2010 polls. ISHCcT
For instance, the Court, in the landmark case of Capalla v. COMELEC
(Capalla), 98 upheld the validity of the March 30, 2012 Deed of Sale
by and between SMTC and COMELEC when the latter exercised the
option to purchase (OTP) clause embodied in their 2009 Automated
Election System Contract (AES Contract). Even though the original
deadline for the option was only until December 31, 2010, We ruled
that the parties to the AES Contract, pursuant to Art. 19 thereof, 99
can still validly extend the same by mutual agreement. The Court
ratiocinated that Art. 19 of the AES Contract may still be invoked even
after December 31, 2010, for the agreement subsisted in view of the
COMELEC's failure to return SMTC's performance security, a
condition for the contract's termination. As provided under Art. 2 of the
AES Contract: 100
Article 2
EFFECTIVITY
2.1. This Contract shall take effect upon the fulfillment of all of the
following conditions:
(a) Submission by the PROVIDER of the Performance Security;
(b) Signing of this Contract in seven (7) copies by the parties; and
(c) Receipt by the PROVIDER of the Notice to Proceed.
2.2. The Term of this Contract begins from the date of effectivity until
the release of the Performance Security, without prejudice to the
surviving provisions of this Contract, including the warranty provision
as prescribed in Article 8.3 and the period of the option to purchase.
(emphasis supplied)
Based on Our ruling in Capalla, the cessation of SMTC's business
cannot be assumed just because the May 10, 2010 polls have already
concluded. For clearly, SMTC's purpose — the "automation of the
2010 national and local elections" — is not limited to the conduct of
the election proper, but extends further to the fulfillment of SMTC's
contractual obligations that spring forth from the AES Contract during
the lifetime of the agreement (i.e., until the release of the performance
security), and even thereafter insofar as the surviving provisions of
the contract are concerned. In other words, regardless of whether or
not SMTC's performance security has already been released,
establishing even just one surviving provision of the AES Contract
would be sufficient to prove that SMTC has not yet completed its
purpose under its AOI, toppling petitioners' argument like a house of
cards.
Unfortunately for petitioners, one such surviving provision has already
been duly noted by the Court in the recent case of Pabillo v.
COMELEC (Pabillo). 101 In Pabillo, the Court cited Art. 8.8 of the AES
Contract, which significantly reads:
8.8 If COMELEC opts to purchase the PCOS and Consolidation and
Canvassing System (CCS), the following warranty provisions
indicated in the RFP shall form part of the purchase contract:
1) For PCOS, SMARTMATIC shall warrant the availability of parts,
labor and technical support and maintenance to COMELEC for ten
(10) years, if purchased (Item 18, Part V of the RFP), beginning May
10, 2010. Any purchase of parts, labor and technical support and
maintenance not covered under Article 4.3 above shall be subject to
the prevailing market prices at the time and at such terms and
conditions as may be agreed upon. (emphasis added)
Pertinently, We have interpreted the foregoing contractual provision
in Pabillo in the following wise: 102
Smartmatic-TIM warrants that its parts, labor and technical support
and maintenance will be available to the COMELEC, if it so decides
to purchase such parts, labor and technical support and maintenance
services, within the warranty period stated, i.e., ten (10) years for the
PCOS, reckoned from May 10, 2010, or until May 10, 2020. Article 8.8
skews from the ordinary concept of warranty since it is a mere
warranty on availability, which entails a subsequent purchase
contract, founded upon a new consideration, the costs of which (unlike
in the first warranty) are still to be paid. With Article 8.8 in place, the
COMELEC is assured that it would always have access to a capable
parts/service provider in Smartmatic-TIM, during the 10-year warranty
period therefor, on account of the peculiar nature of the purchased
goods. (emphasis added)
Indubitably, the vinculum juris between COMELEC and SMTC
remains solid and unsevered despite the 2010 elections' inevitable
conclusion. Several contractual provisions contained in the 2009 AES
Contract, as observed in a review of our jurisprudence, continue to
subsist and remain enforceable up to this date. Pabillo, in effect, at
least guaranteed that SMTC's purpose under its AOI will not be
fulfilled until May 10, 2020. Therefore, petitioners' theory — that
SMTC no longer has a valid purpose — is flawed. Otherwise, there
would be no way of enforcing the subsisting provisions of the contract
and of holding SMTC to its warranties after the conduct of the May 10,
2010 elections. CAacTH
Having resolved the continuity of SMTC's business, We now proceed
to determine whether its participation in the bidding process is an
authorized or an ultra vices act.
b. The issue is mooted by the subsequent
approval of the amendment to
SMTC's AOI
Commissioner Guia, in his dissent, opines that a bidder should be
authorized to participate in the bidding as early as the time the pre-
qualification was conducted, which in this case was held on December
4, 2014. Thus, the December 10, 2014 approval of SMTC's amended
AOI, to Commissioner Guia's mind, cannot cure the alleged vice
attending SMTC's submission of its bid, as a partner in Smartmatic
JV, for a project that it was, at that time, unauthorized to undertake.
The argument fails to persuade.
As earlier discussed, the function of the BAC, in making an initial
assessment as to the eligibility of the bidders during pre-qualification,
is ministerial and nondiscretionary. It merely counterchecks the
documents submitted by the bidder against the checklist of
requirements included in the bid documents disseminated by the
procuring agency. It cannot consider documents not listed in the
checklist for purposes of ascertaining a bidder's eligibility during pre-
qualification.
The only time the procuring agency can go beyond the checklist is
during post-qualification wherein it is allowed to check to its
satisfaction the veracity of the information submitted to it by the
bidder. To recall, Sec. 29.3 of the Invitation to Bid provides that on
post-qualification, the procuring entity may utilize any "other
information as [it] may deem necessary and appropriate" in order to
test the accuracy of the information provided in the bidder's eligibility
documents and bid proposal. In the end, notwithstanding the
dispensability of the AOI insofar as compliance with documentary
requirements is concerned, the procuring entity may nevertheless
consider the same in ultimately determining a bidder's eligibility.
Stated in the alternative, the procuring entity, for purposes of post-
qualification, cannot be faulted for, as it is not precluded from,
considering information volunteered by the bidder with the highest bid.
Bearing in mind the non-discretionary function of the BAC during pre-
qualification, it is then understandable that it is only on post-
qualification, when it is allowed to consider other documents, during
which an extensive inquiry will be made to detect any defect in the
bidder's capacity to contract. Hence, even though the submission of
an AOI was not required for either pre or post-qualification purposes,
the COMELEC and BAC, on post-qualification, may still consider the
same in determining whether or not the project is in line with the
bidder's corporate purpose, and, ultimately, in ascertaining the
bidder's eligibility.
In the case at bar, We take note that during the opening of the bids
on December 4, 2014, Smartmatic JV already informed the BAC that
SMTC was already in the process of amending its AOI. The contents
of the AOI, at that time, were immaterial since the AOI is not an
eligibility requirement that can be considered by the BAC on pre-
qualification. By post-qualification, however, the time the BAC can
validly consider extraneous documents, SMTC's AOI has already
been duly amended, and the amendments approved by the SEC on
December 10, 2014, for its updated primary purpose to read: 103
To sell, supply, lease, import, export, develop, assemble, repair and
deal with automated voting machines, canvassing equipment,
computer software, computer equipment and all other goods and
supplies, and/or to provide, render and deal in all kinds of services,
including project management services for the conduct of elections,
whether regular or special, in the Philippine(s) and to provide
Information and Communication Technology (ICT) goods and
services to private and government entities in the Philippines.
Hence, any doubt on SMTC's authorization to continue its business
has already been dispelled by December 10, 2014. It matters not that
the amendments to the AOI took effect only on that day 104 for as
long as it preceded post-qualification.
c. SMTC's participation in the bidding
is not an ultra vires act but one that is
incidental to its corporate purpose
In any event, there is merit in private respondents' argument that
SMTC's participation in the bidding is not beyond its declared
corporate purpose; that, in the first place, there was no impediment in
SMTC's AOI that could have prevented Smartmatic JV from
participating in the project.
To elucidate, an ultra vires act is defined under BP 68 in the following
wise:
Section 45. Ultra vires acts of corporations. — No corporation under
this Code shall possess or exercise any corporate powers except
those conferred by this Code or by its articles of incorporation and
except such as are necessary or incidental to the exercise of the
powers so conferred. (emphasis added) IAETDc
The language of the Code appears to confine the term ultra vires to
an act outside or beyond express, implied and incidental corporate
powers. Nevertheless, the concept can also include those acts that
may ostensibly be within such powers but are, by general or special
laws, either proscribed or declared illegal. 105 Ultra vires acts or acts
which are clearly beyond the scope of one's authority are null and void
and cannot be given any effect. 106
In determining whether or not a corporation may perform an act, one
considers the logical and necessary relation between the act assailed
and the corporate purpose expressed by the law or in the charter, for
if the act were one which is lawful in itself or not otherwise prohibited
and done for the purpose of serving corporate ends or reasonably
contributes to the promotion of those ends in a substantial and not
merely in a remote and fanciful sense, it may be fairly considered
within corporate powers. 107 The test to be applied is whether the act
in question is in direct and immediate furtherance of the corporation's
business, fairly incident to the express powers and reasonably
necessary to their exercise. If so, the corporation has the power to do
it; otherwise, not. 108
In the case at bar, notwithstanding the specific mention of the 2010
National and Local Elections in SMTC's primary purpose, it is not, as
earlier discussed, precluded from entering into contracts over
succeeding ones. Here, SMTC cannot be deemed to be overstepping
its limits by participating in the bidding for the 23,000 new optical mark
readers for the 2016 polls since upgrading the machines that the
company supplied the COMELEC for the automation of the 2010
elections and offering them for subsequent elections is but a logical
consequence of SMTC's course of business, and should, therefore,
be considered included in, if not incidental to, its corporate purpose.
A restricted interpretation of its purpose would mean limiting SMTC's
activity to that of waiting for the expiration of its warranties in 2020.
How then can the company be expected to subsist and sustain itself
until then if it cannot engage in any other project, even in those similar
to what the company already performed?
In the final analysis, We see no defect in the AOI that needed to be
cured before SMTC could have participated in the bidding as a partner
in Smartmatic JV, the automation of the 2016 National and Local
Elections being a logical inclusion of SMTC's corporate purpose.
Smartmatic JV cannot be declared
ineligible for SMTC's nationality
In a desperate last ditch effort to have Smartmatic JV declared
ineligible to participate in the procurement project, petitioners
question the nationality of SMTC. They direct the Court's attention to
the 2013 Annual Report and Consolidated Financial Statements 109
of Smartmatic Limited to prove that SMTC is 100% foreign owned.
They then contend that SMTC is the biggest shareholder in the
bidding joint venture at 46.5% share, making the joint venture less
than 60% Filipino-owned and, hence, ineligible.
is the prevailing mode of determining whether or not a corporation is
Filipino. Under the "control test," shares belonging to corporations or
partnerships at least 60% of the capital of which is owned by Filipino
citizens shall be considered as of Philippine nationality. 113 It is only
when based on the attendant facts and circumstances of the case,
there is, in the mind of the Court, doubt in the 60-40 Filipino-equity
ownership in the corporation, that it may apply the "grandfather rule."
Perusing SMTC's GIS 115 proves useful in applying the control test.
Upon examination, SMTC's GIS reveals that it has an authorized
capital stock of P226,000,000.00, comprised of 226,000,000 common
stocks 116 at P1.00 par value, of which 100% is subscribed and
paid. 117 The GIS further provides information on the stockholders as
follows:
SHARES SUBSCRIBED
NAME
NATIONALITY TYPE NUMBER AMOUNT % OF AMOUNT
AND
CURRENT OWNER
PAID
RESIDENTIAL SHIP

ADDRESS

The argument is specious.

Clause 5 of the Instruction to Bidders provides that the following may 1920 Business,Com 135,599,9 135,599,9 677,999,99
participate in the bidding process: 110 60%
Inc. mon 97 97.00 7.00

5.1. Unless otherwise provided in the BDS, the following persons shall Filipino "A"
be eligible to participate in the bidding:
King's Court 2,
xxx xxx xxx 2129 Don Chino
(e) Unless otherwise provided in the BDS, persons/entities forming Roces Ave.,
themselves into a JV, i.e., group of two (2) or more persons/entities TOTA 135,599,9 135,599,9
Makati, Metro
that intend to be jointly and severally responsible or liable for a L 97 97.00
Manila
peculiar contract: Provided, however, that Filipino ownership or
interest of the joint venture concerned shall be at least sixty percent
(60%).
Smartmatic Com 90,399,99 90,399,99 451,999,99
40%
While petitioners are correct in asserting that Smartmatic JV ought to International, Corp.mon 8 8.00 8.00
be at least 60% Filipino-owned to qualify, they did not adduce
sufficient evidence to prove that the joint venture did not meet the Barbadian "B"
requirement. Petitioners, having alleged non-compliance, have the
correlative burden of proving that Smartmatic JV did not meet the 4 Stafford House,
requirement, but aside from their bare allegation that SMTC is 100% Garisson St.,
foreign-owned, they did not offer any relevant evidence to
substantiate their claim. Even the 2013 financial statements submitted TOTA 90,399,99 90,399,99
Michael, Barbados
to Court fail to impress for they pertain to the financial standing of L 8 8.00
Smartmatic Limited, 111 which is a distinct and separate entity from
SMTC. It goes without saying that Smarmatic Limited's nationality is
irrelevant herein for it is not even a party to this case, and even to the Com
joint venture. DcHSEa Juan C. Villa, Jr. 1 1.00 0% 1.00
mon
Aside from the sheer weakness of petitioners' claim, SMTC Filipino "B"
satisfactorily refuted the challenge to its nationality and established
that it is, indeed, a Filipino corporation as defined under our laws. As No. 74, Jalan
provided in Republic Act No. 7042 (RA 7042), otherwise known as the Setiabakti,
Foreign Investments Act, a Philippine corporation is defined in the
following wise: Damansara
TOTA
Heights, Kuala 1 1.00
Section 3. Definitions. — As used in this Act: L
Lumpur
a) The term "Philippine national" shall mean a citizen of the
Philippines or a domestic partnership or association wholly owned by
citizens of the Philippines; or a corporation organized under the laws Jacinto R. Perez,Com
of the Philippines of which at least sixty percent (60%) of the capital 1 1.00 1.00
Jr. mon
stock outstanding and entitled to vote is owned and held by citizens
of the Philippines; or a trustee of funds for pension or other employee Filipino "A"
retirement or separation benefits, where the trustee is a Philippine
national and at least sixty (60%) of the fund will accrue to the benefit 1211 Consuelo St.,
of the Philippine nationals: Provided, That where a corporation and its Singalong,
non-Filipino stockholders own stocks in a Securities and Exchange
Commission (SEC) registered enterprise, at least sixty percent (60%) TOTA
Manila 1 1.00
of the capital stocks outstanding and entitled to vote of both L
corporations must be owned and held by citizens of the Philippines
and at least sixty percent (60%) of the members of the Board of
Directors of both corporations must be citizens of the Philippines, in Alastair JosephCom
order that the corporations shall be considered a Philippine national. 1 1.00 0% 1.00
James Wells mon
In Narra Nickel Mining and Development, Corp. v. Redmont British "B"
Consolidated Mines, Corp., 112 the Court held that the "control test"
 1405 Spanish incumbent upon them to prove that the aggregate Filipino equity of
Bay, Bonifacio the joint venture partners — SMTC, Total Information Management
Corporation, Smartmatic International Holding B.V., and Jarltech
Ridge, 1stTOTA
1 1.00 International Corporation — does not comply with the 60% Filipino
Avenue, Bonifacio L equity requirement, following the oft-cited doctrine that he who alleges
must prove. 123 Regrettably, one fatal flaw in petitioners' posture is
Global City, Taguig that they challenged the nationality of SMTC alone, which, after
utilizing the control test, turned out to be a Philippine corporation as
defined under RA 7042. There was no iota of evidence presented or,
at the very least, even a claim advanced that the remaining partners
Marian Ivy F.Com
1 1.00 0% 1.00 are foreign-owned. There are, in fact, no other submissions whence
Reyes-Fajardo mon
this Court can inquire as to the nationalities of the other joint venture
Filipino "A" partners. Hence, there is no other alternative for this Court other than
to adopt the findings of the COMELEC and the BAC upholding
71-B Tindalo St., Smartmatic JV's eligibility to participate in the bidding process,
Monte Vista, subsumed in which is the joint venture and its individual partners'
compliance with the nationality requirement. cHECAS
Subdivision,
Total 1 1.00 WHEREFORE, in view of the foregoing, the petition is
Marikina
hereby DISMISSED for lack of merit. The June 29, 2015 Decision of
the COMELEC en banc is herebyAFFIRMED.

Com SO ORDERED.
Salvador P. Aque 1 1.00 0% 1.00
mon
Sereno, C.J., Carpio, Leonardo-de Castro, Peralta, Bersamin, Del
Filipino "A" Castillo, Villarama, Jr., Perez, Mendoza, Reyes and Jardeleza,
JJ., concur.
2250 P. Burgos,
Pasay City Brion, J., * is on official leave.

Total 1 1.00 Perlas-Bernabe, J., I join the separate opinion of J. Leonen.

Leonen, J., see separate concurring and dissenting opinion.

Applying the control test, 60% of SMTC's 226,000,000 shares, that is ||| (Querubin v. Commission on Elections (En Banc), G.R. No.
135,600,000 shares, must be Filipino-owned. From the above-table, 218787, [December 8, 2015])
it is clear that SMTC reached this threshold amount to qualify as a
Filipino-owned corporation. To demonstrate, the following are SMTC's
Filipino investors:

NAME OFTYPE OFNUMBER OF

SHAREHOLDER SHARE SHARES

1920 Business Inc. Common "A" 135,599,997

Juan C. Villa, Jr. Common "B" 1

Jacinto R. Perez, Jr. Common "A" 1

Marian Ivy F. Reyes-

Common "A" 1
Fajardo

Salvador P. Aque Common "A" 1

––––––––––––

TOTAL 135,600,001

===========

Indeed, the application of the control test would yield the result that
SMTC is a Filipino corporation. There is then no truth to petitioners'
claim that SMTC is 100% foreign-owned. Consequently, it becomes
unnecessary to confirm this finding through the grandfather
rule 119 since the test is only employed when the 60% Filipino
ownership in the corporation is in doubt. 120 In this case, not even the
slightest doubt is cast since the petition is severely wanting in facts
and circumstances that raise legitimate challenges to SMTC's 60-40
Filipino ownership. The petition rested solely on petitioners' vague
assertions and baseless claims. On the other hand, SMTC countered
by furnishing the Court a copy of its GIS providing its shareholders'
stock ownership details, and by submitting a copy of its AOI, which
reserved all of SMTC's 135,600,000 class A common shares to
Filipinos 121 in a bid to guarantee that when all of its shares are
outstanding, foreign ownership will not exceed 40%.

Anent the nationality of the other joint venture partners, the Court
defers to the findings of the COMELEC and the BAC, and finds
sufficient their declaration that Smartmatic JV is, indeed, eligible to
participate in the bidding process, and is in fact the bidder with the
lowest calculated responsive bid. 122 If petitioners would insist
otherwise by reason of Smartmatic JV's nationality, it becomes
SECOND DIVISION
[G.R. No. 217508. April 18, 2016.]
JOSEPH SCOTT PEMBERTON, petitioner, vs. HON. LEILA M. DE
LIMA, in her capacity as the Secretary of Justice, JUDGE ROLINE
GINEZ-JABALDE, in her capacity as Presiding Judge of Branch 74 of
the Regional Trial Court of Olongapo City, and MARILOU LAUDE y
SERDONCILLO, respondents.
DECISION
LEONEN, J p:
This resolves a Petition for Certiorari 1 praying that the Resolutions
dated January 27, 2015 2 and February 20, 2015 3 of respondent
Secretary of Justice Leila M. De Lima (Secretary De Lima) in I.S. No.
III-10-INV-14J-01102 4 be reversed and set aside. 5
A complaint for murder was filed by the Philippine National Police-
Olongapo City Police Office and private respondent Marilou Laude y
Serdoncillo (Laude) against petitioner Joseph Scott Pemberton
(Pemberton). 6
On October 17, 2014, Pemberton received a Subpoena 7 issued by
the City Prosecutor of Olongapo City giving him 10 days from receipt
within which to file a counter-affidavit. 8 Laude filed an Omnibus
Motion 9 dated October 21, 2014 praying that the City Prosecutor of
Olongapo City issue subpoenas addressed to: (a) "Pemberton,
directing him to present himself for the lifting of his fingerprint and of
buccal swabs during the clarificatory hearing set on [November 5,]
2014;" 10 and (b) the Philippine National Police Crime Laboratory,
directing the Chief of Office to assign forensic personnel to gather
fingerprints and buccal swabs from Pemberton and subject him to
"forensic examination and analysis, including DNA testing." 11
Pemberton opposed this in his Opposition to the Omnibus Motion
dated 21 October 2014 12 dated October 27, 2014. 13 He also filed a
Manifestation and Omnibus Motion: (1) For Clarification; (2) To
Declare Absence of Probable Cause for Murder or Any Other Crime
Against [Petitioner]; and (3) By Way of Ad Cautela [sic] Prayer, in the
Event that this Honorable Office does not Declare the Absence of
Probable Cause, at the very least, To Reduce the Charge to Homicide
Considering the Lack of Circumstances Qualifying the Offense to
Murder 14 dated October 27, 2014. 15
During the preliminary investigation on October 27, 2014, the City
Prosecutor of Olongapo City stated that Pemberton's right to file a
counter-affidavit was deemed waived. 16 In the Order dated October
29, 2014, the City Prosecutor directed the Philippine National Police
Crime Laboratory to obtain latent fingerprint and buccal swabs from
Pemberton and "to submit . . . the results of the forensic examination
within a period of three (3) weeks . . . from the date of actual collection
of the specimen[s.]" 17
Pemberton filed a Manifestation with Omnibus Motion: 1) to
Determine Probable Cause on the Basis of Evidence Submitted as of
27 October 2014; and 2) For Reconsideration of the Order dated 29
October 2014 18 dated November 4, 2014. 19
However, the City Prosecutor of Olongapo City continued to evaluate
the evidence and conducted ocular inspections in connection with the
preliminary investigation. 20 Through the Resolution dated December
15, 2014, it "found probable cause against [Pemberton] for the crime
of murder." 21 On the same day, an Information 22 for murder was
filed against Pemberton before the Regional Trial Court of Olongapo
City. 23 The case was docketed as Criminal Case No. 865-2014 and
was raffled to Branch 74 of the Regional Trial Court. 24 The trial court
issued a warrant of arrest. 25
On December 18, 2014, Pemberton filed his Petition for Review
before the Department of Justice. 26 On the same day, he filed a
Motion to Defer the Proceedings 27 before the Regional Trial Court.
28
In the Resolution dated January 27, 2015, Secretary De Lima denied
Pemberton's Petition for Review 29 and stated that based on the
evidence on record, there was "no reason to alter, modify, or reverse
the resolution of the City Prosecutor of Olongapo City." 30
Pemberton's Motion for Reconsideration was likewise denied for lack
of merit in the Resolution dated February 20, 2015. 31
Aggrieved, Pemberton filed this Petition for Certiorari with application
for the ex-parte issuance of a temporary restraining order and/or writ
of preliminary injunction. 32 CAIHTE
Pemberton argues that in sustaining a finding of probable cause,
Secretary De Lima committed grave abuse of discretion amounting to
excess or absence of jurisdiction based on the following grounds: (a)
Secretary De Lima took into account additional evidence which the
City Prosecutor allegedly had no authority to receive and which
Pemberton had no opportunity to address and rebut, thereby denying
him due process of law; 33 (b) Secretary De Lima found probable
cause to charge Pemberton with the crime of murder when "the
evidence on record does not support the existence of probable cause
to indict [him] . . . with either homicide or murder[;]" 34 and (c)
Secretary De Lima found that "the killing was attended with the
qualifying circumstances of treachery, abuse of superior strength[,]
and cruelty despite prevailing jurisprudence dictating that the
elements of these qualifying circumstances . . . be established by
direct evidence." 35
Secretary De Lima, through the Office of the Solicitor General, points
out that this Petition is procedurally infirm. The Petition assails the
appreciation of evidence and law by Secretary De Lima, which are
"errors of judgment . . . [that] cannot be remedied by a writ of
certiorari." 36 Further, by filing this Petition before this court and not
the Court of Appeals, Pemberton violated the principle of hierarchy of
courts. 37 Moreover, the case is moot and academic, considering that
the Regional Trial Court has convicted Pemberton for the crime
charged. 38
Thus, for resolution are the following issues:
First, whether respondent Secretary Leila M. De Lima committed
grave abuse of discretion in sustaining the finding of probable cause
against petitioner Joseph Scott Pemberton, thereby denying petitioner
due process of law;
Second, whether petitioner violated the principle of hierarchy of courts
by filing his Petition before this Court instead of the Court of Appeals;
and
Lastly, whether this case has been rendered moot and academic.
We deny the Petition for Certiorari for lack of merit and for being moot
and academic.
I
In Alafriz v. Nable, 39 this Court defined grave abuse of discretion:
Certiorari lies where a court has acted without or in excess of
jurisdiction or with grave abuse of discretion. "Without jurisdiction"
means that the court acted with absolute want of jurisdiction. There is
"excess of jurisdiction" where the court has jurisdiction but has
transcended the same or acted without any statutory authority. "Grave
abuse of discretion" implies such capricious and whimsical exercise
of judgment as is equivalent to lack of jurisdiction, or, in other words,
where the power is exercised in an arbitrary or despotic manner by
reason of passion or personal hostility, and it must be so patent and
gross as to amount to an evasion of positive duty or to a virtual refusal
to perform the duty enjoined or to act at all in contemplation of law. 40
(Citations omitted)
In Ching v. Secretary of Justice, 41 this Court expounded on the
evidence required for a determination of probable cause:
Probable cause need not be based on clear and convincing evidence
of guilt, as the investigating officer acts upon probable cause of
reasonable belief. Probable cause implies probability of guilt and
requires more than bare suspicion but less than evidence which would
justify a conviction. A finding of probable cause needs only to rest on
evidence showing that more likely than not, a crime has been
committed by the suspect. 42
This was reiterated in Chan v. Secretary of Justice: 43
Probable cause has been defined as the existence of such facts and
circumstances as would lead a person of ordinary caution and
prudence to entertain an honest and strong suspicion that the person
charged is guilty of the crime subject of the investigation. Being based
merely on opinion and reasonable belief, it does not import absolute
certainty. Probable cause need not be based on clear and convincing
evidence of guilt, as the investigating officer acts upon reasonable
belief. Probable cause implies probability of guilt and requires more
than bare suspicion but less than evidence which would justify a
conviction. 44
There is no basis to doubt that respondent De Lima judiciously
scrutinized the evidence on record. Based on respondent De Lima's
assessment, there was ample evidence submitted to establish
probable cause that petitioner murdered the victim:
First, the killing of Laude has been indubitably confirmed.
Second, the various pieces of evidence so far presented in this case,
i.e., the CCTV footage of Ambyanz showing Gelviro, Laude and
respondent leaving the club together; the unequivocal testimonies of
Gelviro and Gallamos positively identifying respondent as the person
who was last seen with Laude on the night he died; the result of the
general physical examination conducted on respondent showing
abrasions and light scratches on different parts of his body; his latent
print on one of the condoms found at the crime scene; and the
unequivocal testimonies of respondent's fellow Marine servicemen
who were with him on that fateful night, lead to no other conclusion
than that respondent was the perpetrator of the crime.
Third, the results of the physical examination conducted on
respondent and Laude's cadaver, as well as the ocular inspection of
the crime scene, demonstrate the attendant qualifying circumstances
of treachery, abuse of superior strength, and cruelty.
Finally, the killing is neither parricide nor infanticide as provided under
the RPC, as amended. Hence, the charge of murder. DETACa
The convergence of the foregoing circumstances all taken together
leads to the fair and reasonable inference that respondent is probably
guilty of killing Laude through treachery, abuse of superior strength,
and cruelty.
Maintaining his innocence, respondent points out the lack of any direct
evidence linking him to the crime. We are not persuaded.
Absence of direct evidence does not preclude a finding of probable
cause. It has been the consistent pronouncement of the Supreme
Court that, in such cases, the prosecution may resort to circumstantial
evidence. Crimes are usually committed in secret and under
conditions where concealment is highly probable. If direct evidence is
insisted upon under all circumstances, the guilt of vicious felons who
committed heinous crimes in secret or in secluded places will be hard,
if not impossible, to prove.
In view of the importance of the qualifying circumstances as the bases
for respondent's indictment for the crime of murder, the same are
heretofore discussed and explained.
There is treachery when these two elements occur: (1) the
employment of means of execution that give the persons attacked no
opportunity to defend themselves or retaliate; and (2) the means of
execution were deliberately or consciously adopted.
Treachery clearly attended the killing of Laude. The evidence reveals
that respondent choked him from behind. The autopsy results as well
as the examination conducted by the NCIS indicate that there were
visible pressure marks and a circular purplish discoloration around his
neck. In addition, the Medico Legal Report No. A14-163RCLO5 shows
that the external portion of the right horn of his larynx is contused and
that there is hematoma on the upper inner portions of the larynx below
the glottis. It is apparent that the manner of attack employed by
respondent rendered Laude unable to defend himself or to retaliate.
It has been repeatedly held that the essence of treachery is the
sudden attack by an aggressor without the slightest provocation on
the part of the victim, depriving the latter of any real chance to defend
himself, thereby ensuring the commission of the crime without risk to
the aggressor. We note that the short span of time it took to kill Laude
indicates the suddenness of the attack. According to the separate
testimonies of certain witnesses, the lifeless body of Laude was
discovered thirty (30) minutes after Gelviro left the room. HEITAD
Moreover, the absence of provocation on the part of Laude to warrant
such vicious attack need not be debated. He went with respondent on
his own volition to engage in sexual acts in exchange for money.
Thus, he most probably did not expect to be in danger and,
consequently, he was unlikely unable to defend himself against the
unwarranted attack.
In appreciating the element of abuse of superior strength, it is not only
necessary to evaluate the physical conditions of the protagonists or
opposing forces and the arms or objects employed by both sides, but
it is also necessary to analyse the incidents and episodes constituting
the total development of the event. We aptly note that respondent is
a member of [the] United States Marine Corps, which is known to have
the strictest recruitment standards among the Uniformed Services of
the United States Armed Forces. In view of the rigorous physical and
mental training requirements for enlistment, all members of the Marine
Corps possess superior strength and exceptional combat skills. On
the other hand, Laude, albeit biologically a man, is a transgender who
chose to adapt (sic) a woman's physical appearance and behavior.
Thus, it is clear that there is manifest physical disparity between
respondent and Laude and that the former took advantage of his
superior strength to cause the death of Laude, as evidenced by the
multiple abrasions and contusions found on the latter.
On the other hand, there is cruelty when the culprit enjoys and delights
in making his victim suffer slowly and gradually, causing him
unnecessary physical pain in the consummation of the criminal act.
The test is whether respondent deliberately and sadistically
augmented the wrong by causing another wrong not necessary for its
commission or inhumanly increased the victim's suffering or outraged
or scoffed at his person or corpse. The autopsy results that Laude
died of "asphyxia due to drowning and strangulation" shows that while
he was still breathing, respondent drowned him by forcefully
submerging his head in the water inside the toilet bowl. This grisly
scenario, coupled with Laude's other major injuries, clearly show that
he suffered excessively prior to his death. Respondent opted to kill
him in a manner that increased his suffering and caused him
unnecessary physical pain before his death. Drowning Laude in a
toilet bowl evidently indicates respondent's intention to degrade him.
45 (Citations omitted)
Respondent De Lima's finding of probable cause against petitioner
was not rendered with grave abuse of discretion. Rather, her
determination was based on a careful evaluation of evidence
presented.
Moreover, petitioner was fully accorded due process in the preliminary
investigation proceedings. This Court has explained that the essence
of due process is an opportunity to be heard: aDSIHc
The essence of due process is that a party is afforded a reasonable
opportunity to be heard in support of his case; what the law abhors
and prohibits is the absolute absence of the opportunity to be heard.
When the party seeking due process was in fact given several
opportunities to be heard and to air his side, but it was by his own fault
or choice that he squandered these chances, then his cry for due
process must fail. 46 (Citations omitted)
Petitioner had multiple opportunities to controvert the evidence
presented during the preliminary investigation. He was directed to file
a counter-affidavit, which was an opportunity to refute the allegations
against him. Petitioner was also given the opportunity to seek
reconsideration of the initial finding of probable cause.
II
In The Diocese of Bacolod v. Commission on Elections, 47 we
explained the role of this Court in relation to the doctrine of hierarchy
of courts:
This brings us to the issue of whether petitioners violated the doctrine
of hierarchy of courts in directly filing their petition before this court.
Respondents contend that petitioners' failure to file the proper suit
with a lower court of concurrent jurisdiction is sufficient ground for the
dismissal of their petition. They add that observation of the hierarchy
of courts is compulsory, citing Heirs of Bertuldo Hinog v. Melicor.
While respondents claim that while there are exceptions to the general
rule on hierarchy of courts, none of these are present in this case.
On the other hand, petitioners cite Fortich v. Corona on this court's
discretionary power to take cognizance of a petition filed directly to it
if warranted by "compelling reasons, or [by] the nature and importance
of the issues raised. . . ." Petitioners submit that there are "exceptional
and compelling reasons to justify a direct resort [with] this Court."
In Bañez, Jr. v. Concepcion, we explained the necessity of the
application of the hierarchy of courts:
The Court must enjoin the observance of the policy on the hierarchy
of courts, and now affirms that the policy is not to be ignored without
serious consequences. The strictness of the policy is designed to
shield the Court from having to deal with causes that are also well
within the competence of the lower courts, and thus leave time to the
Court to deal with the more fundamental and more essential tasks that
the Constitution has assigned to it. The Court may act on petitions for
the extraordinary writs of certiorari, prohibition and mandamus only
when absolutely necessary or when serious and important reasons
exist to justify an exception to the policy.
In Bañez, we also elaborated on the reasons why lower courts are
allowed to issue writs of certiorari, prohibition, and mandamus, citing
Vergara v. Suelto:
The Supreme Court is a court of last resort, and must so remain if it is
to satisfactorily perform the functions assigned to it by the
fundamental charter and immemorial tradition. It cannot and should
not be burdened with the task of dealing with causes in the first
instance. Its original jurisdiction to issue the so-called extraordinary
writs should be exercised only where absolutely necessary or where
serious and important reasons exist therefore. Hence, that jurisdiction
should generally be exercised relative to actions or proceedings
before the Court of Appeals, or before constitutional or other tribunals,
bodies or agencies whose acts for some reason or another are not
controllable by the Court of Appeals. Where the issuance of an
extraordinary writ is also within the competence of the Court of
Appeals or a Regional Trial Court, it is in either of these courts that
the specific action for the writ's procurement must be presented. This
is and should continue to be the policy in this regard, a policy that
courts and lawyers must strictly observe.
The doctrine that requires respect for the hierarchy of courts was
created by this court to ensure that every level of the judiciary
performs its designated roles in an effective and efficient manner. Trial
courts do not only determine the facts from the evaluation of the
evidence presented before them. They are likewise competent to
determine issues of law which may include the validity of an
ordinance, statute, or even an executive issuance in relation to the
Constitution. To effectively perform these functions, they are
territorially organized into regions and then into branches. Their writs
generally reach within those territorial boundaries. Necessarily, they
mostly perform the all-important task of inferring the facts from the
evidence as these are physically presented before them. In many
instances, the facts occur within their territorial jurisdiction, which
properly present the 'actual case' that makes ripe a determination of
the constitutionality of such action. The consequences, of course,
would be national in scope. There are, however, some cases where
resort to courts at their level would not be practical considering their
decisions could still be appealed before the higher courts, such as the
Court of Appeals.
The Court of Appeals is primarily designed as an appellate court that
reviews the determination of facts and law made by the trial courts. It
is collegiate in nature. This nature ensures more standpoints in the
review of the actions of the trial court. But the Court of Appeals also
has original jurisdiction over most special civil actions. Unlike the trial
courts, its writs can have a nationwide scope. It is competent to
determine facts and, ideally, should act on constitutional issues that
may not necessarily be novel unless there are factual questions to
determine.
This court, on the other hand, leads the judiciary by breaking new
ground or further reiterating — in the light of new circumstances or in
the light of some confusions of bench or bar — existing precedents.
Rather than a court of first instance or as a repetition of the actions of
the Court of Appeals, this court promulgates these doctrinal devices
in order that it truly performs that role. 48
We proceeded to name exceptional cases, where direct resort to this
Court may be allowed:
First, a direct resort to this court is allowed when there are genuine
issues of constitutionality that must be addressed at the most
immediate time. A direct resort to this court includes availing of the
remedies of certiorari and prohibition to assail the constitutionality of
actions of both legislative and executive branches of the government.
In this case, the assailed issuances of respondents prejudice not only
petitioners' right to freedom of expression in the present case, but also
of others in future similar cases. The case before this court involves
an active effort on the part of the electorate to reform the political
landscape. This has become a rare occasion when private citizens
actively engage the public in political discourse. To quote an eminent
political theorist: ETHIDa
[T]he theory of freedom of expression involves more than a technique
for arriving at better social judgments through democratic procedures.
It comprehends a vision of society, a faith and a whole way of life. The
theory grew out of an age that was awakened and invigorated by the
idea of new society in which man's mind was free, his fate determined
by his own powers of reason, and his prospects of creating a rational
and enlightened civilization virtually unlimited. It is put forward as a
prescription for attaining a creative, progressive, exciting and
intellectually robust community. It contemplates a mode of life that,
through encouraging toleration, skepticism, reason and initiative, will
allow man to realize his full potentialities. It spurns the alternative of a
society that is tyrannical, conformist, irrational and stagnant.
In a democracy, the citizen's right to freely participate in the exchange
of ideas in furtherance of political decision-making is recognized. It
deserves the highest protection the courts may provide, as public
participation in nation-building is a fundamental principle in our
Constitution. As such, their right to engage in free expression of ideas
must be given immediate protection by this court.
A second exception is when the issues involved are of transcendental
importance. In these cases, the imminence and clarity of the threat to
fundamental constitutional rights outweigh the necessity for prudence.
The doctrine relating to constitutional issues of transcendental
importance prevents courts from the paralysis of procedural niceties
when clearly faced with the need for substantial protection.
In the case before this court, there is a clear threat to the paramount
right of freedom of speech and freedom of expression which warrants
invocation of relief from this court. The principles laid down in this
decision will likely influence the discourse of freedom of speech in the
future, especially in the context of elections. The right to suffrage not
only includes the right to vote for one's chosen candidate, but also the
right to vocalize that choice to the public in general, in the hope of
influencing their votes. It may be said that in an election year, the right
to vote necessarily includes the right to free speech and expression.
The protection of these fundamental constitutional rights, therefore,
allows for the immediate resort to this court.
Third, cases of first impression warrant a direct resort to this court. In
cases of first impression, no jurisprudence yet exists that will guide
the lower courts on this matter. In Government of the United States v.
Purganan, this court took cognizance of the case as a matter of first
impression that may guide the lower courts:
In the interest of justice and to settle once and for all the important
issue of bail in extradition proceedings, we deem it best to take
cognizance of the present case. Such proceedings constitute a matter
of first impression over which there is, as yet, no local jurisprudence
to guide lower courts.
This court finds that this is indeed a case of first impression involving
as it does the issue of whether the right of suffrage includes the right
of freedom of expression. This is a question which this court has yet
to provide substantial answers to, through jurisprudence. Thus, direct
resort to this court is allowed.
Fourth, the constitutional issues raised are better decided by this
court. In Drilon v. Lim, this court held that:
. . . it will be prudent for such courts, if only out of a becoming modesty,
to defer to the higher judgment of this Court in the consideration of its
validity, which is better determined after a thorough deliberation by a
collegiate body and with the concurrence of the majority of those who
participated in its discussion.
In this case, it is this court, with its constitutionally enshrined judicial
power, that can rule with finality on whether COMELEC committed
grave abuse of discretion or performed acts contrary to the
Constitution through the assailed issuances.
Fifth, the time element presented in this case cannot be ignored. This
case was filed during the 2013 election period. Although the elections
have already been concluded, future cases may be filed that
necessitate urgency in its resolution. Exigency in certain situations
would qualify as an exception for direct resort to this court.
Sixth, the filed petition reviews the act of a constitutional organ.
COMELEC is a constitutional body. In Albano v. Arranz, cited by
petitioners, this court held that "[i]t is easy to realize the chaos that
would ensue if the Court of First Instance of each and every province
were [to] arrogate itself the power to disregard, suspend, or contradict
any order of the Commission on Elections: that constitutional body
would be speedily reduced to impotence."
In this case, if petitioners sought to annul the actions of COMELEC
through pursuing remedies with the lower courts, any ruling on their
part would not have been binding for other citizens whom respondents
may place in the same situation. Besides, this court affords great
respect to the Constitution and the powers and duties imposed upon
COMELEC. Hence, a ruling by this court would be in the best interest
of respondents, in order that their actions may be guided accordingly
in the future.
Seventh, petitioners rightly claim that they had no other plain, speedy,
and adequate remedy in the ordinary course of law that could free
them from the injurious effects of respondents' acts in violation of their
right to freedom of expression. cSEDTC
In this case, the repercussions of the assailed issuances on this basic
right constitute an exceptionally compelling reason to justify the direct
resort to this court. The lack of other sufficient remedies in the course
of law alone is sufficient ground to allow direct resort to this court.
Eighth, the petition includes questions that are "dictated by public
welfare and the advancement of public policy, or demanded by the
broader interest of justice, or the orders complained of were found to
be patent nullities, or the appeal was considered as clearly an
inappropriate remedy." In the past, questions similar to these which
this court ruled on immediately despite the doctrine of hierarchy of
courts included citizens' right to bear arms, government contracts
involving modernization of voters' registration lists, and the status and
existence of a public office.
This case also poses a question of similar, if not greater import.
Hence, a direct action to this court is permitted.
It is not, however, necessary that all of these exceptions must occur
at the same time to justify a direct resort to this court. While generally,
the hierarchy of courts is respected, the present case falls under the
recognized exceptions and, as such, may be resolved by this court
directly. 49
A direct invocation of this Court's original jurisdiction to issue these
writs should be allowed only when there are special and important
reasons clearly and specifically set out in the petition. 50
In this case, petitioner alleges that the case against him has been
scheduled for an expedited trial. 51 Thus, petitioner claims that it is
necessary "to expeditiously arrive at a definitive ruling as to whether .
. . respondent [De Lima] committed grave abuse of discretion . . . in
issuing the [a]ssailed [r]esolutions." 52 In his view, a direct invocation
of this Court's original jurisdiction is necessary. Petitioner argues that
without this Court's intervention, a situation may result where "the trial
has already concluded[,] while the issue on whether there exists
probable cause to charge [petitioner] with the crime of murder . . . has
not been settled with finality." 53
This argument is completely bereft of merit. It is not clear why any
action by the Court of Appeals, which has concurrent original
jurisdiction in petitions for certiorari under Rule 65, cannot be
considered as sufficient for review of petitioner's case.
Furthermore, the possibility of the conclusion of the trial of the case
against petitioner is not a reason that is special and important enough
to successfully invoke this Court's original jurisdiction. Once there has
been a judicial finding of probable cause, an executive determination
of probable cause is irrelevant. Consequently, even assuming that
grave abuse of discretion somehow taints an executive finding of
probable cause, such grave abuse of discretion has no effect in a trial.
Whether respondent De Lima, indeed, committed grave abuse of
discretion in relation to the executive determination of probable cause
is irrelevant to the trial itself.
III
A petition for certiorari questioning the validity of the preliminary
investigation in any other venue is rendered moot by the issuance of
a warrant of arrest and the conduct of arraignment. In De Lima v.
Reyes: 54
The filing of the information and the issuance by the trial court of the
respondent's warrant of arrest has already rendered this Petition
moot.
It is settled that executive determination of probable cause is different
from the judicial determination of probable cause. In People v. Castillo
and Mejia:
There are two kinds of determination of probable cause: executive
and judicial. The executive determination of probable cause is one
made during preliminary investigation. It is a function that properly
pertains to the public prosecutor who is given a broad discretion to
determine whether probable cause exists and to charge those whom
he believes to have committed the crime as defined by law and thus
should be held for trial. Otherwise stated, such official has the quasi-
judicial authority to determine whether or not a criminal case must be
filed in court. Whether or not that function has been correctly
discharged by the public prosecutor, i.e., whether or not he has made
a correct ascertainment of the existence of probable cause in a case,
is a matter that the trial court itself does not and may not be compelled
to pass upon.
The judicial determination of probable cause, on the other hand, is
one made by the judge to ascertain whether a warrant of arrest should
be issued against the accused. The judge must satisfy himself that
based on the evidence submitted, there is necessity for placing the
accused under custody in order not to frustrate the ends of justice. If
the judge finds no probable cause, the judge cannot be forced to issue
the arrest warrant.
The courts do not interfere with the prosecutor's conduct of a
preliminary investigation. The prosecutor's determination of probable
cause is solely within his or her discretion. Prosecutors are given a
wide latitude of discretion to determine whether an information should
be filed in court or whether the complaint should be dismissed.
SDAaTC
A preliminary investigation is "merely inquisitorial," and is only
conducted to aid the prosecutor in preparing the information. It serves
a two-fold purpose: first, to protect the innocent against wrongful
prosecutions; and second, to spare the state from using its funds and
resources in useless prosecutions. . . .
xxx xxx xxx
Once the information is filed in court, the court acquires jurisdiction of
the case and any motion to dismiss the case or to determine the
accused's guilt or innocence rests within the sound discretion of the
court. In Crespo v. Mogul:
The filing of a complaint or information in Court initiates a criminal
action. The Court thereby acquires jurisdiction over the case, which is
the authority to hear and determine the case. When after the filing of
the complaint or information a warrant for the arrest of the accused is
issued by the trial court and the accused either voluntarily submitted
himself to the court or was duly arrested, the Court thereby acquired
jurisdiction over the person of the accused.
The preliminary investigation conducted by the fiscal for the purpose
of determining whether a prima facie case exists warranting the
prosecution of the accused is terminated upon the filing of the
information in the proper court. In turn, as above stated, the filing of
said information sets in motion the criminal action against the accused
in Court. Should the fiscal find it proper to conduct a reinvestigation of
the case, at such stage, the permission of the Court must be secured.
After such reinvestigation the finding and recommendations of the
fiscal should be submitted to the Court for appropriate action. While it
is true that the fiscal has the quasi-judicial discretion to determine
whether or not a criminal case should be filed in court or not, once the
case had already been brought to Court whatever disposition the
fiscal may feel should be proper in the case thereafter should be
addressed for the consideration of the Court, the only qualification is
that the action of the Court must not impair the substantial rights of
the accused or the right of the People to due process of law.
Whether the accused had been arraigned or not and whether it was
due to a reinvestigation by the fiscal or a review by the Secretary of
Justice whereby a motion to dismiss was submitted to the Court, the
Court in the exercise of its discretion may grant the motion or deny it
and require that the trial on the merits proceed for the proper
determination of the case.
However, one may ask, if the trial court refuses to grant the motion to
dismiss filed by the fiscal upon the directive of the Secretary of Justice
will there not be a vacuum in the prosecution? A state prosecutor to
handle the case cannot possibly be designated by the Secretary of
Justice who does not believe that there is a basis for prosecution nor
can the fiscal be expected to handle the prosecution of the case
thereby defying the superior order of the Secretary of Justice.
The answer is simple. The role of the fiscal or prosecutor as We all
know is to see that justice is done and not necessarily to secure the
conviction of the person accused before the Courts. Thus, in spite of
his [or her] opinion to the contrary, it is the duty of the fiscal to proceed
with the presentation of evidence of the prosecution to the Court to
enable the Court to arrive at its own independent judgment as to
whether the accused should be convicted or acquitted. The fiscal
should not shirk from the responsibility of appearing for the People of
the Philippines even under such circumstances much less should he
[or she] abandon the prosecution of the case leaving it to the hands
of a private prosecutor for then the entire proceedings will be null and
void. The least that the fiscal should do is to continue to appear for
the prosecution although he [or she] may turn over the presentation
of the evidence to the private prosecutor but still under his direction
and control.

The rule therefore in this jurisdiction is that once a complaint or

information is filed in Court, any disposition of the case as to its
dismissal or the conviction or acquittal of the accused rests in the
sound discretion of the Court. Although the fiscal retains the direction
and control of the prosecution of criminal cases even while the case
is already in Court he [or she] cannot impose his [or her] opinion on
the trial court. The Court is the best and sole judge on what to do with
the case before it. The determination of the case is within its exclusive
jurisdiction and competence. A motion to dismiss the case filed by the
fiscal should be addressed to the Court who has the option to grant or
deny the same. It does not matter if this is done before or after the
arraignment of the accused or that the motion was filed after a
reinvestigation or upon instructions of the Secretary of Justice who
reviewed the records of the investigation.

Thus, it would be ill-advised for the Secretary of Justice to proceed

with resolving respondent's Petition for Review pending before her. It
would be more prudent to refrain from entertaining the Petition
considering that the trial court already issued a warrant of arrest
against respondent. The issuance of the warrant signifies that the trial
court has made an independent determination of the existence of
probable cause. . . .

xxx xxx xxx

Here, the trial court has already determined, independently of any

finding or recommendation by the First Panel or the Second Panel,
that probable cause exists for the issuance of the warrant of arrest
against respondent. Probable cause has been judicially determined.
Jurisdiction over the case, therefore, has transferred to the trial court.
A petition for certiorari questioning the validity of the preliminary
investigation in any other venue has been rendered moot by the
issuance of the warrant of arrest and the conduct of arraignment. 55
(Emphasis in the original)

Respondent De Lima's manifestation regarding the conviction of

petitioner of the crime of homicide 56 is well-taken. However, even
without the conviction, this Petition has already been rendered moot
and academic by virtue of the judicial finding of probable cause in the
form of the Regional Trial Court's issuance of an arrest warrant
against petitioner.

WHEREFORE, the Petition for Certiorari is DISMISSED. The January

27, 2015 Resolution and the February 20, 2015 Resolution of
respondent Secretary of Justice Leila M. De Lima in I.S. No. III-10-
INV-14J-01102 are AFFIRMED.

SO ORDERED.

Carpio, Brion, Del Castillo and Mendoza, JJ., concur.

||| (Pemberton v. De Lima, G.R. No. 217508, [April 18, 2016])

SECOND DIVISION
[G.R. No. 187094. February 15, 2017.]
LIZA L. MAZA, SATURNINO C. OCAMPO, TEODORO A. CASIÑO,
AND RAFAEL V. MARIANO, petitioners, vs. HON. EVELYN A.
TURLA, in her capacity as Presiding Judge of Regional Trial Court of
Palayan City, Branch 40, FLORO F. FLORENDO, in his capacity as
Officer-in-Charge Provincial Prosecutor, ANTONIO LL. LAPUS, JR.,
EDISON V. RAFANAN, and EDDIE C. GUTIERREZ, in their capacity
as members of the panel of investigating prosecutors, and RAUL M.
GONZALEZ, in his capacity as Secretary of Justice, respondents.
DECISION
LEONEN, J p:
Upon filing of an information in court, trial court judges must determine
the existence or non-existence of probable cause based on their
personal evaluation of the prosecutor's report and its supporting
documents. They may dismiss the case, issue an arrest warrant, or
require the submission of additional evidence. However, they cannot
remand the case for another conduct of preliminary investigation on
the ground that the earlier preliminary investigation was improperly
conducted.
This is a Petition for Certiorari and Prohibition 1 with a Prayer for the
Issuance of a Temporary Restraining Order and/or Writ of Preliminary
Injunction. Petitioners seek to have the Orders 2 dated July 18, 2008
3 and December 2, 2008 4 of the Regional Trial Court, Palayan City,
Branch 40 in Criminal Case Nos. 1879-P and 1880-P nullified and set
aside and the criminal cases against them dismissed.
Petitioners Liza L. Maza, Saturnino C. Ocampo, Teodoro A. Casiño,
and Rafael V. Mariano (petitioners) are former members of the House
of Representatives. Liza represented Gabriela Women's Party
(Gabriela), Saturnino and Teodoro represented Bayan Muna Party-
List (Bayan Muna), while Rafael represented Anakpawis Party-List
(Anakpawis). 5
In three letters 6 all dated December 14, 2006, Police Senior Inspector
Arnold M. Palomo (Inspector Palomo), Deputy Provincial Chief of the
Nueva Ecija Criminal Investigation and Detection Team, referred to
the Provincial Prosecutor of Cabanatuan City, Nueva Ecija, three (3)
cases of murder against petitioners and 15 other persons. 7 CAIHTE
Inspector Palomo named 19 individuals, including Petitioners, who
were allegedly responsible for the death of Carlito Bayudang, Jimmy
Peralta, and Danilo Felipe. 8 His findings show that the named
individuals conspired, planned, and implemented the killing of the
supporters of AKBAYAN Party List (AKBAYAN), a rival of Bayan
Muna and Gabriela. 9 Carlito Bayudang and Danilo Felipe were
AKBAYAN community organizers, 10 whereas Jimmy Peralta was
mistaken for a certain Ricardo Peralta, an AKBAYAN supporter. 11
Inspector Palomo recommended that a preliminary investigation be
conducted and that an Information for each count of murder be filed
against the 19 individuals. 12
On February 2, 2007, Investigating Prosecutor Antonio Ll. Lapus, Jr.
issued a subpoena 13 requiring petitioners to testify at the hearings
scheduled on February 16 and 23, 2007.
On March 9, 2007, petitioners filed a Special Appearance with Motion
to Quash Complaint/Subpoena and to Expu[ng]e Supporting
Affidavits. 14 They argue that the Provincial Prosecutor had no
jurisdiction to conduct the preliminary investigation since no valid
complaint was filed against them. 15 They also claimed that, "the
preliminary investigation conducted was highly irregular, and that the
subpoena issued against [them] was patently defective amounting to
a denial of their rights to due process." 16
On July 13, 2007, the panel of investigating prosecutors, composed
of Antonio Ll. Lapus, Jr., Eddie C. Gutierrez, and Edison V. Rafanan,
denied petitioners' motion and ordered the submission of their
counter-affidavits. 17
Petitioners filed their respective counter-affidavits. 18 They also filed
a (1) Motion to conduct Clarificatory Hearing and to Allow [them] to
Submit Written Memorandum, 19 and a (2) Joint Supplemental
Counter-Affidavit on Common Legal Grounds in Support of their
Prayer to Dismiss the Case, 20 both dated August 21, 2007.
On October 23, 2007, the panel issued an Order 21 again denying the
motion. Petitioners moved for reconsideration, 22 which was denied
by the panel in the Resolution 23 dated November 14, 2007.
The panel of prosecutors issued on April 11, 2008 a Joint Resolution,
24 reviewed and approved by Officer-in-charge Provincial Prosecutor
Floro F. Florendo (Prosecutor Florendo). The panel found probable
cause for murder in the killing of Carlito Bayudang and Jimmy Peralta,
and for kidnapping with murder in the killing of Danilo Felipe, against
the nineteen 19 suspects. However, the panel considered one of the
suspects, Julie Flores Sinohin, as a state witness. The panel
recommended that the corresponding Informations be filed against
the remaining suspects. 25 On the same day, two (2) Informations 26
for murder were filed before the Regional Trial Court of Palayan City,
Branch 40 in Nueva Ecija, (Palayan cases) and an Information 27 for
kidnapping with murder was filed in Guimba, Nueva Ecija (Guimba
case).
Petitioners filed a Motion for Judicial Determination of Probable Cause
with Prayer to Dismiss the Case Outright on the Guimba case. This
was opposed by the panel of investigating prosecutors and
Prosecutor Florendo. 28 After the hearing on the motion and
submission of the parties' memoranda, Judge Napoleon R. Sta.
Romana issued an Order 29 dated August 5, 2008, dismissing the
case for lack of probable cause. 30
On April 21, 2008, petitioners also filed a Motion for Judicial
Determination of Probable Cause with Prayer to Dismiss the Case
Outright 31 on the Palayan cases. They requested the court to move
forward with the presented evidence and decide if there were
probable cause and, consequently, dismiss the case outright if there
were none. 32
The panel of investigating prosecutors and Prosecutor Florendo
opposed the motion. 33 Petitioners filed their Reply 34 on May 12,
2008.
On April 25, 2008 and May 12, 2008, the motion was heard by the
Regional Trial Court of Palayan City, Branch 40. 35 Thereafter, both
parties submitted their respective memoranda. 36
On July 18, 2008, Presiding Judge Evelyn A. Atienza-Turla (Judge
Turla) issued an Order 37 on the Palayan cases. Judge Turla held
that "the proper procedure in the conduct of the preliminary
investigation was not followed in [the Palayan] cases" 38 due to the
following:
First, the records show that the supposed principal witnesses for the
prosecution were not presented before the panel of prosecutors,
much less subscribed their supposed affidavits before them.
The marginal note of one of the panel member, Asst. Prov'l. Pros.
Eddie Gutierrez said it all, thus: "I concur with the conclusion but I
would have been more than satisfied if witnesses for the prosecution
were presented."
Second, the charge against [petitioners] is Murder (two counts), a
non-bailable offense. The gravity of the offense alone, not to mention
the fact that three of the movants are incumbent Party-List
Representatives while the other one was a former Party-List
Representative himself, whose imprisonment during the pendency of
the case would deprive their constituents of their duly-elected
representatives, should have merited a deeper and more thorough
preliminary investigation.
The panel of prosecutors, however, did nothing of the sort and instead
swallowed hook, line and sinker the allegations made by Isabelita
Bayudang, Cleotilde Peralta[,] and Alvaro Juliano, and principally
hinges on the affidavit of Julie Sinohin, a supposed "co-conspirator"
of the movants, which were all not "subscribed or sworn" before the
said panel. DETACa
Given the foregoing circumstances, this Court for all practical
purposes will do an even worse job than what the panel of prosecutors
did, by accepting in its entirety the findings of the said panel despite
its obvious flaws. This practice should not be condoned.
xxx xxx xxx
Third, [petitioners'] filing of a motion for reconsideration of the
resolution of the preliminary investigation conducted by the panel of
prosecutors is allowed by the rules . . . .
xxx xxx xxx
Strictly speaking, the filing of a "Motion for Reconsideration" is an
integral part of the preliminary investigation proper. There is no
dispute that the two (2) Informations for murder were filed without first
affording the movants their right to file a motion for reconsideration.
The denial thereof is tantamount to a denial of the right itself to a
preliminary investigation. This fact alone already renders preliminary
investigation conducted in this case incomplete. The inevitable
conclusion is that the movants were not only effectively denied the
opportunity to file a "Motion for Reconsideration" of the "Joint
Resolution" dated April 11, 2008 issued by the panel of prosecutors
assigned in these cases, but were also deprived of their right to a full
preliminary investigation preparatory to the filing of the Information
against them. (Emphasis in the original, citation omitted). 39
Judge Turla further held:
In this case, the undue haste in filing of the information against
movants cannot be ignored. From the gathering of evidence until the
termination of the preliminary investigation, it appears that the state
prosecutors were overly-eager to file the case and to secure a warrant
of arrest of [petitioners] without bail and their consequent detention.
There can be no gainsaying the fact that the task of ridding society of
criminals and misfits and sending them to jail in the hope that they will
in the future reform and be productive members of the community
rests both on the judiciousness of judges and the prudence of the
prosecutors. There is however, a standard in the determination of the
existence of probable cause. The determination has not measured up
to that standard in this case. 40
Judge Turla added that her order of remanding the Palayan cases
back to the provincial prosecutors "for a complete preliminary
investigation is not a manifestation of ignorance of law or a willful
abdication of a duty imposed by law . . . but due to the peculiar
circumstances obtaining in [the cases] and not just 'passing the buck'
to the panel of prosecutors[.]" 41
The dispositive portion reads:
WHEREFORE, PREMISES CONSIDERED, this Court hereby
resolves to:
1.) SET ASIDE the "Joint Resolution" of the Nueva Ecija Provincial
Prosecutor's Office dated April 11, 2008 finding probable cause for
two (2) counts of Murder against the herein movants; and,
2.) ORDER the Office of the Provincial Prosecutor of Nueva Ecija to
conduct the preliminary investigation on the incidents subject matter
hereof in accordance with the mandates of Rule 112 of the Rules of
Court.
SO ORDERED. 42 (Emphasis in the original)
Petitioners moved for partial reconsideration 43 of the July 18, 2008
Order, praying for the outright dismissal of the Palayan cases against
them for lack of probable cause. 44 The Motion was denied by Judge
Turla in an Order dated December 2, 2008. 45
Hence, on March 27, 2009, petitioners filed this Petition for Certiorari
and Prohibition with Prayer for Issuance of a Temporary Restraining
Order and/or Writ of Preliminary Injunction against Judge Evelyn A.
Turla, Prosecutors Floro F. Florendo, Antonio Ll. Lapus, Jr., Edison
V. Rafanan, and Eddie C. Gutierrez, and Justice Secretary Raul M.
Gonzalez (respondents). 46
Petitioners pray that the July 18, 2008 and December 2, 2008 Orders
of Judge Turla be set aside and annulled and that the murder cases
against them be dismissed for failure to show probable cause. They
also ask for the issuance of a temporary restraining order and/or writ
of preliminary injunction to enjoin Judge Turla from remanding the
cases to the provincial prosecutors, and "the respondent prosecutors
from conducting further preliminary investigation [on] these cases." 47
Petitioners claim that they "have no plain, speedy[,] and adequate
remedy in the ordinary course of law[.]" 48 They also contend that
"[r]espondents' actions will certainly cause grave and irreparable
damage to [their] constitutional rights unless injunctive relief is
afforded them through the issuance of a writ of preliminary injunction
and/or temporary restraining order[.]" 49
They allege that Judge Turla acted with grave abuse of discretion
amounting to lack or excess of jurisdiction,
[I] WHEN SHE SHIRKED FROM HER CONSTITUTIONAL DUTY TO
DETERMINE PROBABLE CAUSE AGAINST PETITIONERS AND
INSTEAD REMANDED THE CASES TO THE OFFICE OF THE
PROVINCIAL PROSECUTOR DESPITE LACK OF EVIDENCE.
[II] WHEN SHE DID NOT DISMISS THE CASES DESPITE THE
LACK OF EVIDENCE TO ESTABLISH PROBABLE CAUSE
AGAINST PETITIONERS.
[III] WHEN SHE REFUSED TO RULE ON THE ISSUE OF FAILURE
OF THE PROSECUTION EVIDENCE TO ESTABLISH THAT
PETITIONERS ARE PRINCIPALS BY INDUCEMENT. aDSIHc
[IV] FOR IGNORING THE ISSUE OF INADMISSIBILITY OF
PROSECUTION EVIDENCE ON THE GROUND OF VIOLATION OF
THE RES INTER ALIOS ACTA RULE. 50
Petitioners claim that Judge Turla's order of remanding the case back
to the prosecutors had no basis in law, jurisprudence, or the rules.
Since she had already evaluated the evidence submitted by the
prosecutors along with the Informations, she should have determined
the existence of probable cause for the issuance of arrest warrants or
the dismissal of the Palayan cases. 51
Petitioners assert that under the Rules of Court,in case of doubt on
the existence of probable cause, Judge Turla could "order the
prosecutor to present additional evidence [or] set the case for hearing
so she could make clarifications on the factual issues of the case." 52
Moreover, petitioners argue that the setting aside of the Joint
Resolution establishes the non-existence of probable cause against
them. Thus, the cases against them should have been dismissed. 53
Petitioners aver that the documents submitted by the prosecution are
neither relevant nor admissible evidence. 54 The documents "do not
establish the complicity of the petitioner party-list representatives to
the death of the supposed victims." 55
On May 29, 2009, respondents filed their Comment 56 through the
Office of the Solicitor General, raising the following arguments:
I.
THE PETITION SHOULD BE DISMISSED FOR VIOLATING THE
HIERARCHY OF COURTS.
II.
RESPONDENT JUDGE'S ACTION IN REMANDING THE CASES
FOR PRELIMINARY INVESTIGATION IS A RECOGNITION OF THE
EXCLUSIVE AUTHORITY OF THE PUBLIC PROSECUTORS TO
DETERMINE PROBABLE CAUSE FOR PURPOSES OF FILING
APPROPRIATE CRIMINAL INFORMATION.
III.
THE PROSECUTION RIGHTLY FOUND PROBABLE CAUSE TO
WARRANT THE FILING OF THE INDICTMENTS.
IV.
A FINDING OF PROBABLE CAUSE IS NOT A PRONOUNCEMENT
OF GUILT BUT MERELY BINDS A SUSPECT TO STAND TRIAL.
V.
THE ISSUE OF ADMISSIBILITY OR INADMISSIBILITY OF
EVIDENCE IS PROPERLY ADDRESSED DURING THE TRIAL ON
THE MERITS OF THE CASE AND NOT DURING THE EARLY
STAGE OF PRELIMINARY INVESTIGATION. 57
Respondents claim that the petition before this Court violates the
principle of hierarchy of courts. They contend that petitioners should
have filed their petition before the Court of Appeals since it also
exercises original jurisdiction over petitions for certiorari and
prohibition. According to respondents, petitioners failed to justify a
direct resort to this Court. 58
Respondents also allege that respondent Secretary Gonzalez was
wrongly impleaded. There was no showing that he exercised judicial
or quasi-judicial functions, for which certiorari may be issued. 59
On the allegation that Judge Turla reneged on her constitutional duty
to determine probable cause, respondents counter that she did not
abandon her mandate. 60 Her act of remanding the cases to the
public prosecutors "is a confirmation of her observance of the well-
settled principle that such determination of probable cause is an
exclusive executive function of the prosecutorial arm of our
government." 61
Furthermore, respondent prosecutors' finding of probable cause is
correct since evidence against petitioners show that more likely than
not, they participated in the murder of the alleged victims. 62 The
prosecutors' finding is not a final declaration of their guilt. It merely
engages them to trial. 63
Finally, respondents argue that the "issue of admissibility or
inadmissibility of evidence is properly addressed during the trial on
the merits of the case and not during the early stage of preliminary
investigation." 64
Petitioners filed their Reply 65 on September 24, 2009. Aside from
reiterating their allegations and arguments in the petition, they added
that direct invocation of this Court's original jurisdiction was allowed
as their petition involved legal questions. 66 Moreover, the inclusion
of Secretary Gonzalez as nominal party-respondent was allowed
under Rule 65, Section 5 67 of the Rules of Court. 68
We resolve the following issues:
First, whether petitioners violated the principle of hierarchy of courts
in bringing their petition directly before this Court;
Second, whether respondent Judge Turla gravely abused her
discretion when she remanded the Palayan cases to the Provincial
Prosecutor for the conduct of preliminary investigation; and
Finally, whether admissibility of evidence can be ruled upon in
preliminary investigation.
I to guide lower courts.
This petition is an exception to the principle of hierarchy of courts.
This Court thoroughly explained the doctrine of hierarchy of courts in
The Diocese of Bacolod v. Commission on Elections: 69 ETHIDa
The doctrine that requires respect for the hierarchy of courts was
created by this court to ensure that every level of the judiciary
performs its designated roles in an effective and efficient manner. Trial
courts do not only determine the facts from the evaluation of the
evidence presented before them. They are likewise competent to
determine issues of law which may include the validity of an
ordinance, statute, or even an executive issuance in relation to the
Constitution. To effectively perform these functions, they are
territorially organized into regions and then into branches. Their writs
generally reach within those territorial boundaries. Necessarily, they
mostly perform the all-important task of inferring the facts from the
evidence as these are physically presented before them. In many
instances, the facts occur within their territorial jurisdiction, which
properly present the 'actual case' that makes ripe a determination of
the constitutionality of such action. The consequences, of course,
would be national in scope. There are, however, some cases where
resort to courts at their level would not be practical considering their
decisions could still be appealed before the higher courts, such as the
Court of Appeals.
The Court of Appeals is primarily designed as an appellate court that
reviews the determination of facts and law made by the trial courts. It
is collegiate in nature. This nature ensures more standpoints in the
review of the actions of the trial court. But the Court of Appeals also
has original jurisdiction over most special civil actions. Unlike the trial
courts, its writs can have a nationwide scope. It is competent to
determine facts and, ideally, should act on constitutional issues that
may not necessarily be novel unless there are factual questions to
determine.
This court, on the other hand, leads the judiciary by breaking new
ground or further reiterating — in the light of new circumstances or in
the light of some confusions of bench or bar — existing precedents.
Rather than a court of first instance or as a repetition of the actions of
the Court of Appeals, this court promulgates these doctrinal devices
in order that it truly performs that role.
In other words, the Supreme Court's role to interpret the Constitution
and act in order to protect constitutional rights when these become
exigent should not be emasculated by the doctrine in respect of the
hierarchy of courts. That has never been the purpose of such doctrine.
Thus, the doctrine of hierarchy of courts is not an iron-clad rule. This
court has "full discretionary power to take cognizance and assume
jurisdiction [over] special civil actions for certiorari . . . filed directly with
it for exceptionally compelling reasons or if warranted by the nature of
the issues clearly and specifically raised in the petition." As correctly
pointed out by petitioners, we have provided exceptions to this
doctrine:
First, a direct resort to this court is allowed when there are genuine
issues of constitutionality that must be addressed at the most
immediate time. A direct resort to this court includes availing of the
remedies of certiorari and prohibition to assail the constitutionality of
actions of both legislative and executive branches of the government.
xxx xxx xxx
A second exception is when the issues involved are of transcendental
importance. In these cases, the imminence and clarity of the threat to
fundamental constitutional rights outweigh the necessity for prudence.
The doctrine relating to constitutional issues of transcendental
importance prevents courts from the paralysis of procedural niceties
when clearly faced with the need for substantial protection.
xxx xxx xxx
Third, cases of first impression warrant a direct resort to this court. In
cases of first impression, no jurisprudence yet exists that will guide
the lower courts on this matter. In Government of the United States v.
Purganan, this court took cognizance of the case as a matter of first
impression that may guide the lower courts:
In the interest of justice and to settle once and for all the important
issue of bail in extradition proceedings, we deem it best to take
cognizance of the present case. Such proceedings constitute a matter
of first impression over which there is, as yet, no local jurisprudence
xxx xxx xxx
Fourth, the constitutional issues raised are better decided by this
court. In Drilon v. Lim, this court held that:
. . . it will be prudent for such courts, if only out of a becoming modesty,
to defer to the higher judgment of this Court in the consideration of its
validity, which is better determined after a thorough deliberation by a
collegiate body and with the concurrence of the majority of those who
participated in its discussion.
xxx xxx xxx
Fifth, . . . Exigency in certain situations would qualify as an exception
for direct resort to this court.
Sixth, the filed petition reviews the act of a constitutional organ. . .
xxx xxx xxx
Seventh, [there is] no other plain, speedy, and adequate remedy in
the ordinary course of law[.]
. . . The lack of other sufficient remedies in the course of law alone is
sufficient ground to allow direct resort to this court. cSEDTC
Eighth, the petition includes questions that are "dictated by public
welfare and the advancement of public policy, or demanded by the
broader interest of justice, or the orders complained of were found to
be patent nullities, or the appeal was considered as clearly an
inappropriate remedy." In the past, questions similar to these which
this court ruled on immediately despite the doctrine of hierarchy of
courts included citizens' right to bear arms, government contracts
involving modernization of voters' registration lists, and the status and
existence of a public office.
xxx xxx xxx
It is not, however, necessary that all of these exceptions must occur
at the same time to justify a direct resort to this court. 70 (Emphasis
supplied, citations omitted)
In First United Constructors Corp. v. Poro Point Management Corp.
(PPMC), et al., 71 this Court reiterated that it "will not entertain a direct
invocation of its jurisdiction unless the redress desired cannot be
obtained in the appropriate lower courts, and exceptional and
compelling circumstances justify the resort to the extraordinary
remedy of a writ of certiorari." 72
In this case, the presence of compelling circumstances warrants the
exercise of this Court's jurisdiction. At the time the petition was filed,
petitioners were incumbent party-list representatives. The possibility
of their arrest and incarceration should the assailed Orders be
affirmed, would affect their representation of their constituents in
Congress.
Although the circumstances mentioned are no longer present, the
merits of this case necessitate this Court's exercise of jurisdiction.
II
The remand of the criminal cases to the Provincial Prosecutor for the
conduct of another preliminary investigation is improper.
Petitioners assert that the documents submitted along with the
Informations are sufficient for Judge Turla to rule on the existence of
probable cause. If she finds the evidence inadequate, she may order
the prosecutors to present additional evidence. Thus, according to
petitioners, Judge Turla's action in remanding the case to the
prosecutors for further preliminary investigation lacks legal basis.
Petitioners' contention has merit.
Rule 112, Section 5 (a) of the Revised Rules of Criminal Procedure
provides:
RULE 112
PRELIMINARY INVESTIGATION
xxx xxx xxx
SEC. 5. When warrant of arrest may issue. —
(a) By the Regional Trial Court. — Within ten (10) days from the filing
of the complaint or information, the judge shall personally evaluate the
resolution of the prosecutor and its supporting evidence. He may
immediately dismiss the case if the evidence on record clearly fails to
establish probable cause. If he finds probable cause, he shall issue a
warrant of arrest, or a commitment order when the complaint or
information was filed pursuant to section 6 of this Rule. In case of
doubt on the existence of probable cause, the judge may order the
prosecutor to present additional evidence within five (5) days from
notice and the issue must be resolved by the court within thirty (30)
days from the filing of the complaint or information.
A plain reading of the provision shows that upon filing of the
information, the trial court judge has the following options: (1) dismiss
the case if the evidence on record clearly fails to establish probable
cause; (2) issue a warrant of arrest or a commitment order if findings
show probable cause; or (3) order the prosecutor to present additional
evidence if there is doubt on the existence of probable cause. 73
The trial court judge's determination of probable cause is based on
her or his personal evaluation of the prosecutor's resolution and its
supporting evidence. The determination of probable cause by the trial
court judge is a judicial function, whereas the determination of
probable cause by the prosecutors is an executive function. 74 This
Court clarified this concept in Napoles v. De Lima: 75
During preliminary investigation, the prosecutor determines the
existence of probable cause for filing an information in court or
dismissing the criminal complaint. As worded in the Rules of Court,the
prosecutor determines during preliminary investigation whether "there
is sufficient ground to engender a well-founded belief that a crime has
been committed and the respondent is probably guilty thereof, and
should be held for trial." At this stage, the determination of probable
cause is an executive function. Absent grave abuse of discretion, this
determination cannot be interfered with by the courts. This is
consistent with the doctrine of separation of powers.
On the other hand, if done to issue an arrest warrant, the
determination of probable cause is a judicial function. No less than the
Constitution commands that "no . . . warrant of arrest shall issue
except upon probable cause to be determined personally by the judge
after examination under oath or affirmation of the complainant and the
witnesses he may produce[.]" This requirement of personal evaluation
by the judge is reaffirmed in Rule 112, Section 5 (a) of the Rules on
Criminal Procedure[.]
xxx xxx xxx
Therefore, the determination of probable cause for filing an
information in court and that for issuance of an arrest warrant are
different. Once the information is filed in court, the trial court acquires
jurisdiction and "any disposition of the case as to its dismissal or the
conviction or acquittal of the accused rests in the sound discretion of
the Court." 76 (Citations omitted) SDAaTC
In De Lima v. Reyes, 77 this Court further held:
The courts do not interfere with the prosecutor's conduct of a
preliminary investigation. The prosecutor's determination of probable
cause is solely within his or her discretion. Prosecutors are given a
wide latitude of discretion to determine whether an information should
be filed in court or whether the complaint should be dismissed. 78
(Emphasis supplied, citation omitted)
Thus, when Judge Turla held that the prosecutors' conduct of
preliminary investigation was "incomplete" 79 and that their
determination of probable cause "has not measured up to [the]
standard," 80 she encroached upon the exclusive function of the
prosecutors. Instead of determining probable cause, she ruled on the
propriety of the preliminary investigation.
In Leviste v. Hon. Alameda, et al.: 81
[T]he task of the presiding judge when the Information is filed with the
court is first and foremost to determine the existence or non-existence
of probable cause for the arrest of the accused.
What the Constitution underscores is the exclusive and personal
responsibility of the issuing judge to satisfy himself of the existence of
probable cause. But the judge is not required to personally examine
the complainant and his witnesses. Following established doctrine
and procedure, he shall (1) personally evaluate the report and the
supporting documents submitted by the prosecutor regarding the
existence of probable cause, and on the basis thereof, he may already
make a personal determination of the existence of probable cause;
and (2) if he is not satisfied that probable cause exists, he may
disregard the prosecutor's report and require the submission of
supporting affidavits of witnesses to aid him in arriving at a conclusion
as to the existence of probable cause. 82 (Citations omitted)
Regardless of Judge Turla's assessment on the conduct of the
preliminary investigation, it was incumbent upon her to determine the
existence of probable cause against the accused after a personal
evaluation of the prosecutors' report and the supporting documents.
She could even disregard the report if she found it unsatisfactory,
and/or require the prosecutors to submit additional evidence. There
was no option for her to remand the case back to the panel of
prosecutors for another preliminary investigation. In doing so, she
acted without any legal basis.
III
The admissibility of evidence cannot be ruled upon in a preliminary
investigation.
In a preliminary investigation,
. . . the public prosecutors do not decide whether there is evidence
beyond reasonable doubt of the guilt of the person charged; they
merely determine whether there is sufficient ground to engender a
well-founded belief that a crime has been committed and that
respondent is probably guilty thereof, and should be held for trial. 83
To emphasize, "a preliminary investigation is merely preparatory to a
trial[;] [i]t is not a trial on the merits." 84 Since "it cannot be expected
that upon the filing of the information in court the prosecutor would
have already presented all the evidence necessary to secure a
conviction of the accused," 85 the admissibility or inadmissibility of
evidence cannot be ruled upon in a preliminary investigation.
WHEREFORE, the Petition is PARTIALLY GRANTED. The assailed
Orders dated July 18, 2008 and December 2, 2008 of the Regional
Trial Court, Palayan City, Branch 40 in Criminal Case Nos. 1879-P
and 1880-P are SET ASIDE. The case is remanded to the Regional
Trial Court, Palayan City, Branch 40 for further proceedings with due
and deliberate dispatch in accordance with this Decision.

SO ORDERED.

Carpio, Peralta, Mendoza and Jardeleza, JJ., concur.

||| (Maza v. Turla, G.R. No. 187094, [February 15, 2017])