TAXATION 1 From this judgment, the plaintiff Pepsi-Cola Bottling Company
appealed to the Court of Appeals, which, in turn, elevated the
CONCEPTS and PRINCIPLES
A. DEFINITION AND CONCEPT
I. Power
II. Process
III. Means
B. NATURE
G.R. No. L-31156 February 27, 1976
PEPSI-COLA BOTTLING COMPANY OF THE PHILIPPINES,
INC., plaintiff-appellant,
vs.
MUNICIPALITY OF TANAUAN, LEYTE, THE MUNICIPAL MAYOR, ET
AL., defendant appellees.
MARTIN, J.:
This is an appeal from the decision of the Court of First Instance of
Leyte in its Civil Case No. 3294, which was certified to Us by the
Court of Appeals on October 6, 1969, as involving only pure
questions of law, challenging the power of taxation delegated to
municipalities under the Local Autonomy Act (Republic Act No.
2264, as amended, June 19, 1959).
On February 14, 1963, the plaintiff-appellant, Pepsi-Cola Bottling
Company of the Philippines, Inc., commenced a complaint with
preliminary injunction before the Court of First Instance of Leyte for
that court to declare Section 2 of Republic Act No.
2264.1 otherwise known as the Local Autonomy Act,
unconstitutional as an undue delegation of taxing authority as
well as to declare Ordinances Nos. 23 and 27, series of 1962, of the
municipality of Tanauan, Leyte, null and void.
On July 23, 1963, the parties entered into a Stipulation of Facts, the
material portions of which state that, first, both Ordinances Nos.
23 and 27 embrace or cover the same subject matter and the
production tax rates imposed therein are practically the same,
and second, that on January 17, 1963, the acting Municipal
Treasurer of Tanauan, Leyte, as per his letter addressed to the
Manager of the Pepsi-Cola Bottling Plant in said municipality,
sought to enforce compliance by the latter of the provisions of
said Ordinance No. 27, series of 1962.
Municipal Ordinance No. 23, of Tanauan, Leyte, which was
approved on September 25, 1962, levies and collects "from soft
drinks producers and manufacturers a tai of one-sixteenth (1/16)
of a centavo for every bottle of soft drink corked." 2 For the
purpose of computing the taxes due, the person, firm, company
or corporation producing soft drinks shall submit to the Municipal
Treasurer a monthly report, of the total number of bottles
produced and corked during the month. 3
On the other hand, Municipal Ordinance No. 27, which was
approved on October 28, 1962, levies and collects "on soft drinks
produced or manufactured within the territorial jurisdiction of this
municipality a tax of ONE CENTAVO (P0.01) on each gallon (128
fluid ounces, U.S.) of volume capacity." 4 For the purpose of
computing the taxes due, the person, fun company, partnership,
corporation or plant producing soft drinks shall submit to the
Municipal Treasurer a monthly report of the total number of
gallons produced or manufactured during the month. 5
The tax imposed in both Ordinances Nos. 23 and 27 is
denominated as "municipal production tax.'
On October 7, 1963, the Court of First Instance of Leyte rendered
judgment "dismissing the complaint and upholding the
constitutionality of [Section 2, Republic Act No. 2264] declaring
Ordinance Nos. 23 and 27 legal and constitutional; ordering the
plaintiff to pay the taxes due under the oft the said Ordinances;
and to pay the costs."
1
case to Us pursuant to Section 31 of the Judiciary Act of 1948, as
amended.
There are three capital questions raised in this appeal:
1. — Is Section 2, Republic Act No. 2264 an undue delegation of
power, confiscatory and oppressive?
2. — Do Ordinances Nos. 23 and 27 constitute double taxation
and impose percentage or specific taxes?
3. — Are Ordinances Nos. 23 and 27 unjust and unfair?
1. The power of taxation is an essential and inherent attribute of
sovereignty, belonging as a matter of right to every independent
government, without being expressly conferred by the people. 6 It
is a power that is purely legislative and which the central
legislative body cannot delegate either to the executive or
judicial department of the government without infringing upon
the theory of separation of powers. The exception, however, lies
in the case of municipal corporations, to which, said theory does
not apply. Legislative powers may be delegated to local
governments in respect of matters of local concern. 7 This is
sanctioned by immemorial practice. 8 By necessary implication,
the legislative power to create political corporations for purposes
of local self-government carries with it the power to confer on
such local governmental agencies the power to tax. 9 Under the
New Constitution, local governments are granted the
autonomous authority to create their own sources of revenue and
to levy taxes. Section 5, Article XI provides: "Each local
government unit shall have the power to create its sources of
revenue and to levy taxes, subject to such limitations as may be
provided by law." Withal, it cannot be said that Section 2 of
Republic Act No. 2264 emanated from beyond the sphere of the
legislative power to enact and vest in local governments the
power of local taxation.
The plenary nature of the taxing power thus delegated, contrary
to plaintiff-appellant's pretense, would not suffice to invalidate the
said law as confiscatory and oppressive. In delegating the
authority, the State is not limited 6 the exact measure of that
which is exercised by itself. When it is said that the taxing power
may be delegated to municipalities and the like, it is meant that
there may be delegated such measure of power to impose and
collect taxes as the legislature may deem expedient. Thus,
municipalities may be permitted to tax subjects which for reasons
of public policy the State has not deemed wise to tax for more
general purposes. 10 This is not to say though that the constitutional
injunction against deprivation of property without due process of
law may be passed over under the guise of the taxing power,
except when the taking of the property is in the lawful exercise of
the taxing power, as when (1) the tax is for a public purpose; (2)
the rule on uniformity of taxation is observed; (3) either the person
or property taxed is within the jurisdiction of the government
levying the tax; and (4) in the assessment and collection of certain
kinds of taxes notice and opportunity for hearing are
provided. 11 Due process is usually violated where the tax imposed
is for a private as distinguished from a public purpose; a tax is
imposed on property outside the State, i.e., extraterritorial
taxation; and arbitrary or oppressive methods are used in
assessing and collecting taxes. But, a tax does not violate the due
process clause, as applied to a particular taxpayer, although the
purpose of the tax will result in an injury rather than a benefit to
such taxpayer. Due process does not require that the property
subject to the tax or the amount of tax to be raised should be
determined by judicial inquiry, and a notice and hearing as to the
amount of the tax and the manner in which it shall be
apportioned are generally not necessary to due process of law. 12
There is no validity to the assertion that the delegated authority
can be declared unconstitutional on the theory of double
taxation. It must be observed that the delegating authority
specifies the limitations and enumerates the taxes over which
local taxation may not be exercised. 13 The reason is that the State
has exclusively reserved the same for its own prerogative.
Moreover, double taxation, in general, is not forbidden by our
fundamental law, since We have not adopted as part thereof the
injunction against double taxation found in the Constitution of the
United States and some states of the Union.14 Double taxation
becomes obnoxious only where the taxpayer is taxed twice for
the benefit of the same governmental entity 15 or by the same
jurisdiction for the same purpose, 16 but not in a case where one
tax is imposed by the State and the other by the city or
municipality. 17
2. The plaintiff-appellant submits that Ordinance No. 23 and 27
constitute double taxation, because these two ordinances cover
the same subject matter and impose practically the same tax
rate. The thesis proceeds from its assumption that both ordinances
are valid and legally enforceable. This is not so. As earlier quoted,
Ordinance No. 23, which was approved on September 25, 1962,
levies or collects from soft drinks producers or manufacturers a tax
of one-sixteen (1/16) of a centavo for .every bottle corked,
irrespective of the volume contents of the bottle used. When it
was discovered that the producer or manufacturer could
increase the volume contents of the bottle and still pay the same
tax rate, the Municipality of Tanauan enacted Ordinance No. 27,
approved on October 28, 1962, imposing a tax of one centavo
(P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity.
The difference between the two ordinances clearly lies in the tax
rate of the soft drinks produced: in Ordinance No. 23, it was 1/16
of a centavo for every bottle corked; in Ordinance No. 27, it is one
centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume
capacity. The intention of the Municipal Council of Tanauan in
enacting Ordinance No. 27 is thus clear: it was intended as a plain
substitute for the prior Ordinance No. 23, and operates as a repeal
of the latter, even without words to that effect. 18 Plaintiff-
appellant in its brief admitted that defendants-appellees are only
seeking to enforce Ordinance No. 27, series of 1962. Even the
stipulation of facts confirms the fact that the Acting Municipal
Treasurer of Tanauan, Leyte sought t6 compel compliance by the
plaintiff-appellant of the provisions of said Ordinance No. 27, series
of 1962. The aforementioned admission shows that only
Ordinance No. 27, series of 1962 is being enforced by defendants-
appellees. Even the Provincial Fiscal, counsel for defendants-
appellees admits in his brief "that Section 7 of Ordinance No. 27,
series of 1962 clearly repeals Ordinance No. 23 as the provisions of
the latter are inconsistent with the provisions of the former."
That brings Us to the question of whether the remaining Ordinance
No. 27 imposes a percentage or a specific tax. Undoubtedly, the
taxing authority conferred on local governments under Section 2,
Republic Act No. 2264, is broad enough as to extend to almost
"everything, accepting those which are mentioned therein." As
long as the text levied under the authority of a city or municipal
ordinance is not within the exceptions and limitations in the law,
the same comes within the ambit of the general rule, pursuant to
the rules of exclucion attehus and exceptio firmat regulum in
cabisus non excepti 19 The limitation applies, particularly, to the
prohibition against municipalities and municipal districts to impose
"any percentage tax or other taxes in any form based thereon nor
impose taxes on articles subject to specific tax except gasoline,
under the provisions of the National Internal Revenue Code." For
purposes of this particular limitation, a municipal ordinance which
prescribes a set ratio between the amount of the tax and the
volume of sale of the taxpayer imposes a sales tax and is null and
void for being outside the power of the municipality to
enact. 20 But, the imposition of "a tax of one centavo (P0.01) on
each gallon (128 fluid ounces, U.S.) of volume capacity" on all soft
drinks produced or manufactured under Ordinance No. 27 does
not partake of the nature of a percentage tax on sales, or other
taxes in any form based thereon. The tax is levied on the produce
(whether sold or not) and not on the sales. The volume capacity
of the taxpayer's production of soft drinks is considered solely for
purposes of determining the tax rate on the products, but there is
not set ratio between the volume of sales and the amount of the
tax.21
Nor can the tax levied be treated as a specific tax. Specific taxes
are those imposed on specified articles, such as distilled spirits,
wines, fermented liquors, products of tobacco other than cigars
and cigarettes, matches firecrackers, manufactured oils and
other fuels, coal, bunker fuel oil, diesel fuel oil, cinematographic
films, playing cards, saccharine, opium and other habit-forming
drugs. 22 Soft drink is not one of those specified.
3. The tax of one (P0.01) on each gallon (128 fluid ounces, U.S.) of
volume capacity on all softdrinks, produced or manufactured, or
an equivalent of 1-½ centavos per case, 23 cannot be considered
unjust and unfair. 24 an increase in the tax alone would not
support the claim that the tax is oppressive, unjust and
confiscatory. Municipal corporations are allowed much discretion
in determining the reates of imposable taxes. 25 This is in line with
the constutional policy of according the widest possible
autonomy to local governments in matters of local taxation, an
aspect that is given expression in the Local Tax Code (PD No. 231,
July 1, 1973). 26 Unless the amount is so excessive as to be
prohibitive, courts will go slow in writing off an ordinance as
unreasonable. 27 Reluctance should not deter compliance with
an ordinance such as Ordinance No. 27 if the purpose of the law
2
to further strengthen local autonomy were to be realized. 28
Finally, the municipal license tax of P1,000.00 per corking machine
with five but not more than ten crowners or P2,000.00 with ten but
not more than twenty crowners imposed on manufacturers,
producers, importers and dealers of soft drinks and/or mineral
waters under Ordinance No. 54, series of 1964, as amended by
Ordinance No. 41, series of 1968, of defendant
Municipality, 29 appears not to affect the resolution of the validity
of Ordinance No. 27. Municipalities are empowered to impose,
not only municipal license taxes upon persons engaged in any
business or occupation but also to levy for public purposes, just
and uniform taxes. The ordinance in question (Ordinance No. 27)
comes within the second power of a municipality.
ACCORDINGLY, the constitutionality of Section 2 of Republic Act
No. 2264, otherwise known as the Local Autonomy Act, as
amended, is hereby upheld and Municipal Ordinance No. 27 of
the Municipality of Tanauan, Leyte, series of 1962, re-pealing
Municipal Ordinance No. 23, same series, is hereby declared of
valid and legal effect. Costs against petitioner-appellant.
SO ORDERED.
I. INHERENT
a. Local Government units and Other Political Subdivisions
1. G.R. No. L-1281 May 31, 1949
JOSEPH E. ICARD, petitioner-appellee,
vs. THE CITY COUNCIL OF BAGUIO and the city of
baguio, respondent-appellants.
REYES, J.:
This an appeal from a decision of the court of First Instance of the
Mountain Province.
The facts are not in dispute. The City of Baguio has enacted the
following ordinances:
1. No. 6-v, providing among other things for an amusement tax of
P0.20 for every person entering a night club licensed to do
business in the city;
2. No. 11-V, providing for a property tax on motor vehicles kept
and operated in the city; and
3. No. 12-V, imposing a graduated license fee on every admission
ticket sold by enterprises enumerated in said ordinance among
them, cinematographs.
Petitioner, a resident of the City of Baguio is holder of a municipal
license for the operation of a night club called "El Club Monaco. "
As owner and operator of said night club, he has to pay to the
National Government an amusement tax on its total gross receipts
under section 260 of the Internal Revenue Code, and to the City
of Baguio the annual license fee provided for in said Ordinance
No. 6-V. But in addition to said amusement tax and license fee, he
has also been required to pay the amusement tax imposed in that
same ordinance, which, on the basis of P0.20 per person entering
the night club, amounted to the total sum of P254,80 for the first
quarter of 1946. This sum he paid under protest.
As owner of a six-passenger automobile for private use a
Chevrolet Ford or Sedan kept and operated in the City of Baguio
petitioner has already paid the sum of P37 as registration fee for
1946 under the Revised Motor Vehicle Law. But pursuant to
Ordinance No. 11-V of said city he would also have to pay in
addition an annual property tax of P15 on the same automobile.
There is no showing that petitioner has any business subject to the
payment of the graduated license fee on admission tickets
imposed by Ordinance No. 12-V of the City of Baguio.
Contending that the ordinance above mentioned are unjust
and ultra vires, petitioner brought the present action for
declaratory relief to have the said ordinance declared void and
also for the refund of the sum of P254,80 which he has paid to the
city under protest.
In an able and well-considered decision the lower court presided
over by Judge Conrado Sanchez to ordinance No. 12-V on the
ground that petitioner had not been shown to be the owner or
operator of any of the enterprises therein enumerated but
declared null and void Ordinance No. 11-V and also that portion
of Ordinance No. 6-V which provides for an amusement tax of
P0.20 on every person entering a night club, without
pronouncement as to the legality or illegality of the remainder of
the said ordinance. And in consequence the city of Baguio was
ordered to refund to petitioner the sum of P254. 80 paid as
amusement tax under Ordinance No. 6-V, without special
pronouncement as to costs.
Appealing from the above decision the city Attorney of Baguio as
counsel for the respondents, presents the case here on the
following assignment of errors:
1. The lower court erred in declaring null and void Ordinance No.
11-V.
2. The lower court erred in declaring null and void that portion of
Ordinance No. 6-V providing for an amusement tax of P0.20 per
person entering a night club; and
3. The lower court erred in ordering the respondent-appellant the
city of Baguio to refund to the petitioner-appellee the sum of
P254,80 paid as amusement tax under Ordinance No. 6-V.
The whole case boils down to this question: Is the City of Baguio
empowered to levy a property tax on motor and an amusement
tax on night clubs?
It is settled that a municipal corporation unlike a sovereign state is
clothed with no inherent power of taxation. The charter or statute
must plainly show an intent to confer that power or the
municipality, cannot assume it. And the power when granted is to
be construed in strictissimi juris. Any doubt or ambiguity that power
must be resolved against the municipality. Inferences,
implications, deductions all these have no place in the
interpretation of the taxing power of a municipal corporation (Cu
Unjieng vs. Patstone, 42 Phil., pp. 818, 830; Pacific Commercial
Co. vs.Romualdez, 49 Phil., pp. 917, 924; Batangas Transportation
Co. vs. Provincial Treasure of Batangas , 52 Phil., pp. 190,196;
Baldwin vs. Coty Council 53 Ala., p. 437; State vs. Smith 31 Lowa,
p. 493; 38 Am Jur pp. 68, 72-73). With the above principle in mind
let us now inquire into the authority of the City of Baguio to levy
taxes. That part of the charter of this city which deal with the
subject of taxation is found in section 2553 (b) of the Revised
Administrative Code which empowers its city council. To provide
for the levy and collection of taxes and other city revenues, as
provided by law and apply the same to the payment of the
municipal expenses in accordance with appropriations."
As the lower court has correctly interpreted it this provision simply
means that the city of Baguio may impose taxes only in those
cases specifically provided in any law. In other words for authority
to levy a tax on specific subjects one must look elsewhere in the
statute book. For had the provision been meant as a blanket
authority to levy taxes, their would have been no need for the
phrase "as provided by law." The insertion of that phrase be speaks
the legislative intent to have the city exercise the law may
provide.
There is of course no question as to the authority of the City of
Baguio to collect a license fee on dance halls and night clubs
such authority being specifically given by section 260 of the
Internal Revenue Code . As a matter of fact petitioner has been
paying such license fee without objection or protest. But what is
objected to is the tax of P0.20 for every person entering those
amusement places as provided for in Ordinance No. 6-V and this
tax is apart and distinct from the license fee, for the ordinance
itself says that it shall be in addition to the latter. This tax is not
authorized by any Act of the Legislature. It is therefore beyond the
power of the City of Baguio to levy.
Our attention has been invited to the fact that the charter of the
city of Manila contains specific provision naming the subject on
which the said may levy taxes and the argument is made that the
absence of such specific provision from the Character of the City
of baguio is indicative of the legislative intent to grand the latter
city the general power of taxation. The argument is clearly
untenable. The Manila character also contains a provision
(section 2444 [a] of the Revised Administration Code)
empowering that city "to provide for the levy and collection of
3
taxes for general and special purposes in accordance with law."
This is the counterpart of the provision in the Baguio Charter
(section 2553 [b]of the Revised Administrative Code) already
quoted above. Though differently worded the two provision
mean exactly the same thing. If those provision were meant to
grant an over-all authority to levy taxes, surely there would have
been no need for those specific provisions in the Manila Chapter
which authorize the imposition of taxes in certain given cases.
Those specific provisions are proof that the said city is to exercise
the power of taxation granted it by section 2444 (a) of the Revised
Administrative Code "in accordance with law" or in the wording
of the Baguio Charter, as provided by law." In other words, there
must be specific legislative authority for the tax. Applying these
consideration to the City of Baguio the logical conclusion is that
where a given tax is not expressly authorized by law that city may
not impose it despite the provision of section 2553 (b) of the
Revised Administrative Code. This accords with the principle
already stated that the power of a municipal corporation to tax,
in order to exist, must be granted expressly, never impliedly or
inferentially.
To the plea that the power of taxation is essential to the continued
existence of a city government, the answer is that the City of
Baguio is amply provided for by its Charter. It is authorized to levy
and collect license fees on a long list of occupations (section
2253, id.). In addition, the city derives income from the sale of
public lands within its limits and from the operation of its water
system and electric plant. The city is thus provided with ample
means with which to carry on the functions of government.
Having come to the conclusion that the City of Baguio may not
levy taxes as it pleases but only as the Legislature may specifically
provide, we have looked in the charter of that city for specific
provision empowering it to levy an amusement tax on night clubs
and have found none. On the other hand, as the lower court
points out, that power is expressly granted to the City of Manila by
section 2444 (m) of the Revised Administrative Code. When it is
recollected that, as already explained, both cities may, under a
general provision of their charters, levy taxes only as the law
authorizes, the absence of a similar express grant in the case of
the city of Baguio is proof that the power to levy this particular tax
has been intentionally withheld from it.
Coming now to Ordinance No. 11-V, a reading of its terms strikes
us that what is therein designated as a property tax on Motor
vehicles kept in the City of Baguio has all the earmarks of a
municipal license fee, a thing expressly forbidden by section 70
(b) of the Revised Motor Vehicle Law. But assuming that it is a
property tax (since the point is not raised), we find that, like in the
case of the amusement tax on cabarets and dance halls, there is
no legal provision authorizing its levy by the City of Baguio. It is true
that the section of the Revised Motor Vehicle Law just cited
contains a proviso to the effect that nothing in that statute shall
be construed to exempt any motor vehicle from the payment of
any lawful and equitable insular, local or municipal property tax
imposed thereon. But here against the question arises as to
whether this proviso is in itself an authorization form any municipal
authority to provide for the imposition of a tax. The wording of the
proviso obviously refers to a tax lawfully imposed so that, in accord
with the views we have expressed above, the City of Baguio may
not collect the tax in the absence of a specific legal provision
authorizing it to do so. It may be remarked in this connection that
the charter of the City of Manila does contain such a provision
(section 2444 [n]), Rev. Adm. Code), which is added proof that
the provision under consideration does not of itself authorize the
imposition of the tax.
In view of the foregoing, it is our conclusion that Ordinance No. 6-
V, in so far as it provides for an amusement tax of P0.20 for each
person entering a night club, and Ordinance No. 11-V, which
provides for a property tax on motor vehicles, should be declared
illegal and void as beyond the authority of the City of Baguio to
enact.
Wherefore, in so far as the judgment below makes that
declaration and orders the City of Baguio to refund to petitioner-
appellee the sum of P254.80 paid as amusement tax under
Ordinance No. 6-V, the same is hereby affirmed, without special
pronouncement as to costs.
2. G.R. No. 149110 April 9, 2003
NATIONAL POWER CORPORATION, petitioner, vs.
CITY OF CABANATUAN, respondent.
PUNO, J.:
This is a petition for review1 of the Decision2 and the Resolution3
of the Court of Appeals dated March 12, 2001 and July 10, 2001,
respectively, finding petitioner National Power Corporation (NPC)
liable to pay franchise tax to respondent City of Cabanatuan.
Petitioner is a government-owned and controlled corporation
created under Commonwealth Act No. 120, as amended.4 It is
tasked to undertake the "development of hydroelectric
generations of power and the production of electricity from
nuclear, geothermal and other sources, as well as, the
transmission of electric power on a nationwide basis."5
Concomitant to its mandated duty, petitioner has, among others,
the power to construct, operate and maintain power plants,
auxiliary plants, power stations and substations for the purpose of
developing hydraulic power and supplying such power to the
inhabitants.6
For many years now, petitioner sells electric power to the residents
of Cabanatuan City, posting a gross income of P107,814,187.96 in
1992.7 Pursuant to section 37 of Ordinance No. 165-92,8 the
respondent assessed the petitioner a franchise tax amounting to
P808,606.41, representing 75% of 1% of the latter's gross receipts
for the preceding year.9
Petitioner, whose capital stock was subscribed and paid wholly by
the Philippine Government,10 refused to pay the tax assessment.
It argued that the respondent has no authority to impose tax on
government entities. Petitioner also contended that as a non-
profit organization, it is exempted from the payment of all forms of
taxes, charges, duties or fees11 in accordance with sec. 13 of
Rep. Act No. 6395, as amended, viz:
"Sec.13. Non-profit Character of the Corporation; Exemption from
all Taxes, Duties, Fees, Imposts and Other Charges by Government
and Governmental Instrumentalities.- The Corporation shall be
non-profit and shall devote all its return from its capital investment,
as well as excess revenues from its operation, for expansion. To
enable the Corporation to pay its indebtedness and obligations
and in furtherance and effective implementation of the policy
enunciated in Section one of this Act, the Corporation is hereby
exempt:
(a) From the payment of all taxes, duties, fees, imposts, charges,
costs and service fees in any court or administrative proceedings
in which it may be a party, restrictions and duties to the Republic
of the Philippines, its provinces, cities, municipalities and other
government agencies and instrumentalities;
(b) From all income taxes, franchise taxes and realty taxes to be
paid to the National Government, its provinces, cities,
municipalities and other government agencies and
instrumentalities;
(c) From all import duties, compensating taxes and advanced
sales tax, and wharfage fees on import of foreign goods required
for its operations and projects; and
(d) From all taxes, duties, fees, imposts, and all other charges
imposed by the Republic of the Philippines, its provinces, cities,
municipalities and other government agencies and
instrumentalities, on all petroleum products used by the
Corporation in the generation, transmission, utilization, and sale of
electric power."12
The respondent filed a collection suit in the Regional Trial Court of
Cabanatuan City, demanding that petitioner pay the assessed
tax due, plus a surcharge equivalent to 25% of the amount of tax,
and 2% monthly interest.13 Respondent alleged that petitioner's
exemption from local taxes has been repealed by section 193 of
Rep. Act No. 7160,14 which reads as follows:
"Sec. 193. Withdrawal of Tax Exemption Privileges.- Unless
otherwise provided in this Code, tax exemptions or incentives
granted to, or presently enjoyed by all persons, whether natural or
juridical, including government owned or controlled corporations,
except local water districts, cooperatives duly registered under
R.A. No. 6938, non-stock and non-profit hospitals and educational
institutions, are hereby withdrawn upon the effectivity of this
4
Code."
On January 25, 1996, the trial court issued an Order15 dismissing
the case. It ruled that the tax exemption privileges granted to
petitioner subsist despite the passage of Rep. Act No. 7160 for the
following reasons: (1) Rep. Act No. 6395 is a particular law and it
may not be repealed by Rep. Act No. 7160 which is a general law;
(2) section 193 of Rep. Act No. 7160 is in the nature of an implied
repeal which is not favored; and (3) local governments have no
power to tax instrumentalities of the national government.
Pertinent portion of the Order reads:
"The question of whether a particular law has been repealed or
not by a subsequent law is a matter of legislative intent. The
lawmakers may expressly repeal a law by incorporating therein
repealing provisions which expressly and specifically cite(s) the
particular law or laws, and portions thereof, that are intended to
be repealed. A declaration in a statute, usually in its repealing
clause, that a particular and specific law, identified by its number
or title is repealed is an express repeal; all others are implied
repeal. Sec. 193 of R.A. No. 7160 is an implied repealing clause
because it fails to identify the act or acts that are intended to be
repealed. It is a well-settled rule of statutory construction that
repeals of statutes by implication are not favored. The
presumption is against inconsistency and repugnancy for the
legislative is presumed to know the existing laws on the subject
and not to have enacted inconsistent or conflicting statutes. It is
also a well-settled rule that, generally, general law does not
repeal a special law unless it clearly appears that the legislative
has intended by the latter general act to modify or repeal the
earlier special law. Thus, despite the passage of R.A. No. 7160 from
which the questioned Ordinance No. 165-92 was based, the tax
exemption privileges of defendant NPC remain.
Another point going against plaintiff in this case is the ruling of the
Supreme Court in the case of Basco vs. Philippine Amusement and
Gaming Corporation, 197 SCRA 52, where it was held that:
'Local governments have no power to tax instrumentalities of the
National Government. PAGCOR is a government owned or
controlled corporation with an original charter, PD 1869. All of its
shares of stocks are owned by the National Government. xxx
Being an instrumentality of the government, PAGCOR should be
and actually is exempt from local taxes. Otherwise, its operation
might be burdened, impeded or subjected to control by mere
local government.'
Like PAGCOR, NPC, being a government owned and controlled
corporation with an original charter and its shares of stocks owned
by the National Government, is beyond the taxing power of the
Local Government. Corollary to this, it should be noted here that
in the NPC Charter's declaration of Policy, Congress declared
that: 'xxx (2) the total electrification of the Philippines through the
development of power from all services to meet the needs of
industrial development and dispersal and needs of rural
electrification are primary objectives of the nations which shall be
pursued coordinately and supported by all instrumentalities and
agencies of the government, including its financial institutions.'
(underscoring supplied). To allow plaintiff to subject defendant to
its tax-ordinance would be to impede the avowed goal of this
government instrumentality.
Unlike the State, a city or municipality has no inherent power of
taxation. Its taxing power is limited to that which is provided for in
its charter or other statute. Any grant of taxing power is to be
construed strictly, with doubts resolved against its existence.
From the existing law and the rulings of the Supreme Court itself, it
is very clear that the plaintiff could not impose the subject tax on
the defendant."16
On appeal, the Court of Appeals reversed the trial court's Order17
on the ground that section 193, in relation to sections 137 and 151
of the LGC, expressly withdrew the exemptions granted to the
petitioner.18 It ordered the petitioner to pay the respondent city
government the following: (a) the sum of P808,606.41 representing
the franchise tax due based on gross receipts for the year 1992,
(b) the tax due every year thereafter based in the gross receipts
earned by NPC, (c) in all cases, to pay a surcharge of 25% of the
tax due and unpaid, and (d) the sum of P 10,000.00 as litigation
expense.19
On April 4, 2001, the petitioner filed a Motion for Reconsideration
on the Court of Appeal's Decision. This was denied by the
appellate court, viz:
"The Court finds no merit in NPC's motion for reconsideration. Its
arguments reiterated therein that the taxing power of the
province under Art. 137 (sic) of the Local Government Code refers
merely to private persons or corporations in which category it
(NPC) does not belong, and that the LGC (RA 7160) which is a
general law may not impliedly repeal the NPC Charter which is a
special law—finds the answer in Section 193 of the LGC to the
effect that 'tax exemptions or incentives granted to, or presently
enjoyed by all persons, whether natural or juridical, including
government-owned or controlled corporations except local
water districts xxx are hereby withdrawn.' The repeal is direct and
unequivocal, not implied.
IN VIEW WHEREOF, the motion for reconsideration is hereby
DENIED.
SO ORDERED."20
In this petition for review, petitioner raises the following issues:
"A. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT
NPC, A PUBLIC NON-PROFIT CORPORATION, IS LIABLE TO PAY A
FRANCHISE TAX AS IT FAILED TO CONSIDER THAT SECTION 137 OF
THE LOCAL GOVERNMENT CODE IN RELATION TO SECTION 131
APPLIES ONLY TO PRIVATE PERSONS OR CORPORATIONS
ENJOYING A FRANCHISE.
B. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT
NPC'S EXEMPTION FROM ALL FORMS OF TAXES HAS BEEN REPEALED
BY THE PROVISION OF THE LOCAL GOVERNMENT CODE AS THE
ENACTMENT OF A LATER LEGISLATION, WHICH IS A GENERAL LAW,
CANNOT BE CONSTRUED TO HAVE REPEALED A SPECIAL LAW.
C. THE COURT OF APPEALS GRAVELY ERRED IN NOT CONSIDERING
THAT AN EXERCISE OF POLICE POWER THROUGH TAX EXEMPTION
SHOULD PREVAIL OVER THE LOCAL GOVERNMENT CODE."21
It is beyond dispute that the respondent city government has the
authority to issue Ordinance No. 165-92 and impose an annual tax
on "businesses enjoying a franchise," pursuant to section 151 in
relation to section 137 of the LGC, viz:
"Sec. 137. Franchise Tax. - Notwithstanding any exemption
granted by any law or other special law, the province may
impose a tax on businesses enjoying a franchise, at a rate not
exceeding fifty percent (50%) of one percent (1%) of the gross
annual receipts for the preceding calendar year based on the
incoming receipt, or realized, within its territorial jurisdiction.
In the case of a newly started business, the tax shall not exceed
one-twentieth (1/20) of one percent (1%) of the capital
investment. In the succeeding calendar year, regardless of when
the business started to operate, the tax shall be based on the gross
receipts for the preceding calendar year, or any fraction thereof,
as provided herein." (emphasis supplied)
x x x ' a tool regulation' (U.S. v. Sanchez, 340 US 42).
Sec. 151. Scope of Taxing Powers.- Except as otherwise provided
in this Code, the city, may levy the taxes, fees, and charges which
the province or municipality may impose: Provided, however, That
the taxes, fees and charges levied and collected by highly
urbanized and independent component cities shall accrue to
them and distributed in accordance with the provisions of this
Code.
The rates of taxes that the city may levy may exceed the
maximum rates allowed for the province or municipality by not
more than fifty percent (50%) except the rates of professional and
amusement taxes."
Petitioner, however, submits that it is not liable to pay an annual
franchise tax to the respondent city government. It contends that
sections 137 and 151 of the LGC in relation to section 131, limit the
taxing power of the respondent city government to private
entities that are engaged in trade or occupation for profit.22
Section 131 (m) of the LGC defines a "franchise" as "a right or
privilege, affected with public interest which is conferred upon
private persons or corporations, under such terms and conditions
as the government and its political subdivisions may impose in the
interest of the public welfare, security and safety." From the
5
phraseology of this provision, the petitioner claims that the word
"private" modifies the terms "persons" and "corporations." Hence,
when the LGC uses the term "franchise," petitioner submits that it
should refer specifically to franchises granted to private natural
persons and to private corporations.23 Ergo, its charter should not
be considered a "franchise" for the purpose of imposing the
franchise tax in question.
On the other hand, section 131 (d) of the LGC defines "business"
as "trade or commercial activity regularly engaged in as means
of livelihood or with a view to profit." Petitioner claims that it is not
engaged in an activity for profit, in as much as its charter
specifically provides that it is a "non-profit organization." In any
case, petitioner argues that the accumulation of profit is merely
incidental to its operation; all these profits are required by law to
be channeled for expansion and improvement of its facilities and
services.24
Petitioner also alleges that it is an instrumentality of the National
Government,25 and as such, may not be taxed by the
respondent city government. It cites the doctrine in Basco vs.
Philippine Amusement and Gaming Corporation26 where this
Court held that local governments have no power to tax
instrumentalities of the National Government, viz:
"Local governments have no power to tax instrumentalities of the
National Government.
PAGCOR has a dual role, to operate and regulate gambling
casinos. The latter role is governmental, which places it in the
category of an agency or instrumentality of the Government.
Being an instrumentality of the Government, PAGCOR should be
and actually is exempt from local taxes. Otherwise, its operation
might be burdened, impeded or subjected to control by a mere
local government.
'The states have no power by taxation or otherwise, to retard,
impede, burden or in any manner control the operation of
constitutional laws enacted by Congress to carry into execution
the powers vested in the federal government. (MC Culloch v.
Maryland, 4 Wheat 316, 4 L Ed. 579)'
This doctrine emanates from the 'supremacy' of the National
Government over local governments.
'Justice Holmes, speaking for the Supreme Court, made reference
to the entire absence of power on the part of the States to touch,
in that way (taxation) at least, the instrumentalities of the United
States (Johnson v. Maryland, 254 US 51) and it can be agreed that
no state or political subdivision can regulate a federal
instrumentality in such a way as to prevent it from consummating
its federal responsibilities, or even seriously burden it from
accomplishment of them.' (Antieau, Modern Constitutional Law,
Vol. 2, p. 140, italics supplied)
Otherwise, mere creatures of the State can defeat National
policies thru extermination of what local authorities may perceive
to be undesirable activities or enterprise using the power to tax as
The power to tax which was called by Justice Marshall as the
'power to destroy' (Mc Culloch v. Maryland, supra) cannot be
allowed to defeat an instrumentality or creation of the very entity
which has the inherent power to wield it."27
Petitioner contends that section 193 of Rep. Act No. 7160,
withdrawing the tax privileges of government-owned or
controlled corporations, is in the nature of an implied repeal. A
special law, its charter cannot be amended or modified impliedly
by the local government code which is a general law.
Consequently, petitioner claims that its exemption from all taxes,
fees or charges under its charter subsists despite the passage of
the LGC, viz:
"It is a well-settled rule of statutory construction that repeals of
statutes by implication are not favored and as much as possible,
effect must be given to all enactments of the legislature.
Moreover, it has to be conceded that the charter of the NPC
constitutes a special law. Republic Act No. 7160, is a general law.
It is a basic rule in statutory construction that the enactment of a
later legislation which is a general law cannot be construed to
have repealed a special law. Where there is a conflict between
a general law and a special statute, the special statute should
prevail since it evinces the legislative intent more clearly than the
general statute."28
Finally, petitioner submits that the charter of the NPC, being a
valid exercise of police power, should prevail over the LGC. It
alleges that the power of the local government to impose
franchise tax is subordinate to petitioner's exemption from
taxation; "police power being the most pervasive, the least
limitable and most demanding of all powers, including the power
of taxation."29
The petition is without merit.
Taxes are the lifeblood of the government,30 for without taxes, the
government can neither exist nor endure. A principal attribute of
sovereignty,31 the exercise of taxing power derives its source from
the very existence of the state whose social contract with its
citizens obliges it to promote public interest and common good.
The theory behind the exercise of the power to tax emanates from
necessity;32 without taxes, government cannot fulfill its mandate
of promoting the general welfare and well-being of the people.
In recent years, the increasing social challenges of the times
expanded the scope of state activity, and taxation has become
a tool to realize social justice and the equitable distribution of
wealth, economic progress and the protection of local industries
as well as public welfare and similar objectives.33 Taxation
assumes even greater significance with the ratification of the 1987
Constitution. Thenceforth, the power to tax is no longer vested
exclusively on Congress; local legislative bodies are now given
direct authority to levy taxes, fees and other charges34 pursuant
to Article X, section 5 of the 1987 Constitution, viz:
"Section 5.- Each Local Government unit shall have the power to
create its own sources of revenue, to levy taxes, fees and charges
subject to such guidelines and limitations as the Congress may
provide, consistent with the basic policy of local autonomy. Such
taxes, fees and charges shall accrue exclusively to the Local
Governments."
This paradigm shift results from the realization that genuine
development can be achieved only by strengthening local
autonomy and promoting decentralization of governance. For a
long time, the country's highly centralized government structure
has bred a culture of dependence among local government
leaders upon the national leadership. It has also "dampened the
spirit of initiative, innovation and imaginative resilience in matters
of local development on the part of local government leaders."35
The only way to shatter this culture of dependence is to give the
LGUs a wider role in the delivery of basic services, and confer
them sufficient powers to generate their own sources for the
purpose. To achieve this goal, section 3 of Article X of the 1987
Constitution mandates Congress to enact a local government
code that will, consistent with the basic policy of local autonomy,
set the guidelines and limitations to this grant of taxing powers, viz:
"Section 3. The Congress shall enact a local government code
which shall provide for a more responsive and accountable local
government structure instituted through a system of
decentralization with effective mechanisms of recall, initiative,
and referendum, allocate among the different local government
units their powers, responsibilities, and resources, and provide for
the qualifications, election, appointment and removal, term,
salaries, powers and functions and duties of local officials, and all
other matters relating to the organization and operation of the
local units."
To recall, prior to the enactment of the Rep. Act No. 7160,36 also
known as the Local Government Code of 1991 (LGC), various
measures have been enacted to promote local autonomy. These
include the Barrio Charter of 1959,37 the Local Autonomy Act of
1959,38 the Decentralization Act of 196739 and the Local
Government Code of 1983.40 Despite these initiatives, however,
the shackles of dependence on the national government
remained. Local government units were faced with the same
problems that hamper their capabilities to participate effectively
in the national development efforts, among which are: (a)
inadequate tax base, (b) lack of fiscal control over external
sources of income, (c) limited authority to prioritize and approve
development projects, (d) heavy dependence on external
sources of income, and (e) limited supervisory control over
personnel of national line agencies.41
Considered as the most revolutionary piece of legislation on local
6
autonomy,42 the LGC effectively deals with the fiscal constraints
faced by LGUs. It widens the tax base of LGUs to include taxes
which were prohibited by previous laws such as the imposition of
taxes on forest products, forest concessionaires, mineral products,
mining operations, and the like. The LGC likewise provides enough
flexibility to impose tax rates in accordance with their needs and
capabilities. It does not prescribe graduated fixed rates but
merely specifies the minimum and maximum tax rates and leaves
the determination of the actual rates to the respective
sanggunian.43
One of the most significant provisions of the LGC is the removal of
the blanket exclusion of instrumentalities and agencies of the
national government from the coverage of local taxation.
Although as a general rule, LGUs cannot impose taxes, fees or
charges of any kind on the National Government, its agencies
and instrumentalities, this rule now admits an exception, i.e., when
specific provisions of the LGC authorize the LGUs to impose taxes,
fees or charges on the aforementioned entities, viz:
"Section 133. Common Limitations on the Taxing Powers of the
Local Government Units.- Unless otherwise provided herein, the
exercise of the taxing powers of provinces, cities, municipalities,
and barangays shall not extend to the levy of the following:
x x x
(o) Taxes, fees, or charges of any kind on the National
Government, its agencies and instrumentalities, and local
government units." (emphasis supplied)
In view of the afore-quoted provision of the LGC, the doctrine in
Basco vs. Philippine Amusement and Gaming Corporation44
relied upon by the petitioner to support its claim no longer applies.
To emphasize, the Basco case was decided prior to the effectivity
of the LGC, when no law empowering the local government units
to tax instrumentalities of the National Government was in effect.
However, as this Court ruled in the case of Mactan Cebu
International Airport Authority (MCIAA) vs. Marcos,45 nothing
prevents Congress from decreeing that even instrumentalities or
agencies of the government performing governmental functions
may be subject to tax.46 In enacting the LGC, Congress exercised
its prerogative to tax instrumentalities and agencies of
government as it sees fit. Thus, after reviewing the specific
provisions of the LGC, this Court held that MCIAA, although an
instrumentality of the national government, was subject to real
property tax, viz:
"Thus, reading together sections 133, 232, and 234 of the LGC, we
conclude that as a general rule, as laid down in section 133, the
taxing power of local governments cannot extend to the levy of
inter alia, 'taxes, fees and charges of any kind on the national
government, its agencies and instrumentalities, and local
government units'; however, pursuant to section 232, provinces,
cities and municipalities in the Metropolitan Manila Area may
impose the real property tax except on, inter alia, 'real property
owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been
granted for consideration or otherwise, to a taxable person as
provided in the item (a) of the first paragraph of section 12.'"47
In the case at bar, section 151 in relation to section 137 of the LGC
clearly authorizes the respondent city government to impose on
the petitioner the franchise tax in question.
In its general signification, a franchise is a privilege conferred by
government authority, which does not belong to citizens of the
country generally as a matter of common right.48 In its specific
sense, a franchise may refer to a general or primary franchise, or
to a special or secondary franchise. The former relates to the right
to exist as a corporation, by virtue of duly approved articles of
incorporation, or a charter pursuant to a special law creating the
corporation.49 The right under a primary or general franchise is
vested in the individuals who compose the corporation and not in
the corporation itself.50 On the other hand, the latter refers to the
right or privileges conferred upon an existing corporation such as
the right to use the streets of a municipality to lay pipes of tracks,
erect poles or string wires.51 The rights under a secondary or
special franchise are vested in the corporation and may ordinarily
be conveyed or mortgaged under a general power granted to a
corporation to dispose of its property, except such special or
secondary franchises as are charged with a public use.52
In section 131 (m) of the LGC, Congress unmistakably defined a
franchise in the sense of a secondary or special franchise. This is to
avoid any confusion when the word franchise is used in the
context of taxation. As commonly used, a franchise tax is "a tax
on the privilege of transacting business in the state and exercising
corporate franchises granted by the state."53 It is not levied on the
corporation simply for existing as a corporation, upon its
property54 or its income,55 but on its exercise of the rights or
privileges granted to it by the government. Hence, a corporation
need not pay franchise tax from the time it ceased to do business
and exercise its franchise.56 It is within this context that the phrase
"tax on businesses enjoying a franchise" in section 137 of the LGC
should be interpreted and understood. Verily, to determine
whether the petitioner is covered by the franchise tax in question,
the following requisites should concur: (1) that petitioner has a
"franchise" in the sense of a secondary or special franchise; and
(2) that it is exercising its rights or privileges under this franchise
within the territory of the respondent city government.
Petitioner fulfills the first requisite. Commonwealth Act No. 120, as
amended by Rep. Act No. 7395, constitutes petitioner's primary
and secondary franchises. It serves as the petitioner's charter,
defining its composition, capitalization, the appointment and the
specific duties of its corporate officers, and its corporate life
span.57 As its secondary franchise, Commonwealth Act No. 120,
as amended, vests the petitioner the following powers which are
not available to ordinary corporations, viz:
"x x x
(e) To conduct investigations and surveys for the development of
water power in any part of the Philippines;
(f) To take water from any public stream, river, creek, lake, spring
or waterfall in the Philippines, for the purposes specified in this Act;
to intercept and divert the flow of waters from lands of riparian
owners and from persons owning or interested in waters which are
or may be necessary for said purposes, upon payment of just
compensation therefor; to alter, straighten, obstruct or increase
the flow of water in streams or water channels intersecting or
connecting therewith or contiguous to its works or any part
thereof: Provided, That just compensation shall be paid to any
person or persons whose property is, directly or indirectly,
adversely affected or damaged thereby;
(g) To construct, operate and maintain power plants, auxiliary
plants, dams, reservoirs, pipes, mains, transmission lines, power
stations and substations, and other works for the purpose of
developing hydraulic power from any river, creek, lake, spring
and waterfall in the Philippines and supplying such power to the
inhabitants thereof; to acquire, construct, install, maintain,
operate, and improve gas, oil, or steam engines, and/or other
prime movers, generators and machinery in plants and/or
auxiliary plants for the production of electric power; to establish,
develop, operate, maintain and administer power and lighting
systems for the transmission and utilization of its power generation;
to sell electric power in bulk to (1) industrial enterprises, (2) city,
municipal or provincial systems and other government institutions,
(3) electric cooperatives, (4) franchise holders, and (5) real estate
subdivisions x x x;
(h) To acquire, promote, hold, transfer, sell, lease, rent, mortgage,
encumber and otherwise dispose of property incident to, or
necessary, convenient or proper to carry out the purposes for
which the Corporation was created: Provided, That in case a right
of way is necessary for its transmission lines, easement of right of
way shall only be sought: Provided, however, That in case the
property itself shall be acquired by purchase, the cost thereof shall
be the fair market value at the time of the taking of such property;
(i) To construct works across, or otherwise, any stream,
watercourse, canal, ditch, flume, street, avenue, highway or
railway of private and public ownership, as the location of said
works may require xxx;
(j) To exercise the right of eminent domain for the purpose of this
Act in the manner provided by law for instituting condemnation
proceedings by the national, provincial and municipal
governments;
x x x
(m) To cooperate with, and to coordinate its operations with those
7
of the National Electrification Administration and public service
entities;
(n) To exercise complete jurisdiction and control over watersheds
surrounding the reservoirs of plants and/or projects constructed or
proposed to be constructed by the Corporation. Upon
determination by the Corporation of the areas required for
watersheds for a specific project, the Bureau of Forestry, the
Reforestation Administration and the Bureau of Lands shall, upon
written advice by the Corporation, forthwith surrender jurisdiction
to the Corporation of all areas embraced within the watersheds,
subject to existing private rights, the needs of waterworks systems,
and the requirements of domestic water supply;
(o) In the prosecution and maintenance of its projects, the
Corporation shall adopt measures to prevent environmental
pollution and promote the conservation, development and
maximum utilization of natural resources xxx "58
With these powers, petitioner eventually had the monopoly in the
generation and distribution of electricity. This monopoly was
strengthened with the issuance of Pres. Decree No. 40,59
nationalizing the electric power industry. Although Exec. Order
No. 21560 thereafter allowed private sector participation in the
generation of electricity, the transmission of electricity remains the
monopoly of the petitioner.
Petitioner also fulfills the second requisite. It is operating within the
respondent city government's territorial jurisdiction pursuant to the
powers granted to it by Commonwealth Act No. 120, as
amended. From its operations in the City of Cabanatuan,
petitioner realized a gross income of P107,814,187.96 in 1992.
Fulfilling both requisites, petitioner is, and ought to be, subject of
the franchise tax in question.
Petitioner, however, insists that it is excluded from the coverage of
the franchise tax simply because its stocks are wholly owned by
the National Government, and its charter characterized it as a
"non-profit" organization.
These contentions must necessarily fail.
To stress, a franchise tax is imposed based not on the ownership
but on the exercise by the corporation of a privilege to do
business. The taxable entity is the corporation which exercises the
franchise, and not the individual stockholders. By virtue of its
charter, petitioner was created as a separate and distinct entity
from the National Government. It can sue and be sued under its
own name,61 and can exercise all the powers of a corporation
under the Corporation Code.62
To be sure, the ownership by the National Government of its entire
capital stock does not necessarily imply that petitioner is not
engaged in business. Section 2 of Pres. Decree No. 202963
classifies government-owned or controlled corporations (GOCCs)
into those performing governmental functions and those
performing proprietary functions, viz:
"A government-owned or controlled corporation is a stock or a
non-stock corporation, whether performing governmental or
proprietary functions, which is directly chartered by special law or
if organized under the general corporation law is owned or
controlled by the government directly, or indirectly through a
parent corporation or subsidiary corporation, to the extent of at
least a majority of its outstanding voting capital stock x x x."
(emphases supplied)
Governmental functions are those pertaining to the
administration of government, and as such, are treated as
absolute obligation on the part of the state to perform while
proprietary functions are those that are undertaken only by way
of advancing the general interest of society, and are merely
optional on the government.64 Included in the class of GOCCs
performing proprietary functions are "business-like" entities such as
the National Steel Corporation (NSC), the National Development
Corporation (NDC), the Social Security System (SSS), the
Government Service Insurance System (GSIS), and the National
Water Sewerage Authority (NAWASA),65 among others.
Petitioner was created to "undertake the development of
hydroelectric generation of power and the production of
electricity from nuclear, geothermal and other sources, as well as
the transmission of electric power on a nationwide basis."66
Pursuant to this mandate, petitioner generates power and sells
electricity in bulk. Certainly, these activities do not partake of the
sovereign functions of the government. They are purely private
and commercial undertakings, albeit imbued with public interest.
The public interest involved in its activities, however, does not
distract from the true nature of the petitioner as a commercial
enterprise, in the same league with similar public utilities like
telephone and telegraph companies, railroad companies, water
supply and irrigation companies, gas, coal or light companies,
power plants, ice plant among others; all of which are declared
by this Court as ministrant or proprietary functions of government
aimed at advancing the general interest of society.67
A closer reading of its charter reveals that even the legislature
treats the character of the petitioner's enterprise as a "business,"
although it limits petitioner's profits to twelve percent (12%), viz:68
"(n) When essential to the proper administration of its corporate
affairs or necessary for the proper transaction of its business or to
carry out the purposes for which it was organized, to contract
indebtedness and issue bonds subject to approval of the
President upon recommendation of the Secretary of Finance;
(o) To exercise such powers and do such things as may be
reasonably necessary to carry out the business and purposes for
which it was organized, or which, from time to time, may be
declared by the Board to be necessary, useful, incidental or
auxiliary to accomplish the said purpose xxx."(emphases supplied)
It is worthy to note that all other private franchise holders receiving
at least sixty percent (60%) of its electricity requirement from the
petitioner are likewise imposed the cap of twelve percent (12%)
on profits.69 The main difference is that the petitioner is mandated
to devote "all its returns from its capital investment, as well as
excess revenues from its operation, for expansion"70 while other
franchise holders have the option to distribute their profits to its
stockholders by declaring dividends. We do not see why this fact
can be a source of difference in tax treatment. In both instances,
the taxable entity is the corporation, which exercises the
franchise, and not the individual stockholders.
We also do not find merit in the petitioner's contention that its tax
exemptions under its charter subsist despite the passage of the
LGC.
As a rule, tax exemptions are construed strongly against the
claimant. Exemptions must be shown to exist clearly and
categorically, and supported by clear legal provisions.71 In the
case at bar, the petitioner's sole refuge is section 13 of Rep. Act
No. 6395 exempting from, among others, "all income taxes,
franchise taxes and realty taxes to be paid to the National
Government, its provinces, cities, municipalities and other
government agencies and instrumentalities." However, section
193 of the LGC withdrew, subject to limited exceptions, the
sweeping tax privileges previously enjoyed by private and public
corporations. Contrary to the contention of petitioner, section 193
of the LGC is an express, albeit general, repeal of all statutes
granting tax exemptions from local taxes.72 It reads:
"Sec. 193. Withdrawal of Tax Exemption Privileges.- Unless
otherwise provided in this Code, tax exemptions or incentives
granted to, or presently enjoyed by all persons, whether natural or
juridical, including government-owned or controlled
corporations, except local water districts, cooperatives duly
registered under R.A. No. 6938, non-stock and non-profit hospitals
and educational institutions, are hereby withdrawn upon the
effectivity of this Code." (emphases supplied)
It is a basic precept of statutory construction that the express
mention of one person, thing, act, or consequence excludes all
others as expressed in the familiar maxim expressio unius est
exclusio alterius.73 Not being a local water district, a cooperative
registered under R.A. No. 6938, or a non-stock and non-profit
hospital or educational institution, petitioner clearly does not
belong to the exception. It is therefore incumbent upon the
petitioner to point to some provisions of the LGC that expressly
grant it exemption from local taxes.
But this would be an exercise in futility. Section 137 of the LGC
clearly states that the LGUs can impose franchise tax
"notwithstanding any exemption granted by any law or other
special law." This particular provision of the LGC does not admit
any exception. In City Government of San Pablo, Laguna v.
Reyes,74 MERALCO's exemption from the payment of franchise
8
taxes was brought as an issue before this Court. The same issue
was involved in the subsequent case of Manila Electric Company
v. Province of Laguna.75 Ruling in favor of the local government
in both instances, we ruled that the franchise tax in question is
imposable despite any exemption enjoyed by MERALCO under
special laws, viz:
"It is our view that petitioners correctly rely on provisions of Sections
137 and 193 of the LGC to support their position that MERALCO's
tax exemption has been withdrawn. The explicit language of
section 137 which authorizes the province to impose franchise tax
'notwithstanding any exemption granted by any law or other
special law' is all-encompassing and clear. The franchise tax is
imposable despite any exemption enjoyed under special laws.
Section 193 buttresses the withdrawal of extant tax exemption
privileges. By stating that unless otherwise provided in this Code,
tax exemptions or incentives granted to or presently enjoyed by
all persons, whether natural or juridical, including government-
owned or controlled corporations except (1) local water districts,
(2) cooperatives duly registered under R.A. 6938, (3) non-stock
and non-profit hospitals and educational institutions, are
withdrawn upon the effectivity of this code, the obvious import is
to limit the exemptions to the three enumerated entities. It is a
basic precept of statutory construction that the express mention
of one person, thing, act, or consequence excludes all others as
expressed in the familiar maxim expressio unius est exclusio
alterius. In the absence of any provision of the Code to the
contrary, and we find no other provision in point, any existing tax
exemption or incentive enjoyed by MERALCO under existing law
was clearly intended to be withdrawn.
Reading together sections 137 and 193 of the LGC, we conclude
that under the LGC the local government unit may now impose a
local tax at a rate not exceeding 50% of 1% of the gross annual
receipts for the preceding calendar based on the incoming
receipts realized within its territorial jurisdiction. The legislative
purpose to withdraw tax privileges enjoyed under existing law or
charter is clearly manifested by the language used on (sic)
Sections 137 and 193 categorically withdrawing such exemption
subject only to the exceptions enumerated. Since it would be not
only tedious and impractical to attempt to enumerate all the
existing statutes providing for special tax exemptions or privileges,
the LGC provided for an express, albeit general, withdrawal of
such exemptions or privileges. No more unequivocal language
could have been used."76 (emphases supplied).
It is worth mentioning that section 192 of the LGC empowers the
LGUs, through ordinances duly approved, to grant tax
exemptions, initiatives or reliefs.77 But in enacting section 37 of
Ordinance No. 165-92 which imposes an annual franchise tax
"notwithstanding any exemption granted by law or other special
law," the respondent city government clearly did not intend to
exempt the petitioner from the coverage thereof.
Doubtless, the power to tax is the most effective instrument to raise
needed revenues to finance and support myriad activities of the
local government units for the delivery of basic services essential
to the promotion of the general welfare and the enhancement of
peace, progress, and prosperity of the people. As this Court
observed in the Mactan case, "the original reasons for the
withdrawal of tax exemption privileges granted to government-
owned or controlled corporations and all other units of
government were that such privilege resulted in serious tax base
erosion and distortions in the tax treatment of similarly situated
enterprises."78 With the added burden of devolution, it is even
more imperative for government entities to share in the
requirements of development, fiscal or otherwise, by paying taxes
or other charges due from them.
IN VIEW WHEREOF, the instant petition is DENIED and the assailed
Decision and Resolution of the Court of Appeals dated March 12,
2001 and July 10, 2001, respectively, are hereby AFFIRMED.
SO ORDERED.
3. [G.R. No. 120082. September 11, 1996]
MACTAN CEBU INTERNATIONAL AIRPORT AUTHORITY, petitioner, vs.
HON. FERDINAND J. MARCOS, in his capacity as the Presiding
Judge of the Regional Trial Court, Branch 20, Cebu City, THE CITY
OF CEBU, represented by its Mayor, HON. TOMAS R. OSMEA, and
EUSTAQUIO B. CESA, respondents.
DECISION
DAVIDE, JR., J.:
For review under Rule 45 of the Rules of Court on a pure question
of law are the decision of 22 March 1995[1] of the Regional Trial
Court (RTC) of Cebu City, Branch 20, dismissing the petition for
declaratory relief in Civil Case No. CEB-16900, entitled Mactan
Cebu International Airport Authority vs. City of Cebu, and its order
of 4 May 1995[2]denying the motion to reconsider the decision.
We resolved to give due course to this petition for it raises issues
dwelling on the scope of the taxing power of local government
units and the limits of tax exemption privileges of government-
owned and controlled corporations.
The uncontradicted factual antecedents are summarized in the
instant petition as follows:
Petitioner Mactan Cebu International Airport Authority (MCIAA)
was created by virtue of Republic Act No. 6958, mandated to
principally undertake the economical, efficient and effective
control, management and supervision of the Mactan
International Airport in the Province of Cebu and the Lahug
Airport in Cebu City, x x x and such other airports as may be
established in the Province of Cebu x x x (Sec. 3, RA 6958). It is also
mandated to:
a) encourage, promote and develop international and domestic
air traffic in the Central Visayas and Mindanao regions as a means
of making the regions centers of international trade and tourism,
and accelerating the development of the means of
transportation and communication in the country; and,
b) upgrade the services and facilities of the airports and to
formulate internationally acceptable standards of airport
accommodation and service.
Since the time of its creation, petitioner MCIAA enjoyed the
privilege of exemption from payment of realty taxes in
accordance with Section 14 of its Charter:
Sec. 14. Tax Exemptions. -- The Authority shall be exempt from
realty taxes imposed by the National Government or any of its
political subdivisions, agencies and instrumentalities x x x.
On October 11, 1994, however, Mr. Eustaquio B. Cesa, Officer-in-
Charge, Office of the Treasurer of the City of Cebu, demanded
payment for realty taxes on several parcels of land belonging to
the petitioner (Lot Nos. 913-G, 743, 88 SWO, 948-A, 989-A, 474,
109(931), I-M, 918, 919, 913-F, 941, 942, 947, 77 Psd., 746 and 991-
A), located at Barrio Apas and Barrio Kasambagan, Lahug, Cebu
City, in the total amount of P2,229,078.79.
Petitioner objected to such demand for payment as baseless and
unjustified, claiming in its favor the aforecited Section 14 of RA
6958 which exempts it from payment of realty taxes. It was also
asserted that it is an instrumentality of the government performing
governmental functions, citing Section 133 of the Local
Government Code of 1991 which puts limitations on the taxing
powers of local government units:
Section 133. Common Limitations on the Taxing Powers of Local
Government Units. -- Unless otherwise provided herein, the
exercise of the taxing powers of provinces, cities, municipalities,
and barangays shall not extend to the levy of the following:
a) x x x
xxx
o) Taxes, fees or charges of any kind on the National Government,
its agencies and instrumentalities, and local government units.
(underscoring supplied)
Respondent City refused to cancel and set aside petitioners realty
tax account, insisting that the MCIAA is a government-controlled
corporation whose tax exemption privilege has been withdrawn
by virtue of Sections 193 and 234 of the Local Government Code
that took effect on January 1, 1992:
Section 193. Withdrawal of Tax Exemption Privilege. Unless
otherwise provided in this Code, tax exemptions or incentives
granted to, or presently enjoyed by all persons whether natural or
9
juridical, including government-owned or controlled
corporations, except local water districts, cooperatives duly
registered under RA No. 6938, non-stock and non-profit hospitals
and educational institutions, are hereby withdrawn upon the
effectivity of this Code. (underscoring supplied)
xxx
Section 234. Exemptions from Real Property Taxes. x x x
(a) x x x
xxx
(e) x x x
Except as provided herein, any exemption from payment of real
property tax previously granted to, or presently enjoyed by all
persons, whether natural or juridical, including government-
owned or controlled corporations are hereby withdrawn upon the
effectivity of this Code.
As the City of Cebu was about to issue a warrant of levy against
the properties of petitioner, the latter was compelled to pay its tax
account under protest and thereafter filed a Petition for
Declaratory Relief with the Regional Trial Court of Cebu, Branch
20, on December 29, 1994. MCIAA basically contended that the
taxing powers of local government units do not extend to the levy
of taxes or fees of any kind on an instrumentality of the national
government. Petitioner insisted that while it is indeed a
government-owned corporation, it nonetheless stands on the
same footing as an agency or instrumentality of the national
government by the very nature of its powers and functions.
Respondent City, however, asserted that MCIAA is not an
instrumentality of the government but merely a government-
owned corporation performing proprietary functions. As such, all
exemptions previously granted to it were deemed withdrawn by
operation of law, as provided under Sections 193 and 234 of the
Local Government Code when it took effect on January 1,
1992.[3]
The petition for declaratory relief was docketed as Civil Case No.
CEB-16900.
In its decision of 22 March 1995,[4] the trial court dismissed the
petition in light of its findings, to wit:
A close reading of the New Local Government Code of 1991 or
RA 7160 provides the express cancellation and withdrawal of
exemption of taxes by government-owned and controlled
corporation per Sections after the effectivity of said Code on
January 1, 1992, to wit: [proceeds to quote Sections 193 and 234]
Petitioners claimed that its real properties assessed by respondent
City Government of Cebu are exempted from paying realty taxes
in view of the exemption granted under RA 6958 to pay the same
(citing Section 14 of RA 6958).
However, RA 7160 expressly provides that All general and special
laws, acts, city charters, decrees [sic], executive orders,
proclamations and administrative regulations, or part of parts
thereof which are inconsistent with any of the provisions of this
Code are hereby repealed or modified accordingly. (/f/, Section
534, RA 7160).
With that repealing clause in RA 7160, it is safe to infer and state
that the tax exemption provided for in RA 6958 creating petitioner
had been expressly repealed by the provisions of the New Local
Government Code of 1991.
So that petitioner in this case has to pay the assessed realty tax of
its properties effective after January 1, 1992 until the present.
This Courts ruling finds expression to give impetus and meaning to
the overall objectives of the New Local Government Code of
1991, RA 7160. It is hereby declared the policy of the State that
the territorial and political subdivisions of the State shall enjoy
genuine and meaningful local autonomy to enable them to
attain their fullest development as self-reliant communities and
make them more effective partners in the attainment of national
goals. Toward this end, the State shall provide for a more
responsive and accountable local government structure
instituted through a system of decentralization whereby local
government units shall be given more powers, authority,
responsibilities, and resources. The process of decentralization
shall proceed from the national government to the local
government units. x x x[5]
Its motion for reconsideration having been denied by the trial
court in its 4 May 1995 order, the petitioner filed the instant petition
based on the following assignment of errors:
I. RESPONDENT JUDGE ERRED IN FAILING TO RULE THAT THE
PETITIONER IS VESTED WITH GOVERNMENT POWERS AND
FUNCTIONS WHICH PLACE IT IN THE SAME CATEGORY AS AN
INSTRUMENTALITY OR AGENCY OF THE GOVERNMENT.
II. RESPONDENT JUDGE ERRED IN RULING THAT PETITIONER IS LIABLE
TO PAY REAL PROPERTY TAXES TO THE CITY OF CEBU.
Anent the first assigned error, the petitioner asserts that although
it is a government-owned or controlled corporation, it is
mandated to perform functions in the same category as an
instrumentality of Government. An instrumentality of Government
is one created to perform governmental functions primarily to
promote certain aspects of the economic life of the people.[6]
Considering its task not merely to efficiently operate and manage
the Mactan-Cebu International Airport, but more importantly, to
carry out the Government policies of promoting and developing
the Central Visayas and Mindanao regions as centers of
international trade and tourism, and accelerating the
development of the means of transportation and communication
in the country,[7] and that it is an attached agency of the
Department of Transportation and Communication (DOTC),[8]
the petitioner may stand in [sic] the same footing as an agency
or instrumentality of the national government. Hence, its tax
exemption privilege under Section 14 of its Charter cannot be
considered withdrawn with the passage of the Local Government
Code of 1991 (hereinafter LGC) because Section 133 thereof
specifically states that the `taxing powers of local government
units shall not extend to the levy of taxes or fees or charges of any
kind on the national government, its agencies and
instrumentalities.
As to the second assigned error, the petitioner contends that
being an instrumentality of the National Government, respondent
City of Cebu has no power nor authority to impose realty taxes
upon it in accordance with the aforesaid Section 133 of the LGC,
as explained in Basco vs. Philippine Amusement and Gaming
Corporation:[9]
Local governments have no power to tax instrumentalities of the
National Government. PAGCOR is a government owned or
controlled corporation with an original charter, PD 1869. All of its
shares of stock are owned by the National Government. . . .
PAGCOR has a dual role, to operate and regulate gambling
casinos. The latter role is governmental, which places it in the
category of an agency or instrumentality of the Government.
Being an instrumentality of the Government, PAGCOR should be
and actually is exempt from local taxes. Otherwise, its operation
might be burdened, impeded or subjected to control by a mere
Local government.
The states have no power by taxation or otherwise, to retard,
impede, burden or in any manner control the operation of
constitutional laws enacted by Congress to carry into execution
the powers vested in the federal government. (McCulloch v.
Maryland, 4 Wheat 316, 4 L Ed. 579)
This doctrine emanates from the supremacy of the National
Government over local governments.
Justice Holmes, speaking for the Supreme Court, made reference
to the entire absence of power on the part of the States to touch,
in that way (taxation) at least, the instrumentalities of the United
States (Johnson v. Maryland, 254 US 51) and it can be agreed that
no state or political subdivision can regulate a federal
instrumentality in such a way as to prevent it from consummating
its federal responsibilities, or even to seriously burden it in the
accomplishment of them. (Antieau, Modern Constitutional Law,
Vol. 2, p. 140)
Otherwise, mere creatures of the State can defeat National
policies thru extermination of what local authorities may perceive
to be undesirable activities or enterprise using the power to tax as
a tool for regulation (U.S. v. Sanchez, 340 US 42). The power to tax
which was called by Justice Marshall as the power to destroy (Mc
10
Culloch v. Maryland, supra) cannot be allowed to defeat an
instrumentality or creation of the very entity which has the inherent
power to wield it. (underscoring supplied)
It then concludes that the respondent Judge cannot therefore
correctly say that the questioned provisions of the Code do not
contain any distinction between a government corporation
performing governmental functions as against one performing
merely proprietary ones such that the exemption privilege
withdrawn under the said Code would apply to all government
corporations. For it is clear from Section 133, in relation to Section
234, of the LGC that the legislature meant to exclude
instrumentalities of the national government from the taxing
powers of the local government units.
In its comment, respondent City of Cebu alleges that as a local
government unit and a political subdivision, it has the power to
impose, levy, assess, and collect taxes within its jurisdiction. Such
power is guaranteed by the Constitution[10] and enhanced
further by the LGC. While it may be true that under its Charter the
petitioner was exempt from the payment of realty taxes,[11] this
exemption was withdrawn by Section 234 of the LGC. In response
to the petitioners claim that such exemption was not repealed
because being an instrumentality of the National Government,
Section 133 of the LGC prohibits local government units from
imposing taxes, fees, or charges of any kind on it, respondent City
of Cebu points out that the petitioner is likewise a government-
owned corporation, and Section 234 thereof does not distinguish
between government-owned or controlled corporations
performing governmental and purely proprietary functions.
Respondent City of Cebu urges this Court to apply by analogy its
ruling that the Manila International Airport Authority is a
government-owned corporation,[12] and to reject the
application of Basco because it was promulgated . . . before the
enactment and the signing into law of R.A. No. 7160, and was not,
therefore, decided in the light of the spirit and intention of the
framers of the said law.
As a general rule, the power to tax is an incident of sovereignty
and is unlimited in its range, acknowledging in its very nature no
limits, so that security against its abuse is to be found only in the
responsibility of the legislature which imposes the tax on the
constituency who are to pay it. Nevertheless, effective limitations
thereon may be imposed by the people through their
Constitutions.[13] Our Constitution, for instance, provides that the
rule of taxation shall be uniform and equitable and Congress shall
evolve a progressive system of taxation.[14] So potent indeed is
the power that it was once opined that the power to tax involves
the power to destroy.[15] Verily, taxation is a destructive power
which interferes with the personal and property rights of the
people and takes from them a portion of their property for the
support of the government. Accordingly, tax statutes must be
construed strictly against the government and liberally in favor of
the taxpayer.[16] But since taxes are what we pay for civilized
society,[17] or are the lifeblood of the nation, the law frowns
against exemptions from taxation and statutes granting tax
exemptions are thus construed strictissimi juris against the taxpayer
and liberally in favor of the taxing authority.[18] A claim of
exemption from tax payments must be clearly shown and based
on language in the law too plain to be mistaken.[19] Elsewise
stated, taxation is the rule, exemption therefrom is the
exception.[20] However, if the grantee of the exemption is a
political subdivision or instrumentality, the rigid rule of construction
does not apply because the practical effect of the exemption is
merely to reduce the amount of money that has to be handled
by the government in the course of its operations.[21]
The power to tax is primarily vested in the Congress; however, in
our jurisdiction, it may be exercised by local legislative bodies, no
longer merely by virtue of a valid delegation as before, but
pursuant to direct authority conferred by Section 5, Article X of the
Constitution.[22] Under the latter, the exercise of the power may
be subject to such guidelines and limitations as the Congress may
provide which, however, must be consistent with the basic policy
of local autonomy.
There can be no question that under Section 14 of R.A. No. 6958
the petitioner is exempt from the payment of realty taxes imposed
by the National Government or any of its political subdivisions,
agencies, and instrumentalities. Nevertheless, since taxation is the
rule and exemption therefrom the exception, the exemption may
thus be withdrawn at the pleasure of the taxing authority. The only
exception to this rule is where the exemption was granted to
private parties based on material consideration of a mutual
nature, which then becomes contractual and is thus covered by
the non-impairment clause of the Constitution.[23]
The LGC, enacted pursuant to Section 3, Article X of the
Constitution, provides for the exercise by local government units
of their power to tax, the scope thereof or its limitations, and the
exemptions from taxation.
Section 133 of the LGC prescribes the common limitations on the
taxing powers of local government units as follows:
SEC. 133. Common Limitations on the Taxing Power of Local
Government Units. Unless otherwise provided herein, the exercise
of the taxing powers of provinces, cities, municipalities, and
barangays shall not extend to the levy of the following:
(a) Income tax, except when levied on banks and other financial
institutions;
(b) Documentary stamp tax;
(c) Taxes on estates, inheritance, gifts, legacies and other
acquisitions mortis causa, except as otherwise provided herein;
(d) Customs duties, registration fees of vessel and wharfage on
wharves, tonnage dues, and all other kinds of customs fees,
charges and dues except wharfage on wharves constructed and
maintained by the local government unit concerned;
(e) Taxes, fees and charges and other impositions upon goods
carried into or out of, or passing through, the territorial jurisdictions
of local government units in the guise of charges for wharfage,
tolls for bridges or otherwise, or other taxes, fees or charges in any
form whatsoever upon such goods or merchandise;
(f) Taxes, fees or charges on agricultural and aquatic products
when sold by marginal farmers or fishermen;
(g) Taxes on business enterprises certified to by the Board of
Investments as pioneer or non-pioneer for a period of six (6) and
four (4) years, respectively from the date of registration;
(h) Excise taxes on articles enumerated under the National
Internal Revenue Code, as amended, and taxes, fees or charges
on petroleum products;
(i) Percentage or value-added tax (VAT) on sales, barters or
exchanges or similar transactions on goods or services except as
otherwise provided herein;
(j) Taxes on the gross receipts of transportation contractors and
persons engaged in the transportation of passengers or freight by
hire and common carriers by air, land or water, except as
provided in this Code;
(k) Taxes on premiums paid by way of reinsurance or retrocession;
(l) Taxes, fees or charges for the registration of motor vehicles and
for the issuance of all kinds of licenses or permits for the driving
thereof, except, tricycles;
(m) Taxes, fees, or other charges on Philippine products actually
exported, except as otherwise provided herein;
(n) Taxes, fees, or charges, on Countryside and Barangay Business
Enterprises and cooperatives duly registered under R.A. No. 6810
and Republic Act Numbered Sixty-nine hundred thirty-eight (R.A.
No. 6938) otherwise known as the Cooperatives Code of the
Philippines respectively; and
(o) TAXES, FEES OR CHARGES OF ANY KIND ON THE NATIONAL
GOVERNMENT, ITS AGENCIES AND INSTRUMENTALITIES, AND
LOCAL GOVERNMENT UNITS. (emphasis supplied)
Needless to say, the last item (item o) is pertinent to this case. The
taxes, fees or charges referred to are of any kind; hence, they
include all of these, unless otherwise provided by the LGC. The
term taxes is well understood so as to need no further elaboration,
especially in light of the above enumeration. The term fees means
charges fixed by law or ordinance for the regulation or inspection
of business or activity,[24] while charges are pecuniary liabilities
such as rents or fees against persons or property.[25]
Among the taxes enumerated in the LGC is real property tax,
11
which is governed by Section 232. It reads as follows:
SEC. 232. Power to Levy Real Property Tax. A province or city or a
municipality within the Metropolitan Manila Area may levy an
annual ad valorem tax on real property such as land, building,
machinery, and other improvements not hereafter specifically
exempted.
Section 234 of the LGC provides for the exemptions from payment
of real property taxes and withdraws previous exemptions
therefrom granted to natural and juridical persons, including
government-owned and controlled corporations, except as
provided therein. It provides:
SEC. 234. Exemptions from Real Property Tax. The following are
exempted from payment of the real property tax:
(a) Real property owned by the Republic of the Philippines or any
of its political subdivisions except when the beneficial use thereof
had been granted, for consideration or otherwise, to a taxable
person;
(b) Charitable institutions, churches, parsonages or convents
appurtenant thereto, mosques, nonprofit or religious cemeteries
and all lands, buildings and improvements actually, directly, and
exclusively used for religious, charitable or educational purposes;
(c) All machineries and equipment that are actually, directly and
exclusively used by local water districts and government-owned
or controlled corporations engaged in the supply and distribution
of water and/or generation and transmission of electric power;
(d) All real property owned by duly registered cooperatives as
provided for under R.A. No. 6938; and
(e) Machinery and equipment used for pollution control and
environmental protection.
Except as provided herein, any exemption from payment of real
property tax previously granted to, or presently enjoyed by, all
persons, whether natural or juridical, including all government-
owned or controlled corporations are hereby withdrawn upon the
effectivity of this Code.
These exemptions are based on the ownership, character, and
use of the property. Thus:
(a) Ownership Exemptions. Exemptions from real property taxes on
the basis of ownership are real properties owned by: (i) the
Republic, (ii) a province, (iii) a city, (iv) a municipality, (v) a
barangay, and (vi) registered cooperatives.
(b) Character Exemptions. Exempted from real property taxes on
the basis of their character are: (i) charitable institutions, (ii) houses
and temples of prayer like churches, parsonages or convents
appurtenant thereto, mosques, and (iii) non-profit or religious
cemeteries.
(c) Usage exemptions. Exempted from real property taxes on the
basis of the actual, direct and exclusive use to which they are
devoted are: (i) all lands, buildings and improvements which are
actually directly and exclusively used for religious, charitable or
educational purposes; (ii) all machineries and equipment
actually, directly and exclusively used by local water districts or by
government-owned or controlled corporations engaged in the
supply and distribution of water and/or generation and
transmission of electric power; and (iii) all machinery and
equipment used for pollution control and environmental
protection.
To help provide a healthy environment in the midst of the
modernization of the country, all machinery and equipment for
pollution control and environmental protection may not be taxed
by local governments.
2. Other Exemptions Withdrawn. All other exemptions previously
granted to natural or juridical persons including government-
owned or controlled corporations are withdrawn upon the
effectivity of the Code.[26]
Section 193 of the LGC is the general provision on withdrawal of
tax exemption privileges. It provides:
SEC. 193. Withdrawal of Tax Exemption Privileges. Unless otherwise
provided in this Code, tax exemptions or incentives granted to, or
presently enjoyed by all persons, whether natural or juridical,
including government-owned or controlled corporations, except
local water districts, cooperatives duly registered under R.A. 6938,
non-stock and non-profit hospitals and educational institutions,
are hereby withdrawn upon the effectivity of this Code.
On the other hand, the LGC authorizes local government units to
grant tax exemption privileges. Thus, Section 192 thereof provides:
SEC. 192. Authority to Grant Tax Exemption Privileges.-- Local
government units may, through ordinances duly approved, grant
tax exemptions, incentives or reliefs under such terms and
conditions as they may deem necessary.
The foregoing sections of the LGC speak of: (a) the limitations on
the taxing powers of local government units and the exceptions
to such limitations; and (b) the rule on tax exemptions and the
exceptions thereto. The use of exceptions or provisos in these
sections, as shown by the following clauses:
(1) unless otherwise provided herein in the opening paragraph of
Section 133;
(2) Unless otherwise provided in this Code in Section 193;
(3) not hereafter specifically exempted in Section 232; and
(4) Except as provided herein in the last paragraph of Section 234
initially hampers a ready understanding of the sections. Note, too,
that the aforementioned clause in Section 133 seems to be
inaccurately worded. Instead of the clause unless otherwise
provided herein, with the herein to mean, of course, the section,
it should have used the clause unless otherwise provided in this
Code. The former results in absurdity since the section itself
enumerates what are beyond the taxing powers of local
government units and, where exceptions were intended, the
exceptions are explicitly indicated in the next. For instance, in item
(a) which excepts income taxes when levied on banks and other
financial institutions; item (d) which excepts wharfage on wharves
constructed and maintained by the local government unit
concerned; and item (1) which excepts taxes, fees and charges
for the registration and issuance of licenses or permits for the
driving of tricycles. It may also be observed that within the body
itself of the section, there are exceptions which can be found only
in other parts of the LGC, but the section interchangeably uses
therein the clause except as otherwise provided herein as in items
(c) and (i), or the clause except as provided in this Code in item
(j). These clauses would be obviously unnecessary or mere
surplusages if the opening clause of the section were Unless
otherwise provided in this Code instead of Unless otherwise
provided herein. In any event, even if the latter is used, since
under Section 232 local government units have the power to levy
real property tax, except those exempted therefrom under
Section 234, then Section 232 must be deemed to qualify Section
133.
Thus, reading together Sections 133, 232, and 234 of the LGC, we
conclude that as a general rule, as laid down in Section 133, the
taxing powers of local government units cannot extend to the
levy of, inter alia, taxes, fees and charges of any kind on the
National Government, its agencies and instrumentalities, and
local government units; however, pursuant to Section 232,
provinces, cities, and municipalities in the Metropolitan Manila
Area may impose the real property tax except on, inter alia, real
property owned by the Republic of the Philippines or any of its
political subdivisions except when the beneficial use thereof has
been granted, for consideration or otherwise, to a taxable person,
as provided in item (a) of the first paragraph of Section 234.
As to tax exemptions or incentives granted to or presently enjoyed
by natural or juridical persons, including government-owned and
controlled corporations, Section 193 of the LGC prescribes the
general rule, viz., they are withdrawn upon the effectivity of the
LGC, except those granted to local water districts, cooperatives
duly registered under R.A. No. 6938, non-stock and non-profit
hospitals and educational institutions, and unless otherwise
provided in the LGC. The latter proviso could refer to Section 234
which enumerates the properties exempt from real property tax.
But the last paragraph of Section 234 further qualifies the retention
12
of the exemption insofar as real property taxes are concerned by
limiting the retention only to those enumerated therein; all others
not included in the enumeration lost the privilege upon the
effectivity of the LGC. Moreover, even as to real property owned
by the Republic of the Philippines or any of its political subdivisions
covered by item (a) of the first paragraph of Section 234, the
exemption is withdrawn if the beneficial use of such property has
been granted to a taxable person for consideration or otherwise.
Since the last paragraph of Section 234 unequivocally withdrew,
upon the effectivity of the LGC, exemptions from payment of real
property taxes granted to natural or juridical persons, including
government-owned or controlled corporations, except as
provided in the said section, and the petitioner is, undoubtedly, a
government-owned corporation, it necessarily follows that its
exemption from such tax granted it in Section 14 of its Charter, R.A.
No. 6958, has been withdrawn. Any claim to the contrary can only
be justified if the petitioner can seek refuge under any of the
exceptions provided in Section 234, but not under Section 133, as
it now asserts, since, as shown above, the said section is qualified
by Sections 232 and 234.
In short, the petitioner can no longer invoke the general rule in
Section 133 that the taxing powers of the local government units
cannot extend to the levy of:
(o) taxes, fees or charges of any kind on the National
Government, its agencies or instrumentalities, and local
government units.
It must show that the parcels of land in question, which are real
property, are any one of those enumerated in Section 234, either
by virtue of ownership, character, or use of the property. Most
likely, it could only be the first, but not under any explicit provision
of the said section, for none exists. In light of the petitioners theory
that it is an instrumentality of the Government, it could only be
within the first item of the first paragraph of the section by
expanding the scope of the term Republic of the Philippines to
embrace its instrumentalities and agencies. For expediency, we
quote:
(a) real property owned by the Republic of the Philippines, or any
of its political subdivisions except when the beneficial use thereof
has been granted, for consideration or otherwise, to a taxable
person.
This view does not persuade us. In the first place, the petitioners
claim that it is an instrumentality of the Government is based on
Section 133(o), which expressly mentions the word
instrumentalities; and, in the second place, it fails to consider the
fact that the legislature used the phrase National Government, its
agencies and instrumentalities in Section 133(o), but only the
phrase Republic of the Philippines or any of its political subdivisions
in Section 234(a).
The terms Republic of the Philippines and National Government
are not interchangeable. The former is broader and synonymous
with Government of the Republic of the Philippines which the
Administrative Code of 1987 defines as the corporate
governmental entity through which the functions of government
are exercised throughout the Philippines, including, save as the
contrary appears from the context, the various arms through
which political authority is made affective in the Philippines,
whether pertaining to the autonomous regions, the provincial,
city, municipal or barangay subdivisions or other forms of local
government.[27] These autonomous regions, provincial, city,
municipal or barangay subdivisions are the political
subdivisions.[28]
On the other hand, National Government refers to the entire
machinery of the central government, as distinguished from the
different forms of local governments.[29] The National
Government then is composed of the three great departments:
the executive, the legislative and the judicial.[30]
An agency of the Government refers to any of the various units of
the Government, including a department, bureau, office,
instrumentality, or government-owned or controlled corporation,
or a local government or a distinct unit therein;[31] while an
instrumentality refers to any agency of the National Government,
not integrated within the department framework, vested with
special functions or jurisdiction by law, endowed with some if not
all corporate powers, administering special funds, and enjoying
operational autonomy, usually through a charter. This term
includes regulatory agencies, chartered institutions and
government-owned and controlled corporations.[32]
If Section 234(a) intended to extend the exception therein to the
withdrawal of the exemption from payment of real property taxes
under the last sentence of the said section to the agencies and
instrumentalities of the National Government mentioned in
Section 133(o), then it should have restated the wording of the
latter. Yet, it did not. Moreover, that Congress did not wish to
expand the scope of the exemption in Section 234(a) to include
real property owned by other instrumentalities or agencies of the
government including government-owned and controlled
corporations is further borne out by the fact that the source of this
exemption is Section 40(a) of P.D. No. 464, otherwise known as The
Real Property Tax Code, which reads:
SEC. 40. Exemptions from Real Property Tax. The exemption shall
be as follows:
(a) Real property owned by the Republic of the Philippines or any
of its political subdivisions and any government-owned or
controlled corporation so exempt by its charter: Provided,
however, That this exemption shall not apply to real property of
the above-mentioned entities the beneficial use of which has
been granted, for consideration or otherwise, to a taxable person.
Note that as reproduced in Section 234(a), the phrase and any
government-owned or controlled corporation so exempt by its
charter was excluded. The justification for this restricted
exemption in Section 234(a) seems obvious: to limit further tax
exemption privileges, especially in light of the general provision on
withdrawal of tax exemption privileges in Section 193 and the
special provision on withdrawal of exemption from payment of
real property taxes in the last paragraph of Section 234. These
policy considerations are consistent with the State policy to ensure
autonomy to local governments[33] and the objective of the LGC
that they enjoy genuine and meaningful local autonomy to
enable them to attain their fullest development as self-reliant
communities and make them effective partners in the attainment
of national goals.[34] The power to tax is the most effective
instrument to raise needed revenues to finance and support
myriad activities of local government units for the delivery of basic
services essential to the promotion of the general welfare and the
enhancement of peace, progress, and prosperity of the people.
It may also be relevant to recall that the original reasons for the
withdrawal of tax exemption privileges granted to government-
owned and controlled corporations and all other units of
government were that such privilege resulted in serious tax base
erosion and distortions in the tax treatment of similarly situated
enterprises, and there was a need for these entities to share in the
requirements of development, fiscal or otherwise, by paying the
taxes and other charges due from them.[35]
The crucial issues then to be addressed are: (a) whether the
parcels of land in question belong to the Republic of the
Philippines whose beneficial use has been granted to the
petitioner, and (b) whether the petitioner is a taxable person.
Section 15 of the petitioners Charter provides:
Sec. 15. Transfer of Existing Facilities and Intangible Assets. All
existing public airport facilities, runways, lands, buildings and other
properties, movable or immovable, belonging to or presently
administered by the airports, and all assets, powers, rights, interests
and privileges relating on airport works or air operations, including
all equipment which are necessary for the operations of air
navigation, aerodrome control towers, crash, fire, and rescue
facilities are hereby transferred to the Authority: Provided,
however, that the operations control of all equipment necessary
for the operation of radio aids to air navigation, airways
communication, the approach control office, and the area
control center shall be retained by the Air Transportation Office.
No equipment, however, shall be removed by the Air
Transportation Office from Mactan without the concurrence of
the Authority. The Authority may assist in the maintenance of the
Air Transportation Office equipment.
The airports referred to are the Lahug Air Port in Cebu City and the
Mactan International Airport in the Province of Cebu,[36] which
belonged to the Republic of the Philippines, then under the Air
Transportation Office (ATO).[37]
It may be reasonable to assume that the term lands refer to lands
13
in Cebu City then administered by the Lahug Air Port and includes
the parcels of land the respondent City of Cebu seeks to levy on
for real property taxes. This section involves a transfer of the lands,
among other things, to the petitioner and not just the transfer of
the beneficial use thereof, with the ownership being retained by
the Republic of the Philippines.
This transfer is actually an absolute conveyance of the ownership
thereof because the petitioners authorized capital stock consists
of, inter alia, the value of such real estate owned and/or
administered by the airports.[38] Hence, the petitioner is now the
owner of the land in question and the exception in Section 234(c)
of the LGC is inapplicable.
Moreover, the petitioner cannot claim that it was never a taxable
person under its Charter. It was only exempted from the payment
of real property taxes. The grant of the privilege only in respect of
this tax is conclusive proof of the legislative intent to make it a
taxable person subject to all taxes, except real property tax.
Finally, even if the petitioner was originally not a taxable person
for purposes of real property tax, in light of the foregoing
disquisitions, it had already become, even if it be conceded to be
an agency or instrumentality of the Government, a taxable
person for such purpose in view of the withdrawal in the last
paragraph of Section 234 of exemptions from the payment of real
property taxes, which, as earlier adverted to, applies to the
petitioner.
Accordingly, the position taken by the petitioner is untenable.
Reliance on Basco vs. Philippine Amusement and Gaming
Corporation[39] is unavailing since it was decided before the
effectivity of the LGC. Besides, nothing can prevent Congress
from decreeing that even instrumentalities or agencies of the
Government performing governmental functions may be subject
to tax. Where it is done precisely to fulfill a constitutional mandate
and national policy, no one can doubt its wisdom.
WHEREFORE, the instant petition is DENIED. The challenged
decision and order of the Regional Trial Court of Cebu, Branch 20,
in Civil Case No. CEB-16900 are AFFIRMED.
No pronouncement as to costs.
SO ORDERED.
4. G.R. No. L-18129 January 31, 1963
C. N. HODGES, petitioner-appellant,
vs.
THE MUNICIPAL BOARD OF THE CITY OF ILOILO, ET AL., respondents-
appellants.
.BAUTISTA ANGELO, J.:
On June 13, 1960, the Municipal Board of the City of Iloilo enacted
Ordinance No. 33, series of 1960, pursuant to the provisions of
Republic Act No. 2264, known as the Local Autonomy Act,
requiring any person, firm, association or corporation to pay a
sales tax of 1/2 of 1% of the selling price of any motor vehicle and
prohibiting the registration of the sale of the motor vehicle in the
Motor Vehicles Office of the City of Iloilo unless the tax has been
paid. It is expressly required therein that the payment of the
municipal tax shall be a requirement for registration and transfer
of ownership, the tax to be paid in the office of the city treasurer,
and that the tax receipt shall be made part of the documents to
be presented to the Motor Vehicles Office..
C. N. Hodges, who was engaged in the business of buying and
selling second-hand motor vehicles in the City of Iloilo, is one of
those affected by the enactment of the ordinance, and believing
that the same is invalid for having been passed in excess of the
authority conferred by law upon the municipal board, he filed on
June 27, 1960 a petition for declaratory judgment with the Court
of First Instance of Iloilo praying that said ordinance be declared
void ab initio, and that the City of Iloilo be ordered to refund to
him the amounts he was required to pay thereunder without
prejudice to determining its validity in an appropriate action.
The City of Iloilo, in its answer, justified the approval of the
ordinance alleging that the same was approved by virtue of the
power and authority granted to it by Section 2 of Republic Act No.
2264, known as the Local Autonomy Act.
Wherefore, the parties respectfully pray that the foregoing
stipulation of facts be admitted and approved by this Honorable
Court, without prejudice to the parties adducing other evidence
to prove their case not covered by this stipulation of
facts. 1äwphï1.ñët
A copy of the petition for declaratory judgment was furnished the
Solicitor General in accordance with Section 4, Rule 66, of the
Rules of Court.
The case having been submitted under a stipulation of facts, the
court a quo rendered decision on December 8, 1960 holding that
that part of the ordinance which requires the owner of a used
motor vehicle to pay a sales tax of 1/2 of 1% of the selling price is
valid, but the portion thereof which requires the payment of the
tax as a condition precedent for the registration of the sale in the
Motor Vehicles Office is invalid for being repugnant to Section 2(h)
of Republic Act 2264.
Both parties have appealed.
Section 2 of Republic Act No. 2264, known as the Local Autonomy
Act pursuant to which the ordinance in question was approved
by the Municipal Board of the City of Iloilo, provides in part:
SEC. 2. Taxation.— Any provision of law to the contrary
notwithstanding, all chartered cities, municipalities and municipal
districts shall have authority to impose municipal license taxes or
fees upon persons engaged in any occupation or business, or
exercising privileges in chartered cities, municipalities or municipal
districts by requiring them to secure licenses at rates fixed by the
municipal board or city council of the city, the municipal council
of the municipality, or the municipal district council of the
municipal district; to collect fees and charges for services
rendered by the city, municipality or municipal district; to regulate
and impose reasonable fees for services rendered in connection
with any business, profession or occupation being conducted
within the city, municipality or municipal district and otherwise to
levy for public purposes, just and uniform taxes, licenses or
fees; Provided, That municipalities and municipal districts shall, in
no case, impose any percentage tax on sales or other taxes in any
form based thereon nor impose taxes on articles subject to
specific tax, except gasoline, under the provisions of the national
internal revenue code: ....
It would appear that the City of Iloilo, thru its municipal board, is
empowered (a) to impose municipal licenses, taxes or fees upon
any person engaged in any occupation or business, or exercising
any privilege, in the city; (b) to regulate and impose reasonable
fees for services rendered in connection with any business,
profession or occupation conducted within the city; and (c) to
levy for public purposes just and uniform taxes, licenses or fees. It
would also appear that municipalities and municipal districts are
prohibited from imposing any percentage tax on sales or other
taxes in any form on articles subject to specific tax, except
gasoline, under the provisions of the National Internal Revenue
Code.
From the cursory analysis of the provisions above-stated we can
readily draw the conclusion that the City of Iloilo has the authority
and power to approve the ordinance in question for it merely
imposes a percentage tax on the sale of a second-hand motor
vehicle that may be carried out within the city by any person, firm,
association or corporation owning or dealing with it who may
come within the jurisdiction. Indeed, it cannot be disputed that a
sales tax of 1/2 of 1% of the selling price of a second-hand motor
vehicle comes within the category of a just tax within the provision
of Section 2 of Republic Act 2264. It is true that the tax in question
is in the form of a percentage tax on the proceeds of the sale of
a second-hand motor vehicle which comes within the prohibition
of the section above adverted to; but the prohibition only refers
to municipalities and municipal districts and does not
comprehend chartered cities as the City of Iloilo.
But the ordinance, besides imposing a percentage tax, also
imposes an additional requirement. It provides that the payment
of the tax shall be a requirement for registration and transfer of
ownership and that unless the tax is paid the registration and
transfer of ownership cannot be effected in the Motor Vehicles
Office of the City. The Court a quo considered this portion invalid
reasoning as follows: "Chartered cities are not authorized to
establish any condition on the registration of Motor vehicles. To
require the payment of sales tax before the registration of the sale
can be made in the Motor Vehicles Office, is tantamount to
14
imposing a tax for the registration of motor vehicles."
We disagree. The court a quo undoubtedly had in mind the
provisions of Section 2(h) of Republic Act No. 2264 which prohibits
a chartered city from imposing a tax on the registration of motor
vehicles and the issuance of all kinds of licenses or permits for the
driving thereof, which is one of the exceptions constituting a
restriction on the taxation power granted by said Act to a city,
municipality or municipal district. But the requirement of the
ordinance cannot be considered a tax in the light viewed by the
court a quo for the same is merely a coercive measure to make
the enforcement of the contemplated sales tax more effective.
Well-settled is the principle that taxes are imposed for the support
of the government in return for the general advantage and
protection which the government affords to taxpayers and their
property (Union Refrigerator Transit Co. v. Com., 26 S. Ct. 36, 199 I
[2nd] 160). Taxes are the lifeblood of the government. It is
imperative that the power to impose them to be clothed with the
implied authority to devise ways and means to accomplish their
collection in the most effective manner. Without this implied
power the end of government may falter or fail.
It is a general and undisputed proposition of law that a municipal
corporation possesses and can exercise the following powers,
and no others: First, those granted in express words; second, those
necessarily or fairly implied in or incident to the powers expressly
granted; third, those essential to the accomplishment of the
declared objects and purposes of the corporation not simply
convenient, but indispensable. (Dillon, Municipal Corporations,
5th Ed., Vol. I, p. 449; citing Cook Co. v. McCrea, 93 Ill. 236; Ottawa
v. Carey, 108 U.S., 110)
Municipal corporations may exercise all powers in the fair intent
and purpose of their creation which are reasonably proper to give
effect to the powers expressly granted, and in so doing they gave
the choice of the means adapted to the ends and are not
confined to any one mode of operation. (62 C.J.S., Section
117, citingSpahn v. Stewart, 103 S.W. 2d 651, 559, 268 Ky. 97; Riddle
v. Ledbetter, 5 S.E., 2d 542, 216 N.C. 491)
If the power of municipalities are to be confined to those expressly
granted by the law, in many cases they will be denied even the
power of self-preservation as well as of the means necessary to
accomplish the essential object of their creation. Hence in giving
corporations authority to carry out the powers expressly granted
to them, it is understood that they are also given the power to
adopt such means as may be necessary for accomplishing their
ends (Sinco, Philippine Political Law, l0th ed., p 688, citing Smith v.
New Bern, 16 Am. Rep. 766.)
We are therefore, of the opinion that the ordinance in question is
valid it being a valid exercise of the power of taxation granted to
Iloilo City by Section 2 of Republic Act No. 2264.
WHEREFORE, the decision appealed from is modified by declaring
Ordinance No. 22 of the City of Iloilo valid even with regard to the
portion which requires the payment of the tax as a condition
precedent for the registration of the sale in the Motor Vehicles
Office of said city. No costs.
II. Legislative
a. Imposition of Tax
1. Nature (Kind)
2. Coverage (Subjects)
3. Purpose (Objects)
4. Extent (Rate)
5. Situs (Place)
G.R. No. 160756 March 9, 2010
CHAMBER OF REAL ESTATE AND BUILDERS' ASSOCIATIONS,
INC., Petitioner,
vs.
THE HON. EXECUTIVE SECRETARY ALBERTO ROMULO, THE HON.
ACTING SECRETARY OF FINANCE JUANITA D. AMATONG, and THE
HON. COMMISSIONER OF INTERNAL REVENUE GUILLERMO
PARAYNO, JR., Respondents.
DECISION
CORONA, J.:
In this original petition for certiorari and mandamus,1 petitioner
Chamber of Real Estate and Builders’ Associations, Inc. is
questioning the constitutionality of Section 27 (E) of Republic Act
(RA) 84242 and the revenue regulations (RRs) issued by the Bureau
of Internal Revenue (BIR) to implement said provision and those
involving creditable withholding taxes.3
Petitioner is an association of real estate developers and builders
in the Philippines. It impleaded former Executive Secretary Alberto
Romulo, then acting Secretary of Finance Juanita D. Amatong
and then Commissioner of Internal Revenue Guillermo Parayno,
Jr. as respondents.
Petitioner assails the validity of the imposition of minimum
corporate income tax (MCIT) on corporations and creditable
withholding tax (CWT) on sales of real properties classified as
ordinary assets.
Section 27(E) of RA 8424 provides for MCIT on domestic
corporations and is implemented by RR 9-98. Petitioner argues
that the MCIT violates the due process clause because it levies
income tax even if there is no realized gain.
Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by
RR 6-2001) and 2.58.2 of RR 2-98, and Section 4(a)(ii) and (c)(ii) of
RR 7-2003, all of which prescribe the rules and procedures for the
collection of CWT on the sale of real properties categorized as
ordinary assets. Petitioner contends that these revenue
regulations are contrary to law for two reasons: first, they ignore
the different treatment by RA 8424 of ordinary assets and capital
assets and second, respondent Secretary of Finance has no
authority to collect CWT, much less, to base the CWT on the gross
selling price or fair market value of the real properties classified as
ordinary assets.
Petitioner also asserts that the enumerated provisions of the
subject revenue regulations violate the due process clause
because, like the MCIT, the government collects income tax even
when the net income has not yet been determined. They
contravene the equal protection clause as well because the CWT
is being levied upon real estate enterprises but not on other
business enterprises, more particularly those in the manufacturing
sector.
The issues to be resolved are as follows:
(1) whether or not this Court should take cognizance of the
present case;
(2) whether or not the imposition of the MCIT on domestic
corporations is unconstitutional and
(3) whether or not the imposition of CWT on income from sales of
real properties classified as ordinary assets under RRs 2-98, 6-2001
and 7-2003, is unconstitutional.
Overview of the Assailed Provisions
Under the MCIT scheme, a corporation, beginning on its fourth
year of operation, is assessed an MCIT of 2% of its gross income
when such MCIT is greater than the normal corporate income tax
imposed under Section 27(A).4 If the regular income tax is higher
than the MCIT, the corporation does not pay the MCIT. Any excess
of the MCIT over the normal tax shall be carried forward and
credited against the normal income tax for the three immediately
succeeding taxable years. Section 27(E) of RA 8424 provides:
Section 27 (E). [MCIT] on Domestic Corporations. -
(1) Imposition of Tax. – A [MCIT] of two percent (2%) of the gross
income as of the end of the taxable year, as defined herein, is
hereby imposed on a corporation taxable under this Title,
beginning on the fourth taxable year immediately following the
year in which such corporation commenced its business
operations, when the minimum income tax is greater than the tax
computed under Subsection (A) of this Section for the taxable
year.
(2) Carry Forward of Excess Minimum Tax. – Any excess of the
[MCIT] over the normal income tax as computed under
Subsection (A) of this Section shall be carried forward and
credited against the normal income tax for the three (3)
15
immediately succeeding taxable years.
(3) Relief from the [MCIT] under certain conditions. – The Secretary
of Finance is hereby authorized to suspend the imposition of the
[MCIT] on any corporation which suffers losses on account of
prolonged labor dispute, or because of force majeure, or
because of legitimate business reverses.
The Secretary of Finance is hereby authorized to promulgate,
upon recommendation of the Commissioner, the necessary rules
and regulations that shall define the terms and conditions under
which he may suspend the imposition of the [MCIT] in a meritorious
case.
(4) Gross Income Defined. – For purposes of applying the [MCIT]
provided under Subsection (E) hereof, the term ‘gross income’
shall mean gross sales less sales returns, discounts and allowances
and cost of goods sold. "Cost of goods sold" shall include all
business expenses directly incurred to produce the merchandise
to bring them to their present location and use.
For trading or merchandising concern, "cost of goods sold" shall
include the invoice cost of the goods sold, plus import duties,
freight in transporting the goods to the place where the goods are
actually sold including insurance while the goods are in transit.
For a manufacturing concern, "cost of goods manufactured and
sold" shall include all costs of production of finished goods, such
as raw materials used, direct labor and manufacturing overhead,
freight cost, insurance premiums and other costs incurred to bring
the raw materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, "gross
income" means gross receipts less sales returns, allowances,
discounts and cost of services. "Cost of services" shall mean all
direct costs and expenses necessarily incurred to provide the
services required by the customers and clients including (A)
salaries and employee benefits of personnel, consultants and
specialists directly rendering the service and (B) cost of facilities
directly utilized in providing the service such as depreciation or
rental of equipment used and cost of supplies: Provided, however,
that in the case of banks, "cost of services" shall include interest
expense.
On August 25, 1998, respondent Secretary of Finance (Secretary),
on the recommendation of the Commissioner of Internal Revenue
(CIR), promulgated RR 9-98 implementing Section 27(E).5 The
pertinent portions thereof read:
Sec. 2.27(E) [MCIT] on Domestic Corporations. –
(1) Imposition of the Tax. – A [MCIT] of two percent (2%) of the
gross income as of the end of the taxable year (whether calendar
or fiscal year, depending on the accounting period employed) is
hereby imposed upon any domestic corporation beginning the
fourth (4th) taxable year immediately following the taxable year
in which such corporation commenced its business operations.
The MCIT shall be imposed whenever such corporation has zero
or negative taxable income or whenever the amount of minimum
corporate income tax is greater than the normal income tax due
from such corporation.
For purposes of these Regulations, the term, "normal income tax"
means the income tax rates prescribed under Sec. 27(A) and Sec.
28(A)(1) of the Code xxx at 32% effective January 1, 2000 and
thereafter.
xxx xxx xxx
(2) Carry forward of excess [MCIT]. – Any excess of the [MCIT] over
the normal income tax as computed under Sec. 27(A) of the
Code shall be carried forward on an annual basis and credited
against the normal income tax for the three (3) immediately
succeeding taxable years.
xxx xxx xxx
Meanwhile, on April 17, 1998, respondent Secretary, upon
recommendation of respondent CIR, promulgated RR 2-98
implementing certain provisions of RA 8424 involving the
withholding of taxes.6 Under Section 2.57.2(J) of RR No. 2-98,
income payments from the sale, exchange or transfer of real
property, other than capital assets, by persons residing in the
Philippines and habitually engaged in the real estate business
were subjected to CWT:
Sec. 2.57.2. Income payment subject to [CWT] and rates
prescribed thereon:
xxx xxx xxx
(J) Gross selling price or total amount of consideration or its
equivalent paid to the seller/owner for the sale, exchange or
transfer of. – Real property, other than capital assets, sold by an
individual, corporation, estate, trust, trust fund or pension fund and
the seller/transferor is habitually engaged in the real estate
business in accordance with the following schedule –
Those which are exempt from a withholding Exempt
tax at source as prescribed in Sec. 2.57.5 of
these regulations.
With a selling price of five hundred thousand 1.5%
pesos (₱500,000.00) or less.
With a selling price of more than five hundred 3.0%
thousand pesos (₱500,000.00) but not more
than two million pesos (₱2,000,000.00).
With selling price of more than two million 5.0%
pesos (₱2,000,000.00)
xxx xxx xxx
Gross selling price shall mean the consideration stated in the sales
document or the fair market value determined in accordance
with Section 6 (E) of the Code, as amended, whichever is higher.
In an exchange, the fair market value of the property received in
exchange, as determined in the Income Tax Regulations shall be
used.
Where the consideration or part thereof is payable on installment,
no withholding tax is required to be made on the periodic
installment payments where the buyer is an individual not
engaged in trade or business. In such a case, the applicable rate
of tax based on the entire consideration shall be withheld on the
last installment or installments to be paid to the seller.
However, if the buyer is engaged in trade or business, whether a
corporation or otherwise, the tax shall be deducted and withheld
by the buyer on every installment.
This provision was amended by RR 6-2001 on July 31, 2001:
Sec. 2.57.2. Income payment subject to [CWT] and rates
prescribed thereon:
xxx xxx xxx
(J) Gross selling price or total amount of consideration or its
equivalent paid to the seller/owner for the sale, exchange or
transfer of real property classified as ordinary asset. - A [CWT]
based on the gross selling price/total amount of consideration or
the fair market value determined in accordance with Section 6(E)
of the Code, whichever is higher, paid to the seller/owner for the
sale, transfer or exchange of real property, other than capital
asset, shall be imposed upon the withholding agent,/buyer, in
accordance with the following schedule:
Where the seller/transferor is exempt from [CWT] Exempt
in accordance with Sec. 2.57.5 of these
regulations.
Upon the following values of real property, where
the seller/transferor is habitually engaged in the
real estate business.
With a selling price of Five Hundred Thousand 1.5%
Pesos (₱500,000.00) or less.
With a selling price of more than Five Hundred 3.0%
16
Thousand Pesos (₱500,000.00) but not more than
Two Million Pesos (₱2,000,000.00).
With a selling price of more than two Million Pesos 5.0%
(₱2,000,000.00).
xxx xxx xxx
Gross selling price shall remain the consideration stated in the
sales document or the fair market value determined in
accordance with Section 6 (E) of the Code, as amended,
whichever is higher. In an exchange, the fair market value of the
property received in exchange shall be considered as the
consideration.
xxx xxx xxx
However, if the buyer is engaged in trade or business, whether a
corporation or otherwise, these rules shall apply:
(i) If the sale is a sale of property on the installment plan (that is,
payments in the year of sale do not exceed 25% of the selling
price), the tax shall be deducted and withheld by the buyer on
every installment.
(ii) If, on the other hand, the sale is on a "cash basis" or is a
"deferred-payment sale not on the installment plan" (that is,
payments in the year of sale exceed 25% of the selling price), the
buyer shall withhold the tax based on the gross selling price or fair
market value of the property, whichever is higher, on the first
installment.
In any case, no Certificate Authorizing Registration (CAR) shall be
issued to the buyer unless the [CWT] due on the sale, transfer or
exchange of real property other than capital asset has been fully
paid. (Underlined amendments in the original)
Section 2.58.2 of RR 2-98 implementing Section 58(E) of RA 8424
provides that any sale, barter or exchange subject to the CWT will
not be recorded by the Registry of Deeds until the CIR has certified
that such transfers and conveyances have been reported and
the taxes thereof have been duly paid:7
Sec. 2.58.2. Registration with the Register of Deeds. – Deeds of
conveyances of land or land and building/improvement thereon
arising from sales, barters, or exchanges subject to the creditable
expanded withholding tax shall not be recorded by the Register
of Deeds unless the [CIR] or his duly authorized representative has
certified that such transfers and conveyances have been
reported and the expanded withholding tax, inclusive of the
documentary stamp tax, due thereon have been fully paid xxxx.
On February 11, 2003, RR No. 7-20038 was promulgated, providing
for the guidelines in determining whether a particular real
property is a capital or an ordinary asset for purposes of imposing
the MCIT, among others. The pertinent portions thereof state:
Section 4. Applicable taxes on sale, exchange or other disposition
of real property. - Gains/Income derived from sale, exchange, or
other disposition of real properties shall, unless otherwise exempt,
be subject to applicable taxes imposed under the Code,
depending on whether the subject properties are classified as
capital assets or ordinary assets;
a. In the case of individual citizen (including estates and trusts),
resident aliens, and non-resident aliens engaged in trade or
business in the Philippines;
xxx xxx xxx
(ii) The sale of real property located in the Philippines, classified as
ordinary assets, shall be subject to the [CWT] (expanded) under
Sec. 2.57..2(J) of [RR 2-98], as amended, based on the gross selling
price or current fair market value as determined in accordance
with Section 6(E) of the Code, whichever is higher, and
consequently, to the ordinary income tax imposed under Sec.
24(A)(1)(c) or 25(A)(1) of the Code, as the case may be, based
on net taxable income.
xxx xxx xxx
c. In the case of domestic corporations. –
xxx xxx xxx
(ii) The sale of land and/or building classified as ordinary asset and
other real property (other than land and/or building treated as
capital asset), regardless of the classification thereof, all of which
are located in the Philippines, shall be subject to the [CWT]
(expanded) under Sec. 2.57.2(J) of [RR 2-98], as amended, and
consequently, to the ordinary income tax under Sec. 27(A) of the
Code. In lieu of the ordinary income tax, however, domestic
corporations may become subject to the [MCIT] under Sec. 27(E)
of the Code, whichever is applicable.
xxx xxx xxx
We shall now tackle the issues raised.
Existence of a Justiciable Controversy
Courts will not assume jurisdiction over a constitutional question
unless the following requisites are satisfied: (1) there must be an
actual case calling for the exercise of judicial review; (2) the
question before the court must be ripe for adjudication; (3) the
person challenging the validity of the act must have standing to
do so; (4) the question of constitutionality must have been raised
at the earliest opportunity and (5) the issue of constitutionality
must be the very lis mota of the case.9
Respondents aver that the first three requisites are absent in this
case. According to them, there is no actual case calling for the
exercise of judicial power and it is not yet ripe for adjudication
because
[petitioner] did not allege that CREBA, as a corporate entity, or
any of its members, has been assessed by the BIR for the payment
of [MCIT] or [CWT] on sales of real property. Neither did petitioner
allege that its members have shut down their businesses as a result
of the payment of the MCIT or CWT. Petitioner has raised concerns
in mere abstract and hypothetical form without any actual,
specific and concrete instances cited that the assailed law and
revenue regulations have actually and adversely affected it.
Lacking empirical data on which to base any conclusion, any
discussion on the constitutionality of the MCIT or CWT on sales of
real property is essentially an academic exercise.
Perceived or alleged hardship to taxpayers alone is not an
adequate justification for adjudicating abstract issues. Otherwise,
adjudication would be no different from the giving of advisory
opinion that does not really settle legal issues.10
An actual case or controversy involves a conflict of legal rights or
an assertion of opposite legal claims which is susceptible of
judicial resolution as distinguished from a hypothetical or abstract
difference or dispute.11 On the other hand, a question is
considered ripe for adjudication when the act being challenged
has a direct adverse effect on the individual challenging it.12
Contrary to respondents’ assertion, we do not have to wait until
petitioner’s members have shut down their operations as a result
of the MCIT or CWT. The assailed provisions are already being
implemented. As we stated in Didipio Earth-Savers’ Multi-Purpose
Association, Incorporated (DESAMA) v. Gozun:13
By the mere enactment of the questioned law or the approval of
the challenged act, the dispute is said to have ripened into a
judicial controversy even without any other overt act. Indeed,
even a singular violation of the Constitution and/or the law is
enough to awaken judicial duty.14
If the assailed provisions are indeed unconstitutional, there is no
better time than the present to settle such question once and for
all.
Respondents next argue that petitioner has no legal standing to
sue:
Petitioner is an association of some of the real estate developers
and builders in the Philippines. Petitioners did not allege that [it]
itself is in the real estate business. It did not allege any material
interest or any wrong that it may suffer from the enforcement of
[the assailed provisions].15
Legal standing or locus standi is a party’s personal and substantial
interest in a case such that it has sustained or will sustain direct
injury as a result of the governmental act being
challenged.16 In Holy Spirit Homeowners Association, Inc. v.
Defensor,17 we held that the association had legal standing
because its members stood to be injured by the enforcement of
17
the assailed provisions:
Petitioner association has the legal standing to institute the instant
petition xxx. There is no dispute that the individual members of
petitioner association are residents of the NGC. As such they are
covered and stand to be either benefited or injured by the
enforcement of the IRR, particularly as regards the selection
process of beneficiaries and lot allocation to qualified
beneficiaries. Thus, petitioner association may assail those
provisions in the IRR which it believes to be unfavorable to the
rights of its members. xxx Certainly, petitioner and its members
have sustained direct injury arising from the enforcement of the
IRR in that they have been disqualified and eliminated from the
selection process.18
In any event, this Court has the discretion to take cognizance of
a suit which does not satisfy the requirements of an actual case,
ripeness or legal standing when paramount public interest is
involved.19 The questioned MCIT and CWT affect not only
petitioners but practically all domestic corporate taxpayers in our
country. The transcendental importance of the issues raised and
their overreaching significance to society make it proper for us to
take cognizance of this petition.20
Concept and Rationale of the MCIT
The MCIT on domestic corporations is a new concept introduced
by RA 8424 to the Philippine taxation system. It came about as a
result of the perceived inadequacy of the self-assessment system
in capturing the true income of corporations.21 It was devised as
a relatively simple and effective revenue-raising instrument
compared to the normal income tax which is more difficult to
control and enforce. It is a means to ensure that everyone will
make some minimum contribution to the support of the public
sector. The congressional deliberations on this are illuminating:
Senator Enrile. Mr. President, we are not unmindful of the practice
of certain corporations of reporting constantly a loss in their
operations to avoid the payment of taxes, and thus avoid sharing
in the cost of government. In this regard, the Tax Reform Act
introduces for the first time a new concept called the [MCIT] so as
to minimize tax evasion, tax avoidance, tax manipulation in the
country and for administrative convenience. … This will go a long
way in ensuring that corporations will pay their just share in
supporting our public life and our economic advancement.22
Domestic corporations owe their corporate existence and their
privilege to do business to the government. They also benefit from
the efforts of the government to improve the financial market and
to ensure a favorable business climate. It is therefore fair for the
government to require them to make a reasonable contribution
to the public expenses.
Congress intended to put a stop to the practice of corporations
which, while having large turn-overs, report minimal or negative
net income resulting in minimal or zero income taxes year in and
year out, through under-declaration of income or over-deduction
of expenses otherwise called tax shelters.23
Mr. Javier (E.) … [This] is what the Finance Dept. is trying to remedy,
that is why they have proposed the [MCIT]. Because from
experience too, you have corporations which have been losing
year in and year out and paid no tax. So, if the corporation has
been losing for the past five years to ten years, then that
corporation has no business to be in business. It is dead. Why
continue if you are losing year in and year out? So, we have this
provision to avoid this type of tax shelters, Your Honor.24
The primary purpose of any legitimate business is to earn a profit.
Continued and repeated losses after operations of a corporation
or consistent reports of minimal net income render its financial
statements and its tax payments suspect. For sure, certain tax
avoidance schemes resorted to by corporations are allowed in
our jurisdiction. The MCIT serves to put a cap on such tax shelters.
As a tax on gross income, it prevents tax evasion and minimizes
tax avoidance schemes achieved through sophisticated and
artful manipulations of deductions and other stratagems. Since
the tax base was broader, the tax rate was lowered.
To further emphasize the corrective nature of the MCIT, the
following safeguards were incorporated into the law:
First, recognizing the birth pangs of businesses and the reality of
the need to recoup initial major capital expenditures, the
imposition of the MCIT commences only on the fourth taxable
year immediately following the year in which the corporation
commenced its operations.25 This grace period allows a new
business to stabilize first and make its ventures viable before it is
subjected to the MCIT.26
Second, the law allows the carrying forward of any excess of the
MCIT paid over the normal income tax which shall be credited
against the normal income tax for the three immediately
succeeding years.27
Third, since certain businesses may be incurring genuine repeated
losses, the law authorizes the Secretary of Finance to suspend the
imposition of MCIT if a corporation suffers losses due to prolonged
labor dispute, force majeure and legitimate business reverses.28
Even before the legislature introduced the MCIT to the Philippine
taxation system, several other countries already had their own
system of minimum corporate income taxation. Our lawmakers
noted that most developing countries, particularly Latin American
and Asian countries, have the same form of safeguards as we do.
As pointed out during the committee hearings:
[Mr. Medalla:] Note that most developing countries where you
have of course quite a bit of room for underdeclaration of gross
receipts have this same form of safeguards.
In the case of Thailand, half a percent (0.5%), there’s a minimum
of income tax of half a percent (0.5%) of gross assessable income.
In Korea a 25% of taxable income before deductions and
exemptions. Of course the different countries have different basis
for that minimum income tax.
The other thing you’ll notice is the preponderance of Latin
American countries that employed this method. Okay, those are
additional Latin American countries.29
At present, the United States of America, Mexico, Argentina,
Tunisia, Panama and Hungary have their own versions of the
MCIT.30
MCIT Is Not Violative of Due Process
Petitioner claims that the MCIT under Section 27(E) of RA 8424 is
unconstitutional because it is highly oppressive, arbitrary and
confiscatory which amounts to deprivation of property without
due process of law. It explains that gross income as defined under
said provision only considers the cost of goods sold and other
direct expenses; other major expenditures, such as administrative
and interest expenses which are equally necessary to produce
gross income, were not taken into account.31 Thus, pegging the
tax base of the MCIT to a corporation’s gross income is
tantamount to a confiscation of capital because gross income,
unlike net income, is not "realized gain."32
We disagree.
Taxes are the lifeblood of the government. Without taxes, the
government can neither exist nor endure. The exercise of taxing
power derives its source from the very existence of the State
whose social contract with its citizens obliges it to promote public
interest and the common good.33
Taxation is an inherent attribute of sovereignty.34 It is a power that
is purely legislative.35 Essentially, this means that in the legislature
primarily lies the discretion to determine the nature (kind), object
(purpose), extent (rate), coverage (subjects) and situs (place) of
taxation.36 It has the authority to prescribe a certain tax at a
specific rate for a particular public purpose on persons or things
within its jurisdiction. In other words, the legislature wields the
power to define what tax shall be imposed, why it should be
imposed, how much tax shall be imposed, against whom (or
what) it shall be imposed and where it shall be imposed.
As a general rule, the power to tax is plenary and unlimited in its
range, acknowledging in its very nature no limits, so that the
principal check against its abuse is to be found only in the
responsibility of the legislature (which imposes the tax) to its
constituency who are to pay it.37 Nevertheless, it is circumscribed
by constitutional limitations. At the same time, like any other
statute, tax legislation carries a presumption of constitutionality.
The constitutional safeguard of due process is embodied in the
18
fiat "[no] person shall be deprived of life, liberty or property without
due process of law." In Sison, Jr. v. Ancheta, et al.,38 we held that
the due process clause may properly be invoked to invalidate, in
appropriate cases, a revenue measure39 when it amounts to a
confiscation of property.40 But in the same case, we also
explained that we will not strike down a revenue measure as
unconstitutional (for being violative of the due process clause) on
the mere allegation of arbitrariness by the taxpayer.41 There must
be a factual foundation to such an unconstitutional taint.42 This
merely adheres to the authoritative doctrine that, where the due
process clause is invoked, considering that it is not a fixed rule but
rather a broad standard, there is a need for proof of such
persuasive character.43
Petitioner is correct in saying that income is distinct from
capital.44 Income means all the wealth which flows into the
taxpayer other than a mere return on capital. Capital is a fund or
property existing at one distinct point in time while income
denotes a flow of wealth during a definite period of
time.45 Income is gain derived and severed from capital.46 For
income to be taxable, the following requisites must exist:
(1) there must be gain;
(2) the gain must be realized or received and
(3) the gain must not be excluded by law or treaty from taxation.47
Certainly, an income tax is arbitrary and confiscatory if it taxes
capital because capital is not income. In other words, it is income,
not capital, which is subject to income tax. However, the MCIT is
not a tax on capital.
The MCIT is imposed on gross income which is arrived at by
deducting the capital spent by a corporation in the sale of its
goods, i.e., the cost of goods48 and other direct expenses from
gross sales. Clearly, the capital is not being taxed.
Furthermore, the MCIT is not an additional tax imposition. It is
imposed in lieu of the normal net income tax, and only if the
normal income tax is suspiciously low. The MCIT merely
approximates the amount of net income tax due from a
corporation, pegging the rate at a very much reduced 2% and
uses as the base the corporation’s gross income.
Besides, there is no legal objection to a broader tax base or
taxable income by eliminating all deductible items and at the
same time reducing the applicable tax rate.49
Statutes taxing the gross "receipts," "earnings," or "income" of
particular corporations are found in many jurisdictions. Tax
thereon is generally held to be within the power of a state to
impose; or constitutional, unless it interferes with interstate
commerce or violates the requirement as to uniformity of
taxation.50
The United States has a similar alternative minimum tax (AMT)
system which is generally characterized by a lower tax rate but a
broader tax base.51 Since our income tax laws are of American
origin, interpretations by American courts of our parallel tax laws
have persuasive effect on the interpretation of these
laws.52 Although our MCIT is not exactly the same as the AMT, the
policy behind them and the procedure of their implementation
are comparable. On the question of the AMT’s constitutionality,
the United States Court of Appeals for the Ninth Circuit stated
in Okin v. Commissioner:53
In enacting the minimum tax, Congress attempted to remedy
general taxpayer distrust of the system growing from large
numbers of taxpayers with large incomes who were yet paying no
taxes.
xxx xxx xxx
We thus join a number of other courts in upholding the
constitutionality of the [AMT]. xxx [It] is a rational means of
obtaining a broad-based tax, and therefore is constitutional.54
The U.S. Court declared that the congressional intent to ensure
that corporate taxpayers would contribute a minimum amount of
taxes was a legitimate governmental end to which the AMT bore
a reasonable relation.55
American courts have also emphasized that Congress has the
power to condition, limit or deny deductions from gross income in
order to arrive at the net that it chooses to tax.56 This is because
deductions are a matter of legislative grace.57
Absent any other valid objection, the assignment of gross income,
instead of net income, as the tax base of the MCIT, taken with the
reduction of the tax rate from 32% to 2%, is not constitutionally
objectionable.
Moreover, petitioner does not cite any actual, specific and
concrete negative experiences of its members nor does it present
empirical data to show that the implementation of the MCIT
resulted in the confiscation of their property.
In sum, petitioner failed to support, by any factual or legal basis,
its allegation that the MCIT is arbitrary and confiscatory. The Court
cannot strike down a law as unconstitutional simply because of its
yokes.58 Taxation is necessarily burdensome because, by its
nature, it adversely affects property rights.59 The party alleging the
law’s unconstitutionality has the burden to demonstrate the
supposed violations in understandable terms.60
RR 9-98 Merely Clarifies Section 27(E) of RA 8424
Petitioner alleges that RR 9-98 is a deprivation of property without
due process of law because the MCIT is being imposed and
collected even when there is actually a loss, or a zero or negative
taxable income:
Sec. 2.27(E) [MCIT] on Domestic Corporations. —
(1) Imposition of the Tax. — xxx The MCIT shall be imposed
whenever such corporation has zero or negative taxable
income or whenever the amount of [MCIT] is greater than the
normal income tax due from such corporation. (Emphasis
supplied)
RR 9-98, in declaring that MCIT should be imposed whenever such
corporation has zero or negative taxable income, merely defines
the coverage of Section 27(E). This means that even if a
corporation incurs a net loss in its business operations or reports
zero income after deducting its expenses, it is still subject to an
MCIT of 2% of its gross income. This is consistent with the law which
imposes the MCIT on gross income notwithstanding the amount of
the net income. But the law also states that the MCIT is to be paid
only if it is greater than the normal net income. Obviously, it may
well be the case that the MCIT would be less than the net income
of the corporation which posts a zero or negative taxable income.
We now proceed to the issues involving the CWT.
The withholding tax system is a procedure through which taxes
(including income taxes) are collected.61 Under Section 57 of RA
8424, the types of income subject to withholding tax are divided
into three categories: (a) withholding of final tax on certain
incomes; (b) withholding of creditable tax at source and (c) tax-
free covenant bonds. Petitioner is concerned with the second
category (CWT) and maintains that the revenue regulations on
the collection of CWT on sale of real estate categorized as
ordinary assets are unconstitutional.
Petitioner, after enumerating the distinctions between capital and
ordinary assets under RA 8424, contends that Sections 2.57.2(J)
and 2.58.2 of RR 2-98 and Sections 4(a)(ii) and (c)(ii) of RR 7-2003
were promulgated "with grave abuse of discretion amounting to
lack of jurisdiction" and "patently in contravention of
law"62 because they ignore such distinctions. Petitioner’s
conclusion is based on the following premises: (a) the revenue
regulations use gross selling price (GSP) or fair market value (FMV)
of the real estate as basis for determining the income tax for the
sale of real estate classified as ordinary assets and (b) they
mandate the collection of income tax on a per transaction
basis, i.e., upon consummation of the sale via the CWT, contrary
to RA 8424 which calls for the payment of the net income at the
end of the taxable period.63
Petitioner theorizes that since RA 8424 treats capital assets and
ordinary assets differently, respondents cannot disregard the
distinctions set by the legislators as regards the tax base, modes
of collection and payment of taxes on income from the sale of
capital and ordinary assets.
Petitioner’s arguments have no merit.
Authority of the Secretary of Finance to Order the Collection of
19
CWT on Sales of Real Property Considered as Ordinary Assets
The Secretary of Finance is granted, under Section 244 of RA 8424,
the authority to promulgate the necessary rules and regulations
for the effective enforcement of the provisions of the law. Such
authority is subject to the limitation that the rules and regulations
must not override, but must remain consistent and in harmony
with, the law they seek to apply and implement.64 It is well-settled
that an administrative agency cannot amend an act of
Congress.65
We have long recognized that the method of withholding tax at
source is a procedure of collecting income tax which is
sanctioned by our tax laws.66 The withholding tax system was
devised for three primary reasons: first, to provide the taxpayer a
convenient manner to meet his probable income tax liability;
second, to ensure the collection of income tax which can
otherwise be lost or substantially reduced through failure to file the
corresponding returns and third, to improve the government’s
cash flow.67 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.68
Respondent Secretary has the authority to require the withholding
of a tax on items of income payable to any person, national or
juridical, residing in the Philippines. Such authority is derived from
Section 57(B) of RA 8424 which provides:
SEC. 57. Withholding of Tax at Source. –
xxx xxx xxx
(B) Withholding of Creditable Tax at Source. The [Secretary] may,
upon the recommendation of the [CIR], require the withholding
of a tax on the items of income payable to natural or juridical
persons, residing in the Philippines, by payor-corporation/persons
as provided for by law, at the rate of not less than one percent
(1%) but not more than thirty-two percent (32%) thereof, which
shall be credited against the income tax liability of the taxpayer
for the taxable year.
The questioned provisions of RR 2-98, as amended, are well within
the authority given by Section 57(B) to the Secretary, i.e., the
graduated rate of 1.5%-5% is between the 1%-32% range; the
withholding tax is imposed on the income payable and the tax is
creditable against the income tax liability of the taxpayer for the
taxable year.
Effect of RRs on the Tax Base for the Income Tax of Individuals or
Corporations Engaged in the Real Estate Business
Petitioner maintains that RR 2-98, as amended, arbitrarily shifted
the tax base of a real estate business’ income tax from net
income to GSP or FMV of the property sold.
Petitioner is wrong.
The taxes withheld are in the nature of advance tax payments by
a taxpayer in order to extinguish its possible tax obligation. 69 They
are installments on the annual tax which may be due at the end
of the taxable year.70
Under RR 2-98, the tax base of the income tax from the sale of real
property classified as ordinary assets remains to be the entity’s net
income imposed under Section 24 (resident individuals) or Section
27 (domestic corporations) in relation to Section 31 of RA
8424, i.e. gross income less allowable deductions. The CWT is to be
deducted from the net income tax payable by the taxpayer at
the end of the taxable year.71 Precisely, Section 4(a)(ii) and (c)(ii)
of RR 7-2003 reiterate that the tax base for the sale of real property
classified as ordinary assets remains to be the net taxable income:
Section 4. – Applicable taxes on sale, exchange or other
disposition of real property. - Gains/Income derived from sale,
exchange, or other disposition of real properties shall unless
otherwise exempt, be subject to applicable taxes imposed under
the Code, depending on whether the subject properties are
classified as capital assets or ordinary assets;
xxx xxx xxx
a. In the case of individual citizens (including estates and trusts),
resident aliens, and non-resident aliens engaged in trade or
business in the Philippines;
xxx xxx xxx
(ii) The sale of real property located in the Philippines, classified as
ordinary assets, shall be subject to the [CWT] (expanded) under
Sec. 2.57.2(j) of [RR 2-98], as amended, based on the [GSP] or
current [FMV] as determined in accordance with Section 6(E) of
the Code, whichever is higher, and consequently, to the ordinary
income tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the
Code, as the case may be, based on net taxable income.
xxx xxx xxx
c. In the case of domestic corporations.
The sale of land and/or building classified as ordinary asset and
other real property (other than land and/or building treated as
capital asset), regardless of the classification thereof, all of which
are located in the Philippines, shall be subject to the [CWT]
(expanded) under Sec. 2.57.2(J) of [RR 2-98], as amended, and
consequently, to theordinary income tax under Sec. 27(A) of the
Code. In lieu of the ordinary income tax, however, domestic
corporations may become subject to the [MCIT] under Sec. 27(E)
of the same Code, whichever is applicable. (Emphasis supplied)
Accordingly, at the end of the year, the taxpayer/seller shall file
its income tax return and credit the taxes withheld (by the
withholding agent/buyer) against its tax due. If the tax due is
greater than the tax withheld, then the taxpayer shall pay the
difference. If, on the other hand, the tax due is less than the tax
withheld, the taxpayer will be entitled to a refund or tax credit.
Undoubtedly, the taxpayer is taxed on its net income.
The use of the GSP/FMV as basis to determine the withholding
taxes is evidently for purposes of practicality and convenience.
Obviously, the withholding agent/buyer who is obligated to
withhold the tax does not know, nor is he privy to, how much the
taxpayer/seller will have as its net income at the end of the
taxable year. Instead, said withholding agent’s knowledge and
privity are limited only to the particular transaction in which he is
a party. In such a case, his basis can only be the GSP or FMV as
these are the only factors reasonably known or knowable by him
in connection with the performance of his duties as a withholding
agent.
No Blurring of Distinctions Between Ordinary Assets and Capital
Assets
RR 2-98 imposes a graduated CWT on income based on the GSP
or FMV of the real property categorized as ordinary assets. On the
other hand, Section 27(D)(5) of RA 8424 imposes a final tax and
flat rate of 6% on the gain presumed to be realized from the sale
of a capital asset based on its GSP or FMV. This final tax is also
withheld at source.72
The differences between the two forms of withholding tax, i.e.,
creditable and final, show that ordinary assets are not treated in
the same manner as capital assets. Final withholding tax (FWT)
and CWT are distinguished as follows:
FWT CWT
a) The amount of a) Taxes withheld on
income tax withheld by certain income
the withholding agent is payments are intended
constituted as a full and to equal or at least
final payment of the approximate the tax due
income tax due from the of the payee on said
payee on the said income.
income.
b)The liability for b) Payee of income is
payment of the tax rests required to report the
20
primarily on the payor as income and/or pay the
a withholding agent. difference between the
tax withheld and the tax
due on the income. The
payee also has the right
to ask for a refund if the
tax withheld is more than
the tax due.
c) The payee is not c) The income recipient
required to file an is still required to file an
income tax return for the income tax return, as
particular income.73 prescribed in Sec. 51 and
Sec. 52 of the NIRC, as
amended.74
As previously stated, FWT is imposed on the sale of capital assets.
On the other hand, CWT is imposed on the sale of ordinary assets.
The inherent and substantial differences between FWT and CWT
disprove petitioner’s contention that ordinary assets are being
lumped together with, and treated similarly as, capital assets in
contravention of the pertinent provisions of RA 8424.
Petitioner insists that the levy, collection and payment of CWT at
the time of transaction are contrary to the provisions of RA 8424
on the manner and time of filing of the return, payment and
assessment of income tax involving ordinary assets.75
The fact that the tax is withheld at source does not automatically
mean that it is treated exactly the same way as capital gains. As
aforementioned, the mechanics of the FWT are distinct from those
of the CWT. The withholding agent/buyer’s act of collecting the
tax at the time of the transaction by withholding the tax due from
the income payable is the essence of the withholding tax method
of tax collection.
No Rule that Only Passive
Incomes Can Be Subject to CWT
Petitioner submits that only passive income can be subjected to
withholding tax, whether final or creditable. According to
petitioner, the whole of Section 57 governs the withholding of
income tax on passive income. The enumeration in Section 57(A)
refers to passive income being subjected to FWT. It follows that
Section 57(B) on CWT should also be limited to passive income:
SEC. 57. Withholding of Tax at Source. —
(A) Withholding of Final Tax on Certain Incomes. — Subject to rules
and regulations, the [Secretary] may promulgate, upon the
recommendation of the [CIR], requiring the filing of income tax
return by certain income payees, the tax imposed or prescribed
by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3),
25(B), 25(C), 25(D), 25(E); 27(D)(1), 27(D)(2), 27(D)(3), 27(D)(5);
28(A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1),
28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33;
and 282 of this Code on specified items of income shall be
withheld by payor-corporation and/or person and paid in the
same manner and subject to the same conditions as provided in
Section 58 of this Code.
(B) Withholding of Creditable Tax at Source. — The [Secretary]
may, upon the recommendation of the [CIR], require the
withholding of a tax on the items of income payable to natural or
juridical persons, residing in the Philippines, by payor-
corporation/persons as provided for by law, at the rate of not less
than one percent (1%) but not more than thirty-two percent (32%)
thereof, which shall be credited against the income tax liability of
the taxpayer for the taxable year. (Emphasis supplied)
This line of reasoning is non sequitur.
Section 57(A) expressly states that final tax can be imposed on
certain kinds of income and enumerates these as passive income.
The BIR defines passive income by stating what it is not:
…if the income is generated in the active pursuit and
performance of the corporation’s primary purposes, the same is
not passive income…76
It is income generated by the taxpayer’s assets. These assets can
be in the form of real properties that return rental income, shares
of stock in a corporation that earn dividends or interest income
received from savings.
On the other hand, Section 57(B) provides that the Secretary can
require a CWT on "income payable to natural or juridical persons,
residing in the Philippines." There is no requirement that this income
be passive income. If that were the intent of Congress, it could
have easily said so.
Indeed, Section 57(A) and (B) are distinct. Section 57(A) refers to
FWT while Section 57(B) pertains to CWT. The former covers the
kinds of passive income enumerated therein and the latter
encompasses any income other than those listed in 57(A). Since
the law itself makes distinctions, it is wrong to regard 57(A) and
57(B) in the same way.
To repeat, the assailed provisions of RR 2-98, as amended, do not
modify or deviate from the text of Section 57(B). RR 2-98 merely
implements the law by specifying what income is subject to CWT.
It has been held that, where a statute does not require any
particular procedure to be followed by an administrative agency,
the agency may adopt any reasonable method to carry out its
functions.77 Similarly, considering that the law uses the general
term "income," the Secretary and CIR may specify the kinds of
income the rules will apply to based on what is feasible. In
addition, administrative rules and regulations ordinarily deserve to
be given weight and respect by the courts78 in view of the rule-
making authority given to those who formulate them and their
specific expertise in their respective fields.
No Deprivation of Property Without Due Process
Petitioner avers that the imposition of CWT on GSP/FMV of real
estate classified as ordinary assets deprives its members of their
property without due process of law because, in their line of
business, gain is never assured by mere receipt of the selling price.
As a result, the government is collecting tax from net income not
yet gained or earned.
Again, it is stressed that the CWT is creditable against the tax due
from the seller of the property at the end of the taxable year. The
seller will be able to claim a tax refund if its net income is less than
the taxes withheld. Nothing is taken that is not due so there is no
confiscation of property repugnant to the constitutional
guarantee of due process. More importantly, the due process
requirement applies to the power to tax.79 The CWT does not
impose new taxes nor does it increase taxes.80 It relates entirely to
the method and time of payment.
Petitioner protests that the refund remedy does not make the CWT
less burdensome because taxpayers have to wait years and may
even resort to litigation before they are granted a refund.81 This
argument is misleading. The practical problems encountered in
claiming a tax refund do not affect the constitutionality and
validity of the CWT as a method of collecting the tax.1avvphi1
Petitioner complains that the amount withheld would have
otherwise been used by the enterprise to pay labor wages,
materials, cost of money and other expenses which can then save
the entity from having to obtain loans entailing considerable
interest expense. Petitioner also lists the expenses and pitfalls of
the trade which add to the burden of the realty industry: huge
investments and borrowings; long gestation period; sudden and
unpredictable interest rate surges; continually spiraling
development/construction costs; heavy taxes and prohibitive
"up-front" regulatory fees from at least 20 government agencies.82
Petitioner’s lamentations will not support its attack on the
constitutionality of the CWT. Petitioner’s complaints are essentially
matters of policy best addressed to the executive and legislative
branches of the government. Besides, the CWT is applied only on
the amounts actually received or receivable by the real estate
entity. Sales on installment are taxed on a per-installment
basis.83 Petitioner’s desire to utilize for its operational and capital
expenses money earmarked for the payment of taxes may be a
practical business option but it is not a fundamental right which
can be demanded from the court or from the government.
No Violation of Equal Protection
21
Petitioner claims that the revenue regulations are violative of the
equal protection clause because the CWT is being levied only on
real estate enterprises. Specifically, petitioner points out that
manufacturing enterprises are not similarly imposed a CWT on
their sales, even if their manner of doing business is not much
different from that of a real estate enterprise. Like a
manufacturing concern, a real estate business is involved in a
continuous process of production and it incurs costs and
expenditures on a regular basis. The only difference is that "goods"
produced by the real estate business are house and lot units.84
Again, we disagree.
The equal protection clause under the Constitution means that
"no person or class of persons shall be deprived of the same
protection of laws which is enjoyed by other persons or other
classes in the same place and in like circumstances."85 Stated
differently, all persons belonging to the same class shall be taxed
alike. It follows that the guaranty of the equal protection of the
laws is not violated by legislation based on a reasonable
classification. Classification, to be valid, must (1) rest on substantial
distinctions; (2) be germane to the purpose of the law; (3) not be
limited to existing conditions only and (4) apply equally to all
members of the same class.86
The taxing power has the authority to make reasonable
classifications for purposes of taxation.87 Inequalities which result
from a singling out of one particular class for taxation, or
exemption, infringe no constitutional limitation.88 The real estate
industry is, by itself, a class and can be validly treated differently
from other business enterprises.
Petitioner, in insisting that its industry should be treated similarly as
manufacturing enterprises, fails to realize that what distinguishes
the real estate business from other manufacturing enterprises, for
purposes of the imposition of the CWT, is not their production
processes but the prices of their goods sold and the number of
transactions involved. The income from the sale of a real property
is bigger and its frequency of transaction limited, making it less
cumbersome for the parties to comply with the withholding tax
scheme.
On the other hand, each manufacturing enterprise may have
tens of thousands of transactions with several thousand customers
every month involving both minimal and substantial amounts. To
require the customers of manufacturing enterprises, at present, to
withhold the taxes on each of their transactions with their tens or
hundreds of suppliers may result in an inefficient and
unmanageable system of taxation and may well defeat the
purpose of the withholding tax system.
Petitioner counters that there are other businesses wherein
expensive items are also sold infrequently, e.g. heavy equipment,
jewelry, furniture, appliance and other capital goods yet these
are not similarly subjected to the CWT.89As already discussed, the
Secretary may adopt any reasonable method to carry out its
functions.90 Under Section 57(B), it may choose what to subject to
CWT.
A reading of Section 2.57.2 (M) of RR 2-98 will also show that
petitioner’s argument is not accurate. The sales of manufacturers
who have clients within the top 5,000 corporations, as specified
by the BIR, are also subject to CWT for their transactions with said
5,000 corporations.91
Section 2.58.2 of RR No. 2-98 Merely Implements Section 58 of RA
8424
Lastly, petitioner assails Section 2.58.2 of RR 2-98, which provides
that the Registry of Deeds should not effect the regisration of any
document transferring real property unless a certification is issued
by the CIR that the withholding tax has been paid. Petitioner
proffers hardly any reason to strike down this rule except to rely on
its contention that the CWT is unconstitutional. We have ruled that
it is not. Furthermore, this provision uses almost exactly the same
wording as Section 58(E) of RA 8424 and is unquestionably in
accordance with it:
Sec. 58. Returns and Payment of Taxes Withheld at Source. –
(E) Registration with Register of Deeds. - No registration of any
document transferring real property shall be effected by the
Register of Deeds unless the [CIR] or his duly authorized
representative has certified that such transfer has been reported,
and the capital gains or [CWT], if any, has been paid: xxxx any
violation of this provision by the Register of Deeds shall be subject
to the penalties imposed under Section 269 of this Code.
(Emphasis supplied)
Conclusion
The renowned genius Albert Einstein was once quoted as saying
"[the] hardest thing in the world to understand is the income
tax."92 When a party questions the constitutionality of an income
tax measure, it has to contend not only with Einstein’s observation
but also with the vast and well-established jurisprudence in
support of the plenary powers of Congress to impose taxes.
Petitioner has miserably failed to discharge its burden of
convincing the Court that the imposition of MCIT and CWT is
unconstitutional.
WHEREFORE, the petition is hereby DISMISSED.
Costs against petitioner.
SO ORDERED.
B. Grant of Exemption
1. G.R. No. L-23645 October 29, 1968
BENJAMIN P. GOMEZ, petitioner-appellee,
vs.
ENRICO PALOMAR, in his capacity as Postmaster General, HON.
BRIGIDO R. VALENCIA, in his capacity as Secretary of Public Works
and Communications, and DOMINGO GOPEZ, in his capacity as
Acting Postmaster of San Fernando, Pampanga, respondent-
appellants.
Lorenzo P. Navarro and Narvaro Belar S. Navarro for petitioner-
appellee.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor
General Frine C. Zaballero and Solicitor Dominador L. Quiroz for
respondents-appellants.
CASTRO, J.:
This appeal puts in issue the constitutionality of Republic Act
1635,1 as amended by Republic Act 2631,2 which provides as
follows:
To help raise funds for the Philippine Tuberculosis Society, the
Director of Posts shall order for the period from August nineteen to
September thirty every year the printing and issue of semi-postal
stamps of different denominations with face value showing the
regular postage charge plus the additional amount of five
centavos for the said purpose, and during the said period, no mail
matter shall be accepted in the mails unless it bears such semi-
postal stamps: Provided, That no such additional charge of five
centavos shall be imposed on newspapers. The additional
proceeds realized from the sale of the semi-postal stamps shall
constitute a special fund and be deposited with the National
Treasury to be expended by the Philippine Tuberculosis Society in
carrying out its noble work to prevent and eradicate tuberculosis.
The respondent Postmaster General, in implementation of the law,
thereafter issued four (4) administrative orders numbered 3 (June
20, 1958), 7 (August 9, 1958), 9 (August 28, 1958), and 10 (July 15,
1960). All these administrative orders were issued with the
approval of the respondent Secretary of Public Works and
Communications.
The pertinent portions of Adm. Order 3 read as follows:
Such semi-postal stamps could not be made available during the
period from August 19 to September 30, 1957, for lack of time.
However, two denominations of such stamps, one at "5 + 5"
centavos and another at "10 + 5" centavos, will soon be released
for use by the public on their mails to be posted during the same
period starting with the year 1958.
xxx xxx xxx
During the period from August 19 to September 30 each year
starting in 1958, no mail matter of whatever class, and whether
domestic or foreign, posted at any Philippine Post Office and
addressed for delivery in this country or abroad, shall be
accepted for mailing unless it bears at least one such semi-postal
22
stamp showing the additional value of five centavos intended for
the Philippine Tuberculosis Society.
In the case of second-class mails and mails prepaid by means of
mail permits or impressions of postage meters, each piece of such
mail shall bear at least one such semi-postal stamp if posted
during the period above stated starting with the year 1958, in
addition to being charged the usual postage prescribed by
existing regulations. In the case of business reply envelopes and
cards mailed during said period, such stamp should be collected
from the addressees at the time of delivery. Mails entitled to
franking privilege like those from the office of the President,
members of Congress, and other offices to which such privilege
has been granted, shall each also bear one such semi-postal
stamp if posted during the said period.
Mails posted during the said period starting in 1958, which are
found in street or post-office mail boxes without the required semi-
postal stamp, shall be returned to the sender, if known, with a
notation calling for the affixing of such stamp. If the sender is
unknown, the mail matter shall be treated as nonmailable and
forwarded to the Dead Letter Office for proper disposition.
Adm. Order 7, amending the fifth paragraph of Adm. Order 3,
reads as follows:
In the case of the following categories of mail matter and mails
entitled to franking privilege which are not exempted from the
payment of the five centavos intended for the Philippine
Tuberculosis Society, such extra charge may be collected in cash,
for which official receipt (General Form No. 13, A) shall be issued,
instead of affixing the semi-postal stamp in the manner hereinafter
indicated:
1. Second-class mail. — Aside from the postage at the second-
class rate, the extra charge of five centavos for the Philippine
Tuberculosis Society shall be collected on each separately-
addressed piece of second-class mail matter, and the total sum
thus collected shall be entered in the same official receipt to be
issued for the postage at the second-class rate. In making such
entry, the total number of pieces of second-class mail posted shall
be stated, thus: "Total charge for TB Fund on 100 pieces . .. P5.00."
The extra charge shall be entered separate from the postage in
both of the official receipt and the Record of Collections.
2. First-class and third-class mail permits. — Mails to be posted
without postage affixed under permits issued by this Bureau shall
each be charged the usual postage, in addition to the five-
centavo extra charge intended for said society. The total extra
charge thus received shall be entered in the same official receipt
to be issued for the postage collected, as in subparagraph 1.
3. Metered mail. — For each piece of mail matter impressed by
postage meter under metered mail permit issued by this Bureau,
the extra charge of five centavos for said society shall be
collected in cash and an official receipt issued for the total sum
thus received, in the manner indicated in subparagraph 1.
4. Business reply cards and envelopes. — Upon delivery of business
reply cards and envelopes to holders of business reply permits, the
five-centavo charge intended for said society shall be collected
in cash on each reply card or envelope delivered, in addition to
the required postage which may also be paid in cash. An official
receipt shall be issued for the total postage and total extra charge
received, in the manner shown in subparagraph 1.
5. Mails entitled to franking privilege. — Government agencies,
officials, and other persons entitled to the franking privilege under
existing laws may pay in cash such extra charge intended for said
society, instead of affixing the semi-postal stamps to their mails,
provided that such mails are presented at the post-office window,
where the five-centavo extra charge for said society shall be
collected on each piece of such mail matter. In such case, an
official receipt shall be issued for the total sum thus collected, in
the manner stated in subparagraph 1.
Mail under permits, metered mails and franked mails not
presented at the post-office window shall be affixed with the
necessary semi-postal stamps. If found in mail boxes without such
stamps, they shall be treated in the same way as herein provided
for other mails.
Adm. Order 9, amending Adm. Order 3, as amended, exempts
"Government and its Agencies and Instrumentalities Performing
Governmental Functions." Adm. Order 10, amending Adm. Order
3, as amended, exempts "copies of periodical publications
received for mailing under any class of mail matter, including
newspapers and magazines admitted as second-class mail."
The FACTS. On September l5, 1963 the petitioner Benjamin P.
Gomez mailed a letter at the post office in San Fernando,
Pampanga. Because this letter, addressed to a certain Agustin
Aquino of 1014 Dagohoy Street, Singalong, Manila did not bear
the special anti-TB stamp required by the statute, it was returned
to the petitioner.
In view of this development, the petitioner brough suit for
declaratory relief in the Court of First Instance of Pampanga, to
test the constitutionality of the statute, as well as the implementing
administrative orders issued, contending that it violates the equal
protection clause of the Constitution as well as the rule of
uniformity and equality of taxation. The lower court declared the
statute and the orders unconstitutional; hence this appeal by the
respondent postal authorities.
For the reasons set out in this opinion, the judgment appealed
from must be reversed.
I.
Before reaching the merits, we deem it necessary to dispose of
the respondents' contention that declaratory relief is unavailing
because this suit was filed after the petitioner had committed a
breach of the statute. While conceding that the mailing by the
petitioner of a letter without the additional anti-TB stamp was a
violation of Republic Act 1635, as amended, the trial court
nevertheless refused to dismiss the action on the ground that
under section 6 of Rule 64 of the Rules of Court, "If before the final
termination of the case a breach or violation of ... a statute ...
should take place, the action may thereupon be converted into
an ordinary action."
The prime specification of an action for declaratory relief is that it
must be brought "before breach or violation" of the statute has
been committed. Rule 64, section 1 so provides. Section 6 of the
same rule, which allows the court to treat an action for
declaratory relief as an ordinary action, applies only if the breach
or violation occurs after the filing of the action but before the
termination thereof.3
Hence, if, as the trial court itself admitted, there had been a
breach of the statute before the firing of this action, then indeed
the remedy of declaratory relief cannot be availed of, much less
can the suit be converted into an ordinary action.
Nor is there merit in the petitioner's argument that the mailing of
the letter in question did not constitute a breach of the statute
because the statute appears to be addressed only to postal
authorities. The statute, it is true, in terms provides that "no mail
matter shall be accepted in the mails unless it bears such semi-
postal stamps." It does not follow, however, that only postal
authorities can be guilty of violating it by accepting mails without
the payment of the anti-TB stamp. It is obvious that they can be
guilty of violating the statute only if there are people who use the
mails without paying for the additional anti-TB stamp. Just as in
bribery the mere offer constitutes a breach of the law, so in the
matter of the anti-TB stamp the mere attempt to use the mails
without the stamp constitutes a violation of the statute. It is not
required that the mail be accepted by postal authorities. That
requirement is relevant only for the purpose of fixing the liability of
postal officials.
Nevertheless, we are of the view that the petitioner's choice of
remedy is correct because this suit was filed not only with respect
to the letter which he mailed on September 15, 1963, but also with
regard to any other mail that he might send in the future. Thus, in
his complaint, the petitioner prayed that due course be given to
"other mails without the semi-postal stamps which he may deliver
for mailing ... if any, during the period covered by Republic Act
1635, as amended, as well as other mails hereafter to be sent by
or to other mailers which bear the required postage, without
collection of additional charge of five centavos prescribed by the
same Republic Act." As one whose mail was returned, the
petitioner is certainly interested in a ruling on the validity of the
statute requiring the use of additional stamps.
II.
23
We now consider the constitutional objections raised against the
statute and the implementing orders.
1. It is said that the statute is violative of the equal protection
clause of the Constitution. More specifically the claim is made
that it constitutes mail users into a class for the purpose of the tax
while leaving untaxed the rest of the population and that even
among postal patrons the statute discriminatorily grants
exemption to newspapers while Administrative Order 9 of the
respondent Postmaster General grants a similar exemption to
offices performing governmental functions. .
The five centavo charge levied by Republic Act 1635, as
amended, is in the nature of an excise tax, laid upon the exercise
of a privilege, namely, the privilege of using the mails. As such the
objections levelled against it must be viewed in the light of
applicable principles of taxation.
To begin with, it is settled that the legislature has the inherent
power to select the subjects of taxation and to grant
exemptions.4 This power has aptly been described as "of wide
range and flexibility."5 Indeed, it is said that in the field of taxation,
more than in other areas, the legislature possesses the greatest
freedom in classification.6 The reason for this is that traditionally,
classification has been a device for fitting tax programs to local
needs and usages in order to achieve an equitable distribution of
the tax burden.7
That legislative classifications must be reasonable is of course
undenied. But what the petitioner asserts is that statutory
classification of mail users must bear some reasonable relationship
to the end sought to be attained, and that absent such
relationship the selection of mail users is constitutionally
impermissible. This is altogether a different proposition. As
explained in Commonwealth v. Life Assurance Co.:8
While the principle that there must be a reasonable relationship
between classification made by the legislation and its purpose is
undoubtedly true in some contexts, it has no application to a
measure whose sole purpose is to raise revenue ... So long as the
classification imposed is based upon some standard capable of
reasonable comprehension, be that standard based upon ability
to produce revenue or some other legitimate distinction, equal
protection of the law has been afforded. See Allied Stores of Ohio,
Inc. v. Bowers, supra, 358 U.S. at 527, 79 S. Ct. at 441; Brown Forman
Co. v. Commonwealth of Kentucky, 2d U.S. 56, 573, 80 S. Ct. 578,
580 (1910).
We are not wont to invalidate legislation on equal protection
grounds except by the clearest demonstration that it sanctions
invidious discrimination, which is all that the Constitution forbids.
The remedy for unwise legislation must be sought in the legislature.
Now, the classification of mail users is not without any reason. It is
based on ability to pay, let alone the enjoyment of a privilege,
and on administrative convinience. In the allocation of the tax
burden, Congress must have concluded that the contribution to
the anti-TB fund can be assured by those whose who can afford
the use of the mails.
The classification is likewise based on considerations of
administrative convenience. For it is now a settled principle of law
that "consideration of practical administrative convenience and
cost in the administration of tax laws afford adequate ground for
imposing a tax on a well recognized and defined class."9 In the
case of the anti-TB stamps, undoubtedly, the single most
important and influential consideration that led the legislature to
select mail users as subjects of the tax is the relative ease and
convenienceof collecting the tax through the post offices. The
small amount of five centavos does not justify the great expense
and inconvenience of collecting through the regular means of
collection. On the other hand, by placing the duty of collection
on postal authorities the tax was made almost self-enforcing, with
as little cost and as little inconvenience as possible.
And then of course it is not accurate to say that the statute
constituted mail users into a class. Mail users were already a class
by themselves even before the enactment of the statue and all
that the legislature did was merely to select their class. Legislation
is essentially empiric and Republic Act 1635, as amended, no
more than reflects a distinction that exists in fact. As Mr. Justice
Frankfurter said, "to recognize differences that exist in fact is living
law; to disregard [them] and concentrate on some abstract
identities is lifeless logic."10
Granted the power to select the subject of taxation, the State's
power to grant exemption must likewise be conceded as a
necessary corollary. Tax exemptions are too common in the law;
they have never been thought of as raising issues under the equal
protection clause.
It is thus erroneous for the trial court to hold that because certain
mail users are exempted from the levy the law and administrative
officials have sanctioned an invidious discrimination offensive to
the Constitution. The application of the lower courts theory would
require all mail users to be taxed, a conclusion that is hardly
tenable in the light of differences in status of mail users. The
Constitution does not require this kind of equality.
As the United States Supreme Court has said, the legislature may
withhold the burden of the tax in order to foster what it conceives
to be a beneficent enterprise.11 This is the case of newspapers
which, under the amendment introduced by Republic Act 2631,
are exempt from the payment of the additional stamp.
As for the Government and its instrumentalities, their exemption
rests on the State's sovereign immunity from taxation. The State
cannot be taxed without its consent and such consent, being in
derogation of its sovereignty, is to be strictly
construed.12 Administrative Order 9 of the respondent Postmaster
General, which lists the various offices and instrumentalities of the
Government exempt from the payment of the anti-TB stamp, is
but a restatement of this well-known principle of constitutional
law.
The trial court likewise held the law invalid on the ground that it
singles out tuberculosis to the exclusion of other diseases which, it
is said, are equally a menace to public health. But it is never a
requirement of equal protection that all evils of the same genus
be eradicated or none at all.13 As this Court has had occasion to
say, "if the law presumably hits the evil where it is most felt, it is not
to be overthrown because there are other instances to which it
might have been applied."14
2. The petitioner further argues that the tax in question is invalid,
first, because it is not levied for a public purpose as no special
benefits accrue to mail users as taxpayers, and second, because
it violates the rule of uniformity in taxation.
The eradication of a dreaded disease is a public purpose, but if
by public purpose the petitioner means benefit to a taxpayer as
a return for what he pays, then it is sufficient answer to say that
the only benefit to which the taxpayer is constitutionally entitled is
that derived from his enjoyment of the privileges of living in an
organized society, established and safeguarded by the devotion
of taxes to public purposes. Any other view would preclude the
levying of taxes except as they are used to compensate for the
burden on those who pay them and would involve the
abandonment of the most fundamental principle of government
— that it exists primarily to provide for the common good.15
Nor is the rule of uniformity and equality of taxation infringed by
the imposition of a flat rate rather than a graduated tax. A tax
need not be measured by the weight of the mail or the extent of
the service rendered. We have said that considerations of
administrative convenience and cost afford an adequate ground
for classification. The same considerations may induce the
legislature to impose a flat tax which in effect is a charge for the
transaction, operating equally on all persons within the class
regardless of the amount involved.16 As Mr. Justice Holmes said in
sustaining the validity of a stamp act which imposed a flat rate of
two cents on every $100 face value of stock transferred:
One of the stocks was worth $30.75 a share of the face value of
$100, the other $172. The inequality of the tax, so far as actual
values are concerned, is manifest. But, here again equality in this
sense has to yield to practical considerations and usage. There
must be a fixed and indisputable mode of ascertaining a stamp
tax. In another sense, moreover, there is equality. When the taxes
on two sales are equal, the same number of shares is sold in each
case; that is to say, the same privilege is used to the same extent.
Valuation is not the only thing to be considered. As was pointed
out by the court of appeals, the familiar stamp tax of 2 cents on
checks, irrespective of income or earning capacity, and many
others, illustrate the necessity and practice of sometimes
24
substituting count for weight ...17
According to the trial court, the money raised from the sales of
the anti-TB stamps is spent for the benefit of the Philippine
Tuberculosis Society, a private organization, without appropriation
by law. But as the Solicitor General points out, the Society is not
really the beneficiary but only the agency through which the
State acts in carrying out what is essentially a public function. The
money is treated as a special fund and as such need not be
appropriated by law.18
3. Finally, the claim is made that the statute is so broadly drawn
that to execute it the respondents had to issue administrative
orders far beyond their powers. Indeed, this is one of the grounds
on which the lower court invalidated Republic Act 1631, as
amended, namely, that it constitutes an undue delegation of
legislative power.
Administrative Order 3, as amended by Administrative Orders 7
and 10, provides that for certain classes of mail matters (such as
mail permits, metered mails, business reply cards, etc.), the five-
centavo charge may be paid in cash instead of the purchase of
the anti-TB stamp. It further states that mails deposited during the
period August 19 to September 30 of each year in mail boxes
without the stamp should be returned to the sender, if known,
otherwise they should be treated as nonmailable.
It is true that the law does not expressly authorize the collection of
five centavos except through the sale of anti-TB stamps, but such
authority may be implied in so far as it may be necessary to
prevent a failure of the undertaking. The authority given to the
Postmaster General to raise funds through the mails must be
liberally construed, consistent with the principle that where the
end is required the appropriate means are given.19
The anti-TB stamp is a distinctive stamp which shows on its face
not only the amount of the additional charge but also that of the
regular postage. In the case of business reply cards, for instance,
it is obvious that to require mailers to affix the anti-TB stamp on their
cards would be to make them pay much more because the cards
likewise bear the amount of the regular postage.
It is likewise true that the statute does not provide for the
disposition of mails which do not bear the anti-TB stamp, but a
declaration therein that "no mail matter shall be accepted in the
mails unless it bears such semi-postal stamp" is a declaration that
such mail matter is nonmailable within the meaning of section
1952 of the Administrative Code. Administrative Order 7 of the
Postmaster General is but a restatement of the law for the
guidance of postal officials and employees. As for Administrative
Order 9, we have already said that in listing the offices and entities
of the Government exempt from the payment of the stamp, the
respondent Postmaster General merely observed an established
principle, namely, that the Government is exempt from taxation.
ACCORDINGLY, the judgment a quo is reversed, and the
complaint is dismissed, without pronouncement as to costs.
2. G.R. No. L-23771 August 4, 1988
THE COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
LINGAYEN GULF ELECTRIC POWER CO., INC. and THE COURT OF TAX
APPEALS, respondents.
Angel Sanchez for Lingayen Electric Power Co., Inc.
SARMIENTO, J.:
This is an appeal from the decision * of the Court of Tax Appeals
(C.T.A., for brevity) dated September 15, 1964 in C.T.A. Cases Nos.
581 and 1302, which were jointly heard upon agreement of the
parties, absolving the respondent taxpayer from liability for the
deficiency percentage, franchise, and fixed taxes and surcharge
assessed against it in the sums of P19,293.41 and P3,616.86 for the
years 1946 to 1954 and 1959 to 1961, respectively.
The respondent taxpayer, Lingayen Gulf Electric Power Co., Inc.,
operates an electric power plant serving the adjoining
municipalities of Lingayen and Binmaley, both in the province of
Pangasinan, pursuant to the municipal franchise granted it by
their respective municipal councils, under Resolution Nos. 14 and
25 of June 29 and July 2, 1946, respectively. Section 10 of these
franchises provide that:
...The said grantee in consideration of the franchise hereby
granted, shall pay quarterly into the Provincial Treasury of
Pangasinan, one per centum of the gross earnings obtained thru
this privilege during the first twenty years and two per centum
during the remaining fifteen years of the life of said franchise.
On February 24, 1948, the President of the Philippines approved
the franchises granted to the private respondent.
On November 21, 1955, the Bureau of Internal Revenue (BIR)
assessed against and demanded from the private respondent the
total amount of P19,293.41 representing deficiency franchise
taxes and surcharges for the years 1946 to 1954 applying the
franchise tax rate of 5% on gross receipts from March 1, 1948 to
December 31, 1954 as prescribed in Section 259 of the National
Internal Revenue Code, instead of the lower rates as provided in
the municipal franchises. On September 29, 1956, the private
respondent requested for a reinvestigation of the case on the
ground that instead of incurring a deficiency liability, it made an
overpayment of the franchise tax. On April 30, 1957, the BIR
through its regional director, denied the private respondent's
request for reinvestigation and reiterated the demand for
payment of the same. In its letters dated July 2, and August 9, 1958
to the petitioner Commissioner, the private respondent protested
the said assessment and requested for a conference with a view
to settling the liability amicably. In his letters dated July 25 and
August 28, 1958, the Commissioner denied the request of the
private respondent. Thus, the appeal to the respondent Court of
Tax Appeals on September 19, 1958, docketed as C.T.A. Case No.
581.
In a letter dated August 21, 1962, the Commissioner demanded
from the private respondent the payment of P3,616.86
representing deficiency franchise tax and surcharges for the years
1959 to 1961 again applying the franchise tax rate of 5% on gross
receipts as prescribed in Section 259 of the National Internal
Revenue Code. In a letter dated October 5, 1962, the private
respondent protested the assessment and requested
reconsideration thereof The same was denied on November 9,
1962. Thus, the appeal to the respondent Court of Appeals on
November 29, 1962, docketed as C.T.A. No. 1302.
Pending the hearing of the said cases, Republic Act (R.A.) No.
3843 was passed on June 22, 1 963, granting to the private
respondent a legislative franchise for the operation of the electric
light, heat, and power system in the same municipalities of
Pangasinan. Section 4 thereof provides that:
In consideration of the franchise and rights hereby granted, the
grantee shall pay into the Internal Revenue office of each
Municipality in which it is supplying electric current to the public
under this franchise, a tax equal to two per centum of the gross
receipts from electric current sold or supplied under this franchise.
Said tax shall be due and payable quarterly and shall be in lieu of
any and all taxes and/or licenses of any kind, nature or description
levied, established, or collected by any authority whatsoever,
municipal, provincial or national, now or in the future, on its poles,
wires, insulator ... and on its franchise, rights, privileges, receipts,
revenues and profits, from which taxes and/or licenses, the
grantee is hereby expressly exempted and effective further upon
the date the original franchise was granted, no other tax and/or
licenses other than the franchise tax of two per centum on the
gross receipts as provided for in the original franchise shall be
collected, any provision of law to the contrary notwithstanding.
On September 15, 1964, the respondent court ruled that the
provisions of R.A. No. 3843 should apply and accordingly
dismissed the claim of the Commissioner of Internal Revenue. The
said ruling is now the subject of the petition at bar.
The issues raised for resolution are:
1. Whether or not the 5% franchise tax prescribed in Section 259 of
the National Internal Revenue Code assessed against the private
respondent on its gross receipts realized before the effectivity of
R.A- No. 3843 is collectible.
2. Whether or not Section 4 of R.A. No. 3843 is unconstitutional for
being violative of the "uniformity and equality of taxation" clause
of the Constitution.
3. If the abovementioned Section 4 of R.A. No. 3843 is valid,
25
whether or not it could be given retroactive effect so as to render
uncollectible the taxes in question which were assessed before its
enactment.
4. Whether or not the respondent taxpayer is liable for the fixed
and deficiency percentage taxes in the amount of P3,025.96 for
the period from January 1, 1946 to February 29, 1948, the period
before the approval of its municipal franchises.
The first issue raised by the petitioner before us is whether or not
the five percent (5%) franchise tax prescribed in Section 259 of the
National Internal Revenue Code (Commonwealth Act No. 466 as
amended by R.A. No. 39) assessed against the private respondent
on its gross receipts realized before the effectivity of R.A- No. 3843
is collectible. It is the contention of the petitioner Commissioner of
Internal Revenue that the private respondent should have been
held liable for the 5% franchise tax on gross receipts prescribed in
Section 259 of the Tax Code, instead of the lower franchise tax
rates provided in the municipal franchises (1% of gross earnings for
the first twenty years and 2% for the remaining fifteen years of the
life of the franchises) because Section 259 of the Tax Code, as
amended by RA No. 39 of October 1, 1946, applied to existing
and future franchises. The franchises of the private respondent
were already in existence at the time of the adoption of the said
amendment, since the franchises were accepted on March 1,
1948 after approval by the President of the Philippines on February
24, 1948. The private respondent's original franchises did not
contain the proviso that the tax provided therein "shall be in lieu
of all taxes;" moreover, the franchises contained a reservation
clause that they shag be subject to amendment, alteration, or
repeal, but even in the absence of such cause, the power of the
Legislature to alter, amend, or repeal any franchise is always
deemed reserved. The franchise of the private respondent have
been modified or amended by Section 259 of the Tax Code, the
petitioner submits.
We find no merit in petitioner's contention. R.A. No. 3843 granted
the private respondent a legislative franchise in June, 1963,
amending, altering, or even repealing the original municipal
franchises, and providing that the private respondent should pay
only a 2% franchise tax on its gross receipts, "in lieu of any and all
taxes and/or licenses of any kind, nature or description levied,
established, or collected by any authority whatsoever, municipal,
provincial, or national, now or in the future ... and effective further
upon the date the original franchise was granted, no other tax
and/or licenses other than the franchise tax of two per centum on
the gross receipts ... shall be collected, any provision of law to the
contrary notwithstanding." Thus, by virtue of R.A- No. 3843, the
private respondent was liable to pay only the 2% franchise tax,
effective from the date the original municipal franchise was
granted.
On the question as to whether or not Section 4 of R.A. No. 3843 is
unconstitutional for being violative of the "uniformity and equality
of taxation" clause of the Constitution, and, if adjudged valid,
whether or not it should be given retroactive effect, the petitioner
submits that the said law is unconstitutional insofar as it provides
for the payment by the private respondent of a franchise tax of
2% of its gross receipts, while other taxpayers similarly situated
were subject to the 5% franchise tax imposed in Section 259 of the
Tax Code, thereby discriminatory and violative of the rule on
uniformity and equality of taxation.
A tax is uniform when it operates with the same force and effect
in every place where the subject of it is found. Uniformity means
that all property belonging to the same class shall be taxed alike
The Legislature has the inherent power not only to select the
subjects of taxation but to grant exemptions. Tax exemptions
have never been deemed violative of the equal protection
clause. 1 It is true that the private respondents municipal
franchises were obtained under Act No. 667 2 of the Philippine
Commission, but these original franchises have been replaced by
a new legislative franchise, i.e. R.A. No. 3843. As correctly held by
the respondent court, the latter was granted subject to the terms
and conditions established in Act No. 3636, 3 as amended by C.A.
No. 132. These conditions Identify the private respondent's power
plant as falling within that class of power plants created by Act
No. 3636, as amended. The benefits of the tax reduction provided
by law (Act No. 3636 as amended by C.A. No. 132 and R.A. No.
3843) apply to the respondent's power plant and others
circumscribed within this class. R.A-No. 3843 merely transferred the
petitioner's power plant from that class provided for in Act No. 667,
as amended, to which it belonged until the approval of R.A- No.
3843, and placed it within the class falling under Act No. 3636, as
amended. Thus, it only effected the transfer of a taxable property
from one class to another.
We do not have the authority to inquire into the wisdom of such
act. Furthermore, the 5% franchise tax rate provided in Section 259
of the Tax Code was never intended to have a universal
application. 4 We note that the said Section 259 of the Tax Code
expressly allows the payment of taxes at rates lower than 5% when
the charter granting the franchise of a grantee, like the one
granted to the private respondent under Section 4 of R.A. No.
3843, precludes the imposition of a higher tax. R.A. No. 3843 did
not only fix and specify a franchise tax of 2% on its gross receipts,
but made it "in lieu of any and all taxes, all laws to the contrary
notwithstanding," thus, leaving no room for doubt regarding the
legislative intent. "Charters or special laws granted and enacted
by the Legislature are in the nature of private contracts. They do
not constitute a part of the machinery of the general government.
They are usually adopted after careful consideration of the
private rights in relation with resultant benefits to the State ... in
passing a special charter the attention of the Legislature is
directed to the facts and circumstances which the act or charter
is intended to meet. The Legislature consider (sic) and make (sic)
provision for all the circumstances of a particular case." 5 In view
of the foregoing, we find no reason to disturb the respondent
court's ruling upholding the constitutionality of the law in question.
Given its validity, should the said law be applied retroactively so
as to render uncollectible the taxes in question which were
assessed before its enactment? The question of whether a statute
operates retrospectively or only prospectively depends on the
legislative intent. In the instant case, Act No. 3843 provides that
"effective ... upon the date the original franchise was granted, no
other tax and/or licenses other than the franchise tax of two per
centum on the gross receipts ... shall be collected, any provision
to the contrary notwithstanding." Republic Act No. 3843 therefore
specifically provided for the retroactive effect of the law.
The last issue to be resolved is whether or not the private
respondent is liable for the fixed and deficiency percentage taxes
in the amount of P3,025.96 (i.e. for the period from January 1, 1946
to February 29, 1948) before the approval of its municipal
franchises. As aforestated, the franchises were approved by the
President only on February 24, 1948. Therefore, before the said
date, the private respondent was liable for the payment of
percentage and fixed taxes as seller of light, heat, and power —
which as the petitioner claims, amounted to P3,025.96. The
legislative franchise (R.A. No. 3843) exempted the grantee from
all kinds of taxes other than the 2% tax from the date the original
franchise was granted. The exemption, therefore, did not cover
the period before the franchise was granted, i.e. before February
24, 1948. However, as pointed out by the respondent court in its
findings, during the period covered by the instant case, that is
from January 1, 1946 to December 31, 1961, the private
respondent paid the amount of P34,184.36, which was very much
more than the amount rightfully due from it. Hence, the private
respondent should no longer be made to pay for the deficiency
tax in the amount of P3,025.98 for the period from January 1, 1946
to February 29, 1948.
WHEREFORE, the appealed decision of the respondent Court of
Tax Appeals is hereby AFFIRMED. No pronouncement as to costs.
SO ORDERED.
3. G. R. No. 119775 October 24, 2003
JOHN HAY PEOPLES ALTERNATIVE COALITION, MATEO CARIÑO
FOUNDATION INC., CENTER FOR ALTERNATIVE SYSTEMS
FOUNDATION INC., REGINA VICTORIA A. BENAFIN REPRESENTED
AND JOINED BY HER MOTHER MRS. ELISA BENAFIN, IZABEL M. LUYK
REPRESENTED AND JOINED BY HER MOTHER MRS. REBECCA MOLINA
LUYK, KATHERINE PE REPRESENTED AND JOINED BY HER MOTHER
ROSEMARIE G. PE, SOLEDAD S. CAMILO, ALICIA C. PACALSO ALIAS
"KEVAB," BETTY I. STRASSER, RUBY C. GIRON, URSULA C. PEREZ ALIAS
"BA-YAY," EDILBERTO T. CLARAVALL, CARMEN CAROMINA, LILIA G.
YARANON, DIANE MONDOC, Petitioners,
vs.
VICTOR LIM, PRESIDENT, BASES CONVERSION DEVELOPMENT
AUTHORITY; JOHN HAY PORO POINT DEVELOPMENT
CORPORATION, CITY OF BAGUIO, TUNTEX (B.V.I.) CO. LTD.,
ASIAWORLD INTERNATIONALE GROUP, INC., DEPARTMENT OF
26
ENVIRONMENT AND NATURAL RESOURCES,Respondents.
DECISION
CARPIO MORALES, J.:
By the present petition for prohibition, mandamus and
declaratory relief with prayer for a temporary restraining order
(TRO) and/or writ of preliminary injunction, petitioners assail, in the
main, the constitutionality of Presidential Proclamation No. 420,
Series of 1994, "CREATING AND DESIGNATING a portion of the area
covered by the former Camp John [Hay] as THE JOHN HAY
Special Economic Zone pursuant to R.A. No. 7227."
R.A. No. 7227, AN ACT ACCELERATING THE CONVERSION OF
MILITARY RESERVATIONS INTO OTHER PRODUCTIVE USES, CREATING
THE BASES CONVERSION AND DEVELOPMENT AUTHORITY FOR THIS
PURPOSE, PROVIDING FUNDS THEREFOR AND FOR OTHER
PURPOSES, otherwise known as the "Bases Conversion and
Development Act of 1992," which was enacted on March 13,
1992, set out the policy of the government to accelerate the
sound and balanced conversion into alternative productive uses
of the former military bases under the 1947 Philippines-United
States of America Military Bases Agreement, namely, the Clark
and Subic military reservations as well as their extensions including
the John Hay Station (Camp John Hay or the camp) in the City of
Baguio.1
As noted in its title, R.A. No. 7227 created public respondent Bases
Conversion and Development Authority2(BCDA), vesting it with
powers pertaining to the multifarious aspects of carrying out the
ultimate objective of utilizing the base areas in accordance with
the declared government policy.
R.A. No. 7227 likewise created the Subic Special Economic [and
Free Port] Zone (Subic SEZ) the metes and bounds of which were
to be delineated in a proclamation to be issued by the President
of the Philippines.3
R.A. No. 7227 granted the Subic SEZ incentives ranging from tax
and duty-free importations, exemption of businesses therein from
local and national taxes, to other hallmarks of a liberalized
financial and business climate.4
And R.A. No. 7227 expressly gave authority to the President to
create through executive proclamation, subject to the
concurrence of the local government units directly affected,
other Special Economic Zones (SEZ) in the areas covered
respectively by the Clark military reservation, the Wallace Air
Station in San Fernando, La Union, and Camp John Hay.5
On August 16, 1993, BCDA entered into a Memorandum of
Agreement and Escrow Agreement with private respondents
Tuntex (B.V.I.) Co., Ltd (TUNTEX) and Asiaworld Internationale
Group, Inc. (ASIAWORLD), private corporations registered under
the laws of the British Virgin Islands, preparatory to the formation
of a joint venture for the development of Poro Point in La Union
and Camp John Hay as premier tourist destinations and
recreation centers. Four months later or on December 16, 1993,
BCDA, TUNTEX and ASIAWORD executed a Joint Venture
Agreement6 whereby they bound themselves to put up a joint
venture company known as the Baguio International
Development and Management Corporation which would lease
areas within Camp John Hay and Poro Point for the purpose of
turning such places into principal tourist and recreation spots, as
originally envisioned by the parties under their Memorandum of
Agreement.
The Baguio City government meanwhile passed a number of
resolutions in response to the actions taken by BCDA as owner and
administrator of Camp John Hay.
By Resolution7 of September 29, 1993, the Sangguniang
Panlungsod of Baguio City (the sanggunian) officially asked
BCDA to exclude all the barangays partly or totally located within
Camp John Hay from the reach or coverage of any plan or
program for its development.
By a subsequent Resolution8 dated January 19, 1994,
the sanggunian sought from BCDA an abdication, waiver or
quitclaim of its ownership over the home lots being occupied by
residents of nine (9) barangays surrounding the military
reservation.
Still by another resolution passed on February 21, 1994,
the sanggunian adopted and submitted to BCDA a 15-point
concept for the development of Camp John
Hay.9 The sanggunian's vision expressed, among other things, a
kind of development that affords protection to the environment,
the making of a family-oriented type of tourist destination, priority
in employment opportunities for Baguio residents and free access
to the base area, guaranteed participation of the city
government in the management and operation of the camp,
exclusion of the previously named nine barangays from the area
for development, and liability for local taxes of businesses to be
established within the camp.10
BCDA, Tuntex and AsiaWorld agreed to some, but rejected or
modified the other proposals of the sanggunian.11They stressed
the need to declare Camp John Hay a SEZ as a condition
precedent to its full development in accordance with the
mandate of R.A. No. 7227.12
On May 11, 1994, the sanggunian passed a resolution requesting
the Mayor to order the determination of realty taxes which may
otherwise be collected from real properties of Camp John
Hay.13 The resolution was intended to intelligently guide
the sanggunian in determining its position on whether Camp John
Hay be declared a SEZ, it (the sanggunian) being of the view that
such declaration would exempt the camp's property and the
economic activity therein from local or national taxation.
More than a month later, however, the sanggunian passed
Resolution No. 255, (Series of 1994),14 seeking and supporting,
subject to its concurrence, the issuance by then President Ramos
of a presidential proclamation declaring an area of 288.1
hectares of the camp as a SEZ in accordance with the provisions
of R.A. No. 7227. Together with this resolution was submitted a draft
of the proposed proclamation for consideration by the
President.15
On July 5, 1994 then President Ramos issued Proclamation No.
420,16 the title of which was earlier indicated, which established a
SEZ on a portion of Camp John Hay and which reads as follows:
xxx
Pursuant to the powers vested in me by the law and the resolution
of concurrence by the City Council of Baguio, I, FIDEL V. RAMOS,
President of the Philippines, do hereby create and designate a
portion of the area covered by the former John Hay reservation
as embraced, covered, and defined by the 1947 Military Bases
Agreement between the Philippines and the United States of
America, as amended, as the John Hay Special Economic Zone,
and accordingly order:
SECTION 1. Coverage of John Hay Special Economic Zone. - The
John Hay Special Economic Zone shall cover the area consisting
of Two Hundred Eighty Eight and one/tenth (288.1) hectares, more
or less, of the total of Six Hundred Seventy-Seven (677) hectares of
the John Hay Reservation, more or less, which have been
surveyed and verified by the Department of Environment and
Natural Resources (DENR) as defined by the following technical
description:
A parcel of land, situated in the City of Baguio, Province of
Benguet, Island of Luzon, and particularly described in survey
plans Psd-131102-002639 and Ccs-131102-000030 as approved on
16 August 1993 and 26 August 1993, respectively, by the
Department of Environment and Natural Resources, in detail
containing:
Lot 1, Lot 2, Lot 3, Lot 4, Lot 5, Lot 6, Lot 7, Lot 13, Lot 14, Lot 15, and
Lot 20 of Ccs-131102-000030
-and-
Lot 3, Lot 4, Lot 5, Lot 6, Lot 7, Lot 8, Lot 9, Lot 10, Lot 11, Lot 14, Lot
15, Lot 16, Lot 17, and Lot 18 of Psd-131102-002639 being portions
of TCT No. T-3812, LRC Rec. No. 87.
With a combined area of TWO HUNDRED EIGHTY EIGHT AND
ONE/TENTH HECTARES (288.1 hectares); Provided that the area
consisting of approximately Six and two/tenth (6.2) hectares,
more or less, presently occupied by the VOA and the residence
of the Ambassador of the United States, shall be considered as
part of the SEZ only upon turnover of the properties to the
government of the Republic of the Philippines.
Sec. 2. Governing Body of the John Hay Special Economic Zone.
27
- Pursuant to Section 15 of R.A. No. 7227, the Bases Conversion and
Development Authority is hereby established as the governing
body of the John Hay Special Economic Zone and, as such,
authorized to determine the utilization and disposition of the lands
comprising it, subject to private rights, if any, and in consultation
and coordination with the City Government of Baguio after
consultation with its inhabitants, and to promulgate the necessary
policies, rules, and regulations to govern and regulate the zone
thru the John Hay Poro Point Development Corporation, which is
its implementing arm for its economic development and optimum
utilization.
Sec. 3. Investment Climate in John Hay Special Economic Zone. -
Pursuant to Section 5(m) and Section 15 of R.A. No. 7227, the John
Hay Poro Point Development Corporation shall implement all
necessary policies, rules, and regulations governing the zone,
including investment incentives, in consultation with pertinent
government departments. Among others, the zone shall have all
the applicable incentives of the Special Economic Zone under
Section 12 of R.A. No. 7227 and those applicable incentives
granted in the Export Processing Zones, the Omnibus Investment
Code of 1987, the Foreign Investment Act of 1991, and new
investment laws that may hereinafter be enacted.
Sec. 4. Role of Departments, Bureaus, Offices, Agencies and
Instrumentalities. - All Heads of departments, bureaus, offices,
agencies, and instrumentalities of the government are hereby
directed to give full support to Bases Conversion and
Development Authority and/or its implementing subsidiary or joint
venture to facilitate the necessary approvals to expedite the
implementation of various projects of the conversion program.
Sec. 5. Local Authority. - Except as herein provided, the affected
local government units shall retain their basic autonomy and
identity.
Sec. 6. Repealing Clause. - All orders, rules, and regulations, or
parts thereof, which are inconsistent with the provisions of this
Proclamation, are hereby repealed, amended, or modified
accordingly.
Sec. 7. Effectivity. This proclamation shall take effect immediately.
Done in the City of Manila, this 5th day of July, in the year of Our
Lord, nineteen hundred and ninety-four.
The issuance of Proclamation No. 420 spawned the present
petition17 for prohibition, mandamus and declaratory relief which
was filed on April 25, 1995 challenging, in the main, its
constitutionality or validity as well as the legality of the
Memorandum of Agreement and Joint Venture Agreement
between public respondent BCDA and private respondents
Tuntex and AsiaWorld.
Petitioners allege as grounds for the allowance of the petition the
following:
I. PRESIDENTIAL PROCLAMATION NO. 420, SERIES OF 1990 (sic) IN
SO FAR AS IT GRANTS TAX EXEMPTIONS IS INVALID AND ILLEGAL AS
IT IS AN UNCONSTITUTIONAL EXERCISE BY THE PRESIDENT OF A
POWER GRANTED ONLY TO THE LEGISLATURE.
II .PRESIDENTIAL PROCLAMATION NO. 420, IN SO FAR AS IT LIMITS
THE POWERS AND INTERFERES WITH THE AUTONOMY OF THE CITY OF
BAGUIO IS INVALID, ILLEGAL AND UNCONSTITUTIONAL.
III. PRESIDENTIAL PROCLAMATION NO. 420, SERIES OF 1994 IS
UNCONSTITUTIONAL IN THAT IT VIOLATES THE RULE THAT ALL TAXES
SHOULD BE UNIFORM AND EQUITABLE.
IV. THE MEMORANDUM OF AGREEMENT ENTERED INTO BY AND
BETWEEN PRIVATE AND PUBLIC RESPONDENTS BASES CONVERSION
DEVELOPMENT AUTHORITY HAVING BEEN ENTERED INTO ONLY BY
DIRECT NEGOTIATION IS ILLEGAL.
V. THE TERMS AND CONDITIONS OF THE MEMORANDUM OF
AGREEMENT ENTERED INTO BY AND BETWEEN PRIVATE AND PUBLIC
RESPONDENT BASES CONVERSION DEVELOPMENT AUTHORITY IS
(sic) ILLEGAL.
VI. THE CONCEPTUAL DEVELOPMENT PLAN OF RESPONDENTS NOT
HAVING UNDERGONE ENVIRONMENTAL IMPACT ASSESSMENT IS
BEING ILLEGALLY CONSIDERED WITHOUT A VALID ENVIRONMENTAL
IMPACT ASSESSMENT.
A temporary restraining order and/or writ of preliminary injunction
was prayed for to enjoin BCDA, John Hay Poro Point Development
Corporation and the city government from implementing
Proclamation No. 420, and Tuntex and AsiaWorld from
proceeding with their plan respecting Camp John Hay's
development pursuant to their Joint Venture Agreement with
BCDA.18
Public respondents, by their separate Comments, allege as moot
and academic the issues raised by the petition, the questioned
Memorandum of Agreement and Joint Venture Agreement
having already been deemed abandoned by the inaction of the
parties thereto prior to the filing of the petition as in fact, by letter
of November 21, 1995, BCDA formally notified Tuntex and
AsiaWorld of the revocation of their said agreements.19
In maintaining the validity of Proclamation No. 420, respondents
contend that by extending to the John Hay SEZ economic
incentives similar to those enjoyed by the Subic SEZ which was
established under R.A. No. 7227, the proclamation is merely
implementing the legislative intent of said law to turn the US
military bases into hubs of business activity or investment. They
underscore the point that the government's policy of bases
conversion can not be achieved without extending the same tax
exemptions granted by R.A. No. 7227 to Subic SEZ to other SEZs.
Denying that Proclamation No. 420 is in derogation of the local
autonomy of Baguio City or that it is violative of the constitutional
guarantee of equal protection, respondents assail petitioners'
lack of standing to bring the present suit even as taxpayers and in
the absence of any actual case or controversy to warrant this
Court's exercise of its power of judicial review over the
proclamation.
Finally, respondents seek the outright dismissal of the petition for
having been filed in disregard of the hierarchy of courts and of
the doctrine of exhaustion of administrative remedies.
Replying,20 petitioners aver that the doctrine of exhaustion of
administrative remedies finds no application herein since they are
invoking the exclusive authority of this Court under Section 21 of
R.A. No. 7227 to enjoin or restrain implementation of projects for
conversion of the base areas; that the established exceptions to
the aforesaid doctrine obtain in the present petition; and that
they possess the standing to bring the petition which is a
taxpayer's suit.
Public respondents have filed their Rejoinder21 and the parties
have filed their respective memoranda.
Before dwelling on the core issues, this Court shall first address the
preliminary procedural questions confronting the petition.
The judicial policy is and has always been that this Court will not
entertain direct resort to it except when the redress sought cannot
be obtained in the proper courts, or when exceptional and
compelling circumstances warrant availment of a remedy within
and calling for the exercise of this Court's primary
jurisdiction.22 Neither will it entertain an action for declaratory
relief, which is partly the nature of this petition, over which it has
no original jurisdiction.
Nonetheless, as it is only this Court which has the power under
Section 2123 of R.A. No. 7227 to enjoin implementation of projects
for the development of the former US military reservations, the
issuance of which injunction petitioners pray for, petitioners' direct
filing of the present petition with it is allowed. Over and above this
procedural objection to the present suit, this Court retains full
discretionary power to take cognizance of a petition filed directly
to it if compelling reasons, or the nature and importance of the
issues raised, warrant.24 Besides, remanding the case to the lower
courts now would just unduly prolong adjudication of the issues.
The transformation of a portion of the area covered by Camp
John Hay into a SEZ is not simply a re-classification of an area, a
mere ascription of a status to a place. It involves turning the former
US military reservation into a focal point for investments by both
local and foreign entities. It is to be made a site of vigorous
business activity, ultimately serving as a spur to the country's long
awaited economic growth. For, as R.A. No. 7227 unequivocally
declares, it is the government's policy to enhance the benefits to
be derived from the base areas in order to promote the economic
and social development of Central Luzon in particular and the
country in general.25 Like the Subic SEZ, the John Hay SEZ should
also be turned into a "self-sustaining, industrial, commercial,
28
financial and investment center."26
More than the economic interests at stake, the development of
Camp John Hay as well as of the other base areas unquestionably
has critical links to a host of environmental and social concerns.
Whatever use to which these lands will be devoted will set a chain
of events that can affect one way or another the social and
economic way of life of the communities where the bases are
located, and ultimately the nation in general.
Underscoring the fragility of Baguio City's ecology with its problem
on the scarcity of its water supply, petitioners point out that the
local and national government are faced with the challenge of
how to provide for an ecologically sustainable, environmentally
sound, equitable transition for the city in the wake of Camp John
Hay's reversion to the mass of government property.27 But that is
why R.A. No. 7227 emphasizes the "sound and balanced
conversion of the Clark and Subic military reservations and their
extensions consistent with ecological and environmental
standards."28 It cannot thus be gainsaid that the matter of
conversion of the US bases into SEZs, in this case Camp John Hay,
assumes importance of a national magnitude.
Convinced then that the present petition embodies crucial issues,
this Court assumes jurisdiction over the petition.
As far as the questioned agreements between BCDA and Tuntex
and AsiaWorld are concerned, the legal questions being raised
thereon by petitioners have indeed been rendered moot and
academic by the revocation of such agreements. There are,
however, other issues posed by the petition, those which center
on the constitutionality of Proclamation No. 420, which have not
been mooted by the said supervening event upon application of
the rules for the judicial scrutiny of constitutional cases. The issues
boil down to:
(1) Whether the present petition complies with the requirements for this C
issues;
(2) Whether Proclamation No. 420 is constitutional by providing for nation
other economic incentives to the John Hay Special Economic Zone;
(3) Whether Proclamation No. 420 is constitutional for limiting or interferin
It is settled that when questions of constitutional significance are
raised, the court can exercise its power of judicial review only if
the following requisites are present: (1) the existence of an actual
and appropriate case; (2) a personal and substantial interest of
the party raising the constitutional question; (3) the exercise of
judicial review is pleaded at the earliest opportunity; and (4) the
constitutional question is the lis mota of the case.29
An actual case or controversy refers to an existing case or
controversy that is appropriate or ripe for determination, not
conjectural or anticipatory.30 The controversy needs to be definite
and concrete, bearing upon the legal relations of parties who are
pitted against each other due to their adverse legal
interests.31 There is in the present case a real clash of interests and
rights between petitioners and respondents arising from the
issuance of a presidential proclamation that converts a portion of
the area covered by Camp John Hay into a SEZ, the former
insisting that such proclamation contains unconstitutional
provisions, the latter claiming otherwise.
R.A. No. 7227 expressly requires the concurrence of the affected
local government units to the creation of SEZs out of all the base
areas in the country.32 The grant by the law on local government
units of the right of concurrence on the bases' conversion is
equivalent to vesting a legal standing on them, for it is in effect a
recognition of the real interests that communities nearby or
surrounding a particular base area have in its utilization. Thus, the
interest of petitioners, being inhabitants of Baguio, in assailing the
legality of Proclamation No. 420, is personal and substantial such
that they have sustained or will sustain direct injury as a result of
the government act being challenged.33Theirs is a material
interest, an interest in issue affected by the proclamation and not
merely an interest in the question involved or an incidental
interest,34 for what is at stake in the enforcement of Proclamation
No. 420 is the very economic and social existence of the people
of Baguio City.
Petitioners' locus standi parallels that of the petitioner and other
residents of Bataan, specially of the town of Limay, in Garcia v.
Board of Investments35 where this Court characterized their
interest in the establishment of a petrochemical plant in their
place as actual, real, vital and legal, for it would affect not only
their economic life but even the air they breathe.
Moreover, petitioners Edilberto T. Claravall and Lilia G. Yaranon
were duly elected councilors of Baguio at the time, engaged in
the local governance of Baguio City and whose duties included
deciding for and on behalf of their constituents the question of
whether to concur with the declaration of a portion of the area
covered by Camp John Hay as a SEZ. Certainly then, petitioners
Claravall and Yaranon, as city officials who voted
against36 the sanggunian Resolution No. 255 (Series of 1994)
supporting the issuance of the now challenged Proclamation No.
420, have legal standing to bring the present petition.
That there is herein a dispute on legal rights and interests is thus
beyond doubt. The mootness of the issues concerning the
questioned agreements between public and private respondents
is of no moment.
"By the mere enactment of the questioned law or the approval of
the challenged act, the dispute is deemed to have ripened into
a judicial controversy even without any other overt act. Indeed,
even a singular violation of the Constitution and/or the law is
enough to awaken judicial duty."37
As to the third and fourth requisites of a judicial inquiry, there is
likewise no question that they have been complied with in the
case at bar. This is an action filed purposely to bring forth
constitutional issues, ruling on which this Court must take up.
Besides, respondents never raised issues with respect to these
requisites, hence, they are deemed waived.
Having cleared the way for judicial review, the constitutionality of
Proclamation No. 420, as framed in the second and third issues
above, must now be addressed squarely.
The second issue refers to petitioners' objection against the
creation by Proclamation No. 420 of a regime of tax exemption
within the John Hay SEZ. Petitioners argue that nowhere in R. A.
No. 7227 is there a grant of tax exemption to SEZs yet to be
established in base areas, unlike the grant under Section 12
thereof of tax exemption and investment incentives to the therein
established Subic SEZ. The grant of tax exemption to the John Hay
SEZ, petitioners conclude, thus contravenes Article VI, Section 28
(4) of the Constitution which provides that "No law granting any
tax exemption shall be passed without the concurrence of a
majority of all the members of Congress."
Section 3 of Proclamation No. 420, the challenged provision,
reads:
Sec. 3. Investment Climate in John Hay Special Economic Zone. -
Pursuant to Section 5(m) and Section 15 of R.A. No. 7227, the John
Hay Poro Point Development Corporation shall implement all
necessary policies, rules, and regulations governing the zone,
including investment incentives, in consultation with pertinent
government departments. Among others, the zone shall have all
the applicable incentives of the Special Economic Zone under
Section 12 of R.A. No. 7227 and those applicable incentives
granted in the Export Processing Zones, the Omnibus Investment
Code of 1987, the Foreign Investment Act of 1991, and new
investment laws that may hereinafter be enacted. (Emphasis and
underscoring supplied)
Upon the other hand, Section 12 of R.A. No. 7227 provides:
xxx
(a) Within the framework and subject to the mandate and
limitations of the Constitution and the pertinent provisions of the
Local Government Code, the Subic Special Economic Zone shall
be developed into a self-sustaining, industrial, commercial,
financial and investment center to generate employment
opportunities in and around the zone and to attract and promote
productive foreign investments;
b) The Subic Special Economic Zone shall be operated and
29
managed as a separate customs territory ensuring free flow or
movement of goods and capital within, into and exported out of
the Subic Special Economic Zone, as well as provide incentives
such as tax and duty free importations of raw materials, capital
and equipment. However, exportation or removal of goods from
the territory of the Subic Special Economic Zone to the other parts
of the Philippine territory shall be subject to customs duties and
taxes under the Customs and Tariff Code and other relevant tax
laws of the Philippines;
(c) The provisions of existing laws, rules and regulations to the
contrary notwithstanding, no taxes, local and national, shall be
imposed within the Subic Special Economic Zone. In lieu of paying
taxes, three percent (3%) of the gross income earned by all
businesses and enterprises within the Subic Special Economic
Zone shall be remitted to the National Government, one percent
(1%) each to the local government units affected by the
declaration of the zone in proportion to their population area,
and other factors. In addition, there is hereby established a
development fund of one percent (1%) of the gross income
earned by all businesses and enterprises within the Subic Special
Economic Zone to be utilized for the Municipality of Subic, and
other municipalities contiguous to be base areas. In case of
conflict between national and local laws with respect to tax
exemption privileges in the Subic Special Economic Zone, the
same shall be resolved in favor of the latter;
(d) No exchange control policy shall be applied and free markets
for foreign exchange, gold, securities and futures shall be allowed
and maintained in the Subic Special Economic Zone;
(e) The Central Bank, through the Monetary Board, shall supervise
and regulate the operations of banks and other financial
institutions within the Subic Special Economic Zone;
(f) Banking and Finance shall be liberalized with the establishment
of foreign currency depository units of local commercial banks
and offshore banking units of foreign banks with minimum Central
Bank regulation;
(g) Any investor within the Subic Special Economic Zone whose
continuing investment shall not be less than Two Hundred fifty
thousand dollars ($250,000), his/her spouse and dependent
children under twenty-one (21) years of age, shall be granted
permanent resident status within the Subic Special Economic
Zone. They shall have freedom of ingress and egress to and from
the Subic Special Economic Zone without any need of special
authorization from the Bureau of Immigration and Deportation.
The Subic Bay Metropolitan Authority referred to in Section 13 of
this Act may also issue working visas renewable every two (2) years
to foreign executives and other aliens possessing highly-technical
skills which no Filipino within the Subic Special Economic Zone
possesses, as certified by the Department of Labor and
Employment. The names of aliens granted permanent residence
status and working visas by the Subic Bay Metropolitan Authority
shall be reported to the Bureau of Immigration and Deportation
within thirty (30) days after issuance thereof;
x x x (Emphasis supplied)
It is clear that under Section 12 of R.A. No. 7227 it is only the Subic
SEZ which was granted by Congress with tax exemption,
investment incentives and the like. There is no express extension of
the aforesaid benefits to other SEZs still to be created at the time
via presidential proclamation.
The deliberations of the Senate confirm the exclusivity to Subic SEZ
of the tax and investment privileges accorded it under the law, as
the following exchanges between our lawmakers show during the
second reading of the precursor bill of R.A. No. 7227 with respect
to the investment policies that would govern Subic SEZ which are
now embodied in the aforesaid Section 12 thereof:
xxx
Senator Maceda: This is what I was talking about. We get into
problems here because all of these following policies are
centered around the concept of free port. And in the main
paragraph above, we have declared both Clark and Subic as
special economic zones, subject to these policies which are, in
effect, a free-port arrangement.
Senator Angara: The Gentleman is absolutely correct, Mr.
President. So we must confine these policies only to Subic.
May I withdraw then my amendment, and instead provide that
"THE SPECIAL ECONOMIC ZONE OF SUBIC SHALL BE ESTABLISHED IN
ACCORDANCE WITH THE FOLLOWING POLICIES." Subject to style,
Mr. President.
Thus, it is very clear that these principles and policies are
applicable only to Subic as a free port.
Senator Paterno: Mr. President.
The President: Senator Paterno is recognized.
Senator Paterno: I take it that the amendment suggested by
Senator Angara would then prevent the establishment of other
special economic zones observing these policies.
Senator Angara: No, Mr. President, because during our short
caucus, Senator Laurel raised the point that if we give this
delegation to the President to establish other economic zones,
that may be an unwarranted delegation.
So we agreed that we will simply limit the definition of powers and
description of the zone to Subic, but that does not exclude the
possibility of creating other economic zones within the baselands.
Senator Paterno: But if that amendment is followed, no other
special economic zone may be created under authority of this
particular bill. Is that correct, Mr. President?
Senator Angara: Under this specific provision, yes, Mr. President.
This provision now will be confined only to Subic.38
x x x (Underscoring supplied).
As gathered from the earlier-quoted Section 12 of R.A. No. 7227,
the privileges given to Subic SEZ consist principally of exemption
from tariff or customs duties, national and local taxes of business
entities therein (paragraphs (b) and (c)), free market and trade of
specified goods or properties (paragraph d), liberalized banking
and finance (paragraph f), and relaxed immigration rules for
foreign investors (paragraph g). Yet, apart from these,
Proclamation No. 420 also makes available to the John Hay SEZ
benefits existing in other laws such as the privilege of export
processing zone-based businesses of importing capital
equipment and raw materials free from taxes, duties and other
restrictions;39 tax and duty exemptions, tax holiday, tax credit, and
other incentives under the Omnibus Investments Code of
1987;40 and the applicability to the subject zone of rules governing
foreign investments in the Philippines.41
While the grant of economic incentives may be essential to the
creation and success of SEZs, free trade zones and the like, the
grant thereof to the John Hay SEZ cannot be sustained. The
incentives under R.A. No. 7227 are exclusive only to the Subic SEZ,
hence, the extension of the same to the John Hay SEZ finds no
support therein. Neither does the same grant of privileges to the
John Hay SEZ find support in the other laws specified under Section
3 of Proclamation No. 420, which laws were already extant before
the issuance of the proclamation or the enactment of R.A. No.
7227.
More importantly, the nature of most of the assailed privileges is
one of tax exemption. It is the legislature, unless limited by a
provision of the state constitution, that has full power to exempt
any person or corporation or class of property from taxation, its
power to exempt being as broad as its power to tax.42 Other than
Congress, the Constitution may itself provide for specific tax
exemptions,43 or local governments may pass ordinances on
exemption only from local taxes.44
The challenged grant of tax exemption would circumvent the
Constitution's imposition that a law granting any tax exemption
must have the concurrence of a majority of all the members of
Congress.45 In the same vein, the other kinds of privileges
extended to the John Hay SEZ are by tradition and usage for
Congress to legislate upon.
Contrary to public respondents' suggestions, the claimed statutory
exemption of the John Hay SEZ from taxation should be manifest
and unmistakable from the language of the law on which it is
based; it must be expressly granted in a statute stated in a
language too clear to be mistaken.46 Tax exemption cannot be
30
implied as it must be categorically and unmistakably expressed.47
If it were the intent of the legislature to grant to the John Hay SEZ
the same tax exemption and incentives given to the Subic SEZ, it
would have so expressly provided in the R.A. No. 7227.
This Court no doubt can void an act or policy of the political
departments of the government on either of two grounds-
infringement of the Constitution or grave abuse of discretion.48
This Court then declares that the grant by Proclamation No. 420
of tax exemption and other privileges to the John Hay SEZ is void
for being violative of the Constitution. This renders it unnecessary
to still dwell on petitioners' claim that the same grant violates the
equal protection guarantee.
With respect to the final issue raised by petitioners -- that
Proclamation No. 420 is unconstitutional for being in derogation of
Baguio City's local autonomy, objection is specifically mounted
against Section 2 thereof in which BCDA is set up as the governing
body of the John Hay SEZ.49
Petitioners argue that there is no authority of the President to
subject the John Hay SEZ to the governance of BCDA which has
just oversight functions over SEZ; and that to do so is to diminish
the city government's power over an area within its jurisdiction,
hence, Proclamation No. 420 unlawfully gives the President power
of control over the local government instead of just mere
supervision.
Petitioners' arguments are bereft of merit. Under R.A. No. 7227, the
BCDA is entrusted with, among other things, the following
purpose:50
xxx
(a) To own, hold and/or administer the military reservations of
John Hay Air Station, Wallace Air Station, O'Donnell Transmitter
Station, San Miguel Naval Communications Station, Mt. Sta. Rita
Station (Hermosa, Bataan) and those portions of Metro Manila
Camps which may be transferred to it by the President;
x x x (Underscoring supplied)
With such broad rights of ownership and administration vested in
BCDA over Camp John Hay, BCDA virtually has control over it,
subject to certain limitations provided for by law. By designating
BCDA as the governing agency of the John Hay SEZ, the law
merely emphasizes or reiterates the statutory role or functions it
has been granted.
The unconstitutionality of the grant of tax immunity and financial
incentives as contained in the second sentence of Section 3 of
Proclamation No. 420 notwithstanding, the entire assailed
proclamation cannot be declared unconstitutional, the other
parts thereof not being repugnant to law or the Constitution. The
delineation and declaration of a portion of the area covered by
Camp John Hay as a SEZ was well within the powers of the
President to do so by means of a proclamation.51 The requisite
prior concurrence by the Baguio City government to such
proclamation appears to have been given in the form of a duly
enacted resolution by the sanggunian. The other provisions of the
proclamation had been proven to be consistent with R.A. No.
7227.
Where part of a statute is void as contrary to the Constitution,
while another part is valid, the valid portion, if separable from the
invalid, may stand and be enforced.52 This Court finds that the
other provisions in Proclamation No. 420 converting a delineated
portion of Camp John Hay into the John Hay SEZ are separable
from the invalid second sentence of Section 3 thereof, hence they
stand.
WHEREFORE, the second sentence of Section 3 of Proclamation
No. 420 is hereby declared NULL AND VOID and is accordingly
declared of no legal force and effect. Public respondents are
hereby enjoined from implementing the aforesaid void provision.
Proclamation No. 420, without the invalidated portion, remains
valid and effective.
SO ORDERED.
c. Provision of Remedies
1. G.R. No. L-31156 February 27, 1976 Code, as amended. However, upon the effectivity of Republic

31
Act (R.A.) No. 8240on January 1, 1997, a shift from ad valorem tax
PEPSI-COLA BOTTLING COMPANY OF THE PHILIPPINES, system to the specific tax system was adopted imposing excise
INC., plaintiff-appellant, taxes on cigarette brands under Section 142 thereof, now
vs. renumbered as Section 145 of the 1997 Tax Code, stating the
MUNICIPALITY OF TANAUAN, LEYTE, THE MUNICIPAL MAYOR, ET following pertinent provision:
AL., defendant appellees.
The excise tax from any brand of cigarettes within the next three
(REFER TO NUMBER 1 CASE under Nature of Taxation) (3) years from the effectivity of R.A. No. 8240 shall not be lower
than the tax, which is due from each brand on October 1, 1996. x
2. G.R. Nos. 167274-75 September 11, 2013
x x The rates of excise tax on cigars and cigarettes under
COMMISSIONER OF INTERNAL REVENUE, Petitioner, paragraphs (1), (2), (3) and (4) hereof, shall be increased by
vs. twelve percent (12%) on January 1, 2000.
FORTUNE TOBACCO CORPORATION, Respondent.
Upon the Commissioner’s recommendation, the Secretary of
x-----------------------x Finance, issued Revenue Regulations (RR) No. 17-99 dated
December 16,1999 for the purpose of implementing the provision
G.R. No. 192576 for a 12% increase of excise tax on, among others, cigars and
cigarettes packed by machines by January 1, 2000. RR No. 17-99
FORTUNE TOBACCO CORPORATION, Petitioner, provides that the new specific tax rate for any existing brand of
vs. cigars, cigarettes packed by machine x x x shall not be lower than
COMMISSIONER OF INTERNAL REVENUE, Respondent. the excise tax that is actually being paid prior to January 1, 2000.

DECISION FTC paid excise taxes on all its cigarettes manufactured and
removed from its place of production for the following period:
VELASCO, JR., J.:

Fortune Tobacco Corporation (FTC), as petitioner in G.R. No. PERIOD PAYMENT

192576,1 assails and seeks the reversal of the Decision of the Court
of Tax Appeals (CTA) En Banc dated March 12, 2010, as effectively January 1, 2000 to ₱585,705,250.00
reiterated in a Resolution of June 11, 2010, both rendered in C.T.A. January 31, 2000
EB No. 530 entitled Fortune Tobacco Corporation v. Commissioner
of Internal Revenue. The assailed issuances affirmed the
Resolution of the CTA First Division dated June 4, 2009, denying the February 1, 2000 to ₱19,366,783,535.00
Motion for Issuance of Additional Writ of Execution filed by herein December 31, 2001
petitioner in CTA Case Nos. 6365, 6383 & 6612, and the Resolution
dated August 10, 2009 which denied its Motion for January 1, 2002 to ₱11,359,578,560.00
Reconsideration. December 31, 2002

The present appellate proceedings traces its origin from and finds
FTC subsequently sought administrative redress for refund before
context in the July 21, 2008 Decision2 of the Court in G.R. Nos.
the Commissioner on the following dates:
167274-75, an appeal thereto interposed by the Commissioner of
Internal Revenue (BIR Commissioner) from the consolidated
Decision and Resolution issued by the Court of Appeals on PERIOD ADMINISTRATIVE AMOUNT
September 28, 2004 and March 1, 2005, respectively, in CA-G.R. FILING OF CLAIM CLAIMED
SP Nos. 80675 and 83165. The decretal part of the July 21, 2008
Decision reads: January 1, 2000 to February 7, 2000 ₱35,651,410.00
January 31, 2000
WHEREFORE, the petition is DENIED. The Decision of the Court of
Appeals in CA G.R. SP No. 80675, dated 28 September 2004,and
its Resolution, dated 1 March 2005, are AFFIRMED. No February 1, 2000 Various claims filed from ₱644,735,615.00
pronouncement as to costs. to December 31, March 21, 2000 –
2001 January 28, 2002
SO ORDERED.3 (Emphasis supplied.)

The antecedent facts, as summarized by the CTA in its adverted January 1, 2002 to February 3, 2003 ₱355,385,920.00
March 12, 2010 Decision, are as follows: December 31, 2002

FTC (herein petitioner Fortune Tobacco Corporation) is engaged (CTA En Banc Decision,
in manufacturing or producing cigarette brands with tax rate Annex "A," Petition, pp. 2-4)
classification based on net retail price prescribed as follows:
2. Since the claim for refund was not acted upon, petitioner filed
Brand Tax Rate on December 11, 2001 and January 30, 2002, respectively,
Petitions for Review before the Court of Tax Appeals (CTA)
Champion M 100 ₱1.00
docketed as CTA Case Nos. 6365 and 6383 questioning the
validity of Revenue Regulations No.17-99 with claims for refund in
the amounts ₱35,651,410.00 and ₱644,735,615.00, respectively.
Salem M 100 ₱1.00

These amounts represented overpaid excise taxes for the periods

Salem M King ₱1.00 from January 1, 2000 to January 31, 2000 and February 1, 2000 to
December 31, 2001, respectively (Ibid., pp. 4-5).
Camel F King ₱1.00
3. In separate Decision dated October 21, 2002, the CTA in Division
ordered the Commissioner of Internal Revenue (respondent
Camel Lights Box 20’s ₱1.00
herein) to refund to petitioner the erroneously paid excise taxes in
the amounts of ₱35,651,410.00 for the period covering January 1,
Camel Filters Box 20’s ₱1.00 2000 to January 31, 2000 (CTA Case No. 6365) and
₱644,735,615.00 for the period February 1, 2000 to December 31,
Winston F King ₱5.00 2001 (CTA Case No.6383) (Ibid.).

4. Respondent filed a motion for reconsideration of the Decision

Winston Lights ₱5.00
dated October 21, 2002 covering CTA Case Nos. 6365 and
6383which was granted in the Resolution dated July 15, 2003.
Prior to January 1, 1997, the aforesaid cigarette brands were
subject to ad-valorem tax under Section 142 of the 1977 Tax
5. Subsequently, petitioner filed another petition docketed as CTA
Case No. 6612 questioning the validity of Revenue Regulations
No.17-99 with a prayer for the refund of overpaid excise tax
amounting to₱355,385,920.00, covering the period from January
1, 2002 to December 31, 2002 (Ibid., p. 5).
6. Petitioner thereafter filed a consolidated Motion for
Reconsideration of the Resolution dated July 15, 2003 (Ibid., pp. 5-
6).
7. The CTA in Division issued Resolution dated November 4,2003
which reversed the Resolution dated July 15, 2003 and ordered
respondent to refund to petitioner the amounts of 35,651,410.00
for the period covering January 1 to January 31, 2000 and
₱644,735,615.00 for the period covering February 1, 2000 to
December 31, 2001, or in the aggregate amount of
₱680,387,025.00, representing erroneously paid excise taxes (Ibid.,
p. 6).
8. In its Decision dated December 4, 2003, the CTA in Division in
Case No. 6612 declared RR No. 17-99 invalid and contrary to
Section 145 of the 1997 National Internal Revenue Code (NIRC).
The Court ordered respondent to refund to petitioner the amount
of ₱355,385,920.00 representing overpaid excise taxes for the
period covering January 1, 2002 to December 21, 2002 (Ibid.)
9. Respondent filed a motion for reconsideration of the Decision
dated December 4, 2003 but this was denied in the Resolution
dated March 17, 2004 (Ibid.)
10. On December 10, 2003, respondent Commissioner filed a
Petition for Review with the Court of Appeals (CA) questioning the
CTA Resolution dated November 4, 2003 which was issued in CTA
Case Nos. 6365 and 6383. The case was docketed as CA-G.R. SP
No.80675 (Ibid.).
11. On April 28, 2004, respondent Commissioner filed another
appeal before the CA questioning the CTA Decision dated
December 4, 2003 issued in CTA Case No. 6612. The case was
docketed as CA-G.R. SP No. 83165 (Ibid., p. 7).
12. Thereafter, petitioner filed a Consolidated Motion for
Execution Pending Appeal before the CTA for CTA Case Nos. 6365
and 6383 and an Amended Motion for Execution Pending Appeal
for CTA Case No. 6612 (Ibid.).
13. The motions were denied in the CTA Resolutions dated August
2, 2004 and August 3, 2004, respectively. The CTA in Division
pointed out that Section 12, Rule 43 of the1997 Rules of Civil
Procedure should be interpreted with Section 18 of R.A. 1125
which provides that CTA rulings become final and conclusive only
where there is no perfected appeal. Considering that respondent
filed an appeal with the CA, the CTA in Division’s rulings granting
the amounts of ₱355,385,920.00 and ₱680,387,025.00 were not yet
final and executory (Ibid.).
14. In the consolidated CA Decision dated September 28,2004
issued in CA-G.R. SP Nos. 80675 (CTA Case Nos. 6365 and6383)
and 83165 (CTA Case No. 6612), the appellate court denied
respondent’s petitions and affirmed petitioner’s refund claims in
the amounts of ₱680,387,025.00 (CTA Case Nos. 6365 and 6383)
and₱355,385,920.00 (CTA Case No. 6612), respectively (Ibid., p. 8).
15. Respondent filed a motion for reconsideration of the CA
Decision dated September 28, 2004 but this was denied in the
CA’s Resolution dated March 1, 2005 (Ibid.).
16. Respondent, filed a Petition for Review on Certiorari docketed
as G.R. Nos. 167274-75 on May 4, 2005 before the Honorable
Court. On June 22, 2005, a Supplemental Petition for Review was
filed and the petitions were consolidated (Ibid.).
17. In its Decision dated July 21, 2008 in G.R. Nos. 167274-75, the
Honorable Court affirmed the findings of the CA granting
petitioner’s claim for refund. The dispositive portion of said
Decision reads:
WHEREFORE, the petition is DENIED. The Decision of the Court of
Appeals in CA-G.R. SP No.80675, dated 28 September 2004, and
its Resolution, dated 1 March 2005, are AFFIRMED. No
pronouncement as to costs.
SO ORDERED.
Commissioner of Internal
32
Revenue vs. Fortune Tobacco
Corporation, 559 SCRA 160
(2008)
18. On January 23, 2009, petitioner filed a motion for execution
praying for the issuance of a writ of execution of the Decision of
the Honorable Court in G.R. Nos. 167274-75 dated July 21, 2008
which was recorded in the Book of Entries of Judgments on
November 6, 2008(Ibid., p. 10).
Petitioner’s prayer was for the CTA to order the BIR to pay/refund
the amounts adjudged by the CTA, as follows:
a) CTA Case No. 6612 under the Decision 04 December 2003 – the
amount of Three Hundred Fifty Five Million Three Hundred Eighty
Five Thousand Nine Hundred Twenty Pesos (₱355,385,920.00).
b) CTA Case Nos. 6365 and 6383 under the Decisions dated 21
October 2002 and Resolution dated 04 November 2003 – the
amount of Six Hundred Eighty Million Three Hundred Eighty Seven
Thousand Twenty Five Pesos (₱680,387,025.00).
(Petition, p. 11)
19. On April 14, 2009, the CTA issued a Writ of Execution, which
reads:
You are hereby ORDERED TO REFUND in favor of the petitioner
FORTUNE TOBACCO CORPORATION, pursuant to the Supreme
Court Decision in the above-entitled case (SC G.R. 167274-
75),dated July 21, 2008, which has become final and executory
on November 6, 2008, by virtue of the Entry of Judgment by the
Supreme Court on said dated, which reads as follows:
xxxx
the amounts of ₱35,651,410.00 (C.T.A Case No. 6365) and
₱644,735,615.00 (C.T.A Case No. 6383) or a total of
₱680,387,025.00 representing petitioners’ erroneously paid excise
taxes for the periods January 1-31, 2000 and February 1, 2000 to
December 31, 2001,respectively under CA G.R. SP No. 80675
(C.T.A. Case No. 6365 and C.T.A. Case No. 6383).
(CTA – 1st Division
Resolution dated June 04,
2009, pp. 2-3)
20. On April 21, 2009, petitioner filed a motion for the issuance of
an additional writ of execution praying that the CTA order the
Commissioner of Internal Revenue to pay petitioner the amount
of Three Hundred Fifty-Five Million Three Hundred Eighty Five
Thousand Nine Hundred Twenty Pesos (₱355,385,920.00)
representing the amount of tax to be refunded in C.T.A. Case No.
6612 under its Decision dated December 4, 2003 and affirmed by
the Honorable Court in its Decision dated July 21, 2008 (Petition,
p. 12, CTA Decision dated March 12, 2010, supra, p. 10).
21. In the CTA Resolution dated June 4, 2009, the CTA denied
petitioner’s Motion for the Issuance of Additional Writ of Execution
(Ibid., p. 11).
22. Petitioner filed a motion for reconsideration of the Resolution
dated June 4, 2009, but this was denied in the CTA Resolution
dated August 10, 2009 (Ibid.).
The dispositive portion of the Resolution reads:
WHEREFORE, premises considered, the instant" Motion for
Reconsideration" is hereby DENIED for lack of merit.
23. Aggrieved by the Decision, petitioner filed a petition for review
before the CTA En Banc docketed as CTA EB Case No. 530,raising
the following arguments, to wit:
The Honorable Court of Tax Appeals seriously erred contrary to law
and jurisprudence when it held in the assailed decision and
resolution that petitioner Fortune Tobacco Corporation is not
entitled to the writ of execution covering the decision in CTA Case
No. 6612.
The Decision of the Court of Tax Appeals in CTA Case Nos. 6365,
6383 and 6612 has become final and executory.
The Decision of the Honorable Supreme Court in GR Nos. 167274-
75 covers both CA GR SP No. 80675 and 83165.
24. The CTA En Banc, in the Decision dated March 12,
2010,dismissed said petition for review. The dispositive portion of
said Decision reads:
WHEREFORE, premises considered, the Petition for Review is
DISMISSED. The Resolutions dated June 4,2009 and August 10, 2009
are AFFIRMED.
SO ORDERED.
(Annex "A," Petition, p. 16)
25. Petitioner filed a Motion for Leave to file Motion for
Reconsideration with attached Motion for Reconsideration but
this was denied in the CTA En Banc’s Resolution dated June 11,
2010. The dispositive portion of said Resolution reads:
WHEREFORE, premises considered, petitioner’s Motion for Leave
to file attached Motion for Reconsideration and its Motion for
Reconsideration are hereby DENIED for lack of merit.
SO ORDERED.4 (Emphasis supplied.)
Undeterred by the rebuff from the CTA, petitioner FTC has come
to this Court via a petition for review, the recourse docketed as
G.R. 192576,thereat praying in essence that an order issue (a)
directing the CTA to issue an additional writ of execution directing
the Bureau of Internal Revenue(BIR) to pay FTC the amount of tax
refund (₱355,385,920.00) as adjudged in CTA Case No. 6612 and
(b) clarifying that the Court’s Decision in G.R. Nos. 167274-75
applies to the affirmatory ruling of the CA in CA G.R. S₱80675 and
CA G.R. SP No. 83165. FTC predicates its instant petition on two (2)
stated grounds, viz.:
I
The Decision of the Honorable Supreme Court in S.C. GR
Nos.167274-75, which has become final and executory, affirmed
the Decision of the Court of Tax Appeals in CTA Case Nos. 6365,
6383 and 6612 and to the Decision of the Court of Appeals in CA
G.R. SP No. 80675 and CAG.R. SP No. 83165.
II
The writ of execution prayed for and pertaining to CTA Case
No.6612 and CA G.R. SP No. 83165 is consistent with the decision
of the Supreme Court in GR Nos. 167274-75.
The petition is meritorious. But before delving on the merits of this
recourse, certain undisputed predicates have to be laid and
basic premises restated to explain the consolidation of G.R. Nos.
167274-75 and G.R. No.192576, thus:
1. As may be recalled, FTC filed before the CTA three (3) separate
petitions for refund covering three different periods involving
varying amounts as hereunder indicated:
a) CTA Case No. 6365 (Jan. 1 to Jan. 31, 2000) for ₱35,651,410.00;
b) CTA Case No. 6383 (Feb. 1, 2000 to Dec. 31, 2001) for
₱644,735,615.00; and
c) CTA Case No. 6612 (Jan. 1 to Dec. 31, 2002) for 355,385,92
In three (3) separate decisions/resolutions, the CTA found the
claims for refund for the amounts aforestated valid and thus
ordered the payment thereof.
2. From the adverse ruling of the CTA in the three (3) cases, the BIR
Commissioner went to the CA on a petition for review assailing in
CA-G.R.SP No. 80675 the CTA decision/resolution pertaining to
consolidated CTA Case Nos. 6365 & 6383. A similar petition,
docketed as CA G.R. SP No.83165, was subsequently filed assailing
the CTA decision/resolution on CTA Case No. 6612.
3. Eventually, the CA, by Decision dated September 4, 2004,
denied the Commissioner’s consolidated petition for review. The
appellate Court also denied the Commissioner’s motion for
reconsideration on March 1,2005.
4. It is upon the foregoing state of things that the Commissioner
came to this Court in G.R. Nos. 167274-75 to defeat FTC’s claim for
refund thus granted initially by the CTA and then by the CA in CA-
G.R. SP No. 80675and CA-G.R. SP No. 83165.
By Decision dated July 21, 2008, the Court found against the
33
Commissioner, disposing as follows:
WHEREFORE, the petition is DENIED. The Decision of the Court of
Appeals in CA G.R. SP No. 80675, dated 28 September 2004,and
its Resolution, dated 1 March 2005, are AFFIRMED. No
pronouncement as to costs.
SO ORDERED.5 (Emphasis supplied.)
From the foregoing narration, two critical facts are at once
apparent. First , the BIR Commissioner came to this Court on a
petition for review in G.R. Nos. 167274-75 to set aside the
consolidated decision of the CA in CA-G.R. SP No. 80675 and CA-
G.R. SP No. 83165. Second, while the Court’s Decision dated July
21, 2008 in G.R. Nos. 167274-75 denied the Commissioner’s petition
for review, necessarily implying that the CA’s appealed
consolidated decision is affirmed in toto, the fallo of that
decidendi makes no mention or even alludes to the appealed CA
decision in CA-G.R. No. 83165, albeit the main decision’s recital of
facts made particular reference to that appealed CA decision. In
fine, there exists an apparent in consistency between the
dispositive portion and the body of the main decision, which
ideally should have been addressed before the finality of the said
decision.
Owing to the foregoing aberration, but cognizant of the fact that
the process of clarifying the dispositive portion in G.R. Nos. 167274-
75 should be acted upon in the main case, the Court, by
Resolution6 dated February 25,2013 ordered the consolidation of
this petition (G.R. No. 192576) with G.R. Nos. 167274-75, to be
assigned to any of the members of the Division who participated
in the rendition of the decision.
Now to the crux of the controversy.
Petitioner FTC posits that the CTA should have issued the desired
additional writ of execution in CTA Case No. 6612 since the body
of the Decision of this Court in G.R. Nos. 167274-75 encompasses
both CA G.R. Case No. 80675 which covers CTA Case Nos. 6365
and 6383 and CA G.R. Case No. 83165 which embraces CTA Case
No. 6612. While the fallo of the Decision dated July 21, 2008 in G.R.
Case Nos. 167274-75 did not indeed specifically mention CA G.R.
SP No. 83165, petitioner FTC would nonetheless maintain that such
a slip is but an inadvertent omission in the fallo. For the text of the
July 21, 2008 Decision, FTC adds, clearly reveals that said CA case
was intended to be included in the disposition of the case.
Respondent Commissioner, on the other hand, argues that per
the CTA, no reversible error may be attributed to the tax court in
rejecting, without more, the prayer for the additional writ of
execution pertaining to CTA Case No. 6612, subject of CA G.R. SP
No. 83165. For the purpose, the Commissioner cited a catena of
cases on the limits of a writ of execution. It is pointed out that such
writ must conform to the judgment to be executed; its
enforcement may not vary the terms of the judgment it seeks to
enforce, nor go beyond its terms. As further asseverated,
"whatever may be found in the body of the decision can only be
considered as part of the reasons or conclusions of the court and
while they may serve as guide or enlightenment to determine the
ratio decidendi, what is controlling is what appears in the
dispositive part of the decision."7
Respondent Commissioner’s posture on the tenability of the CTA’s
assailed denial action is correct. As it were, CTA did no more than
simply apply established jurisprudence that a writ of execution
issued by the court of origin tasked to implement the final decision
in the case handled by it cannot go beyond the contents of the
dispositive portion of the decision sought to be implemented. The
execution of a judgment is purely a ministerial phase of
adjudication. The executing court is without power its own, to
tinker let alone vary the explicit wordings of the dispositive portion,
as couched.
But the state of things under the premises ought not to remain
uncorrected. And the BIR cannot plausibly raise a valid objection
for such approach. That bureau knew where it was coming from
when it appealed, first before the CA then to this Court, the award
of refund to FTC and the rationale underpinning the award. It
cannot plausibly, in all good faith, seek refuge on the basis of slip
on the formulation of the fallo of a decision to evade a duty. On
the other hand, FTC has discharged its burden of establishing its
entitlement to the tax refund in the total amount indicated in its
underlying petitions for refund filed with the CTA. The successive
favorable rulings of the tax court, the appellate court and finally
this Court in G.R. Nos. 167274-75 say as much. Accordingly, the
Court, in the higher interest of justice and orderly proceedings
should make the corresponding clarification on the fallo of its July
21, 2008 Decision in G.R. Case Nos.162274-75. It is an established
rule that when the dispositive portion of a judgment, which has
meanwhile become final and executory, contains a clerical error
or an ambiguity arising from a inadvertent omission, such error or
ambiguity may be clarified by reference to the body of the
decision itself.
After a scrutiny of the body of the aforesaid July 21, 2008 Decision,
the Court finds it necessary to render a judgment nunc pro tunc
and address an error in the fallo of said decision. The office of a
judgment nunc pro tunc is to record some act of the court done
at a former time which was not then carried into the record, and
the power of a court to make such entries is restricted to placing
upon the record evidence of judicial action which has actually
been taken.9 The object of a judgment nunc pro tunc is not the
rendering of a new judgment and the ascertainment and
determination of new rights, but is one placing in proper form on
the record, that has been previously rendered, to make it speak
the truth, so as to make it show what the judicial action really was,
not to correct judicial errors, such as to render a judgment which
the court ought to have rendered, in place of the one it did
erroneously render, not to supply non-action by the court,
however erroneous the judgment may have been.10 The Court
would thus have the record reflect the deliberations and
discussions had on the issue. In this particular case it is a correction
of a clerical, not a judicial error. The body of the decision in
question is clear proof that the fallo must be corrected, to properly
convey the ruling of this Court.
We thus declare that the dispositive portion of said decision
should be clarified to include CA G.R. SP No. 83165 which affirmed
the December 4,2003 Decision of the Court of Tax Appeals in CTA
Case No. 6612, for the following reasons, heretofore summarized:
1. The petition for review on certiorari in G.R. Nos. 167274-75filed
by respondent CIR sought the reversal of the September 28,
2004Decision of the Court of Appeals rendered in the
consolidated cases of CA-G.R. SP No. 80675 and CA-G.R. SP No.
83165, thus:Hence, this petition for review on certiorari under Rule
45 of the Rules of Court which seeks the nullification of the Court
of Appeals’ (1)Decision promulgated on September 28, 2004 in
CA-G.R. SP No. 80675and CA-G.R. SP No. 83165, both entitled
"Commissioner of Internal Revenue vs. Fortune Tobacco
Corporation," denying the CIR’s petition and affirming the assailed
decisions and resolutions of the Court of Tax Appeals (CTA) in CTA
Cases Nos. 6365, 6383 and 6612; and (2)Resolution dated March
1, 2005 denying petitioner’s motion for reconsideration of the said
decision."11
Earlier on, it was made clear that respondent CIR questioned the
Decision of the CTA dated October 21, 2002 in CTA Case Nos.
6365 and 6383 in CA G.R. SP No. 80675 before the Court of
Appeals. In CA G.R. SP No. 83165, the Commissioner also assailed
the Decision of the CTA dated December 4, 2003 in CTA Case No.
66l2 also before the same appellate court. The two CA cases were
later consolidated. Since the appellate court rendered its
September 28, 2004 Decision in the consolidated cases of CAG.R.
SP Nos. 80675 and 83165, what reached and was challenged
before this Court in G.R. Nos. 167274-75 is the ruling of the Court of
Appeals in both cases. When this Court rendered its July 21, 2008
Decision, the ruling necessarily embraced both CA G.R. SP Case
Nos. 80675 and 83165 and adjudicated the respective rights of the
parties. Clearly then, there was indeed an inadvertence in not
specifying in the fallo of our July 21, 2008Decision that the
September 28, 2004 CA Decision included not only CAG.R. SP No.
80675 but also CA G.R. SP No. 83165 since the two cases were
merged prior to the issuance of the September 28, 2004 Decision.
Given the above perspective, the inclusion of CA G.R. SP Case
No.83165 in the fallo of the Decision dated July 21, 2008 is very
much in order and is in keeping with the imperatives of fairness.
2. The very contents of the body of the Decision dated July
21,2008 rendered by this Court in G.R. Nos. 167274-75 undoubtedly
reveal that both CA G.R. SP No. 80675 and CA G.R. SP No. 83165
were the subject matter of the petition therein. And as FTC would
point out at every turn, the Court’s Decision passed upon and
decided the merits of the September 28,2004 Decision of the
Court of Appeals in the consolidated cases of CA G.R.SP Case
34
Nos. 80675 and 83165 and necessarily CA G.R. SP No. 83165 was
included in our disposition of G.R. Nos. 167274-75. We quote the
pertinent portions of the said decision:
The following undisputed facts, summarized by the Court of
Appeals, are quoted in the assailed Decision dated 28 September
2004:
CAG.R. SP No. 80675
xxxx
Petitioner FTC is the manufacturer/producer of, among others, the
following cigarette brands, with tax rate classification based on
net retail price prescribed by Annex "D" to R.A. No. 4280, to wit:
Brand Tax Rate
Champion M 100 ₱1.00
Salem M 100 ₱1.00
Salem M King ₱1.00
Camel F King ₱1.00
Camel Lights Box 20’s ₱1.00
Camel Filters Box 20’s ₱1.00
Winston F Kings ₱5.00
Winston Lights ₱5.00
Immediately prior to January 1, 1997, the above-mentioned
cigarette brands were subject to ad valorem tax pursuant to then
Section142 of the Tax Code of 1977, as amended. However, on
January 1, 1997,R.A. No. 8240 took effect whereby a shift from the
ad valorem tax (AVT)system to the specific tax system was made
and subjecting the aforesaid cigarette brands to specific tax
under Section 142 thereof, now renumbered as Sec. 145 of the Tax
Code of 1997, pertinent provisions of which are quoted thus:
xxxx
The rates of excise tax on cigars and cigarettes under paragraphs
(1), (2) (3) and (4) hereof, shall be increased by twelve percent
(12%) on January 1, 2000. (Emphasis supplied.)
xxxx
To implement the provisions for a twelve percent (12%) increase
of excise tax on, among others, cigars and cigarettes packed by
machines by January 1, 2000, the Secretary of Finance, xxx issued
Revenue Regulations [RR] No. 17-99, dated December 16, 1999,
which provides the increase on the applicable tax rates on cigar
and cigarettes x x x.
[tax rates deleted]
Revenue Regulations No. 17-99 likewise provides in the last
paragraph of Section 1 thereof, "(t)hat the new specific tax rate
for any existing brand of cigars, cigarettes packed by machine,
distilled spirits, wines and fermented liquor shall not be lower than
the excise tax that is actually being paid prior to January 1, 2000."
For the period covering January 1-31, 2000, petitioner allegedly
paid specific taxes on all brands manufactured and removed in
the total amounts of ₱585,705,250.00.
On February 7, 2000, petitioner filed with respondent’s Appellate
Division a claim for refund or tax credit of its purportedly overpaid
excise tax for the month of January 2000 in the amount of
₱35,651,410.00.
On June 21, 2001, petitioner filed with respondent’s Legal Service
a letter dated June 20, 2001 reiterating all the claims for refund/tax
credit of its overpaid excise taxes filed on various dates, including
the present claim for the month of January 2000 in the amount of
₱35,651,410.00.
As there was no action on the part of the respondent, petitioner
filed the instant petition for review with this Court on December
11, 2001,in order to comply with the two-year period for filing a
claim for refund.
xxxx
CA G.R. SP No. 83165
The petition contains essentially similar facts, except that the said
case questions the CTA’s December 4, 2003 decision in CTA Case
No.6612 granting respondent’s claim for refund of the amount of
₱355,385,920.00 representing erroneously or illegally collected
specific taxes covering the period January 1, 2002 to December
31, 2002, as well as its March 17, 2004 Resolution denying a
reconsideration thereof.
xxxx
However, on consolidated motions for reconsideration filed by the
respondent in CTA Case Nos. 6363 and 6383, the July 15, 2002
resolution was set aside, and the Tax Court ruled, this time with a
semblance of finality, that the respondent is entitled to the refund
claimed. Hence, in are solution dated November 4, 2003, the tax
court reinstated its December 21, 2002 Decision and disposed as
follows:
WHEREFORE, our Decisions in CTA Case Nos.6365 and 6383 are
hereby REINSTATED. Accordingly, respondent is hereby ORDERED
to REFUND petitioner the total amount of ₱680,387,025.00
representing erroneously paid excise taxes for the period January
1, 2000 to January 31, 2000 and February 1,2000 to December 31,
2001.
SO ORDERED.
Meanwhile, on December 4, 2003, the CTA rendered a decision in
CTA Case No. 6612 granting the prayer for the refund of the
amount of ₱355,385,920.00 representing overpaid excise tax for
the period covering January 1, 2002 to December 31, 2002. The
tax court disposed of the case as follows:
IN VIEW OF THE FOREGOING, the Petition for Review is GRANTED.
Accordingly, respondent is hereby ORDERED to REFUND to
petitioner the amount of ₱355,385,920.00 representing overpaid
excise tax for the period covering January 1, 2002 to December
31, 2002.
SO ORDERED.
Petitioner sought reconsideration of the decision, but the same
was denied in a Resolution dated March 17,
2004.1âwphi1(Emphasis supplied; citations omitted.)
The Commissioner appealed the aforesaid decisions of the CTA.
The petition questioning the grant of refund in the amount of
₱680,387,025.00 was docketed as CA-G.R. SP No. 80675, whereas
that assailing the grant of refund in the amount of ₱355,385,920.00
was docketed as CA-G.R. SP No. 83165. The petitions were
consolidated and eventually denied by the CA. The appellate
court also denied reconsideration in its Resolution dated 1 March
2005.
In its Memorandum 22 dated November 2006, filed on behalf of
the Commissioner, the Office of the Solicitor General (OSG) seeks
to convince the Court that the literal interpretation given by the
CTA and the CA of Section 145 of the Tax Code of 1997 (Tax
Code) would lead to a lower tax imposable on 1 January 2000
than that imposable during the transition period. Instead of an
increase of 12% in the tax rate effective on 1 January 2000 as
allegedly mandated by the Tax Code, the appellate court’s ruling
would result in a significant decrease in the tax rate by as much
as 66%.
xxxx
Finally, the OSG asserts that a tax refund is in the nature of a tax
exemption and must, therefore, be construed strictly against the
taxpayer, such as Fortune Tobacco. In its Memorandum dated 10
November 2006, Fortune Tobacco argues that the CTA and the
CA merely followed the letter of the law when they ruled that the
basis for the 12% increase in the tax rate should be the net retail
price of the cigarettes in the market as outlined in paragraph C,
35
sub par. (1)-(4), Section 145 of the Tax Code. The Commissioner
allegedly has gone beyond his delegated rule-making power
when he promulgated, enforced and implemented RR No. 17-
99,which effectively created a separate classification for
cigarettes based on the excise tax "actually being paid prior to
January 1, 2000."
xxxx
This entire controversy revolves around the interplay between
Section 145 of the Tax Code and RR 17-99. The main issue is an
inquiry into whether the revenue regulation has exceeded the
allowable limits of legislative delegation.
xxxx
Revenue Regulation 17-99, which was issued pursuant to the
unquestioned authority of the Secretary of Finance to promulgate
rules and regulations for the effective implementation of the Tax
Code, interprets the above-quoted provision and reflects the 12%
increase in excise taxes in the following manner:
[table on tax rates deleted]
This table reflects Section 145 of the Tax Code insofar as it
mandates a 12% increase effective on 1 January 2000 based on
the taxes indicated under paragraph C, sub-paragraph (1)-(4).
However, RR No.17-99 went further and added that "The new
specific tax rate for any existing brand of cigars, cigarettes
packed by machine, distilled spirits, wines and fermented liquor
shall not be lower than the excise tax that is actually being paid
prior to January 1, 2000."
Parenthetically, Section 145 states that during the transition period
,i.e., within the next three (3) years from the effectivity of the Tax
Code, the excise tax from any brand of cigarettes shall not be
lower than the tax due from each brand on 1 October 1996. This
qualification, however, is conspicuously absent as regards the 12%
increase which is to be applied on cigars and cigarettes packed
by machine, among others, effective on 1 January 2000. Clearly
and unmistakably, Section 145mandates a new rate of excise tax
for cigarettes packed by machine due to the 12% increase
effective on 1 January 2000 without regard to whether the
revenue collection starting from this period may turn out to be
lower than that collected prior to this date.
By adding the qualification that the tax due after the 12% increase
becomes effective shall not be lower than the tax actually paid
prior to 1January 2000, RR No. 17-99 effectively imposes a tax
which is the higher amount between the ad valorem tax being
paid at the end of the three (3)-year transition period and the
specific tax under paragraph C, sub-paragraph (1)-(4), as
increased by 12%—a situation not supported by the plain wording
of Section 145 of the Tax Code.
This is not the first time that national revenue officials had ventured
in the area of unauthorized administrative legislation.
In Commissioner of Internal Revenue v. Reyes, respondent was not
informed in writing of the law and the facts on which the
assessment of estate taxes was made pursuant to Section 228 of
the 1997 Tax Code, as amended by Republic Act (R.A.) No. 8424.
She was merely notified of the findings by the Commissioner, who
had simply relied upon the old provisions of the law and RR No.
12-85 which was based on the old provision of the law. The Court
held that in case of discrepancy between the law as amended
and the implementing regulation based on the old law, the
former necessarily prevails. The law must still be followed, even
though the existing tax regulation at that time provided for a
different procedure.
xxxx
In the case at bar, the OSG’s argument that by 1 January 2000,
the excise tax on cigarettes should be the higher tax imposed
under the specific tax system and the tax imposed under the
ad valorem tax system plus the 12% increase imposed by
paragraph 5, Section 145 of the Tax Code, is an unsuccessful
attempt to justify what is clearly an impermissible incursion into the
limits of administrative legislation. Such an interpretation is not
supported by the clear language of the law and is obviously only
meant to validate the OSG’s thesis that Section 145 of the Tax
Code is ambiguous and admits of several interpretations.
The contention that the increase of 12% starting on 1 January 2000
does not apply to the brands of cigarettes listed under Annex "D"
is likewise unmeritorious, absurd even. Paragraph 8, Section 145of
the Tax Code simply states that, "The classification of each brand
of cigarettes based on its average net retail price as of October
1, 1996, as set forth in Annex ‘D’, shall remain in force until revised
by Congress." This declaration certainly does not lend itself to the
interpretation given to it by the OSG. As plainly worded, the
average net retail prices of the listed brands under Annex "D,"
which classify cigarettes according to their net retail price into
low, medium or high, obviously remain the bases for the
application of the increase in excise tax rates effective on 1
January 2000.
The foregoing leads us to conclude that RR No. 17-99 is indeed
indefensibly flawed. The Commissioner cannot seek refuge in his
claim that the purpose behind the passage of the Tax Code is to
generate additional revenues for the government. Revenue
generation has undoubtedly been a major consideration in the
passage of the Tax Code. However, as borne by the legislative
record, the shift from the ad valorem system to the specific tax
system is likewise meant to promote fair competition among the
players in the industries concerned, to ensure an equitable
distribution of the tax burden and to simplify tax administration by
classifying cigarettes x x x into high, medium and low- priced
based on their net retail price and accordingly graduating tax
rates.
xxxx
WHEREFORE, the petition is DENIED. The Decision of the Court of
Appeals in CA G.R. SP No. 80675, dated 28 September 2004, and
its Resolution, dated 1 March 2005, are AFFIRMED. No
pronouncement as to costs.
SO ORDERED.12
The July 21, 2008 Decision in G.R. Nos. 167274-75 brings into sharp
focus the following facts and proceedings:
1. It specifically mentioned CA G.R. SP No. 80675 and CA G.R.SP
No. 83165 as the subject matter of the decision on p. 2 and p.
7,respectively.
2. It traced the history of CTA Case Nos. 6365 and 6383 from the
time the CTA peremptorily resolved the twin refund suits to the
appeal of the decisions thereat to the Court of Appeals via a
petition docketed as CA-G.R. SP No. 80675 and eventually to this
Court in G.R. Nos. 167274-75. It likewise narrated the events
connected with CTA Case No. 6612 to the time the decision in
said case was appealed to the Court of Appeals in CA-G.R.SP No.
83165, consolidated with CA G.R. SP No. 80675 and later decided
by the appellate court. It cited the appeal from the CA decision
by the BIR Commissioner to this Court in G.R. Nos. 167274-75.
3. It resolved in the negative the main issue presented in both CA-
G.R. SP No. 80675 and CA-G.R. SP No. 83165 as to whether or not
the last paragraph of Section 1 of Revenue Regulation No. 17-99
is in accordance with the pertinent provisions of Republic Act No.
8240, now incorporated in Section 145 of the Tax Code of 1997.
4. The very disposition in the fallo in G.R. Case Nos. 167274-75 that
"the petition is denied" and that the "Decision of the Court of
Appeals x x x dated 28 September 2004 and its Resolution dated
1 March 2005 are affirmed" reflects an intention that CA G.R. SP
No. 83165 should have been stated therein, being one of the
cases subject of the September 28, 2004 CA Decision.
The legality of Revenue Regulation No. 17-99 is the only
determinative issue resolved by the July 21, 2008 Decision which
was the very same issue resolved by the CA in the consolidated
CA-G.R. SP Nos.80675 and 83165 and exactly the same issue in
CTA Nos. 6365, 6383 and 6612.
From the foregoing cogent reasons, We conclude that CA-G.R.
SP No. 83165 should be included in the fallo of the July 21, 2008
decision.1âwphi1
It is established jurisprudence that "the only portion of the decision
which becomes the subject of execution and determines what is
ordained is the dispositive part, the body of the decision being
considered as the reasons or conclusions of the Court, rather than
36
its adjudication."13
In the case of Ong Ching Kian Chung v. China National Cereals
Oil and Foodstuffs Import and Export Corporation, the Court noted
two (2)exceptions to the rule that the fallo prevails over the body
of the opinion, viz:
(a) where there is ambiguity or uncertainty, the body of the
opinion may be referred to for purposes of construing the
judgment because the dispositive part of a decision must find
support from the decision’s ratio decidendi;
(b) where extensive and explicit discussion and settlement of the
issue is found in the body of the decision.14
Both exceptions obtain in the present case. We find that there is
an ambiguity in the fallo of Our July 21, 2008 Decision in G.R. Nos.
167274-75 considering that the propriety of the CA holding in CA-
G.R. SP No.83165 formed part of the core issues raised in G.R. Case
Nos. 167274-75, but unfortunately was left out in the all-important
decretal portion of the judgment. The fallo of Our July 21, 2008
Decision should, therefore, be correspondingly corrected.
For sure, the CTA cannot, as the Commissioner argues, be faulted
for denying petitioner FTC’s Motion for Additional Writ of Execution
filed in CTA Case Nos. 6365, 6383 and 6612 and for denying
petitioner’s Motion for Reconsideration for it has no power nor
authority to deviate from the wording of the dispositive portion of
Our July 21, 2008 Decision in G.R. Nos. 167274-75. To reiterate, the
CTA simply followed the all too familiar doctrine that "when there
is a conflict between the dispositive portion of the decision and
the body thereof, the dispositive portion controls irrespective what
appears in the body of the decision."15 Veering away from the
fallo might even be viewed as irregular and may give rise to a
charge of breach of the Code of Judicial Conduct. Nevertheless,
it behooves this Court for reasons articulated earlier to grant relief
to petitioner FTC by way of clarifying Our July 21, 2008 Decision.
This corrective step constitutes, in the final analysis, a continuation
of the proceedings in G.R. Case Nos. 167274-75. And it is the right
thing to do under the premises. If the BIR, or other government
taxing agencies for that matter, expects taxpayers to observe
fairness, honesty, transparency and accountability in paying their
taxes, it must, to borrow from BPI Family Savings Bank, Inc. v Court
of Appeals16 hold itself against the same standard in refunding
excess payments or illegal exactions. As a necessary corollary,
when the taxpayer’s entitlement to are fund stands undisputed,
the State should not misuse technicalities and legalisms, however
exalted, to keep money not belonging to it.17 As we stressed in
G.R. Nos. 167274-75, the government is not exempt from the
application of solutio indebiti, a basic postulate proscribing one,
including the State, from enriching himself or herself at the
expense of another.18So it must be here.
WHEREFORE, the petition is GRANTED. The dispositive portion of the
Court’s July 21, 2008 Decision in G.R. Nos. 167274-75 is corrected
to reflect the inclusion of CA G.R. SP No. 83165 therein. As
amended, the fallo of the aforesaid decision shall read:
WHEREFORE, the petition is DENIED. The Decision of the Court of
Appeals in the consolidated cases of CA- G.R. SP No. 80675 and
83165 dated 28 September 2004, and its Resolution, dated 1
March 2005, are AFFIRMED. No pronouncement as to costs.
The Decision of the Court of Tax Appeals (CTA) En Banc dated
March 12, 2010 and the Resolution dated June 11, 2010 in CTA EB
No. 530 entitled "Fortune Tobacco Corporation vs. Commissioner
of Internal Revenue" as well as the Resolutions dated June 4, 2009
and August 10, 2009which denied the Motion for Issuance of
Additional Writ of Execution of the CTA First Division in CTA Cases
Nos. 6365, 6383 and 6612 are SETASIDE. The CTA is ORDERED to
issue a writ of execution directing the respondent CIR to pay
petitioner Fortune Tobacco Corporation the amount of tax refund
of ₱355,385,920.00 as adjudged in CTA Case No. 6612.
SO ORDERED.
C. BASIS
I. Necessity Theory (Principle of Necessity)
a. Lifeblood Doctrine
1. G.R. No. L-22074 April 30, 1965
THE PHILIPPINE GUARANTY CO., INC., petitioner,
vs.
THE COMMISSIONER OF INTERNAL REVENUE and THE COURT OF TAX
APPEALS, respondents.
Josue H. Gustilo and Ramirez and Ortigas for petitioner.
Office of the Solicitor General and Attorney V.G. Saldajena for
respondents.
BENGZON, J.P., J.:
The Philippine Guaranty Co., Inc., a domestic insurance
company, entered into reinsurance contracts, on various dates,
with foreign insurance companies not doing business in the
Philippines namely: Imperio Compañia de Seguros, La Union y El
Fenix Español, Overseas Assurance Corp., Ltd., Socieded
Anonima de Reaseguros Alianza, Tokio Marino & Fire Insurance
Co., Ltd., Union Assurance Society Ltd., Swiss Reinsurance
Company and Tariff Reinsurance Limited. Philippine Guaranty
Co., Inc., thereby agreed to cede to the foreign reinsurers a
portion of the premiums on insurance it has originally underwritten
in the Philippines, in consideration for the assumption by the latter
of liability on an equivalent portion of the risks insured. Said
reinsurrance contracts were signed by Philippine Guaranty Co.,
Inc. in Manila and by the foreign reinsurers outside the Philippines,
except the contract with Swiss Reinsurance Company, which was
signed by both parties in Switzerland.
The reinsurance contracts made the commencement of the
reinsurers' liability simultaneous with that of Philippine Guaranty
Co., Inc. under the original insurance. Philippine Guaranty Co.,
Inc. was required to keep a register in Manila where the risks
ceded to the foreign reinsurers where entered, and entry therein
was binding upon the reinsurers. A proportionate amount of taxes
on insurance premiums not recovered from the original assured
were to be paid for by the foreign reinsurers. The foreign reinsurers
further agreed, in consideration for managing or administering
their affairs in the Philippines, to compensate the Philippine
Guaranty Co., Inc., in an amount equal to 5% of the reinsurance
premiums. Conflicts and/or differences between the parties under
the reinsurance contracts were to be arbitrated in Manila.
Philippine Guaranty Co., Inc. and Swiss Reinsurance Company
stipulated that their contract shall be construed by the laws of the
Philippines.
Pursuant to the aforesaid reinsurance contracts, Philippine
Guaranty Co., Inc. ceded to the foreign reinsurers the following
premiums:
1953 . . . . . . . . . . . . . . . . . . . . . P842,466.71
1954 . . . . . . . . . . . . . . . . . . . . . 721,471.85
Said premiums were excluded by Philippine Guaranty Co., Inc.
from its gross income when it file its income tax returns for 1953 and
1954. Furthermore, it did not withhold or pay tax on them.
Consequently, per letter dated April 13, 1959, the Commissioner
of Internal Revenue assessed against Philippine Guaranty Co., Inc.
withholding tax on the ceded reinsurance premiums, thus:
1953
Gross premium per investigation . . . . . . . . . .
Withholding tax due thereon at 24% . . . . . . . .
25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . .
Compromise for non-filing of withholding
income tax return . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL AMOUNT DUE & COLLECTIBLE . . . .
1954
37
Gross premium per investigation . . . . . . . . . . P780.880.68
Withholding tax due thereon at 24% . . . . . . . . P184,411.00
25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . . P184,411.00
Compromise for non-filing of withholding
100.00
income tax return . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL AMOUNT DUE & COLLECTIBLE . . . .
P234,364.00
==========
Philippine Guaranty Co., Inc., protested the assessment on the
ground that reinsurance premiums ceded to foreign reinsurers not
doing business in the Philippines are not subject to withholding tax.
Its protest was denied and it appealed to the Court of Tax
Appeals.
On July 6, 1963, the Court of Tax Appeals rendered judgment with
this dispositive portion:
IN VIEW OF THE FOREGOING CONSIDERATIONS, petitioner
Philippine Guaranty Co., Inc. is hereby ordered to pay to the
Commissioner of Internal Revenue the respective sums of
P202,192.00 and P173,153.00 or the total sum of P375,345.00 as
withholding income taxes for the years 1953 and 1954, plus the
statutory delinquency penalties thereon. With costs against
petitioner.
Philippine Guaranty Co, Inc. has appealed, questioning the
legality of the Commissioner of Internal Revenue's assessment for
withholding tax on the reinsurance premiums ceded in 1953 and
1954 to the foreign reinsurers.
Petitioner maintain that the reinsurance premiums in question did
not constitute income from sources within the Philippines because
the foreign reinsurers did not engage in business in the Philippines,
nor did they have office here.
The reinsurance contracts, however, show that the transactions or
activities that constituted the undertaking to reinsure Philippine
Guaranty Co., Inc. against loses arising from the original
insurances in the Philippines were performed in the Philippines. The
liability of the foreign reinsurers commenced simultaneously with
the liability of Philippine Guaranty Co., Inc. under the original
insurances. Philippine Guaranty Co., Inc. kept in Manila a register
of the risks ceded to the foreign reinsurers. Entries made in such
register bound the foreign resinsurers, localizing in the Philippines
the actual cession of the risks and premiums and assumption of
the reinsurance undertaking by the foreign reinsurers. Taxes on
premiums imposed by Section 259 of the Tax Code for the
privilege of doing insurance business in the Philippines were
payable by the foreign reinsurers when the same were not
recoverable from the original assured. The foreign reinsurers paid
Philippine Guaranty Co., Inc. an amount equivalent to 5% of the
ceded premiums, in consideration for administration and
management by the latter of the affairs of the former in the
P768,580.00
Philippines in regard to their reinsurance activities here. Disputes
and differences between the parties were subject to arbitration in
P184,459.00 the City of Manila. All the reinsurance contracts, except that with
Swiss Reinsurance Company, were signed by Philippine Guaranty
Co., Inc. in the Philippines and later signed by the foreign reinsurers
46,114.00 abroad. Although the contract between Philippine Guaranty Co.,
Inc. and Swiss Reinsurance Company was signed by both parties
in Switzerland, the same specifically provided that its provision
100.00 shall be construed according to the laws of the Philippines,
thereby manifesting a clear intention of the parties to subject
themselves to Philippine law.
Section 24 of the Tax Code subjects foreign corporations to tax on
P230,673.00 their income from sources within the Philippines. The word
========== "sources" has been interpreted as the activity, property or service
giving rise to the income. 1 The reinsurance premiums were
income created from the undertaking of the foreign reinsurance
companies to reinsure Philippine Guaranty Co., Inc., against
liability for loss under original insurances. Such undertaking, as
explained above, took place in the Philippines. These insurance
premiums, therefore, came from sources within the Philippines
and, hence, are subject to corporate income tax.
The foreign insurers' place of business should not be confused with
their place of activity. Business should not be continuity and
progression of transactions 2 while activity may consist of only a
single transaction. An activity may occur outside the place of
business. Section 24 of the Tax Code does not require a foreign
corporation to engage in business in the Philippines in subjecting
its income to tax. It suffices that the activity creating the income
is performed or done in the Philippines. What is controlling,
therefore, is not the place of business but the place
of activity that created an income.
Petitioner further contends that the reinsurance premiums are not
income from sources within the Philippines because they are not
specifically mentioned in Section 37 of the Tax Code. Section 37 is
not an all-inclusive enumeration, for it merely directs that the kinds
of income mentioned therein should be treated as income from
sources within the Philippines but it does not require that other
kinds of income should not be considered likewise.1äwphï1.ñët
The power to tax is an attribute of sovereignty. It is a power
emanating from necessity. It is a necessary burden to preserve the
State's sovereignty and a means to give the citizenry an army to
resist an aggression, a navy to defend its shores from invasion, a
corps of civil servants to serve, public improvement designed for
the enjoyment of the citizenry and those which come within the
State's territory, and facilities and protection which a government
is supposed to provide. Considering that the reinsurance
premiums in question were afforded protection by the
government and the recipient foreign reinsurers exercised rights
and privileges guaranteed by our laws, such reinsurance
premiums and reinsurers should share the burden of maintaining
the state.
Petitioner would wish to stress that its reliance in good faith on the
rulings of the Commissioner of Internal Revenue requiring no
withholding of the tax due on the reinsurance premiums in
question relieved it of the duty to pay the corresponding
withholding tax thereon. This defense of petitioner may free if from
the payment of surcharges or penalties imposed for failure to pay
the corresponding withholding tax, but it certainly would not
exculpate if from liability to pay such withholding tax The
Government is not estopped from collecting taxes by the mistakes
or errors of its agents.3
In respect to the question of whether or not reinsurance premiums
ceded to foreign reinsurers not doing business in the Philippines
are subject to withholding tax under Section 53 and 54 of the Tax
Code, suffice it to state that this question has already been
answered in the affirmative in Alexander Howden & Co., Ltd. vs.
Collector of Internal Revenue, L-19393, April 14, 1965.
Finally, petitioner contends that the withholding tax should be
computed from the amount actually remitted to the foreign
reinsurers instead of from the total amount ceded. And since it did
not remit any amount to its foreign insurers in 1953 and 1954, no
withholding tax was due.
The pertinent section of the Tax Code States:
Sec. 54. Payment of corporation income tax at source. — In the
case of foreign corporations subject to taxation under this Title not
engaged in trade or business within the Philippines and not having
any office or place of business therein, there shall be deducted
and withheld at the source in the same manner and upon the
same items as is provided in Section fifty-three a tax equal to
twenty-four per centum thereof, and such tax shall be returned
and paid in the same manner and subject to the same conditions
as provided in that section.
The applicable portion of Section 53 provides:
(b) Nonresident aliens. — All persons, corporations and general
copartnerships (compañias colectivas), in what ever capacity
acting, including lessees or mortgagors of real or personal
property, trustees acting in any trust capacity, executors,
administrators, receivers, conservators, fiduciaries, employers, and
all officers and employees of the Government of the Philippines
having the control, receipt, custody, disposal, or payment of
interest, dividends, rents, salaries, wages, premiums, annuities,
compensation, remunerations, emoluments, or other fixed or
38
determinable annual or periodical gains, profits, and income of
any nonresident alien individual, not engaged in trade or business
within the Philippines and not having any office or place of
business therein, shall (except in the case provided for in
subsection [a] of this section) deduct and withhold from such
annual or periodical gains, profits, and income a tax equal to
twelve per centum thereof: Provided That no deductions or
withholding shall be required in the case of dividends paid by a
foreign corporation unless (1) such corporation is engaged in
trade or business within the Philippines or has an office or place of
business therein, and (2) more than eighty-five per centum of the
gross income of such corporation for the three-year period ending
with the close of its taxable year preceding the declaration of
such dividends (or for such part of such period as the corporation
has been in existence)was derived from sources within the
Philippines as determined under the provisions of section thirty-
seven: Provided, further, That the Collector of Internal Revenue
may authorize such tax to be deducted and withheld from the
interest upon any securities the owners of which are not known to
the withholding agent.
The above-quoted provisions allow no deduction from the
income therein enumerated in determining the amount to be
withheld. According, in computing the withholding tax due on the
reinsurance premium in question, no deduction shall be
recognized.
WHEREFORE, in affirming the decision appealed from, the
Philippine Guaranty Co., Inc. is hereby ordered to pay to the
Commissioner of Internal Revenue the sums of P202,192.00 and
P173,153.00, or a total amount of P375,345.00, as withholding tax
for the years 1953 and 1954, respectively. If the amount of
P375,345.00 is not paid within 30 days from the date this
judgement becomes final, there shall be collected a surcharged
of 5% on the amount unpaid, plus interest at the rate of 1% a
month from the date of delinquency to the date of payment,
provided that the maximum amount that may be collected as
interest shall not exceed the amount corresponding to a period
of three (3) years. With costs againsts petitioner.
2. G.R. No. L-28896 February 17, 1988
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.
CRUZ, J.:
Taxes are the lifeblood of the government and so should be
collected without unnecessary hindrance On the other hand,
such collection should be made in accordance with law as any
arbitrariness will negate the very reason for government itself. It is
therefore necessary to reconcile the apparently conflicting
interests of the authorities and the taxpayers so that the real
purpose of taxation, which is the promotion of the common good,
may be achieved.
The main issue in this case is whether or not the Collector of
Internal Revenue correctly disallowed the P75,000.00 deduction
claimed by private respondent Algue as legitimate business
expenses in its income tax returns. The corollary issue is whether or
not the appeal of the private respondent from the decision of the
Collector of Internal Revenue was made on time and in
accordance with law.
We deal first with the procedural question.
The record shows that on January 14, 1965, the private
respondent, a domestic corporation engaged in engineering,
construction and other allied activities, received a letter from the
petitioner assessing it in the total amount of P83,183.85 as
delinquency income taxes for the years 1958 and 1959.1 On
January 18, 1965, Algue flied a letter of protest or request for
reconsideration, which letter was stamp received on the same
day in the office of the petitioner. 2 On March 12, 1965, a warrant
of distraint and levy was presented to the private respondent,
through its counsel, Atty. Alberto Guevara, Jr., who refused to
receive it on the ground of the pending protest. 3 A search of the
protest in the dockets of the case proved fruitless. Atty. Guevara
produced his file copy and gave a photostat to BIR agent Ramon
Reyes, who deferred service of the warrant. 4 On April 7, 1965,
Atty. Guevara was finally informed that the BIR was not taking any
action on the protest and it was only then that he accepted the
warrant of distraint and levy earlier sought to be served.5 Sixteen
days later, on April 23, 1965, Algue filed a petition for review of the
decision of the Commissioner of Internal Revenue with the Court
of Tax Appeals.6
The above chronology shows that the petition was filed
seasonably. According to Rep. Act No. 1125, the appeal may be
made within thirty days after receipt of the decision or ruling
challenged.7 It is true that as a rule the warrant of distraint and
levy is "proof of the finality of the assessment" 8 and renders
hopeless a request for reconsideration," 9 being "tantamount to
an outright denial thereof and makes the said request deemed
rejected." 10 But there is a special circumstance in the case at bar
that prevents application of this accepted doctrine.
The proven fact is that four days after the private respondent
received the petitioner's notice of assessment, it filed its letter of
protest. This was apparently not taken into account before the
warrant of distraint and levy was issued; indeed, such protest
could not be located in the office of the petitioner. It was only
after Atty. Guevara gave the BIR a copy of the protest that it was,
if at all, considered by the tax authorities. During the intervening
period, the warrant was premature and could therefore not be
served.
As the Court of Tax Appeals correctly noted," 11 the protest filed
by private respondent was not pro forma and was based on
strong legal considerations. It thus had the effect of suspending
on January 18, 1965, when it was filed, the reglementary period
which started on the date the assessment was received, viz.,
January 14, 1965. The period started running again only on April 7,
1965, when the private respondent was definitely informed of the
implied rejection of the said protest and the warrant was finally
served on it. Hence, when the appeal was filed on April 23, 1965,
only 20 days of the reglementary period had been consumed.
Now for the substantive question.
The petitioner contends that the claimed deduction of P75,000.00
was properly disallowed because it was not an ordinary
reasonable or necessary business expense. The Court of Tax
Appeals had seen it differently. Agreeing with Algue, it held that
the said amount had been legitimately paid by the private
respondent for actual services rendered. The payment was in the
form of promotional fees. These were collected by the Payees for
their work in the creation of the Vegetable Oil Investment
Corporation of the Philippines and its subsequent purchase of the
properties of the Philippine Sugar Estate Development Company.
Parenthetically, it may be observed that the petitioner had
Originally claimed these promotional fees to be personal holding
company income 12 but later conformed to the decision of the
respondent court rejecting this assertion.13 In fact, as the said
court found, the amount was earned through the joint efforts of
the persons among whom it was distributed It has been
established that the Philippine Sugar Estate Development
Company had earlier appointed Algue as its agent, authorizing it
to sell its land, factories and oil manufacturing process. Pursuant
to such authority, Alberto Guevara, Jr., Eduardo Guevara, Isabel
Guevara, Edith, O'Farell, and Pablo Sanchez, worked for the
formation of the Vegetable Oil Investment Corporation, inducing
other persons to invest in it.14 Ultimately, after its incorporation
largely through the promotion of the said persons, this new
corporation purchased the PSEDC properties.15 For this sale, Algue
received as agent a commission of P126,000.00, and it was from
this commission that the P75,000.00 promotional fees were paid to
the aforenamed individuals.16
There is no dispute that the payees duly reported their respective
shares of the fees in their income tax returns and paid the
corresponding taxes thereon.17 The Court of Tax Appeals also
found, after examining the evidence, that no distribution of
dividends was involved.18
The petitioner claims that these payments are fictitious because
most of the payees are members of the same family in control of
Algue. It is argued that no indication was made as to how such
payments were made, whether by check or in cash, and there is
not enough substantiation of such payments. In short, the
petitioner suggests a tax dodge, an attempt to evade a
legitimate assessment by involving an imaginary deduction.
We find that these suspicions were adequately met by the private
39
respondent when its President, Alberto Guevara, and the
accountant, Cecilia V. de Jesus, testified that the payments were
not made in one lump sum but periodically and in different
amounts as each payee's need arose. 19 It should be
remembered that this was a family corporation where strict
business procedures were not applied and immediate issuance of
receipts was not required. Even so, at the end of the year, when
the books were to be closed, each payee made an accounting
of all of the fees received by him or her, to make up the total of
P75,000.00. 20 Admittedly, everything seemed to be informal. This
arrangement was understandable, however, in view of the close
relationship among the persons in the family corporation.
We agree with the respondent court that the amount of the
promotional fees was not excessive. The total commission paid by
the Philippine Sugar Estate Development Co. to the private
respondent was P125,000.00. 21After deducting the said fees,
Algue still had a balance of P50,000.00 as clear profit from the
transaction. The amount of P75,000.00 was 60% of the total
commission. This was a reasonable proportion, considering that it
was the payees who did practically everything, from the
formation of the Vegetable Oil Investment Corporation to the
actual purchase by it of the Sugar Estate properties. This finding of
the respondent court is in accord with the following provision of
the Tax Code:
SEC. 30. Deductions from gross income.--In computing net
income there shall be allowed as deductions —
(a) Expenses:
(1) In general.--All the ordinary and necessary expenses paid or
incurred during the taxable year in carrying on any trade or
business, including a reasonable allowance for salaries or other
compensation for personal services actually rendered; ... 22
and Revenue Regulations No. 2, Section 70 (1), reading as follows:
SEC. 70. Compensation for personal services.--Among the
ordinary and necessary expenses paid or incurred in carrying on
any trade or business may be included a reasonable allowance
for salaries or other compensation for personal services actually
rendered. The test of deductibility in the case of compensation
payments is whether they are reasonable and are, in fact,
payments purely for service. This test and deductibility in the case
of compensation payments is whether they are reasonable and
are, in fact, payments purely for service. This test and its practical
application may be further stated and illustrated as follows:
Any amount paid in the form of compensation, but not in fact as
the purchase price of services, is not deductible. (a) An ostensible
salary paid by a corporation may be a distribution of a dividend
on stock. This is likely to occur in the case of a corporation having
few stockholders, Practically all of whom draw salaries. If in such a
case the salaries are in excess of those ordinarily paid for similar
services, and the excessive payment correspond or bear a close
relationship to the stockholdings of the officers of employees, it
would seem likely that the salaries are not paid wholly for services
rendered, but the excessive payments are a distribution of
earnings upon the stock. . . . (Promulgated Feb. 11, 1931, 30 O.G.
No. 18, 325.)
It is worth noting at this point that most of the payees were not in
the regular employ of Algue nor were they its controlling
stockholders. 23
The Solicitor General is correct when he says that the burden is on
the taxpayer to prove the validity of the claimed deduction. In
the present case, however, we find that the onus has been
discharged satisfactorily. The private respondent has proved that
the payment of the fees was necessary and reasonable in the
light of the efforts exerted by the payees in inducing investors and
prominent businessmen to venture in an experimental enterprise
and involve themselves in a new business requiring millions of
pesos. This was no mean feat and should be, as it was, sufficiently
recompensed.
It is said that taxes are what we pay for civilization society. Without
taxes, the government would be paralyzed for lack of the motive
power to activate and operate it. Hence, despite the natural
reluctance to surrender part of one's hard earned income to the
taxing authorities, every person who is able to must contribute his
share in the running of the government. The government for its
part, is expected to respond in the form of tangible and intangible 3. Real Estate dealer's tax for the fourth

benefits intended to improve the lives of the people and enhance
their moral and material values. This symbiotic relationship is the
rationale of taxation and should dispel the erroneous notion that
it is an arbitrary method of exaction by those in the seat of power.
But even as we concede the inevitability and indispensability of
taxation, it is a requirement in all democratic regimes that it be
exercised reasonably and in accordance with the prescribed
procedure. If it is not, then the taxpayer has a right to complain
and the courts will then come to his succor. For all the awesome
power of the tax collector, he may still be stopped in his tracks if
the taxpayer can demonstrate, as it has here, that the law has not
been observed.
We hold that the appeal of the private respondent from the
decision of the petitioner was filed on time with the respondent
court in accordance with Rep. Act No. 1125. And we also find that
the claimed deduction by the private respondent was permitted
under the Internal Revenue Code and should therefore not have
been disallowed by the petitioner.
ACCORDINGLY, the appealed decision of the Court of Tax
Appeals is AFFIRMED in toto, without costs.
SO ORDERED.
40
quarter of 1946 and the whole year of P207.50
1947 ===========
Manuel B. Pineda, who received the assessment, contested the
same. Subsequently, he appealed to the Court of Tax Appeals
alleging that he was appealing "only that proportionate part or
portion pertaining to him as one of the heirs."
After hearing the parties, the Court of Tax Appeals rendered
judgment reversing the decision of the Commissioner on the
ground that his right to assess and collect the tax has prescribed.
The Commissioner appealed and this Court affirmed the findings
of the Tax Court in respect to the assessment for income tax for
the year 1947 but held that the right to assess and collect the taxes
for 1945 and 1946 has not prescribed. For 1945 and 1946 the
returns were filed on August 24, 1953; assessments for both taxable
years were made within five years therefrom or on October 19,
1953; and the action to collect the tax was filed within five years
from the latter date, on August 7, 1957. For taxable year 1947,
however, the return was filed on March 1, 1948; the assessment
was made on October 19, 1953, more than five years from the
date the return was filed; hence, the right to assess income tax for
1947 had prescribed. Accordingly, We remanded the case to the
Tax Court for further appropriate proceedings.1

3. G.R. No. L-22734 September 15, 1967 In the Tax Court, the parties submitted the case for decision
without additional evidence.
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs. On November 29, 1963 the Court of Tax Appeals rendered
MANUEL B. PINEDA, as one of the heirs of deceased ATANASIO judgment holding Manuel B. Pineda liable for the payment
PINEDA, respondent. corresponding to his share of the following taxes:

BENGZON, J.P., J.: Deficiency income tax

On May 23, 1945 Atanasio Pineda died, survived by his wife, P135.8
1945
Felicisima Bagtas, and 15 children, the eldest of whom is Manuel 3
B. Pineda, a lawyer. Estate proceedings were had in the Court of
First Instance of Manila (Case No. 71129) wherein the surviving 1946 436.95
widow was appointed administratrix. The estate was divided
among and awarded to the heirs and the proceedings Real estate dealer's fixed tax
terminated on June 8, 1948. Manuel B. Pineda's share amounted 4th quarter of 1946 and
to about P2,500.00. whole year of 1947 P187.50

After the estate proceedings were closed, the Bureau of Internal The Commissioner of Internal Revenue has appealed to Us and
Revenue investigated the income tax liability of the estate for the has proposed to hold Manuel B. Pineda liable for the payment of
years 1945, 1946, 1947 and 1948 and it found that the all the taxes found by the Tax Court to be due from the estate in
corresponding income tax returns were not filed. Thereupon, the the total amount of P760.28 instead of only for the amount of taxes
representative of the Collector of Internal Revenue filed said corresponding to his share in the estate.1awphîl.nèt
returns for the estate on the basis of information and data
obtained from the aforesaid estate proceedings and issued an Manuel B. Pineda opposes the proposition on the ground that as
assessment for the following: an heir he is liable for unpaid income tax due the estate only up
to the extent of and in proportion to any share he received. He
1. Deficiency income tax relies on Government of the Philippine Islands v.
Pamintuan2 where We held that "after the partition of an estate,
1945 P135.83 heirs and distributees are liable individually for the payment of all
lawful outstanding claims against the estate in proportion to the
1946 436.95 amount or value of the property they have respectively received
from the estate."
1947 1,206.91 P1,779.69
We hold that the Government can require Manuel B. Pineda to
Add: 5% surcharge 88.98 pay the full amount of the taxes assessed.

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

1% monthly interest from
transferee of property belonging to the estate/taxpayer. As an
November 30, 1953 to April 15,
heir he is individually answerable for the part of the tax
1957 720.77
proportionate to the share he received from the inheritance.3 His
liability, however, cannot exceed the amount of his share.4
Compromise for late filing 80.00
As a holder of property belonging to the estate, Pineda is liable
Compromise for late payment 40.00 for he tax up to the amount of the property in his possession. The
reason is that the Government has a lien on the P2,500.00
received by him from the estate as his share in the inheritance, for
Total amount due unpaid income taxes4a for which said estate is liable, pursuant to
P2,707.44 the last paragraph of Section 315 of the Tax Code, which we
=========== quote hereunder:

P14.50 If any person, corporation, partnership, joint-account (cuenta en

2. Additional residence tax for 1945
=========== participacion), association, or insurance company liable to pay
the income tax, neglects or refuses to pay the same after
demand, the amount shall be a lien in favor of the Government
of the Philippines from the time when the assessment was made
by the Commissioner of Internal Revenue until paid with interest,
penalties, and costs that may accrue in addition thereto upon all
property and rights to property belonging to the taxpayer: . . .
By virtue of such lien, the Government has the right to subject the
property in Pineda's possession, i.e., the P2,500.00, to satisfy the
income tax assessment in the sum of P760.28. After such payment,
Pineda will have a right of contribution from his co-heirs,5 to
achieve an adjustment of the proper share of each heir in the
distributable estate.
All told, the Government has two ways of collecting the tax in
question. One, by going after all the heirs and collecting from
each one of them the amount of the tax proportionate to the
inheritance received. This remedy was adopted in Government of
the Philippine Islands v. Pamintuan, supra. In said case, the
Government filed an action against all the heirs for the collection
of the tax. This action rests on the concept that hereditary
property consists only of that part which remains after the
settlement of all lawful claims against the estate, for the
settlement of which the entire estate is first liable.6 The reason why
in case suit is filed against all the heirs the tax due from the estate
is levied proportionately against them is to achieve thereby two
results: first, payment of the tax; and second, adjustment of the
shares of each heir in the distributed estate as lessened by the tax.
Another remedy, pursuant to the lien created by Section 315 of
the Tax Code upon all property and rights to property belonging
to the taxpayer for unpaid income tax, is by subjecting said
property of the estate which is in the hands of an heir or transferee
to the payment of the tax due, the estate. This second remedy is
the very avenue the Government took in this case to collect the
tax. The Bureau of Internal Revenue should be given, in instances
like the case at bar, the necessary discretion to avail itself of the
most expeditious way to collect the tax as may be envisioned in
the particular provision of the Tax Code above quoted, because
taxes are the lifeblood of government and their prompt and
certain availability is an imperious need.7 And as afore-stated in
this case the suit seeks to achieve only one objective: payment of
the tax. The adjustment of the respective shares due to the heirs
from the inheritance, as lessened by the tax, is left to await the suit
for contribution by the heir from whom the Government
recovered said tax.
WHEREFORE, the decision appealed from is modified. Manuel B.
Pineda is hereby ordered to pay to the Commissioner of Internal
Revenue the sum of P760.28 as deficiency income tax for 1945
and 1946, and real estate dealer's fixed tax for the fourth quarter
of 1946 and for the whole year 1947, without prejudice to his right
of contribution for his co-heirs. No costs. So ordered.
4. G.R. No. 149110 April 9, 2003
NATIONAL POWER CORPORATION, petitioner,
vs.
CITY OF CABANATUAN, respondent.
(See CASE NUMBER 2, under Inherent – Local government Units
and Other Political Subdivision)
5. G.R. No. L-31364 March 30, 1979
MISAEL P. VERA, as Commissioner of Internal Revenue, and JAIME
ARANETA, as Regional Director, Revenue Region No. 14, Bureau of
Internal Revenue, petitioners,
vs.
HON. JOSE F. FERNANDEZ, Judge of the Court of First Instance of
Negros Occidental, Branch V, and FRANCIS A. TONGOY,
Administrator of the Estate of the late LUIS D.
TONGOY respondents.
DE CASTRO, J.:
Appeal from two orders of the Court of First Instance of Negros
Occidental, Branch V in Special Proceedings No. 7794, entitled:
"Intestate Estate of Luis D. Tongoy," the first dated July 29, 1969
dismissing the Motion for Allowance of Claim and for an Order of
Payment of Taxes by the Government of the Republic of the
Philippines against the Estate of the late Luis D. Tongoy, for
deficiency income taxes for the years 1963 and 1964 of the
decedent in the total amount of P3,254.80, inclusive 5% surcharge,
1% monthly interest and compromise penalties, and the second,
dated October 7, 1969, denying the Motion for reconsideration of
the Order of dismissal.
The Motion for allowance of claim and for payment of taxes
41
dated May 28, 1969 was filed on June 3, 1969 in the
abovementioned special proceedings, (par. 3, Annex A, Petition,
pp. 1920, Rollo). The claim represents the indebtedness to the
Government of the late Luis D. Tongoy for deficiency income
taxes in the total sum of P3,254.80 as above stated, covered by
Assessment Notices Nos. 11-50-29-1-11061-21-63 and 11-50-291-1
10875-64, to which motion was attached Proof of Claim (Annex B,
Petition, pp. 21-22, Rollo). The Administrator opposed the motion
solely on the ground that the claim was barred under Section 5,
Rule 86 of the Rules of Court (par. 4, Opposition to Motion for
Allowance of Claim, pp. 23-24, Rollo). Finding the opposition well-
founded, the respondent Judge, Jose F. Fernandez, dismissed the
motion for allowance of claim filed by herein petitioner, Regional
Director of the Bureau of Internal Revenue, in an order dated July
29, 1969 (Annex D, Petition, p. 26, Rollo). On September 18, 1969,
a motion for reconsideration was filed, of the order of July 29, 1969,
but was denied in an Order dated October 7, 1969.
Hence, this appeal on certiorari, petitioner assigning the following
errors:
1. The lower court erred in holding that the claim for taxes by the
government against the estate of Luis D. Tongoy was filed beyond
the period provided in Section 2, Rule 86 of the Rules of Court.
2. The lower court erred in holding that the claim for taxes of the
government was already barred under Section 5, Rule 86 of the
Rules of Court.
which raise the sole issue of whether or not the statute of non-
claims Section 5, Rule 86 of the New Rule of Court, bars claim of
the government for unpaid taxes, still within the period of limitation
prescribed in Section 331 and 332 of the National Internal
Revenue Code.
Section 5, Rule 86, as invoked by the respondent Administrator in
hid Oppositions to the Motion for Allowance of Claim, etc. of the
petitioners reads as follows:
All claims for money against the decedent, arising from contracts,
express or implied, whether the same be due, not due, or
contingent, all claims for funeral expenses and expenses for the
last sickness of the decedent, and judgment for money against
the decedent, must be filed within the time limited in they notice;
otherwise they are barred forever, except that they may be set
forth as counter claims in any action that the executor or
administrator may bring against the claimants. Where the
executor or administrator commence an action, or prosecutes an
action already commenced by the deceased in his lifetime, the
debtor may set forth may answer the claims he has against the
decedents, instead of presenting them independently to the
court has herein provided, and mutual claims may be set off
against each other in such action; and in final judgment is
rendered in favored of the decedent, the amount to determined
shall be considered the true balance against the estate, as
though the claim has been presented directly before the court in
the administration proceedings. Claims not yet due, or contingent
may be approved at their present value.
A perusal of the aforequoted provisions shows that it makes no
mention of claims for monetary obligation of the decedent
created by law, such as taxes which is entirely of different
character from the claims expressly enumerated therein, such as:
"all claims for money against the decedent arising from contract,
express or implied, whether the same be due, not due or
contingent, all claim for funeral expenses and expenses for the
last sickness of the decedent and judgment for money against the
decedent." Under the familiar rule of statutory construction
of expressio unius est exclusio alterius, the mention of one thing
implies the exclusion of another thing not mentioned. Thus, if a
statute enumerates the things upon which it is to operate,
everything else must necessarily, and by implication be excluded
from its operation and effect (Crawford, Statutory Construction,
pp. 334-335).
In the case of Commissioner of Internal Revenue vs. Ilagan Electric
& Ice Plant, et al., G.R. No. L-23081, December 30, 1969, it was held
that the assessment, collection and recovery of taxes, as well as
the matter of prescription thereof are governed by the provisions
of the National Internal revenue Code, particularly Sections 331
and 332 thereof, and not by other provisions of law. (See also Lim
Tio, Dy Heng and Dee Jue vs. Court of Tax Appeals & Collector of
Internal Revenue, G.R. No. L-10681, March 29, 1958). Even without
being specifically mentioned, the provisions of Section 2 of Rule
86 of the Rules of Court may reasonably be presumed to have
been also in the mind of the Court as not affecting the aforecited
Section of the National Internal Revenue Code.
In the case of Pineda vs. CFI of Tayabas, 52 Phil. 803, it was even
more pointedly held that "taxes assessed against the estate of a
deceased person ... need not be submitted to the committee on
claims in the ordinary course of administration. In the exercise of
its control over the administrator, the court may direct the
payment of such taxes upon motion showing that the taxes have
been assessed against the estate." The abolition of the Committee
on Claims does not alter the basic ruling laid down giving
exception to the claim for taxes from being filed as the other
claims mentioned in the Rule should be filed before the Court.
Claims for taxes may be collected even after the distribution of
the decedent's estate among his heirs who shall be liable therefor
in proportion of their share in the inheritance. (Government of the
Philippines vs. Pamintuan, 55 Phil. 13).
The reason for the more liberal treatment of claims for taxes
against a decedent's estate in the form of exception from the
application of the statute of non-claims, is not hard to find. Taxes
are the lifeblood of the Government and their prompt and certain
availability are imperious need. (Commissioner of Internal
Revenue vs. Pineda, G. R. No. L-22734, September 15, 1967, 21
SCRA 105). Upon taxation depends the Government ability to
serve the people for whose benefit taxes are collected. To
safeguard such interest, neglect or omission of government
officials entrusted with the collection of taxes should not be
allowed to bring harm or detriment to the people, in the same
manner as private persons may be made to suffer individually on
account of his own negligence, the presumption being that they
take good care of their personal affairs. This should not hold true
to government officials with respect to matters not of their own
personal concern. This is the philosophy behind the government's
exception, as a general rule, from the operation of the principle
of estoppel. (Republic vs. Caballero, L-27437, September 30, 1977,
79 SCRA 177; Manila Lodge No. 761, Benevolent and Protective
Order of the Elks Inc. vs. Court of Appeals, L-41001, September 30,
1976, 73 SCRA 162; Sy vs. Central Bank of the Philippines, L-41480,
April 30,1976, 70 SCRA 571; Balmaceda vs. Corominas & Co., Inc.,
66 SCRA 553; Auyong Hian vs. Court of Tax Appeals, 59 SCRA 110;
Republic vs. Philippine Rabbit Bus Lines, Inc., 66 SCRA 553;
Republic vs. Philippine Long Distance Telephone Company, L-
18841, January 27, 1969, 26 SCRA 620; Zamora vs. Court of Tax
Appeals, L-23272, November 26, 1970, 36 SCRA 77; E. Rodriguez,
Inc. vs. Collector of Internal Revenue, L- 23041, July 31, 1969, 28
SCRA 119.) As already shown, taxes may be collected even after
the distribution of the estate of the decedent among his heirs
(Government of the Philippines vs. Pamintuan, supra; Pineda vs.
CFI of Tayabas, supra Clara Diluangco Palanca vs. Commissioner
of Internal Revenue, G. R. No. L-16661, January 31, 1962).
Furthermore, as held in Commissioner of Internal Revenue vs.
Pineda, supra, citing the last paragraph of Section 315 of the Tax
Code payment of income tax shall be a lien in favor of the
Government of the Philippines from the time the assessment was
made by the Commissioner of Internal Revenue until paid with
interests, penalties, etc. By virtue of such lien, this court held that
the property of the estate already in the hands of an heir or
transferee may be subject to the payment of the tax due the
estate. A fortiori before the inheritance has passed to the heirs,
the unpaid taxes due the decedent may be collected, even
without its having been presented under Section 2 of Rule 86 of
the Rules of Court. It may truly be said that until the property of the
estate of the decedent has vested in the heirs, the decedent,
represented by his estate, continues as if he were still alive, subject
to the payment of such taxes as would be collectible from the
estate even after his death. Thus in the case above cited, the
income taxes sought to be collected were due from the estate,
for the three years 1946, 1947 and 1948 following his death in May,
1945.
Even assuming arguendo that claims for taxes have to be filed
within the time prescribed in Section 2, Rule 86 of the Rules of
Court, the claim in question may be filed even after the expiration
of the time originally fixed therein, as may be gleaned from the
italicized portion of the Rule herein cited which reads:
Section 2. Time within which claims shall be filed. - In the notice
42
provided in the preceding section, the court shall state the time
for the filing of claims against the estate, which shall not be more
than twelve (12) nor less than six (6) months after the date of the
first publication of the notice. However, at any time before an
order of distribution is entered, on application of a creditor who
has failed to file his claim within the time previously limited the
court may, for cause shown and on such terms as are equitable,
allow such claim to be flied within a time not exceeding one (1)
month. (Emphasis supplied)
In the instant case, petitioners filed an application (Motion for
Allowance of Claim and for an Order of Payment of Taxes) which,
though filed after the expiration of the time previously limited but
before an order of the distribution is entered, should have been
granted by the respondent court, in the absence of any valid
ground, as none was shown, justifying denial of the motion,
specially considering that it was for allowance Of claim for taxes
due from the estate, which in effect represents a claim of the
people at large, the only reason given for the denial that the
claim was filed out of the previously limited period, sustaining
thereby private respondents' contention, erroneously as has been
demonstrated.
WHEREFORE, the order appealed from is reverse. Since the Tax
Commissioner's assessment in the total amount of P3,254.80 with 5
% surcharge and 1 % monthly interest as provided in the Tax Code
is a final one and the respondent estate's sole defense of
prescription has been herein overruled, the Motion for Allowance
of Claim is herein granted and respondent estate is ordered to
pay and discharge the same, subject only to the limitation of the
interest collectible thereon as provided by the Tax Code. No
pronouncement as to costs.
SO ORDERED.
6. MCIAA vs MARCOS ( SAME CASE)
7. G.R. No. 112024 January 28, 1999
PHILIPPINE BANK OF COMMUNICATIONS, petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, COURT OF TAX APPEALS
and COURT OF APPEALS, respondent.
QUISUMBING, J.:
This petition for review assails the Resolution 1 of the Court of
Appeals dated September 22, 1993 affirming the Decision2 and a
Resolution 3 of the Court Of Tax Appeals which denied the claims
of the petitioner for tax refund and tax credits, and disposing as
follows:
IN VIEW OF ALL, THE FOREGOING, the instant petition for review, is
DENIED due course. The Decision of the Court of Tax Appeals
dated May 20, 1993 and its resolution dated July 20, 1993, are
hereby AFFIRMED in toto.
SO ORDERED.4
The Court of Tax Appeals earlier ruled as follows:
WHEREFORE, Petitioner's claim for refund/tax credits of overpaid
income tax for 1985 in the amount of P5,299,749.95 is hereby
denied for having been filed beyond the reglementary period.
The 1986 claim for refund amounting to P234,077.69 is likewise
denied since petitioner has opted and in all likelihood
automatically credited the same to the succeeding year. The
petition for review is dismissed for lack of merit.
SO ORDERED.5
The facts on record show the antecedent circumstances
pertinent to this case.
Petitioner, Philippine Bank of Communications (PBCom), a
commercial banking corporation duly organized under Philippine
laws, filed its quarterly income tax returns for the first and second
quarters of 1985, reported profits, and paid the total income tax
of P5,016,954.00. The taxes due were settled by applying PBCom's
tax credit memos and accordingly, the Bureau of Internal
Revenue (BIR) issued Tax Debit Memo Nos. 0746-85 and 0747-85
for P3,401,701.00 and P1,615,253.00, respectively.
Subsequently, however, PBCom suffered losses so that when it
filed its Annual Income Tax Returns for the year-ended December
31, 1986, the petitioner likewise reported a net loss of
P14,129,602.00, and thus declared no tax payable for the year.
But during these two years, PBCom earned rental income from
leased properties. The lessees withheld and remitted to the BIR
withholding creditable taxes of P282,795.50 in 1985 and
P234,077.69 in 1986.
On August 7, 1987, petitioner requested the Commissioner of
Internal Revenue, among others, for a tax credit of P5,016,954.00
representing the overpayment of taxes in the first and second
quarters of 1985.
Thereafter, on July 25, 1988, petitioner filed a claim for refund of
creditable taxes withheld by their lessees from property rentals in
1985 for P282,795.50 and in 1986 for P234,077.69.
Pending the investigation of the respondent Commissioner of
Internal Revenue, petitioner instituted a Petition for Review on
November 18, 1988 before the Court of Tax Appeals (CTA). The
petition was docketed as CTA Case No. 4309 entitled: "Philippine
Bank of Communications vs. Commissioner of Internal Revenue."
The losses petitioner incurred as per the summary of petitioner's
claims for refund and tax credit for 1985 and 1986, filed before the
Court of Tax Appeals, are as follows:
1985 1986
——— ———
Net Income (Loss) (P25,317,288.00) (P14,129,602.00)
Tax Due NIL NIL
Quarterly tax.
Payments Made 5,016,954.00 —
Tax Withheld at Source 282,795.50 234,077.69
———————— ———————
Excess Tax Payments P5,299,749.50* P234,077.69
=============== =============
* CTA's decision reflects PBCom's 1985 tax claim as P5,299,749.95.
A forty five centavo difference was noted.
On May 20, 1993, the CTA rendered a decision which, as stated
on the outset, denied the request of petitioner for a tax refund or
credit in the sum amount of P5,299,749.95, on the ground that it
was filed beyond the two-year reglementary period provided for
by law. The petitioner's claim for refund in 1986 amounting to
P234,077.69 was likewise denied on the assumption that it was
automatically credited by PBCom against its tax payment in the
succeeding year.
On June 22, 1993, petitioner filed a Motion for Reconsideration of
the CTA's decision but the same was denied due course for lack
of merit. 6
Thereafter, PBCom filed a petition for review of said decision and
resolution of the CTA with the Court of Appeals. However on
September 22, 1993, the Court of Appeals affirmed in toto the
CTA's resolution dated July 20, 1993. Hence this petition now
before us.
The issues raised by the petitioner are:
I. Whether taxpayer PBCom — which relied in good faith on the
formal assurances of BIR in RMC No. 7-85 and did not immediately
file with the CTA a petition for review asking for the refund/tax
credit of its 1985-86 excess quarterly income tax payments — can
be prejudiced by the subsequent BIR rejection, applied
retroactivity, of its assurances in RMC No. 7-85 that the prescriptive
period for the refund/tax credit of excess quarterly income tax
payments is not two years but ten (10).7
II. Whether the Court of Appeals seriously erred in affirming the
CTA decision which denied PBCom's claim for the refund of
P234,077.69 income tax overpaid in 1986 on the mere speculation,
without proof, that there were taxes due in 1987 and that PBCom
availed of tax-crediting that year.8
Simply stated, the main question is: Whether or not the Court of
Appeals erred in denying the plea for tax refund or tax credits on
the ground of prescription, despite petitioner's reliance on RMC
No. 7-85, changing the prescriptive period of two years to ten
years?
Petitioner argues that its claims for refund and tax credits are not
yet barred by prescription relying on the applicability of Revenue
Memorandum Circular No. 7-85 issued on April 1, 1985. The circular
states that overpaid income taxes are not covered by the two-
year prescriptive period under the tax Code and that taxpayers
43
may claim refund or tax credits for the excess quarterly income
tax with the BIR within ten (10) years under Article 1144 of the Civil
Code. The pertinent portions of the circular reads:
REVENUE MEMORANDUM CIRCULAR NO. 7-85
SUBJECT: PROCESSING OF REFUND OR TAX CREDIT OF EXCESS
CORPORATE INCOME TAX RESULTING FROM THE FILING OF THE
FINAL ADJUSTMENT RETURN.
TO: All Internal Revenue Officers and Others Concerned.
Sec. 85 And 86 Of the National Internal Revenue Code provide:
xxx xxx xxx
The foregoing provisions are implemented by Section 7 of
Revenue Regulations Nos. 10-77 which provide;
xxx xxx xxx
It has been observed, however, that because of the excess tax
payments, corporations file claims for recovery of overpaid
income tax with the Court of Tax Appeals within the two-year
period from the date of payment, in accordance with sections
292 and 295 of the National Internal Revenue Code. It is obvious
that the filing of the case in court is to preserve the judicial right of
the corporation to claim the refund or tax credit.
It should he noted, however, that this is not a case of erroneously
or illegally paid tax under the provisions of Sections 292 and 295 of
the Tax Code.
In the above provision of the Regulations the corporation may
request for the refund of the overpaid income tax or claim for
automatic tax credit. To insure prompt action on corporate
annual income tax returns showing refundable amounts arising
from overpaid quarterly income taxes, this Office has
promulgated Revenue Memorandum Order No. 32-76 dated
June 11, 1976, containing the procedure in processing said
returns. Under these procedures, the returns are merely pre-
audited which consist mainly of checking mathematical
accuracy of the figures of the return. After which, the refund or
tax credit is granted, and, this procedure was adopted to
facilitate immediate action on cases like this.
In this regard, therefore, there is no need to file petitions for review
in the Court of Tax Appeals in order to preserve the right to claim
refund or tax credit the two year period. As already stated,
actions hereon by the Bureau are immediate after only a cursory
pre-audit of the income tax returns. Moreover, a taxpayer may
recover from the Bureau of Internal Revenue excess income tax
paid under the provisions of Section 86 of the Tax Code within 10
years from the date of payment considering that it is an obligation
created by law (Article 1144 of the Civil Code).9 (Emphasis
supplied.)
Petitioner argues that the government is barred from asserting a
position contrary to its declared circular if it would result to injustice
to taxpayers. Citing ABS CBN Broadcasting Corporation vs. Court
of Tax Appeals 10 petitioner claims that rulings or circulars
promulgated by the Commissioner of Internal Revenue have no
retroactive effect if it would be prejudicial to taxpayers, In ABS-
CBN case, the Court held that the government is precluded from
adopting a position inconsistent with one previously taken where
injustice would result therefrom or where there has been a
misrepresentation to the taxpayer.
Petitioner contends that Sec. 246 of the National Internal Revenue
Code explicitly provides for this rules as follows:
Sec. 246 Non-retroactivity of rulings— Any revocation,
modification or reversal of any of the rules and regulations
promulgated in accordance with the preceding section or any of
the rulings or circulars promulgated by the Commissioner shall not
be given retroactive application if the revocation, modification or
reversal will be prejudicial to the taxpayers except in the following
cases:
a). where the taxpayer deliberately misstates or omits material
facts from his return or in any document required of him by the
Bureau of Internal Revenue;
b). where the facts subsequently gathered by the Bureau of
Internal Revenue are materially different from the facts on which
the ruling is based;
c). where the taxpayer acted in bad faith.
Respondent Commissioner of Internal Revenue, through Solicitor
General, argues that the two-year prescriptive period for filing tax
cases in court concerning income tax payments of Corporations
is reckoned from the date of filing the Final Adjusted Income Tax
Return, which is generally done on April 15 following the close of
the calendar year. As precedents, respondent Commissioner
cited cases which adhered to this principle, to wit ACCRA
Investments Corp. vs. Court of Appeals, et
al., 11 and Commissioner of Internal Revenue vs. TMX Sales, Inc., et
al.. 12 Respondent Commissioner also states that since the Final
Adjusted Income Tax Return of the petitioner for the taxable year
1985 was supposed to be filed on April 15, 1986, the latter had only
until April 15, 1988 to seek relief from the court. Further, respondent
Commissioner stresses that when the petitioner filed the case
before the CTA on November 18, 1988, the same was filed beyond
the time fixed by law, and such failure is fatal to petitioner's cause
of action.
After a careful study of the records and applicable jurisprudence
on the matter, we find that, contrary to the petitioner's contention,
the relaxation of revenue regulations by RMC 7-85 is not
warranted as it disregards the two-year prescriptive period set by
law.
Basic is the principle that "taxes are the lifeblood of the nation."
The primary purpose is to generate funds for the State to finance
the needs of the citizenry and to advance the common
weal. 13 Due process of law under the Constitution does not
require judicial proceedings in tax cases. This must necessarily be
so because it is upon taxation that the government chiefly relies
to obtain the means to carry on its operations and it is of utmost
importance that the modes adopted to enforce the collection of
taxes levied should be summary and interfered with as little as
possible. 14
From the same perspective, claims for refund or tax credit should
be exercised within the time fixed by law because the BIR being
an administrative body enforced to collect taxes, its functions
should not be unduly delayed or hampered by incidental matters.
Sec. 230 of the National Internal Revenue Code (NIRC) of 1977
(now Sec. 229, NIRC of 1997) provides for the prescriptive period
for filing a court proceeding for the recovery of tax erroneously or
illegally collected, viz.:
Sec. 230. Recovery of tax erroneously or illegally collected. — No
suit or proceeding shall be maintained in any court for the
recovery of any national internal revenue tax hereafter alleged to
have been erroneously or illegally assessed or collected, or of any
penalty claimed to have been collected without authority, or of
any sum alleged to have been excessive or in any manner
wrongfully collected, until a claim for refund or credit has been
duly filed with the Commissioner; but such suit or proceeding may
be maintained, whether or not such tax, penalty, or sum has been
paid under protest or duress.
In any case, no such suit or proceedings shall begun after the
expiration of two years from the date of payment of the tax or
penalty regardless of any supervening cause that may arise after
payment; Provided however, That the Commissioner may, even
without a written claim therefor, refund or credit any tax, where
on the face of the return upon which payment was made, such
payment appears clearly to have been erroneously paid.
(Emphasis supplied)
The rule states that the taxpayer may file a claim for refund or
credit with the Commissioner of Internal Revenue, within two (2)
years after payment of tax, before any suit in CTA is commenced.
The two-year prescriptive period provided, should be computed
from the time of filing the Adjustment Return and final payment of
the tax for the year.
In Commissioner of Internal Revenue vs. Philippine American Life
Insurance Co., 15 this Court explained the application of Sec. 230
of 1977 NIRC, as follows:
Clearly, the prescriptive period of two years should commence to
run only from the time that the refund is ascertained, which can
only be determined after a final adjustment return is
accomplished. In the present case, this date is April 16, 1984, and
two years from this date would be April 16, 1986. . . . As we have
earlier said in the TMX Sales case, Sections 68. 16 69, 17 and 70 18 on
Quarterly Corporate Income Tax Payment and Section 321 should
be considered in conjunction with it 19
When the Acting Commissioner of Internal Revenue issued RMC
7-85, changing the prescriptive period of two years to ten years
on claims of excess quarterly income tax payments, such circular
created a clear inconsistency with the provision of Sec. 230 of
1977 NIRC. In so doing, the BIR did not simply interpret the law;
rather it legislated guidelines contrary to the statute passed by
44
Congress.
It bears repeating that Revenue memorandum-circulars are
considered administrative rulings (in the sense of more specific
and less general interpretations of tax laws) which are issued from
time to time by the Commissioner of Internal Revenue. It is widely
accepted that the interpretation placed upon a statute by the
executive officers, whose duty is to enforce it, is entitled to great
respect by the courts. Nevertheless, such interpretation is not
conclusive and will be ignored if judicially found to be
erroneous. 20 Thus, courts will not countenance administrative
issuances that override, instead of remaining consistent and in
harmony with the law they seek to apply and implement. 21
In the case of People vs. Lim, 22 it was held that rules and
regulations issued by administrative officials to implement a law
cannot go beyond the terms and provisions of the latter.
Appellant contends that Section 2 of FAO No. 37-1 is void because
it is not only inconsistent with but is contrary to the provisions and
spirit of Act. No 4003 as amended, because whereas the
prohibition prescribed in said Fisheries Act was for any single
period of time not exceeding five years duration, FAO No 37-1
fixed no period, that is to say, it establishes an absolute ban for all
time. This discrepancy between Act No. 4003 and FAO No. 37-1
was probably due to an oversight on the part of Secretary of
Agriculture and Natural Resources. Of course, in case of
discrepancy, the basic Act prevails, for the reason that the
regulation or rule issued to implement a law cannot go
beyond the terms and provisions of the
latter. . . . In this connection, the attention of the technical men in
the offices of Department Heads who draft rules and regulation is
called to the importance and necessity of closely following the
terms and provisions of the law which they intended to
implement, this to avoid any possible misunderstanding or
confusion as in the present case.23
Further, fundamental is the rule that the State cannot be put in
estoppel by the mistakes or errors of its officials or agents. 24 As
pointed out by the respondent courts, the nullification of RMC No.
7-85 issued by the Acting Commissioner of Internal Revenue is an
administrative interpretation which is not in harmony with Sec. 230
of 1977 NIRC. for being contrary to the express provision of a
statute. Hence, his interpretation could not be given weight for to
do so would, in effect, amend the statute.
It is likewise argued that the Commissioner of Internal Revenue,
after promulgating RMC No. 7-85, is estopped by the principle of
non-retroactively of BIR rulings. Again We do not agree. The
Memorandum Circular, stating that a taxpayer may recover the
excess income tax paid within 10 years from date of payment
because this is an obligation created by law, was issued by the
Acting Commissioner of Internal Revenue. On the other hand, the
decision, stating that the taxpayer should still file a claim for a
refund or tax credit and corresponding petition fro review within
the
two-year prescription period, and that the lengthening of the
period of limitation on refund from two to ten years would be
adverse to public policy and run counter to the positive mandate
of Sec. 230, NIRC, - was the ruling and judicial interpretation of the
Court of Tax Appeals. Estoppel has no application in the case at
bar because it was not the Commissioner of Internal Revenue who
denied petitioner's claim of refund or tax credit. Rather, it was the
Court of Tax Appeals who denied (albeit correctly) the claim and
in effect, ruled that the RMC No. 7-85 issued by the Commissioner
of Internal Revenue is an administrative interpretation which is out
of harmony with or contrary to the express provision of a statute
(specifically Sec. 230, NIRC), hence, cannot be given weight for
to do so would in effect amend the statute.25
Art. 8 of the Civil Code 26 recognizes judicial decisions, applying or
interpreting statutes as part of the legal system of the country. But
administrative decisions do not enjoy that level of recognition. A
memorandum-circular of a bureau head could not operate to
vest a taxpayer with shield against judicial action. For there are no
vested rights to speak of respecting a wrong construction of the
law by the administrative officials and such wrong interpretation
could not place the Government in estoppel to correct or
overrule the same. 27 Moreover, the non-retroactivity of rulings by
the Commissioner of Internal Revenue is not applicable in this
case because the nullity of RMC No. 7-85 was declared by
respondent courts and not by the Commissioner of Internal
Revenue. Lastly, it must be noted that, as repeatedly held by this
Court, a claim for refund is in the nature of a claim for exemption
and should be construed in strictissimi juris against the taxpayer.28
On the second issue, the petitioner alleges that the Court of
Appeals seriously erred in affirming CTA's decision denying its
claim for refund of P234,077.69 (tax overpaid in 1986), based on
mere speculation, without proof, that PBCom availed of the
automatic tax credit in 1987.
Sec. 69 of the 1977 NIRC 29 (now Sec. 76 of the 1997 NIRC) provides
that any excess of the total quarterly payments over the actual
income tax computed in the adjustment or final corporate
income tax return, shall either(a) be refunded to the corporation,
or (b) may be credited against the estimated quarterly income
tax liabilities for the quarters of the succeeding taxable year.
The corporation must signify in its annual corporate adjustment
return (by marking the option box provided in the BIR form) its
intention, whether to request for a refund or claim for an
automatic tax credit for the succeeding taxable year. To ease the
administration of tax collection, these remedies are in the
alternative, and the choice of one precludes the other.
As stated by respondent Court of Appeals:
Finally, as to the claimed refund of income tax over-paid in 1986
— the Court of Tax Appeals, after examining the adjusted final
corporate annual income tax return for taxable year 1986, found
out that petitioner opted to apply for automatic tax credit. This
was the basis used (vis-avis the fact that the 1987 annual
corporate tax return was not offered by the petitioner as
evidence) by the CTA in concluding that petitioner had indeed
availed of and applied the automatic tax credit to the
succeeding year, hence it can no longer ask for refund, as to [sic]
the two remedies of refund and tax credit are alternative. 30
That the petitioner opted for an automatic tax credit in
accordance with Sec. 69 of the 1977 NIRC, as specified in its 1986
Final Adjusted Income Tax Return, is a finding of fact which we
must respect. Moreover, the 1987 annual corporate tax return of
the petitioner was not offered as evidence to contovert said fact.
Thus, we are bound by the findings of fact by respondent courts,
there being no showing of gross error or abuse on their part to
disturb our reliance thereon. 31
WHEREFORE, the, petition is hereby DENIED, The decision of the
Court of Appeals appealed from is AFFIRMED, with COSTS against
the petitioner.1âwphi1.nêt
SO ORDERED.
8. G.R. No. L-29059 December 15, 1987
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
CEBU PORTLAND CEMENT COMPANY and COURT OF TAX
APPEALS, respondents.
CRUZ, J.:
By virtue of a decision of the Court of Tax Appeals rendered on
June 21, 1961, as modified on appeal by the Supreme Court on
February 27, 1965, the Commissioner of Internal Revenue was
ordered to refund to the Cebu Portland Cement Company the
amount of P 359,408.98, representing overpayments of ad
valorem taxes on cement produced and sold by it after October
1957. 1
On March 28, 1968, following denial of motions for reconsideration
filed by both the petitioner and the private respondent, the latter
moved for a writ of execution to enforce the said judgment . 2
The motion was opposed by the petitioner on the ground that the
private respondent had an outstanding sales tax liability to which
the judgment debt had already been credited. In fact, it was
stressed, there was still a balance owing on the sales taxes in the
amount of P 4,789,279.85 plus 28% surcharge. 3
On April 22, 1968, the Court of Tax Appeals * granted the motion,
holding that the alleged sales tax liability of the private
respondent was still being questioned and therefore could not be
set-off against the refund. 4
In his petition to review the said resolution, the Commissioner of
Internal Revenue claims that the refund should be charged
against the tax deficiency of the private respondent on the sales
of cement under Section 186 of the Tax Code. His position is that
cement is a manufactured and not a mineral product and
therefore not exempt from sales taxes. He adds that enforcement
of the said tax deficiency was properly effected through his
power of distraint of personal property under Sections 316 and
318 5 of the said Code and, moreover, the collection of any
national internal revenue tax may not be enjoined under Section
305, 6 subject only to the exception prescribed in Rep. Act No.
1125. 7 This is not applicable to the instant case. The petitioner also
45
denies that the sales tax assessments have already prescribed
because the prescriptive period should be counted from the filing
of the sales tax returns, which had not yet been done by the
private respondent.
For its part, the private respondent disclaims liability for the sales
taxes, on the ground that cement is not a manufactured product
but a mineral product. 8 As such, it was exempted from sales taxes
under Section 188 of the Tax Code after the effectivity of Rep. Act
No. 1299 on June 16, 1955, in accordance with Cebu Portland
Cement Co. v. Collector of Internal Revenue, 9 decided in 1968.
Here Justice Eugenio Angeles declared that "before the effectivity
of Rep. Act No. 1299, amending Section 246 of the National
Internal Revenue Code, cement was taxable as a manufactured
product under Section 186, in connection with Section 194(4) of
the said Code," thereby implying that it was not considered a
manufactured product afterwards. Also, the alleged sales tax
deficiency could not as yet be enforced against it because the
tax assessment was not yet final, the same being still under protest
and still to be definitely resolved on the merits. Besides, the
assessment had already prescribed, not having been made
within the reglementary five-year period from the filing of the tax
returns. 10
Our ruling is that the sales tax was properly imposed upon the
private respondent for the reason that cement has always been
considered a manufactured product and not a mineral product.
This matter was extensively discussed and categorically resolved
in Commissioner of Internal Revenue v. Republic Cement
Corporation, 11 decided on August 10, 1983, where Justice Efren
L. Plana, after an exhaustive review of the pertinent cases,
declared for a unanimous Court:
From all the foregoing cases, it is clear that cement qua cement
was never considered as a mineral product within the meaning of
Section 246 of the Tax Code, notwithstanding that at least 80% of
its components are minerals, for the simple reason that cement is
the product of a manufacturing process and is no longer the
mineral product contemplated in the Tax Code (i.e.; minerals
subjected to simple treatments) for the purpose of imposing
the ad valorem tax.
What has apparently encouraged the herein respondents to
maintain their present posture is the case of Cebu Portland
Cement Co. v. Collector of Internal Revenue, L-20563, Oct. 29,
1968 (28 SCRA 789) penned by Justice Eugenio Angeles. For some
portions of that decision give the impression that Republic Act No.
1299, which amended Section 246, reclassified cement as a
mineral product that was not subject to sales tax. ...
xxx xxx xxx
After a careful study of the foregoing, we conclude that reliance
on the decision penned by Justice Angeles is misplaced. The said
decision is no authority for the proposition that after the
enactment of Republic Act No. 1299 in 1955 (defining mineral
product as things with at least 80% mineral content), cement
became a 'mineral product," as distinguished from a
"manufactured product," and therefore ceased to be subject to
sales tax. It was not necessary for the Court to so rule. It was
enough for the Court to say in effect that even assuming Republic
Act No. 1299 had reclassified cement was a mineral product, the
reclassification could not be given retrospective application (so
as to justify the refund of sales taxes paid before Republic Act 1299
was adopted) because laws operate prospectively only, unless
the legislative intent to the contrary is manifest, which was not so
in the case of Republic Act 1266. [The situation would have been
different if the Court instead had ruled in favor of refund, in which
case it would have been absolutely necessary (1) to make an
unconditional ruling that Republic Act 1299 re-classified cement
as a mineral product (not subject to sales tax), and (2) to declare
the law retroactive, as a basis for granting refund of sales tax paid
before Republic Act 1299.]
In any event, we overrule the CEPOC decision of October 29, 1968
(G.R. No. L-20563) insofar as its pronouncements or any
implication therefrom conflict with the instant decision.
The above views were reiterated in the resolution 12 denying
reconsideration of the said decision, thus:
The nature of cement as a "manufactured product" (rather than
a "mineral product") is well-settled. The issue has repeatedly
presented itself as a threshold question for determining the basis
for computing the ad valorem mining tax to be paid by cement
Companies. No pronouncement was made in these cases that as
a "manufactured product" cement is subject to sales tax because WHEREFORE, the petition is GRANTED. The resolution dated April
this was not at issue. 22, 1968, in CTA Case No. 786 is SET ASIDE, without any

The decision sought to be reconsidered here referred to the
legislative history of Republic Act No. 1299 which introduced a
definition of the terms "mineral" and "mineral products" in Sec. 246
of the Tax Code. Given the legislative intent, the holding in the
CEPOC case (G.R. No. L-20563) that cement was subject to sales
tax prior to the effectivity •f Republic Act No. 1299 cannot be
construed to mean that, after the law took effect, cement
ceased to be so subject to the tax. To erase any and all
misconceptions that may have been spawned by reliance on the
case of Cebu Portland Cement Co. v. Collector of Internal
Revenue, L-20563, October 29, 1968 (28 SCRA 789) penned by
Justice Eugenio Angeles, the Court has expressly overruled it
insofar as it may conflict with the decision of August 10, 1983, now
subject of these motions for reconsideration.
On the question of prescription, the private respondent claims
that the five-year reglementary period for the assessment of its tax
liability started from the time it filed its gross sales returns on June
30, 1962. Hence, the assessment for sales taxes made on January
16, 1968 and March 4, 1968, were already out of time. We
disagree. This contention must fail for what CEPOC filed was not
the sales returns required in Section 183(n) but the ad valorem tax
returns required under Section 245 of the Tax Code. As Justice
Irene R. Cortes emphasized in the aforestated resolution:
In order to avail itself of the benefits of the five-year prescription
period under Section 331 of the Tax Code, the taxpayer should
have filed the required return for the tax involved, that is, a sales
tax return. (Butuan Sawmill, Inc. v. CTA, et al., G.R. No. L-21516,
April 29, 1966, 16 SCRA 277). Thus CEPOC should have filed sales
tax returns of its gross sales for the subject periods. Both parties
admit that returns were made for the ad valorem mining tax.
CEPOC argues that said returns contain the information necessary
for the assessment of the sales tax. The Commissioner does not
consider such returns as compliance with the requirement for the
filing of tax returns so as to start the running of the five-year
prescriptive period.
We agree with the Commissioner. It has been held in Butuan
Sawmill Inc. v. CTA, supra, that the filing of an income tax return
cannot be considered as substantial compliance with the
requirement of filing sales tax returns, in the same way that an
income tax return cannot be considered as a return for
compensating tax for the purpose of computing the period of
prescription under Sec. 331. (Citing Bisaya Land Transportation
Co., Inc. v. Collector of Internal Revenue, G.R. Nos. L-12100 and L-
11812, May 29, 1959). There being no sales tax returns filed by
CEPOC, the statute of stations in Sec. 331 did not begin to run
against the government. The assessment made by the
Commissioner in 1968 on CEPOC's cement sales during the period
from July 1, 1959 to December 31, 1960 is not barred by the five-
year prescriptive period. Absent a return or when the return is false
or fraudulent, the applicable period is ten (10) days from the
discovery of the fraud, falsity or omission. The question in this case
is: When was CEPOC's omission to file tha return deemed
discovered by the government, so as to start the running of said
period? 13
46
pronouncement as to costs.
SO ORDERED.
9. G.R. No. 197117 April 10, 2013
FIRST LEPANTO TAISHO INSURANCE CORPORATION, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
MENDOZA, J.:
Before the Court is a petition for review on certiorari 1 under Rule
45 of the 1997 Rules of Civil Procedure filed by First Lepanto Taisho
Corporation, now FLT Prime Insurance Corporation (petitioner),
assailing the March l, 2011 Decision2 and the May 27, 2011
Resolution3 of the Court of Tax Appeals (CTA) En Bane, in CTA E.B.
No. 563, which affirmed the May 21, 2009 Decision of the CTA-
Second Division.
The Facts:
Petitioner is a non-lire insurance corporation and considered as a
"Large Taxpayer under Revenue Regulations No. 6-85, as
amended by Revenue Regulations No. 12-94 effective
1994."4 After submitting its corporate income tax return for taxable
year ending December 31, 1997, petitioner received a Letter of
Authority, dated October 30, 1998, from respondent
Commissioner of Internal Revenue (CIR) to allow it to examine
their books of account and other accounting records for 1997
and other unverified prior years.
On December 29, 1999, CIR issued internal revenue tax
assessments for deficiency income, withholding, expanded
withholding, final withholding, value-added, and documentary
stamp taxes for taxable year 1997.
On February 24, 2000, petitioner protested the said tax
assessments.
During the pendency of the case, particularly on February 15,
2008, petitioner filed its Motion for Partial Withdrawal of Petition for
Review of Assessment Notice Nos. ST-INC-97-0220-99; ST-VAT-97-
0222-99 and ST-DST-97-0217-00, in view of the tax amnesty
program it had availed. The CTA Second Division granted the said
motion in a Resolution,5 dated March 31, 2008.
Consequently, on May 21, 2009, the CTA Second Division partially
granted the petition.6 It directed
petitioner to pay CIR a reduced tax liability of ₱1,994,390.86. The
dispositive portion reads:

The argument that the assessment cannot as yet be enforced

because it is still being contested loses sight of the urgency of the
need to collect taxes as "the lifeblood of the government." If the
payment of taxes could be postponed by simply questioning their
validity, the machinery of the state would grind to a halt and all
government functions would be paralyzed. That is the reason why,
save for the exception already noted, the Tax Code provides:

Sec. 291. Injunction not available to restrain collection of tax. —

No court shall have authority to grant an injunction to restrain the
collection of any national internal revenue tax, fee or charge
imposed by this Code.

It goes without saying that this injunction is available not only

when the assessment is already being questioned in a court of
justice but more so if, as in the instant case, the challenge to the
assessment is still-and only-on the administrative level. There is all
the more reason to apply the rule here because it appears that
even after crediting of the refund against the tax deficiency, a
balance of more than P 4 million is still due from the private
respondent.

To require the petitioner to actually refund to the private

respondent the amount of the judgment debt, which he will later
have the right to distrain for payment of its sales tax liability is in our
view an Idle ritual. We hold that the respondent Court of Tax
Appeals erred in ordering such a charade.
WHEREFORE, in view of the foregoing considerations, the instant
Petition for Review is hereby PARTIALLY GRANTED. Accordingly,
petitioner is hereby ORDERED TO PAY deficiency withholding tax
on compensation, expanded withholding tax and final tax in the
reduced amount of ₱1,994,390.86, computed as follows:
(continuation table)
Petitioner’s Motion for Partial Reconsideration7 was likewise
denied by the CTA Second Division in its October 29, 2009
Resolution.8
Unsatisfied, petitioner filed a Petition for Review before the CTA En
Banc.9
On March 1, 2011, the CTA En Banc affirmed the decision of the
CTA Second Division.10
Petitioner contended that it was not liable to pay Withholding Tax
on Compensation on the ₱500,000.00 Director’s Bonus to their
directors, specifically, Rodolfo Bausa, Voltaire Gonzales, Felipe
Yap, and Catalino Macaraig, Jr., because they were not
employees and the amount was already subjected to Expanded
Withholding Tax. The CTA En Banc, however, ruled that Section 5
of Revenue Regulation No. 12-86 expressly identified a director to
be an employee.
As to transportation, subsistence and lodging, and representation
expenses, the expenses would not be subject to withholding tax
only if the same were reimbursement for actual expenses of the
company. In the present case, the CTA En Banc declared that
petitioner failed to prove that they were so.
As to deficiency expanded withholding taxes on compensation,
petitioner failed to substantiate that the commissions earned
totaling ₱905,428.36, came from reinsurance activities and should
not be subject to withholding tax. Petitioner likewise failed to
prove its direct loss expense, occupancy cost and
service/contractors and purchases.
As to deficiency final withholding taxes, "petitioner failed to
present proof of remittance to establish that it had remitted the
final tax on dividends paid as well as the payments for services
rendered by the Malaysian entity."11
As to the imposition of delinquency interest under Section 249 (c)
(3) of the 1997 National Internal Revenue Code (NIRC), records
reveal that petitioner failed to pay the deficiency taxes within
thirty (30) days from receipt of the demand letter, thus,
delinquency interest accrued from such non-payment.
Petitioner moved for partial reconsideration, but the CTA En Banc
denied the same in its May 27, 2011 Resolution.12
Hence, this petition.13
The principal issue in this case is whether the CTA En Banc erred in
holding petitioner liable for:
a. deficiency withholding taxes on compensation on directors’
bonuses under Assessment No. ST-WC-97-0021-99;
b. deficiency expanded withholding taxes on transportation,
subsistence and lodging, and representation expense;
commission expense; direct loss expense; occupancy cost; and
service/contractor and purchases under Assessment No. ST-EWT-
97-0218-99;
c. deficiency final withholding taxes on payment of dividends and
computerization expenses to foreign entities under Assessment
No. ST-FT-97-0219-99; and
d. delinquency interest under Section 249 (c) (3) of the NIRC.
The Court finds no merit in the petition.
For taxation purposes, a director is considered an employee
under Section 5 of Revenue Regulation No. 12-86,14 to wit:
An individual, performing services for a corporation, whether as
an officer and director or merely as a director whose duties are
confined to attendance at and participation in the meetings of
the Board of Directors, is an employee.
The non-inclusion of the names of some of petitioner’s directors in
the company’s Alpha List does not ipso facto create a
presumption that they are not employees of the corporation,
because the imposition of withholding tax on compensation
hinges upon the nature of work performed by such individuals in
the company. Moreover, contrary to petitioner’s attestations,
Revenue Regulation No. 2-98,15 specifically, Section 2.57.2. A (9)
thereof,16 cannot be applied to this case as the latter is a later
regulation while the accounting books examined were for
taxable year 1997.
47
As to the deficiency withholding tax assessment on transportation,
subsistence and lodging, and representation expense,
commission expense, direct loss expense, occupancy cost,
Basic Surcharges Interest Total
Tax
Deficiency ₱774,200.55 ₱193,550.14 ₱312.227.34 ₱1,279,978.03
Withholding
Tax on
Compensation
ST-WC-97-0221-99
Deficiency 132,724.02 33,181.01 53,526.27 219,431.30
Expanded
Withholding
Tax ST-EWT-97-
0218-99
Deficiency 299,391.84 74,847.96 120,741.73 494,981.53
Final
Withholding
Tax ST-FT-97-0219-
99
TOTALS ₱1,206,316.41 ₱301,579.11 ₱486,495.34 ₱1,994,390.86
service/contractor and purchases, the Court finds no cogent
reason to deviate from the findings of the CTA En Banc. As
correctly observed by the CTA Second Division and the CTA En
Banc, petitioner was not able to sufficiently establish that the
transportation expenses reflected in their books were
reimbursement from actual transportation expenses incurred by
its employees in connection with their duties as the only
document presented was a Schedule of Transportation
Expenses without pertinent supporting documents. Without said
documents, such as but not limited to, receipts, transportation-
related vouchers and/or invoices, there is no way of ascertaining
whether the amounts reflected in the schedule of expenses were
disbursed for transportation.
With regard to commission expense, no additional documentary
evidence, like the reinsurance agreements contracts, was
presented to support petitioner’s allegation that the expenditure
originated from reinsurance activities that gave rise to reinsurance
commissions, not subject to withholding tax. As to occupancy
costs, records reveal that petitioner failed to compute the correct
total occupancy cost that should be subjected to withholding
tax, hence, petitioner is liable for the deficiency.
As to service/contractors and purchases, petitioner contends that
both parties already stipulated that it correctly withheld the taxes
due. Thus, petitioner is of the belief that it is no longer required to
present evidence to prove the correct payment of taxes withheld.
As correctly ruled by the CTA Second Division and En Bane,
however, stipulations cannot defeat the right of the State to
collect the correct taxes due on an individual or juridical person
because taxes are the lifeblood of our nation so its collection
should be actively pursued without unnecessary impediment.
As to the deficiency final withholding tax assessments for
payments of dividends and computerization expenses incurred
by petitioner to foreign entities, particularly Matsui Marine & Fire
Insurance Co. Ltd. (Matsui),17 the Court agrees with CIR that
petitioner failed to present evidence to show the supposed
remittance to Matsui.
The Court likewise holds the imposition of delinquency interest
under Section 249 (c) (3) of the 1997 NIRC to be proper, because
failure to pay the deficiency tax assessed within the time
prescribed for its payment justifies the imposition of interest at the
rate of twenty percent (20%) per annum, which interest shall be
assessed and collected from the date prescribed for its payment
until full payment is made.
It is worthy to note that tax revenue statutes are not generally
intended to be liberally construed.18 Moreover, the CTA being a
highly specialized court particularly created for the purpose of
reviewing tax and customs cases, it is settled that its findings and
conclusions are accorded great respect and are generally
upheld by this Court, unless there is a clear showing of a reversible
error or an improvident exercise of authority.19 Absent such errors,
the challenged decision should be maintained.
WHEREFORE, the petition is DENIED. The March 1, 2011 Decision
and the May 27, 2011 Resolution of the Court of Tax Appeals En
Bane, in CTA E.B. No. 563, are AFFIRMED.
SO ORDERED.
10. G.R. No. L-49529 March 31, 1989
VALLEY TRADING CO., INC., petitioner,
vs.
COURT OF FIRST INSTANCE OF ISABELA, BRANCH II; DR. CARLOS UY
(in his capacity as Mayor of Cauayan, Isabela); MOISES
BALMACEDA (in his capacity as Municipal Treasurer of Cauayan,
Isabela); and SANGGUNIANG BAYAN of Cauayan,
Isabela, respondents.
REGALADO, J.:
Challenged in this petition for certiorari are the orders of the then
Court of First Instance of Isabela, 1 dated October 13, 1978 and
November 17, 1978, denying petitioner's prayer for a writ of
preliminary injunction in Special Civil Action Br. II-61. 2
The records show that petitioner Valley Trading Co., Inc. filed a
complaint in the court a quo seeking a declaration of the
supposed nullity of Section 2B.02, Sub-paragraph 1, Letter (A),
Paragraph 2 of Ordinance No. T-1, Revenue Code of Cauayan,
Isabela, which imposed a graduated tax on retailers,
independent wholesalers and distributors; and for the refund of
P23,202.12, plus interest of 14 % per annum thereon, which
petitioner had paid pursuant to said ordinance. Petitioner likewise
prayed for the issuance of a writ of preliminary prohibitory
injunction to enjoin the collection of said tax. 3 Defendants in said
case were Dr. Carlos A. Uy and Moises Balmaceda, who were
sued in their capacity as Mayor and Municipal Treasurer of
Cauayan, Isabela, respectively, together with the Sangguniang
Bayan of the same town.
Petitioner takes the position that said ordinance imposes a
"graduated fixed tax based on Sales" that "in effect imposes a
sales tax in contravention of Sec. 5, Charter I, par. (L) of P.D. 231
amended by P.D. 426 otherwise known as the Local Tax Code
" 4 which prohibits a municipality from imposing a percentage tax
on sales.
Respondents, on the other hand, claim in their answer that the tax
is an annual fixed business tax, not a percentage tax on sales,
imposable by a municipality under Section 19(A-1) of the Local
Tax Code. They cited the ruling of the Acting Secretary of Finance,
in his letter of April 14, 1977, upholding the validity of said tax on
the ground that the same is an annual graduated fixed tax
imposed on the privilege to engage in business, and not a
percentage tax on sales which consists of a fixed percentage of
the proceeds realized out of every sale transaction of taxable
items sold by the taxpayer. 5
After a reply to the answer had been filed, the trial court set the
case for a pre-trial conference. 6 However, on October 13, 1978,
the court issued an order terminating the pre-trial and reset the
hearing on the merits for failure of the parties to arrive at an
amicable settlement. In the same order, the trial court also denied
the prayer for a writ of preliminary injunction on the ground that
"the collection of taxes cannot be enjoined". 7
Petitioner moved for the reconsideration of the order, contending
that a hearing is mandatory before action may be taken on the
motion for the issuance of a writ of preliminary injunction, 8 but the
court below denied said motion and reiterated its previous
order. 9
At the center of this controversy is the submission of the petitioner
that a hearing on the merits is necessary before a motion for a writ
of preliminary injunction may be denied. Petitioner supports its
contention by invoking Section 7, Rule 58 of the Rules of Court
which provides that "(a)fter hearing on the merits the court may
grant or refuse, continue, modify or dissolve the injunction as
justice may require." Petitioner maintains that Section 6 of Rule 58
relied upon by respondents refers to the objections that might be
interposed to the issuance of the writ or the justification for the
48
dissolution of an injunction previously issued ex parte, but that
nowhere is it mentioned that a hearing is not necessary.
The weakness of petitioner's position is easily discernible. While it
correctly pointed out that Section 6 of Rule 58 provides for the
grounds for objection to an injunction, petitioner ignores the
circumstances under which these objections may be
appreciated by the trial court. Thus, if the ground is the
insufficiency of the complaint, the same is apparent from the
complaint itself and preliminary injunction may be refused
outright, with or without notice to the adverse party. In fact, under
said section, the court may also refuse an injunction on other
grounds on the basis of affidavits which may have been
submitted by the parties in connection with such application. In
the foregoing instances, a hearing is not necessary.
The reliance of the petitioner on Section 7 of Rule 58 is misplaced.
This section merely specifies the actions that the court may take
on the application for the writ if there is a hearing on the merits; it
does not declare that such hearing is mandatory or a prerequisite
therefor. Otherwise, we may have a situation where courts will be
forced to conduct a hearing even if from a consideration of the
pleadings alone it can readily be ascertained that the movant is
not entitled to the writ. In fine, it will thereby entail a useless
exercise and unnecessary waste of judicial time.
It would be different, of course, it there is a prima facie showing
on the face of the motion and/or pleadings that the grant of
preliminary injunction may be proper, in which case notice to the
opposing party would be necessary since the grant of such writ
on an ex parte proceeding is now proscribed. 10 A hearing
should be conducted since, under such circumstances, only in
case of extreme urgency will the writ issue prior to a final
hearing.11 Such requirement for prior notice and hearing
underscores the necessity that a writ of preliminary injunction is to
be dispensed with circumspection both sides should be heard
whenever possible. 12 It does not follow, however, that such a
hearing is indispensable where right at the outset the court is
reasonably convinced that the writ will not lie. What was then
discouraged, and is now specifically prohibited, is the issuance of
the writ without notice and hearing.
An opinion has been expressed that injunction is available as an
ancillary remedy in actions to determine the construction or
validity of a local tax ordinance. 13 Unlike the National Internal
Revenue Code, the Local Tax Code does not contain any specific
provision prohibiting courts from enjoining the collection of local
taxes. Such Statutory lapse or intent, however it may be viewed,
may have allowed preliminary injunction where local taxes are
involved but cannot negate the procedural rules and
requirements under Rule 58.
The issuance of a writ of preliminary injunction in the present case,
as in any other case, is addressed to the sound discretion of the
court, conditioned on the existence of a clear and positive right
of the movant which should be protected. It is an extraordinary
peremptory remedy available only on the grounds expressly
provided by law, specifically Section 3 of Rule 58 of the Rules of
Court.
The circumstances required for the writ to issue do not obtain in
the case at bar. The damage that may be caused to the
petitioner will not, of course, be irrepairable; where so indicated
by subsequent events favorable to it, whatever it shall have paid
is easily refundable. Besides, the damage to its property rights
must perforce take a back seat to the paramount need of the
State for funds to sustain governmental functions. Compared to
the damage to the State which may be caused by reduced
financial resources, the damage to petitioner is negligible. The
policy of the law is to discountenance any delay in the collection
of taxes because of the oft-repeated but unassailable
consideration that taxes are the lifeblood of the Government and
their prompt and certain availability is an imperious need.
Equally pertinent is the rule that courts should avoid issuing a writ
of preliminary injunction which, in effect, would dispose of the
main case without trial. 14 In the present case, it is evident that
the only ground relied upon for injunction relief is the alleged
patent nullity of the ordinance. 15 If the court should issue the
desired writ, premised on that sole justification therefor of
petitioner, it would be a virtual acceptance of his claim that the
imposition is patently invalid or, at the very least, that the
ordinance is of doubtful validity. There would, in effect, be a
prejudgment of the main case and a reversal of the rule on the
burden of proof since it would assume the proposition which the
petitioner is inceptively duty bound to prove.
Furthermore, such action will run counter to the well settled rule
that laws are presumed to be valid unless and until the courts
declare the contrary in clear and unequivocal terms. A court
should issue a writ of preliminary injunction only when the
petitioner assailing a statute has made out a case of
unconstitutionality or invalidity strong enough to overcome, in the
mind of the judge, the presumption of validity, aside from a
showing of a clear legal right to the remedy sought. 16 The case
before Us, however, presents no features sufficient to overcome
such presumption. This must have been evident to the trial court
from the answer of the respondents and the well reasoned ruling
of the Acting Secretary of Finance.
There mere fact that a statute is alleged to be unconstitutional or
invalid will not entitle a party to have its enforcement
enjoined. 17 Under the foregoing disquisitions, We see no
plausible reason to consider this case as an exception.
WHEREFORE, judgment is hereby rendered DISMISSING this petition
and SUSTAINING the validity of the questioned orders of the trial
court.
SO ORDERED.
11. G.R. No. L-10572 December 21, 1915
FRANCIS A. CHURCHILL and STEWART TAIT, plaintiffs-appellees,
vs.
JAMES J. RAFFERTY, Collector of Internal Revenue, defendant-
appellant.
TRENT, J.:
The judgment appealed from in this case perpetually restrains and
prohibits the defendant and his deputies from collecting and
enforcing against the plaintiffs and their property the annual tax
mentioned and described in subsection (b) of section 100 of Act
No. 2339, effective July 1, 1914, and from destroying or removing
any sign, signboard, or billboard, the property of the plaintiffs, for
the sole reason that such sign, signboard, or billboard is, or may
be, offensive to the sight; and decrees the cancellation of the
bond given by the plaintiffs to secure the issuance of the
preliminary injunction granted soon after the commencement of
this action.
This case divides itself into two parts and gives rise to two main
questions; (1) that relating to the power of the court to restrain by
injunction the collection of the tax complained of, and (2) that
relating to the validity of those provisions of subsection (b) of
section 100 of Act No. 2339, conferring power upon the Collector
of Internal Revenue to remove any sign, signboard, or billboard
upon the ground that the same is offensive to the sight or is
otherwise a nuisance.
The first question is one of the jurisdiction and is of vital importance
to the Government. The sections of Act No. 2339, which bear
directly upon the subject, are 139 and 140. The first expressly
forbids the use of an injunction to stay the collection of any
internal revenue tax; the second provides a remedy for any wrong
in connection with such taxes, and this remedy was intended to
be exclusive, thereby precluding the remedy by injunction, which
remedy is claimed to be constitutional. The two sections, then,
involve the right of a dissatisfied taxpayers to use an exceptional
remedy to test the validity of any tax or to determine any other
question connected therewith, and the question whether the
remedy by injunction is exceptional.
Preventive remedies of the courts are extraordinary and are not
the usual remedies. The origin and history of the writ of injunction
show that it has always been regarded as an extraordinary,
preventive remedy, as distinguished from the common course of
the law to redress evils after they have been consummated. No
injunction issues as of course, but is granted only upon the oath of
a party and when there is no adequate remedy at law. The
Government does, by section 139 and 140, take away the
preventive remedy of injunction, if it ever existed, and leaves the
taxpayer, in a contest with it, the same ordinary remedial actions
which prevail between citizen and citizen. The Attorney-General,
on behalf of the defendant, contends that there is no provisions
of the paramount law which prohibits such a course. While, on the
other hand, counsel for plaintiffs urge that the two sections are
unconstitutional because (a) they attempt to deprive aggrieved
taxpayers of all substantial remedy for the protection of their
property, thereby, in effect, depriving them of their property
without due process of law, and (b) they attempt to diminish the
jurisdiction of the courts, as conferred upon them by Acts Nos. 136
and 190, which jurisdiction was ratified and confirmed by the Act
of Congress of July 1, 1902.
In the first place, it has been suggested that section 139 does not
apply to the tax in question because the section, in speaking of a
49
"tax," means only legal taxes; and that an illegal tax (the one
complained of) is not a tax, and, therefore, does not fall within the
inhibition of the section, and may be restrained by injunction.
There is no force in this suggestion. The inhibition applies to all
internal revenue taxes imposes, or authorized to be imposed, by
Act No. 2339. (Snyder vs. Marks, 109 U.S., 189.) And, furthermore,
the mere fact that a tax is illegal, or that the law, by virtue of which
it is imposed, is unconstitutional, does not authorize a court of
equity to restrain its collection by injunction. There must be a
further showing that there are special circumstances which bring
the case under some well recognized head of equity
jurisprudence, such as that irreparable injury, multiplicity of suits, or
a cloud upon title to real estate will result, and also that there is,
as we have indicated, no adequate remedy at law. This is the
settled law in the United States, even in the absence of statutory
enactments such as sections 139 and 140.
(Hannewinkle vs. Mayor, etc., of Georgetown, 82 U.S., 547;
Indiana Mfg. Co. vs. Koehne, 188 U.S., 681; Ohio Tax cases, 232 U.
S., 576, 587; Pittsburgh C. C. & St. L. R. Co. vs. Board of Public Works,
172 U. S., 32; Shelton vs. Plat, 139 U.S., 591; State Railroad Tax
Cases, 92 U. S., 575.) Therefore, this branch of the case must be
controlled by sections 139 and 140, unless the same be held
unconstitutional, and consequently, null and void.
The right and power of judicial tribunals to declare whether
enactments of the legislature exceed the constitutional limitations
and are invalid has always been considered a grave
responsibility, as well as a solemn duty. The courts invariably give
the most careful consideration to questions involving the
interpretation and application of the Constitution, and approach
constitutional questions with great deliberation, exercising their
power in this respect with the greatest possible caution and even
reluctance; and they should never declare a statute void, unless
its invalidity is, in their judgment, beyond reasonable doubt. To
justify a court in pronouncing a legislative act unconstitutional, or
a provision of a state constitution to be in contravention of the
Constitution of the United States, the case must be so clear to be
free from doubt, and the conflict of the statute with the
constitution must be irreconcilable, because it is but a decent
respect to the wisdom, the integrity, and the patriotism of the
legislative body by which any law is passed to presume in favor of
its validity until the contrary is shown beyond reasonable doubt.
Therefore, in no doubtful case will the judiciary pronounce a
legislative act to be contrary to the constitution. To doubt the
constitutionality of a law is to resolve the doubt in favor of its
validity. (6 Ruling Case Law, secs. 71, 72, and 73, and cases cited
therein.)
It is also the settled law in the United States that "due process of
law" does not always require, in respect to the Government, the
same process that is required between citizens, though it
generally implies and includes regular allegations, opportunity to
answer, and a trial according to some well settled course of
judicial proceedings. The case with which we are dealing is in
point. A citizen's property, both real and personal, may be taken,
and usually is taken, by the government in payment of its taxes
without any judicial proceedings whatever. In this country, as well
as in the United States, the officer charged with the collection of
taxes is authorized to seize and sell the property of delinquent
taxpayers without applying to the courts for assistance, and the
constitutionality of the law authorizing this procedure never has
been seriously questioned. (City of Philadelphia vs. [Diehl] The
Collector, 5 Wall., 720; Nicholl vs. U.S., 7 Wall., 122, and cases
cited.) This must necessarily be the course, because it is upon
taxation that the Government chiefly relies to obtain the means
to carry on its operations, and it is of the utmost importance that
the modes adopted to enforce the collection of the taxes levied
should be summary and interfered with as little as possible. No
government could exist if every litigious man were permitted to
delay the collection of its taxes. This principle of public policy must
be constantly borne in mind in determining cases such as the one
under consideration.
With these principles to guide us, we will proceed to inquire
whether there is any merit in the two propositions insisted upon by
counsel for the plaintiffs. Section 5 of the Philippine Bill provides:
"That no law shall be enacted in said Islands which shall deprive
any person of life, liberty, or property without due process of law,
or deny to any person therein the equal protection of the law."
The origin and history of these provisions are well-known. They are
found in substance in the Constitution of the United States and in
that of ever state in the Union.
Section 3224 of the Revised Statutes of the United States, effective
since 1867, provides that: "No suit for the purpose of restraining the
assessment or collection of any tax shall be maintained in any
court."
Section 139, with which we have been dealing, reads: "No court
shall have authority to grant an injunction to restrain the collection
of any internal-revenue tax."
A comparison of these two sections show that they are essentially
the same. Both expressly prohibit the restraining of taxes by
injunction. If the Supreme Court of the United States has clearly
and definitely held that the provisions of section 3224 do not
violate the "due process of law" and "equal protection of the law"
clauses in the Constitution, we would be going too far to hold that
section 139 violates those same provisions in the Philippine Bill. That
the Supreme Court of the United States has so held, cannot be
doubted.
In Cheatham vs. United States (92 U.S., 85,89) which involved the
validity of an income tax levied by an act of Congress prior to the
one in issue in the case of Pollock vs. Farmers' Loan & Trust Co. (157
U.S., 429) the court, through Mr. Justice Miller, said: "If there existed
in the courts, state or National, any general power of impeding or
controlling the collection of taxes, or relieving the hardship
incident to taxation, the very existence of the government might
be placed in the power of a hostile judiciary. (Dows vs. The City of
Chicago, 11 Wall., 108.) While a free course of remonstrance and
appeal is allowed within the departments before the money is
finally exacted, the General Government has wisely made the
payment of the tax claimed, whether of customs or of internal
revenue, a condition precedent to a resort to the courts by the
party against whom the tax is assessed. In the internal revenue
branch it has further prescribed that no such suit shall be brought
until the remedy by appeal has been tried; and, if brought after
this, it must be within six months after the decision on the appeal.
We regard this as a condition on which alone the government
consents to litigate the lawfulness of the original tax. It is not a hard
condition. Few governments have conceded such a right on any
condition. If the compliance with this condition requires the party
aggrieved to pay the money, he must do it."
Again, in State Railroad Tax Cases (92 U.S., 575, 613), the court
said: "That there might be no misunderstanding of the universality
of this principle, it was expressly enacted, in 1867, that "no suit for
the purpose of restraining the assessment or collection of any tax
shall be maintained in any court." (Rev, Stat., sec. 3224.) And
though this was intended to apply alone to taxes levied by the
United States, it shows the sense of Congress of the evils to be
feared if courts of justice could, in any case, interfere with the
process of collecting taxes on which the government depends for
its continued existence. It is a wise policy. It is founded in the simple
philosophy derived from the experience of ages, that the
payment of taxes has to be enforced by summary and stringent
means against a reluctant and often adverse sentiment; and to
do this successfully, other instrumentalities and other modes of
procedure are necessary, than those which belong to courts of
justice."
And again, in Snyder vs. Marks (109 U.S., 189), the court said: "The
remedy of a suit to recover back the tax after it is paid is provided
by statute, and a suit to restrain its collection is forbidden. The
remedy so given is exclusive, and no other remedy can be
substituted for it. Such has been the current of decisions in the
Circuit Courts of the United States, and we are satisfied it is a
correct view of the law."itc-a1f
In the consideration of the plaintiffs' second proposition, we will
attempt to show (1) that the Philippine courts never have had,
since the American occupation, the power to restrain by
injunction the collection of any tax imposed by the Insular
Government for its own purpose and benefit, and (2) that
assuming that our courts had or have such power, this power has
not been diminished or curtailed by sections 139 and 140.
We will first review briefly the former and present systems of
taxation. Upon the American occupation of the Philippine, there
was found a fairly complete system of taxation. This system was
continued in force by the military authorities, with but few
changes, until the Civil Government assumed charge of the
subject. The principal sources of revenue under the Spanish
regime were derived from customs receipts, the so-called
industrial taxes, the urbana taxes, the stamp tax, the personal
cedula tax, and the sale of the public domain. The industrial and
urbana taxes constituted practically an income tax of some 5 per
cent on the net income of persons engaged in industrial and
commercial pursuits and on the income of owners of improved
city property. The sale of stamped paper and adhesive stamp tax.
The cedula tax was a graduated tax, ranging from nothing up to
P37.50. The revenue derived from the sale of the public domain
was not considered a tax. The American authorities at once
abolished the cedula tax, but later restored it in a modified form,
charging for each cedula twenty centavos, an amount which
50
was supposed to be just sufficient to cover the cost of issuance.
The urbana tax was abolished by Act No. 223, effective
September 6, 1901.
The "Municipal Code" (Act No. 82) and the Provincial Government
Act (No. 83), both enacted in 1901, authorize municipal councils
and provincial boards to impose an ad valorem tax on real
estate. The Municipal Code did not apply to the city of Manila.
This city was given a special charter (Act No. 183), effective
August 30, 1901; Under this charter the Municipal Board of Manila
is authorized and empowered to impose taxes upon real estate
and, like municipal councils, to license and regulate certain
occupations. Customs matters were completely reorganized by
Act No. 355, effective at the port of Manila on February 7, 1902,
and at other ports in the Philippine Islands the day after the receipt
of a certified copy of the Act. The Internal Revenue Law of 1904
(Act No. 1189), repealed all existing laws, ordinances, etc.,
imposing taxes upon the persons, objects, or occupations taxed
under that act, and all industrial taxes and stamp taxes imposed
under the Spanish regime were eliminated, but the industrial tax
was continued in force until January 1, 1905. This Internal Revenue
Law did not take away from municipal councils, provincial
boards, and the Municipal Board of the city of Manila the power
to impose taxes upon real estate. This Act (No. 1189), with its
amendments, was repealed by Act No. 2339, an act "revising and
consolidating the laws relative to internal revenue."
Section 84 of Act No. 82 provides that "No court shall entertain any
suit assailing the validity of a tax assessed under this act until the
taxpayer shall have paid, under protest, the taxes assessed
against him, . . . ."
This inhibition was inserted in section 17 of Act No. 83 and applies
to taxes imposed by provincial boards. The inhibition was not
inserted in the Manila Charter until the passage of Act No. 1793,
effective October 12, 1907. Act No. 355 expressly makes the
payment of the exactions claimed a condition precedent to a
resort to the courts by dissatisfied importers. Section 52 of Act No.
1189 provides "That no courts shall have authority to grant an
injunction restraining the collection of any taxes imposed by virtue
of the provisions of this Act, but the remedy of the taxpayer who
claims that he is unjustly assessed or taxed shall be by payment
under protest of the sum claimed from him by the Collector of
Internal Revenue and by action to recover back the sum claimed
to have been illegally collected."
Sections 139 and 140 of Act No. 2339 contain, as we have
indicated, the same prohibition and remedy. The result is that the
courts have been expressly forbidden, in every act creating or
imposing taxes or imposts enacted by the legislative body of the
Philippines since the American occupation, to entertain any suit
assailing the validity of any tax or impost thus imposed until the tax
shall have been paid under protest. The only taxes which have
not been brought within the express inhibition were those
included in that part of the old Spanish system which completely
disappeared on or before January 1, 1905, and possibly the old
customs duties which disappeared in February, 1902.
Section 56 of the Organic Act (No. 136), effective June 16, 1901,
provides that "Courts of First Instance shall have original
jurisdiction:
xxx xxx xxx
2. In all civil actions which involve the ... legality of any tax, impost,
or assessment, . . . .
xxx xxx xxx
7. Said courts and their judges, or any of them, shall have power
to issue writs of injunction, mandamus, certiorari, prohibition, quo
warranto, and habeas corpus in their respective provinces and
districts, in the manner provided in the Code of Civil Procedure.
The provisions of the Code of Civil Procedure (Act No. 190),
effective October 1, 1901, which deals with the subject of
injunctions, are sections 162 to 172, inclusive. Injunctions, as here
defined, are of two kinds; preliminary and final. The former may
be granted at any time after the commencement of the action
and before final judgment, and the latter at the termination of the
trial as the relief or part of the relief prayed for (sec. 162). Any
judge of the Supreme Court may grant a preliminary injunction in
any action pending in that court or in any Court of First Instance.
A preliminary injunction may also be granted by a judge of the
Court of First Instance in actions pending in his district in which he
has original jurisdiction (sec. 163). But such injunctions may be
granted only when the complaint shows facts entitling the plaintiff
to the relief demanded (sec. 166), and before a final or
permanent injunction can be granted, it must appear upon the
trial of the action that the plaintiff is entitled to have commission
or continuance of the acts complained of perpetually restrained
(sec. 171). These provisions authorize the institution in Courts of First
Instance of what are known as "injunction suits," the sole object of
which is to obtain the issuance of a final injunction. They also
authorize the granting of injunctions as aiders in ordinary civil
actions. We have defined in Davesa vs. Arbes (13 Phil. Rep., 273),
an injunction to be "A "special remedy" adopted in that code (Act
190) from American practice, and originally borrowed from
English legal procedure, which was there issued by the authority
and under the seal of a court of equity, and limited, as in other
cases where equitable relief is sought, to those cases where there
is no "plain, adequate, and complete remedy at law,"which will
not be granted while the rights between the parties are
undetermined, except in extraordinary cases where material and
irreparable injury will be done,"which cannot be compensated in
damages . . .
By paragraph 2 of section 56 of Act No. 136, supra, and the
provisions of the various subsequent Acts heretofore mentioned,
the Insular Government has consented to litigate with aggrieved
persons the validity of any original tax or impost imposed by it on
condition that this be done in ordinary civil actions after the taxes
or exactions shall have been paid. But it is said that paragraph 2
confers original jurisdiction upon Courts of First Instance to hear
and determine "all civil actions" which involve the validity of any
tax, impost or assessment, and that if the all-inclusive words "all"
and "any" be given their natural and unrestricted meaning, no
action wherein that question is involved can arise over which such
courts do not have jurisdiction. (Barrameda vs. Moir, 25 Phil. Rep.,
44.) This is true. But the term "civil actions" had its well defined
meaning at the time the paragraph was enacted. The same
legislative body which enacted paragraph 2 on June 16, 1901,
had, just a few months prior to that time, defined the only kind of
action in which the legality of any tax imposed by it might be
assailed. (Sec. 84, Act 82, enacted January 31, 1901, and sec. 17,
Act No. 83, enacted February 6, 1901.) That kind of action being
payment of the tax under protest and an ordinary suit to recover
and no other, there can be no doubt that Courts of First Instance
have jurisdiction over all such actions. The subsequent legislation
on the same subject shows clearly that the Commission, in
enacting paragraph 2, supra, did not intend to change or modify
in any way section 84 of Act No. 82 and section 17 of Act No. 83,
but, on the contrary, it was intended that "civil actions,"
mentioned in said paragraph, should be understood to mean, in
so far as testing the legality of taxes were concerned, only those
of the kind and character provided for in the two sections above
mentioned. It is also urged that the power to restrain by injunction
the collection of taxes or imposts is conferred upon Courts of First
Instance by paragraph 7 of section 56, supra. This paragraph does
empower those courts to grant injunctions, both preliminary and
final, in any civil action pending in their districts, provided always,
that the complaint shows facts entitling the plaintiff to the relief
demanded. Injunction suits, such as the one at bar, are "civil
actions," but of a special or extraordinary character. It cannot be
said that the Commission intended to give a broader or different
meaning to the word "action," used in Chapter 9 of the Code of
Civil Procedure in connection with injunctions, than it gave to the
same word found in paragraph 2 of section 56 of the Organic Act.
The Insular Government, in exercising the power conferred upon
it by the Congress of the United States, has declared that the
citizens and residents of this country shall pay certain specified
taxes and imposts. The power to tax necessarily carries with it the
power to collect the taxes. This being true, the weight of authority
supports the proposition that the Government may fix the
conditions upon which it will consent to litigate the validity of its
original taxes. (Tennessee vs. Sneed, 96 U.S., 69.)
We must, therefore, conclude that paragraph 2 and 7 of section
56 of Act No. 136, construed in the light of the prior and
subsequent legislation to which we have referred, and the
legislative and judicial history of the same subject in the United
States with which the Commission was familiar, do not empower
Courts of firs Instance to interfere by injunction with the collection
of the taxes in question in this case.1awphil.net
If we are in error as to the scope of paragraph 2 and 7, supra, and
the Commission did intend to confer the power upon the courts
to restrain the collection of taxes, it does not necessarily follow
that this power or jurisdiction has been taken away by section 139
of Act No. 2339, for the reason that all agree that an injunction will
not issue in any case if there is an adequate remedy at law. The
very nature of the writ itself prevents its issuance under such
circumstances. Legislation forbidding the issuing of injunctions in
such cases is unnecessary. So the only question to be here
determined is whether the remedy provided for in section 140 of
Act No. 2339 is adequate. If it is, the writs which form the basis of
this appeal should not have been issued. If this is the correct view,
51
the authority to issue injunctions will not have been taken away
by section 139, but rendered inoperative only by reason of an
adequate remedy having been made available.
The legislative body of the Philippine Islands has declared from the
beginning (Act No. 82) that payment under protest and suit to
recover is an adequate remedy to test the legality of any tax or
impost, and that this remedy is exclusive. Can we say that the
remedy is not adequate or that it is not exclusive, or both? The
plaintiffs in the case at bar are the first, in so far as we are aware,
to question either the adequacy or exclusiveness of this remedy.
We will refer to a few cases in the United States where statutes
similar to sections 139 and 140 have been construed and applied.
In May, 1874, one Bloomstein presented a petition to the circuit
court sitting in Nashville, Tennessee, stating that his real and
personal property had been assessed for state taxes in the year
1872 to the amount of $132.60; that he tendered to the collector
this amount in "funds receivable by law for such purposes;" and
that the collector refused to receive the same. He prayed for an
alternative writ of mandamus to compel the collector to receive
the bills in payment for such taxes, or to show cause to the
contrary. To this petition the collector, in his answer, set up the
defense that the petitioner's suit was expressly prohibited by the
Act of the General Assembly of the State of Tennessee, passed in
1873. The petition was dismissed and the relief prayed for refused.
An appeal to the supreme court of the State resulted in the
affirmance of the judgment of the lower court. The case was then
carried to the Supreme Court of the United States
(Tennessee vs. Sneed, 96 U. S., 69), where the judgment was again
affirmed.
The two sections of the Act of [March 21,] 1873, drawn in question
in that cases, read as follows:
1. That in all cases in which an officer, charged by law with the
collection of revenue due the State, shall institute any
proceeding, or take any steps for the collection of the same,
alleged or claimed to be due by said officer from any citizen, the
party against whom the proceeding or step is taken shall, if he
conceives the same to be unjust or illegal, or against any statute
or clause of the Constitution of the State, pay the same under
protest; and, upon his making said payment, the officer or
collector shall pay such revenue into the State Treasury, giving
notice at the time of payment to the Comptroller that the same
was paid under protest; and the party paying said revenue may,
at any time within thirty days after making said payment, and not
longer thereafter, sue the said officer having collected said sum,
for the recovery thereof. And the same may be tried in any court
having the jurisdiction of the amount and parties; and, if it be
determined that the same was wrongfully collected, as not being
due from said party to the State, for any reason going to the merits
of the same, then the court trying the case may certify of record
that the same was wrongfully paid and ought to be refunded;
and thereupon the Comptroller shall issue his warrant for the
same, which shall be paid in preference to other claims on the
Treasury.
2. That there shall be no other remedy, in any case of the
collection of revenue, or attempt to collect revenue illegally, or
attempt to collect revenue in funds only receivable by said officer
under the law, the same being other or different funds than such
as the tax payer may tender, or claim the right to pay, than that
above provided; and no writ for the prevention of the collection
of any revenue claimed, or to hinder or delay the collection of the
same, shall in anywise issue, either injunction, supersedeas,
prohibition, or any other writ or process whatever; but in all cases
in which, for any reason, any person shall claim that the tax so
collected was wrongfully or illegally collected, the remedy for said
party shall be as above provided, and in no other manner."
In discussing the adequacy of the remedy provided by the
Tennessee Legislature, as above set forth, the Supreme Court of
the United States, in the case just cited, said: "This remedy is simple
and effective. A suit at law to recover money unlawfully exacted
is as speedy, as easily tried, and less complicated than a
proceeding by mandamus. ... In revenue cases, whether arising
upon its (United States) Internal Revenue Laws or those providing
for the collection of duties upon foreign imports, it (United States)
adopts the rule prescribed by the State of Tennessee. It requires
the contestant to pay the amount as fixed by the Government,
and gives him power to sue the collector, and in such suit to test
the legality of the tax. There is nothing illegal or even harsh in this.
It is a wise and reasonable precaution for the security of the
Government."
Thomas C. Platt commenced an action in the Circuit Court of the
United States for the Eastern District of Tennessee to restrain the
collection of a license tax from the company which he
represented. The defense was that sections 1 and 2 of the Act of
1873, supra, prohibited the bringing of that suit. This case also
reached the Supreme Court of the United States.
(Shelton vs. Platt, 139 U. 591.) In speaking of the inhibitory
provisions of sections 1 and 2 of the Act of 1873, the court said:
"This Act has been sanctioned and applied by the Courts of
Tennessee. (Nashville vs.Smith, 86 Tenn., 213; Louisville & N. R.
Co. vs. State, 8 Heisk., 663, 804.) It is, as counsel observe, similar to
the Act of Congress forbidding suit for the purpose of restraining
the assessment or collection of taxes under the Internal Revenue
Laws, in respect to which this court held that the remedy by suit to
recover back the tax after payment, provided for by the Statute,
was exclusive. (Snyder vs. Marks, of this character has been called
for by the embarrassments resulting from the improvident
employment of the writ of injunction in arresting the collection of
the public revenue; and, even in its absence, the strong arm of
the court of chancery ought not to be interposed in that direction
except where resort to that court is grounded upon the settled
principles which govern its jurisdiction."
In Louisville & N.R. Co. vs. State (8 Heisk. [64 Tenn.], 663, 804), cited
by the Supreme Court of the United States in
Shelton vs. Platt, supra, the court said: "It was urged that this
statute (sections 1 and 2 of the Act of 1873, supra) is
unconstitutional and void, as it deprives the citizen of the remedy
by certiorari, guaranteed by the organic law."
By the 10th section of the sixth article of the Constitution,
[Tennessee] it is provided that: "The judges or justices of inferior
courts of law and equity shall have power in all civil cases to issue
writs of certiorari, to remove any cause, or the transcript of the
record thereof, from any inferior jurisdiction into such court of law,
on sufficient cause, supported by oath or affirmation."
The court held the act valid as not being in conflict with these
provisions of the State constitution.
In Eddy vs. The Township of Lee (73 Mich., 123), the complainants
sought to enjoin the collection of certain taxes for the year 1886.
The defendants, in support of their demurrer, insisted that the
remedy by injunction had been taken away by section 107 of the
Act of 1885, which section reads as follows: "No injunction shall
issue to stay proceedings for the assessment or collection of taxes
under this Act."
It was claimed by the complainants that the above quoted
provisions of the Act of 1885 were unconstitutional and void as
being in conflict with article 6, sec. 8, of the Constitution, which
provides that: "The circuit courts shall have original jurisdiction in
all matters, civil and criminal, not excepted in this Constitution,
and not prohibited by law. ... They shall also have power to issue
writs of habeas corpus, mandamus, injunction, quo
warranto, certiorari, and other writs necessary to carry into effect
their orders, judgments, and decrees."
Mr. Justice Champlin, speaking for the court, said: "I have no
doubt that the Legislature has the constitutional authority, where
it has provided a plain, adequate, and complete remedy at law
to recover back taxes illegally assessed and collected, to take
away the remedy by injunction to restrain their collection."
Section 9 of the Philippine Bill reads in part as follows: "That the
Supreme Court and the Courts of First Instance of the Philippine
Islands shall possess and exercise jurisdiction as heretofore
provided and such additional jurisdiction as shall hereafter be
prescribed by the Government of said Islands, subject to the
power of said Government to change the practice and method
of procedure."
It will be seen that this section has not taken away from the
Philippine Government the power to change the practice and
method of procedure. If sections 139 and 140, considered
together, and this must always be done, are nothing more than a
mode of procedure, then it would seem that the Legislature did
not exceed its constitutional authority in enacting them.
Conceding for the moment that the duly authorized procedure
for the determination of the validity of any tax, impost, or
assessment was by injunction suits and that this method was
available to aggrieved taxpayers prior to the passage of Act No.
2339, may the Legislature change this method of procedure? That
the Legislature has the power to do this, there can be no doubt,
provided some other adequate remedy is substituted in lieu
thereof. In speaking of the modes of enforcing rights created by
contracts, the Supreme Court of the United States, in
Tennessee vs. Sneed, supra, said: "The rule seems to be that in
modes of proceedings and of forms to enforce the contract the
Legislature has the control, and may enlarge, limit or alter them,
provided that it does not deny a remedy, or so embarrass it with
52
conditions and restrictions as seriously to impair the value of the
right."
In that case the petitioner urged that the Acts of 1873 were laws
impairing the obligation of the contract contained in the charter
of the Bank of Tennessee, which contract was entered into with
the State in 1838. It was claimed that this was done by placing
such impediments and obstructions in the way of its enforcement,
thereby so impairing the remedies as practically to render the
obligation of no value. In disposing of this contention, the court
said: "If we assume that prior to 1873 the relator had authority to
prosecute his claim against the State by mandamus, and that by
the statutes of that year the further use of that form was prohibited
to him, the question remains. whether an effectual remedy was
left to him or provided for him. We think the regulation of the
statute gave him an abundant means of enforcing such right as
he possessed. It provided that he might pay his claim to the
collector under protest, giving notice thereof to the Comptroller
of the Treasury; that at any time within thirty days thereafter he
might sue the officer making the collection; that the case should
be tried by any court having jurisdiction and, if found in favor of
the plaintiff on the merits, the court should certify that the same
was wrongfully paid and ought to be refunded and the
Comptroller should thereupon issue his warrant therefor, which
should be paid in preference to other claim on the Treasury."
But great stress is laid upon the fact that the plaintiffs in the case
under consideration are unable to pay the taxes assessed against
them and that if the law is enforced, they will be compelled to
suspend business. This point may be best answered by quoting
from the case of Youngblood vs. Sexton (32 Mich., 406), wherein
Judge Cooley, speaking for the court, said: "But if this
consideration is sufficient to justify the transfer of a controversy
from a court of law to a court of equity, then every controversy
where money is demanded may be made the subject of
equitable cognizance. To enforce against a dealer a promissory
note may in some cases as effectually break up his business as to
collect from him a tax of equal amount. This is not what is known
to the law as irreparable injury. The courts have never recognized
the consequences of the mere enforcement of a money demand
as falling within that category."
Certain specified sections of Act No. 2339 were amended by Act
No. 2432, enacted December 23, 1914, effective January 1, 1915,
by imposing increased and additional taxes. Act No. 2432 was
amended, were ratified by the Congress of the United States on
March 4, 1915. The opposition manifested against the taxes
imposed by Acts Nos. 2339 and 2432 is a matter of local history. A
great many business men thought the taxes thus imposed were
too high. If the collection of the new taxes on signs, signboards,
and billboards may be restrained, we see no well-founded reason
why injunctions cannot be granted restraining the collection of all
or at least a number of the other increased taxes. The fact that
this may be done, shows the wisdom of the Legislature in denying
the use of the writ of injunction to restrain the collection of any tax
imposed by the Acts. When this was done, an equitable remedy
was made available to all dissatisfied taxpayers.
The question now arises whether, the case being one of which the
court below had no jurisdiction, this court, on appeal, shall
proceed to express an opinion upon the validity of provisions of
subsection (b) of section 100 of Act No. 2339, imposing the taxes
complained of. As a general rule, an opinion on the merits of a
controversy ought to be declined when the court is powerless to
give the relief demanded. But it is claimed that this case is, in
many particulars, exceptional. It is true that it has been argued on
the merits, and there is no reason for any suggestion or suspicion
that it is not a bona fide controversy. The legal points involved in
the merits have been presented with force, clearness, and great
ability by the learned counsel of both sides. If the law assailed
were still in force, we would feel that an opinion on its validity
would be justifiable, but, as the amendment became effective
on January 1, 1915, we think it advisable to proceed no further
with this branch of the case.
The next question arises in connection with the supplementary
complaint, the object of which is to enjoin the Collector of Internal
Revenue from removing certain billboards, the property of the
plaintiffs located upon private lands in the Province of Rizal. The
plaintiffs allege that the billboards here in question "in no sense
constitute a nuisance and are not deleterious to the health,
morals, or general welfare of the community, or of any persons."
The defendant denies these allegations in his answer and claims
that after due investigation made upon the complaints of the
British and German Consuls, he "decided that the billboard
complained of was and still is offensive to the sight, and is
otherwise a nuisance." The plaintiffs proved by Mr. Churchill that
the "billboards were quite a distance from the road and that they
were strongly built, not dangerous to the safety of the people, and
contained no advertising matter which is filthy, indecent, or
deleterious to the morals of the community." The defendant
presented no testimony upon this point. In the agreed statement
of facts submitted by the parties, the plaintiffs "admit that the
billboards mentioned were and still are offensive to the sight."
The pertinent provisions of subsection (b) of section 100 of Act No.
2339 read: "If after due investigation the Collector of Internal
Revenue shall decide that any sign, signboard, or billboard
displayed or exposed to public view is offensive to the sight or is
otherwise a nuisance, he may by summary order direct the
removal of such sign, signboard, or billboard, and if same is not
removed within ten days after he has issued such order he my
himself cause its removal, and the sign, signboard, or billboard
shall thereupon be forfeited to the Government, and the owner
thereof charged with the expenses of the removal so effected.
When the sign, signboard, or billboard ordered to be removed as
herein provided shall not comply with the provisions of the general
regulations of the Collector of Internal Revenue, no rebate or
refund shall be allowed for any portion of a year for which the tax
may have been paid. Otherwise, the Collector of Internal
Revenue may in his discretion make a proportionate refund of the
tax for the portion of the year remaining for which the taxes were
paid. An appeal may be had from the order of the Collector of
Internal Revenue to the Secretary of Finance and Justice whose
decision thereon shall be final."
The Attorney-General, on behalf of the defendant, says: "The
question which the case presents under this head for
determination, resolves itself into this inquiry: Is the suppression of
advertising signs displayed or exposed to public view, which are
admittedly offensive to the sight, conducive to the public
interest?"
And cunsel for the plaintiffs states the question thus: "We contend
that that portion of section 100 of Act No. 2339, empowering the
Collector of Internal Revenue to remove billboards as nuisances,
if objectionable to the sight, is unconstitutional, as constituting a
deprivation of property without due process of law."
From the position taken by counsel for both sides, it is clear that
our inquiry is limited to the question whether the enactment
assailed by the plaintiffs was a legitimate exercise of the police
power of the Government; for all property is held subject to that
power.
As a consequence of the foregoing, all discussion and authorities
cited, which go to the power of the state to authorize
administrative officers to find, as a fact, that legitimate trades,
callings, and businesses are, under certain circumstances,
statutory nuisances, and whether the procedure prescribed for
this purpose is due process of law, are foreign to the issue here
presented.
There can be no doubt that the exercise of the police power of
the Philippine Government belongs to the Legislature and that this
power is limited only by the Acts of Congress and those
fundamentals principles which lie at the foundation of all
republican forms of government. An Act of the Legislature which
is obviously and undoubtedly foreign to any of the purposes of the
police power and interferes with the ordinary enjoyment of
property would, without doubt, be held to be invalid. But where
the Act is reasonably within a proper consideration of and care
for the public health, safety, or comfort, it should not be disturbed
by the courts. The courts cannot substitute their own views for
what is proper in the premises for those of the Legislature. In
Munn vs. Illinois (94 U.S., 113), the United States Supreme Court
states the rule thus: "If no state of circumstances could exist to
justify such statute, then we may declare this one void because in
excess of the legislative power of this state; but if it could, we must
presume it did. Of the propriety of legislative interference, within
the scope of the legislative power, a legislature is the exclusive
judge."
This rule very fully discussed and declared in
Powell vs. Pennsylvania (127 U.S., 678) — "oleo-margarine" case.
(See also Crowley vs. Christensen, 137 U.S., 86, 87;
Camfield vs. U.S., 167 U.S., 518.) While the state may interfere
wherever the public interests demand it, and in this particular a
large discretion is necessarily vested in the legislature to
determine, not only what the interest of the public require, but
what measures are necessary for the protection of such interests;
yet, its determination in these matters is not final or conclusive, but
is subject to the supervision of the courts. (Lawton vs. Steele, 152
U.S., 133.) Can it be said judicially that signs, signboards, and
billboards, which are admittedly offensive to the sight, are not with
the category of things which interfere with the public safety,
welfare, and comfort, and therefore beyond the reach of the
police power of the Philippine Government?
53
The numerous attempts which have been made to limit by
definition the scope of the police power are only interesting as
illustrating its rapid extension within comparatively recent years to
points heretofore deemed entirely within the field of private liberty
and property rights. Blackstone's definition of the police power
was as follows: "The due regulation and domestic order of the
kingdom, whereby the individuals of the state, like members of a
well governed family, are bound to conform their general
behavior to the rules of propriety, good neigborhood, and good
manners, to be decent, industrious, and inoffensive in their
respective stations." (Commentaries, vol. 4, p. 162.)
Chanceller Kent considered the police power the authority of the
state "to regulate unwholesome trades, slaughter houses,
operations offensive to the senses." Chief Justice Shaw of
Massachusetts defined it as follows: "The power vested in the
legislature by the constitution to make, ordain, and establish all
manner of wholesome and reasonable laws, statutes, and
ordinances, either with penalties or without, not repugnant to the
constitution, as they shall judge to be for the good and welfare of
the commonwealth, and of the subjects of the same."
(Com. vs. Alger, 7 Cush., 53.)
In the case of Butchers' Union Slaughter-house, etc.
Co. vs. Crescent City Live Stock Landing, etc. Co. (111 U.S., 746),
it was suggested that the public health and public morals are
matters of legislative concern of which the legislature cannot
divest itself. (See State vs. Mountain Timber Co. [1913], 75 Wash.,
581, where these definitions are collated.)
In Champer vs. Greencastle (138 Ind., 339), it was said: "The police
power of the State, so far, has not received a full and complete
definition. It may be said, however, to be the right of the State, or
state functionary, to prescribe regulations for the good order,
peace, health, protection, comfort, convenience and morals of
the community, which do not ... violate any of the provisions of
the organic law." (Quoted with approval in Hopkins vs. Richmond
[Va., 1915], 86 S.E., 139.)
In Com. vs. Plymouth Coal Co. ([1911] 232 Pa., 141), it was said:
"The police power of the state is difficult of definition, but it has
been held by the courts to be the right to prescribe regulations for
the good order, peace, health, protection, comfort,
convenience and morals of the community, which does not
encroach on a like power vested in congress or state legislatures
by the federal constitution, or does not violate the provisions of
the organic law; and it has been expressly held that the fourteenth
amendment to the federal constitution was not designed to
interfere with the exercise of that power by the state."
In People vs. Brazee ([Mich., 1914], 149 N.W., 1053), it was said: "It
[the police power] has for its object the improvement of social
and economic conditioned affecting the community at large
and collectively with a view to bring about "he greatest good of
the greatest number."Courts have consistently and wisely
declined to set any fixed limitations upon subjects calling for the
exercise of this power. It is elastic and is exercised from time to
time as varying social conditions demand correction."
In 8 Cyc., 863, it is said: "Police power is the name given to that
inherent sovereignty which it is the right and duty of the
government or its agents to exercise whenever public policy, in a
broad sense, demands, for the benefit of society at large,
regulations to guard its morals, safety, health, order or to insure in
any respect such economic conditions as an advancing
civilization of a high complex character requires." (As quoted with
approval in Stettler vs.O'Hara [1914], 69 Ore, 519.)
Finally, the Supreme Court of the United States has said in Noble
State Bank vs. Haskell (219 U.S. [1911], 575: "It may be said in a
general way that the police power extends to all the great public
needs. It may be put forth in aid of what is sanctioned by usage,
or held by the prevailing morality or strong and preponderant
opinion to be greatly and immediately necessary to the public
welfare."
This statement, recent as it is, has been quoted with approval by
several courts. (Cunningham vs. Northwestern Imp. Co. [1911], 44
Mont., 180; State vs. Mountain Timber Co. [1913], 75 Wash., 581;
McDavid vs. Bank of Bay Minette [Ala., 1915], 69 Sou., 452;
Hopkins vs. City of Richmond [Va., 1915], 86 S.E., 139;
State vs. Philipps [Miss. 1915], 67 Sou., 651.)
It was said in Com. vs. Alger (7 Cush., 53, 85), per Shaw, C.J., that:
"It is much easier to perceive and realize the existence and
sources of this police power than to mark its boundaries, or to
prescribe limits to its exercise." In Stone vs. Mississippi (101 U.S., 814),
it was said: "Many attempts have been made in this court and
elsewhere to define the police power, but never with entire
success. It is always easier to determine whether a particular case
comes within the general scope of the power, than to give an
abstract definition of the power itself, which will be in all respects
accurate."
Other courts have held the same vow of efforts to evolve a
satisfactory definition of the police power. Manifestly, definitions
which fail to anticipate cases properly within the scope of the
police power are deficient. It is necessary, therefore, to confine
our discussion to the principle involved and determine whether
the cases as they come up are within that principle. The basic
idea of civil polity in the United States is that government should
interfere with individual effort only to the extent necessary to
preserve a healthy social and economic condition of the country.
State interference with the use of private property may be
exercised in three ways. First, through the power of taxation,
second, through the power of eminent domain, and third, through
the police power. Buy the first method it is assumed that the
individual receives the equivalent of the tax in the form of
protection and benefit he receives from the government as such.
By the second method he receives the market value of the
property taken from him. But under the third method the benefits
he derived are only such as may arise from the maintenance of a
healthy economic standard of society and is often referred to
as damnum absque injuria. (Com. vs. Plymouth Coal Co. 232 Pa.,
141; Bemis vs. Guirl Drainage Co., 182 Ind., 36.) There was a time
when state interference with the use of private property under the
guise of the police power was practically confined to the
suppression of common nuisances. At the present day, however,
industry is organized along lines which make it possible for large
combinations of capital to profit at the expense of the socio-
economic progress of the nation by controlling prices and
dictating to industrial workers wages and conditions of labor. Not
only this but the universal use of mechanical contrivances by
producers and common carriers has enormously increased the toll
of human life and limb in the production and distribution of
consumption goods. To the extent that these businesses affect not
only the public health, safety, and morals, but also the general
social and economic life of the nation, it has been and will
continue to be necessary for the state to interfere by regulation.
By so doing, it is true that the enjoyment of private property is
interfered with in no small degree and in ways that would have
been considered entirely unnecessary in years gone by. The
regulation of rates charged by common carriers, for instance, or
the limitation of hours of work in industrial establishments have only
a very indirect bearing upon the public health, safety, and morals,
but do bear directly upon social and economic conditions. To
permit each individual unit of society to feel that his industry will
bring a fair return; to see that his work shall be done under
conditions that will not either immediately or eventually ruin his
health; to prevent the artificial inflation of prices of the things
which are necessary for his physical well being are matters which
the individual is no longer capable of attending to himself. It is
within the province of the police power to render assistance to
the people to the extent that may be necessary to safeguard
these rights. Hence, laws providing for the regulation of wages
and hours of labor of coal miners (Rail & River Coal Co. vs. Taylor,
234 U.S., 224); requiring payment of employees of railroads and
other industrial concerns in legal tender and requiring salaries to
be paid semimonthly (Erie R.R. Co. vs. Williams, 233 U.S., 685);
providing a maximum number of hours of labor for women
(Miller vs. Wilson, U.S. Sup. Ct. [Feb. 23, 1915], Adv. Opns., p. 342);
prohibiting child labor (Sturges & Burn vs. Beauchamp, 231 U.S.,
320); restricting the hours of labor in public laundries (In re Wong
Wing, 167 Cal., 109); limiting hours of labor in industrial
establishment generally (State vs. Bunting, 71 Ore., 259); Sunday
Closing Laws (State vs. Nicholls [Ore., 1915], 151 Pac., 473;
People vs. C. Klinck Packing Co. [N.Y., 1915], 108 N. E., 278;
Hiller vs. State [Md., 1914], 92 Atl., 842; State vs. Penny, 42 Mont.,
118; City of Springfield vs. Richter, 257 Ill., 578, 580;
State vs. Hondros [S.C., 1915], 84 S.E., 781); have all been upheld
as a valid exercise of the police power. Again, workmen's
compensation laws have been quite generally upheld. These
statutes discard the common law theory that employers are not
liable for industrial accidents and make them responsible for all
accidents resulting from trade risks, it being considered that such
accidents are a legitimate charge against production and that
the employer by controlling the prices of his product may shift the
burden to the community. Laws requiring state banks to join in
establishing a depositors' guarantee fund have also been upheld
by the Federal Supreme Court in Noble State Bank vs. Haskell (219
U. S., 104), and Assaria State Bank vs. Dolley (219 U.S., 121).
Offensive noises and smells have been for a long time considered
susceptible of suppression in thickly populated districts. Barring
livery stables from such locations was approved of in
Reinman vs. Little Rock (U.S. Sup. Ct. [Apr. 5, 1915], U.S. Adv. Opns.,
54
p. 511). And a municipal ordinance was recently upheld
(People vs. Ericsson, 263 Ill., 368), which prohibited the location of
garages within two hundred feet of any hospital, church, or
school, or in any block used exclusively for residential purposes,
unless the consent of the majority of the property owners be
obtained. Such statutes as these are usually upheld on the theory
of safeguarding the public health. But we apprehend that in point
of fact they have little bearing upon the health of the normal
person, but a great deal to do with his physical comfort and
convenience and not a little to do with his peace of mind. Without
entering into the realm of psychology, we think it quite
demonstrable that sight is as valuable to a human being as any
of his other senses, and that the proper ministration to this sense
conduces as much to his contentment as the care bestowed
upon the senses of hearing or smell, and probably as much as
both together. Objects may be offensive to the eye as well as to
the nose or ear. Man's esthetic feelings are constantly being
appealed to through his sense of sight. Large investments have
been made in theaters and other forms of amusement, in
paintings and spectacular displays, the success of which depends
in great part upon the appeal made through the sense of sight.
Moving picture shows could not possible without the sense of
sight. Governments have spent millions on parks and boulevards
and other forms of civic beauty, the first aim of which is to appeal
to the sense of sight. Why, then, should the Government not
interpose to protect from annoyance this most valuable of man's
senses as readily as to protect him from offensive noises and
smells?
The advertising industry is a legitimate one. It is at the same time a
cause and an effect of the great industrial age through which the
world is now passing. Millions are spent each year in this manner
to guide the consumer to the articles which he needs. The sense
of sight is the primary essential to advertising success. Billboard
advertising, as it is now conducted, is a comparatively recent form
of advertising. It is conducted out of doors and along the arteries
of travel, and compels attention by the strategic locations of the
boards, which obstruct the range of vision at points where
travelers are most likely to direct their eyes. Beautiful landscapes
are marred or may not be seen at all by the traveler because of
the gaudy array of posters announcing a particular kind of
breakfast food, or underwear, the coming of a circus, an
incomparable soap, nostrums or medicines for the curing of all the
ills to which the flesh is heir, etc. It is quite natural for people to
protest against this indiscriminate and wholesale use of the
landscape by advertisers and the intrusion of tradesmen upon
their hours of leisure and relaxation from work. Outdoor life must
lose much of its charm and pleasure if this form of advertising is
permitted to continue unhampered until it converts the streets
and highways into veritable canyons through which the world
must travel in going to work or in search of outdoor pleasure.
The success of billboard advertising depends not so much upon
the use of private property as it does upon the use of the channels
of travel used by the general public. Suppose that the owner of
private property, who so vigorously objects to the restriction of this
form of advertising, should require the advertiser to paste his
posters upon the billboards so that they would face the interior of
the property instead of the exterior. Billboard advertising would
die a natural death if this were done, and its real dependency not
upon the unrestricted use of private property but upon the
unrestricted use of the public highways is at once apparent.
Ostensibly located on private property, the real and sole value of
the billboard is its proximity to the public thoroughfares. Hence,
we conceive that the regulation of billboards and their restriction
is not so much a regulation of private property as it is a regulation
of the use of the streets and other public thoroughfares.
We would not be understood as saying that billboard advertising
is not a legitimate business any more than we would say that a
livery stable or an automobile garage is not. Even a billboard is
more sightly than piles of rubbish or an open sewer. But all these
businesses are offensive to the senses under certain conditions.
It has been urged against ministering to the sense of sight that
tastes are so diversified that there is no safe standard of legislation
in this direction. We answer in the language of the Supreme Court
in Noble State Bank vs.Haskell (219 U.S., 104), and which has
already been adopted by several state courts (see supra), that
"the prevailing morality or strong and preponderating opinion"
demands such legislation. The agitation against the unrestrained
development of the billboard business has produced results in
nearly all the countries of Europe. (Ency. Britannica, vol. 1, pp. 237-
240.) Many drastic ordinances and state laws have been passed
in the United States seeking to make the business amenable to
regulation. But their regulation in the United states is hampered by
what we conceive an unwarranted restriction upon the scope of
the police power by the courts. If the police power may be
exercised to encourage a healthy social and economic condition
in the country, and if the comfort and convenience of the people
are included within those subjects, everything which encroaches
upon such territory is amenable to the police power. A source of
annoyance and irritation to the public does not minister to the
comfort and convenience of the public. And we are of the
opinion that the prevailing sentiment is manifestly against the
erection of billboards which are offensive to the sight.
We do not consider that we are in conflict with the decision in
Eubank vs. Richmond (226 U.S., 137), where a municipal
ordinance establishing a building line to which property owners
must conform was held unconstitutional. As we have pointed out,
billboard advertising is not so much a use of private property as it
is a use of the public thoroughfares. It derives its value to the
power solely because the posters are exposed to the public gaze.
It may well be that the state may not require private property
owners to conform to a building line, but may prescribe the
conditions under which they shall make use of the adjoining
streets and highways. Nor is the law in question to be held invalid
as denying equal protection of the laws. In Keokee Coke
Co. vs. Taylor (234 U.S., 224), it was said: "It is more pressed that the
act discriminates unconstitutionally against certain classes. But
while there are differences of opinion as to the degree and kind
of discrimination permitted by the Fourteenth Amendment, it is
established by repeated decisions that a statute aimed at what is
deemed an evil, and hitting it presumably where experience
shows it to be most felt, is not to be upset by thinking up and
enumerating other instances to which it might have been applied
equally well, so far as the court can see. That is for the legislature
to judge unless the case is very clear."
But we have not overlooked the fact that we are not in harmony
with the highest courts of a number of the states in the American
Union upon this point. Those courts being of the opinion that
statutes which are prompted and inspired by esthetic
considerations merely, having for their sole purpose the promotion
and gratification of the esthetic sense, and not the promotion or
protection of the public safety, the public peace and good order
of society, must be held invalid and contrary to constitutional
provisions holding inviolate the rights of private property. Or, in
other words, the police power cannot interfere with private
property rights for purely esthetic purposes. The courts, taking this
view, rest their decisions upon the proposition that the esthetic
sense is disassociated entirely from any relation to the public
health, morals, comfort, or general welfare and is, therefore,
beyond the police power of the state. But we are of the opinion,
as above indicated, that unsightly advertisements or signs,
signboards, or billboards which are offensive to the sight, are not
disassociated from the general welfare of the public. This is not
establishing a new principle, but carrying a well recognized
principle to further application. (Fruend on Police Power, p. 166.)
For the foregoing reasons the judgment appealed from is hereby
reversed and the action dismissed upon the merits, with costs. So
ordered.
Arellano, C.J., Torres, Carson, and Araullo, JJ., concur.
DECISION ON THE MOTION FOR A REHEARING, JANUARY 24, 1916.
TRENT, J.:
Counsel for the plaintiffs call our attention to the case of Ex
parte Young (209 U.S., 123); and say that they are of the opinion
that this case "is the absolutely determinative of the question of
jurisdiction in injunctions of this kind." We did not refer to this case
in our former opinion because we were satisfied that the
reasoning of the case is not applicable to section 100 (b), 139 and
140 of Act No. 2339. The principles announced in the Young case
are stated as follows: "It may therefore be said that when the
penalties for disobedience are by fines so enormous and
imprisonment so severe as to intimidate the company and its
officers from resorting to the courts to test the validity of the
legislation, the result is the same as if the law in terms prohibited
the company from seeking judicial construction of laws which
deeply affect its rights.
It is urged that there is no principle upon which to base the claim
that a person is entitled to disobey a statute at least once, for the
purpose of testing its validity without subjecting himself to the
penalties for disobedience provided by the statute in case it is
valid. This is not an accurate statement of the case. Ordinarily a
law creating offenses in the nature of misdemeanors or felonies
relates to a subject over which the jurisdiction of the legislature is
complete in any event. In these case, however, of the
establishment of certain rates without any hearing, the validity of
such rates necessarily depends upon whether they are high
enough to permit at least some return upon the investment (how
55
much it is not now necessary to state), and an inquiry as to that
fact is a proper subject of judicial investigation. If it turns out that
the rates are too low for that purpose, then they are illegal. Now,
to impose upon a party interested the burden of obtaining a
judicial decision of such a question (no prior hearing having ever
been given) only upon the condition that, if unsuccessful, he must
suffer imprisonment and pay fines as provided in these acts, is, in
effect, to close up all approaches to the courts, and thus prevent
any hearing upon the question whether the rates as provided by
the acts are not too low, and therefore invalid. The distinction is
obvious between a case where the validity of the acts depends
upon the existence of a fact which can be determined only after
investigation of a very complicated and technical character, and
the ordinary case of a statute upon a subject requiring no such
investigation and over which the jurisdiction of the legislature is
complete in any event.
An examination of the sections of our Internal Revenue Law and
of the circumstances under which and the purposes for which
they were enacted, will show that, unlike the statutes under
consideration in the above cited case, their enactment involved
no attempt on the part of the Legislature to prevent dissatisfied
taxpayers "from resorting to the courts to test the validity of the
legislation;" no effort to prevent any inquiry as to their validity.
While section 139 does prevent the testing of the validity of
subsection (b) of section 100 in injunction suits instituted for the
purpose of restraining the collection of internal revenue taxes,
section 140 provides a complete remedy for that purpose. And
furthermore, the validity of subsection (b) does not depend upon
"the existence of a fact which can be determined only after
investigation of a very complicated and technical character," but
the jurisdiction of the Legislature over the subject with which the
subsection deals "is complete in any event." The judgment of the
court in the Young case rests upon the proposition that the
aggrieved parties had no adequate remedy at law.
Neither did we overlook the case of General Oil Co. vs. Crain (209
U.S., 211), decided the same day and citing Ex
parte Young, supra. In that case the plaintiff was a Tennessee
corporation, with its principal place of business in Memphis,
Tennessee. It was engaged in the manufacture and sale of coal
oil, etc. Its wells and plant were located in Pennsylvania and Ohio.
Memphis was not only its place of business, at which place it sold
oil to the residents of Tennessee, but also a distributing point to
which oils were shipped from Pennsylvania and Ohio and
unloaded into various tanks for the purpose of being forwarded
to the Arkansas, Louisiana, and Mississippi customers.
Notwithstanding the fact that the company separated its oils,
which were designated to meet the requirements of the orders
from those States, from the oils for sale in Tennessee, the
defendant insisted that he had a right, under the Act of the
Tennessee Legislature, approved April 21, 1899, to inspect all the
oils unlocated in Memphis, whether for sale in that State or not,
and charge and collect for such inspection a regular fee of
twenty-five cents per barrel. The company, being advised that
the defendant had no such right, instituted this action in the
inferior States court for the purpose of enjoining the defendant,
upon the grounds stated in the bill, from inspecting or attempting
to inspect its oils. Upon trial, the preliminary injunction which had
been granted at the commencement of the action, was
continued in force. Upon appeal, the supreme court of the State
of Tennessee decided that the suit was one against the State and
reversed the judgment of the Chancellor. In the Supreme Court of
the United States, where the case was reviewed upon a writ of
error, the contentions of the parties were stated by the court as
follows: "It is contended by defendant in error that this court is
without jurisdiction because no matter sought to be litigated by
plaintiff in error was determined by the Supreme Court of
Tennessee. The court simply held, it is paid, that, under the laws of
the State, it had no jurisdiction to entertain the suit for any
purpose. And it is insisted "hat this holding involved no Federal
question, but only the powers and jurisdiction of the courts of the
State of Tennessee, in respect to which the Supreme Court of
Tennessee is the final arbiter."
Opposing these contentions, plaintiff in error urges that whether a
suit is one against a State cannot depend upon the declaration
of a statute, but depends upon the essential nature ofthe suit, and
that the Supreme Court recognized that the statute "aded
nothing to the axiomatic principle that the State, as a sovereign,
is not subject to suit save by its own consent."And it is hence
insisted that the court by dismissing the bill gave effect to the law
which was attacked. It is further insisted that the bill undoubtedly
present rights under the Constitution of the United States and
conditions which entitle plaintiff in error to an injunction for the
protection of such rights, and that a statute of the State which
operates to deny such rights, or such relief, `is itself in conflict with
the Constitution of the United States."
That statute of Tennessee, which the supreme court of that State
construed and held to be prohibitory of the suit, was an act
passed February 28, 1873, which provides: "That no court in the
State of Tennessee has, nor shall hereafter have, any power,
jurisdiction, or authority to entertain any suit against the State, or
any officer acting by the authority of the State, with a view to
reach the State, its treasury, funds or property; and all such suits
now pending, or hereafter brought, shall be dismissed as to the
State, or such officer, on motion, plea or demurrer of the law
officer of the State, or counsel employed by the State."
The Supreme Court of the United States, after reviewing many
cases, said: "Necessarily, to give adequate protection to
constitutional rights a distinction must be made between valid
and invalid state laws, as determining the character of the suit
against state officers. And the suit at bar illustrates the necessity. If
a suit against state officer is precluded in the national courts by
the Eleventh Amendment to the Constitution, and may be
forbidden by a State to its courts, as it is contended in the case at
bar that it may be, without power of review by this court, it must
be evident that an easy way is open to prevent the enforcement
of many provisions of the Constitution; and the Fourteenth
Amendment, which is directed at state action, could be nullified
as to much of its operation. ... It being then the right of a party to
be protected against a law which violates a constitutional right,
whether by its terms or the manner of its enforcement, it is manifest
that a decision which denies such protection gives effect to the
law, and the decision is reviewable by this court."
The court then proceeded to consider whether the law of 1899
would, if administered against the oils in question, violate any
constitutional right of the plaintiff and after finding and adjudging
that the oils were not in movement through the States, that they
had reached the destination of their first shipment, and were held
there, not in necessary delay at means of transportation but for
the business purposes and profit of the company, and resting its
judgment upon the taxing power of the State, affirmed the
decree of the supreme court of the State of Tennessee.
From the foregoing it will be seen that the Supreme Court of
Tennessee dismissed the case for want of jurisdiction because the
suit was one against the State, which was prohibited by the
Tennessee Legislature. The Supreme Court of the United States
took jurisdiction of the controversy for the reasons above quoted
and sustained the Act of 1899 as a revenue law.
The case of Tennessee vs. Sneed (96 U.S., 69), and Shelton vs. Platt
(139 U.S., 591), relied upon in our former opinion, were not cited in
General Oil Co. vs. Crain, supra, because the questions presented
and the statutes under consideration were entirely different. The
Act approved March 31, 1873, expressly prohibits the courts from
restraining the collection of any tax, leaving the dissatisfied
taxpayer to his exclusive remedy — payment under protest and
suit to recover — while the Act approved February 28, 1873,
prohibits suits against the State.
In upholding the statute which authorizes the removal of
signboards or billboards upon the sole ground that they are
offensive to the sight, we recognized the fact that we are not in
harmony with various state courts in the American Union. We have
just examined the decision of the Supreme Court of the State of
Illinois in the recent case (October [December], 1914) of Thomas
Cusack Co. vs. City of Chicago (267 Ill., 344), wherein the court
upheld the validity of a municipal ordinances, which reads as
follows: "707. Frontage consents required. It shall be unlawful for
any person, firm or corporation to erect or construct any bill-board
or sign-board in any block on any public street in which one-half
of the buildings on both sides of the street are used exclusively for
residence purposes, without first obtaining the consent, in writing,
of the owners or duly authorized agents of said owners owning a
majority of the frontage of the property, on both sides of the
street, in the block in which such bill-board or sign-board is to be
erected, constructed or located. Such written consent shall be
filed with the commissioner of buildings before a permit shall be
issued for the erection, construction or location of such bill-board
or sign-board."
The evidence which the Illinois court relied upon was the danger
of fires, the fact that billboards promote the commission of various
immoral and filthy acts by disorderly persons, and the inadequate
police protection furnished to residential districts. The last
objection has no virtue unless one or the other of the other
objections are valid. If the billboard industry does, in fact, promote
such municipal evils to noticeable extent, it seems a curious
inconsistency that a majority of the property owners on a given
block may legalize the business. However, the decision is
undoubtedly a considerable advance over the views taken by
other high courts in the United States and distinguishes several
56
Illinois decisions. It is an advance because it permits the
suppression of billboards where they are undesirable. The
ordinance which the court approved will no doubt cause the
virtual suppression of the business in the residential districts. Hence,
it is recognized that under certain circumstances billboards may
be suppressed as an unlawful use of private property. Logically, it
would seem that the premise of fact relied upon is not very solid.
Objections to the billboard upon police, sanitary, and moral
grounds have been, as pointed out by counsel for Churchill and
Tait, duly considered by numerous high courts in the United States,
and, with one exception, have been rejected as without
foundation. The exception is the Supreme Court of Missouri, which
advances practically the same line of reasoning as has the Illinois
court in this recent case. (St. Louis Gunning Advt. Co. vs. City of St.
Louis, 137 S. W., 929.) In fact, the Illinois court, in Haller Sign
Works vs. Physical Culture Training School (249 Ill., 436),
"distinguished" in the recent case, said: "There is nothing inherently
dangerous to the health or safety of the public in structures that
are properly erected for advertising purposes."
If a billboard is so constructed as to offer no room for objections
on sanitary or moral grounds, it would seem that the ordinance
above quoted would have to be sustained upon the very grounds
which we have advanced in sustaining our own statute.
It might be well to note that billboard legislation in the United
States is attempting to eradicate a business which has already
been firmly established. This business was allowed to expand
unchecked until its very extent called attention to its
objectionable features. In the Philippine Islands such legislation
has almost anticipated the business, which is not yet of such
proportions that it can be said to be fairly established. It may be
that the courts in the United States have committed themselves
to a course of decisions with respect to billboard advertising, the
full consequences of which were not perceived for the reason
that the development of the business has been so recent that the
objectionable features of it did not present themselves clearly to
the courts nor to the people. We, in this country, have the benefit
of the experience of the people of the United States and may
make our legislation preventive rather than corrective. There are
in this country, moreover, on every hand in those districts where
Spanish civilization has held sway for so many centuries, examples
of architecture now belonging to a past age, and which are
attractive not only to the residents of the country but to visitors. If
the billboard industry is permitted without constraint or control to
hide these historic sites from the passerby, the country will be less
attractive to the tourist and the people will suffer a district
economic loss.
The motion for a rehearing is therefore denied.
II. Benefits –Protection Theory (Principles of benefits received)
1. NPC vs CITY OF CABANTUAN (Same Case)
2. CIR vs ALGUE (Same Case)
3. Gomez vs. Palomar (Same case)
4. G.R. No. L-43082 June 18, 1937
PABLO LORENZO, as trustee of the estate of Thomas Hanley,
deceased, plaintiff-appellant,
vs.
JUAN POSADAS, JR., Collector of Internal Revenue, defendant-
appellant.
LAUREL, J.:
On October 4, 1932, the plaintiff Pablo Lorenzo, in his capacity as
trustee of the estate of Thomas Hanley, deceased, brought this
action in the Court of First Instance of Zamboanga against the
defendant, Juan Posadas, Jr., then the Collector of Internal
Revenue, for the refund of the amount of P2,052.74, paid by the
plaintiff as inheritance tax on the estate of the deceased, and for
the collection of interst thereon at the rate of 6 per cent per
annum, computed from September 15, 1932, the date when the
aforesaid tax was [paid under protest. The defendant set up a
counterclaim for P1,191.27 alleged to be interest due on the tax
in question and which was not included in the original assessment.
From the decision of the Court of First Instance of Zamboanga
dismissing both the plaintiff's complaint and the defendant's
counterclaim, both parties appealed to this court.
It appears that on May 27, 1922, one Thomas Hanley died in
Zamboanga, Zamboanga, leaving a will (Exhibit 5) and
considerable amount of real and personal properties. On june 14,
1922, proceedings for the probate of his will and the settlement
and distribution of his estate were begun in the Court of First
Instance of Zamboanga. The will was admitted to probate. Said
will provides, among other things, as follows:
4. I direct that any money left by me be given to my nephew
Matthew Hanley.
5. I direct that all real estate owned by me at the time of my death
be not sold or otherwise disposed of for a period of ten (10) years
after my death, and that the same be handled and managed by
the executors, and proceeds thereof to be given to my nephew,
Matthew Hanley, at Castlemore, Ballaghaderine, County of
Rosecommon, Ireland, and that he be directed that the same be
used only for the education of my brother's children and their
descendants.
6. I direct that ten (10) years after my death my property be given
to the above mentioned Matthew Hanley to be disposed of in the
way he thinks most advantageous.
xxx xxx xxx
8. I state at this time I have one brother living, named Malachi
Hanley, and that my nephew, Matthew Hanley, is a son of my said
brother, Malachi Hanley.
The Court of First Instance of Zamboanga considered it proper for
the best interests of ther estate to appoint a trustee to administer
the real properties which, under the will, were to pass to Matthew
Hanley ten years after the two executors named in the will, was,
on March 8, 1924, appointed trustee. Moore took his oath of office
and gave bond on March 10, 1924. He acted as trustee until
February 29, 1932, when he resigned and the plaintiff herein was
appointed in his stead.
During the incumbency of the plaintiff as trustee, the defendant
Collector of Internal Revenue, alleging that the estate left by the
deceased at the time of his death consisted of realty valued at
P27,920 and personalty valued at P1,465, and allowing a
deduction of P480.81, assessed against the estate an inheritance
tax in the amount of P1,434.24 which, together with the penalties
for deliquency in payment consisting of a 1 per cent monthly
interest from July 1, 1931 to the date of payment and a surcharge
of 25 per cent on the tax, amounted to P2,052.74. On March 15,
1932, the defendant filed a motion in the testamentary
proceedings pending before the Court of First Instance of
Zamboanga (Special proceedings No. 302) praying that the
trustee, plaintiff herein, be ordered to pay to the Government the
said sum of P2,052.74. The motion was granted. On September 15,
1932, the plaintiff paid said amount under protest, notifying the
defendant at the same time that unless the amount was promptly
refunded suit would be brought for its recovery. The defendant
overruled the plaintiff's protest and refused to refund the said
amount hausted, plaintiff went to court with the result herein
above indicated.
In his appeal, plaintiff contends that the lower court erred:
I. In holding that the real property of Thomas Hanley, deceased,
passed to his instituted heir, Matthew Hanley, from the moment of
the death of the former, and that from the time, the latter
became the owner thereof.
II. In holding, in effect, that there was deliquency in the payment
of inheritance tax due on the estate of said deceased.
III. In holding that the inheritance tax in question be based upon
the value of the estate upon the death of the testator, and not,
as it should have been held, upon the value thereof at the
expiration of the period of ten years after which, according to the
testator's will, the property could be and was to be delivered to
the instituted heir.
IV. In not allowing as lawful deductions, in the determination of
the net amount of the estate subject to said tax, the amounts
allowed by the court as compensation to the "trustees" and paid
to them from the decedent's estate.
V. In not rendering judgment in favor of the plaintiff and in denying
his motion for new trial.
The defendant-appellant contradicts the theories of the plaintiff
and assigns the following error besides:
The lower court erred in not ordering the plaintiff to pay to the
defendant the sum of P1,191.27, representing part of the interest
at the rate of 1 per cent per month from April 10, 1924, to June 30,
1931, which the plaintiff had failed to pay on the inheritance tax
assessed by the defendant against the estate of Thomas Hanley.
The following are the principal questions to be decided by this
court in this appeal: (a) When does the inheritance tax accrue
57
and when must it be satisfied? (b) Should the inheritance tax be
computed on the basis of the value of the estate at the time of
the testator's death, or on its value ten years later? (c) In
determining the net value of the estate subject to tax, is it proper
to deduct the compensation due to trustees? (d) What law
governs the case at bar? Should the provisions of Act No. 3606
favorable to the tax-payer be given retroactive effect? (e) Has
there been deliquency in the payment of the inheritance tax? If
so, should the additional interest claimed by the defendant in his
appeal be paid by the estate? Other points of incidental
importance, raised by the parties in their briefs, will be touched
upon in the course of this opinion.
(a) The accrual of the inheritance tax is distinct from the obligation
to pay the same. Section 1536 as amended, of the Administrative
Code, imposes the tax upon "every transmission by virtue of
inheritance, devise, bequest, gift mortis causa, or advance in
anticipation of inheritance,devise, or bequest." The tax therefore
is upon transmission or the transfer or devolution of property of a
decedent, made effective by his death. (61 C. J., p. 1592.) It is in
reality an excise or privilege tax imposed on the right to succeed
to, receive, or take property by or under a will or the intestacy law,
or deed, grant, or gift to become operative at or after death.
Acording to article 657 of the Civil Code, "the rights to the
succession of a person are transmitted from the moment of his
death." "In other words", said Arellano, C. J., ". . . the heirs succeed
immediately to all of the property of the deceased ancestor. The
property belongs to the heirs at the moment of the death of the
ancestor as completely as if the ancestor had executed and
delivered to them a deed for the same before his death."
(Bondad vs. Bondad, 34 Phil., 232. See also, Mijares vs. Nery, 3 Phil.,
195; Suilong & Co., vs. Chio-Taysan, 12 Phil., 13; Lubrico vs. Arbado,
12 Phil., 391; Innocencio vs. Gat-Pandan, 14 Phil., 491; Aliasas
vs.Alcantara, 16 Phil., 489; Ilustre vs. Alaras Frondosa, 17 Phil., 321;
Malahacan vs. Ignacio, 19 Phil., 434; Bowa vs. Briones, 38 Phil., 27;
Osario vs. Osario & Yuchausti Steamship Co., 41 Phil., 531; Fule vs.
Fule, 46 Phil., 317; Dais vs. Court of First Instance of Capiz, 51 Phil.,
396; Baun vs. Heirs of Baun, 53 Phil., 654.) Plaintiff, however, asserts
that while article 657 of the Civil Code is applicable to testate as
well as intestate succession, it operates only in so far as forced
heirs are concerned. But the language of article 657 of the Civil
Code is broad and makes no distinction between different classes
of heirs. That article does not speak of forced heirs; it does not
even use the word "heir". It speaks of the rights of succession and
the transmission thereof from the moment of death. The provision
of section 625 of the Code of Civil Procedure regarding the
authentication and probate of a will as a necessary condition to
effect transmission of property does not affect the general rule
laid down in article 657 of the Civil Code. The authentication of a
will implies its due execution but once probated and allowed the
transmission is effective as of the death of the testator in
accordance with article 657 of the Civil Code. Whatever may be
the time when actual transmission of the inheritance takes place,
succession takes place in any event at the moment of the
decedent's death. The time when the heirs legally succeed to the
inheritance may differ from the time when the heirs actually
receive such inheritance. "Poco importa", says Manresa
commenting on article 657 of the Civil Code, "que desde el
falleimiento del causante, hasta que el heredero o legatario
entre en posesion de los bienes de la herencia o del legado,
transcurra mucho o poco tiempo, pues la adquisicion ha de
retrotraerse al momento de la muerte, y asi lo ordena el articulo
989, que debe considerarse como complemento del presente."
(5 Manresa, 305; see also, art. 440, par. 1, Civil Code.) Thomas
Hanley having died on May 27, 1922, the inheritance tax accrued
as of the date.
From the fact, however, that Thomas Hanley died on May 27,
1922, it does not follow that the obligation to pay the tax arose as
of the date. The time for the payment on inheritance tax is clearly
fixed by section 1544 of the Revised Administrative Code as
amended by Act No. 3031, in relation to section 1543 of the same
Code. The two sections follow:
SEC. 1543. Exemption of certain acquisitions and transmissions. —
The following shall not be taxed:
(a) The merger of the usufruct in the owner of the naked title.
(b) The transmission or delivery of the inheritance or legacy by the
fiduciary heir or legatee to the trustees.
(c) The transmission from the first heir, legatee, or donee in favor
of another beneficiary, in accordance with the desire of the
predecessor.
In the last two cases, if the scale of taxation appropriate to the
new beneficiary is greater than that paid by the first, the former
must pay the difference.
SEC. 1544. When tax to be paid. — The tax fixed in this article shall
be paid:
(a) In the second and third cases of the next preceding section,
before entrance into possession of the property.
(b) In other cases, within the six months subsequent to the death
of the predecessor; but if judicial testamentary or intestate
proceedings shall be instituted prior to the expiration of said
period, the payment shall be made by the executor or
administrator before delivering to each beneficiary his share.
If the tax is not paid within the time hereinbefore prescribed,
interest at the rate of twelve per centum per annum shall be
added as part of the tax; and to the tax and interest due and
unpaid within ten days after the date of notice and demand
thereof by the collector, there shall be further added a surcharge
of twenty-five per centum.
A certified of all letters testamentary or of admisitration shall be
furnished the Collector of Internal Revenue by the Clerk of Court
within thirty days after their issuance.
It should be observed in passing that the word "trustee", appearing
in subsection (b) of section 1543, should read "fideicommissary" or
"cestui que trust". There was an obvious mistake in translation from
the Spanish to the English version.
The instant case does fall under subsection (a), but under
subsection (b), of section 1544 above-quoted, as there is here no
fiduciary heirs, first heirs, legatee or donee. Under the subsection,
the tax should have been paid before the delivery of the
properties in question to P. J. M. Moore as trustee on March 10,
1924.
(b) The plaintiff contends that the estate of Thomas Hanley, in so
far as the real properties are concerned, did not and could not
legally pass to the instituted heir, Matthew Hanley, until after the
expiration of ten years from the death of the testator on May 27,
1922 and, that the inheritance tax should be based on the value
of the estate in 1932, or ten years after the testator's death. The
plaintiff introduced evidence tending to show that in 1932 the real
properties in question had a reasonable value of only P5,787. This
amount added to the value of the personal property left by the
deceased, which the plaintiff admits is P1,465, would generate an
inheritance tax which, excluding deductions, interest and
surcharge, would amount only to about P169.52.
If death is the generating source from which the power of the
estate to impose inheritance taxes takes its being and if, upon the
death of the decedent, succession takes place and the right of
the estate to tax vests instantly, the tax should be measured by
the vlaue of the estate as it stood at the time of the decedent's
death, regardless of any subsequent contingency value of any
subsequent increase or decrease in value. (61 C. J., pp. 1692,
1693; 26 R. C. L., p. 232; Blakemore and Bancroft, Inheritance
Taxes, p. 137. See also Knowlton vs. Moore, 178 U.S., 41; 20 Sup. Ct.
Rep., 747; 44 Law. ed., 969.) "The right of the state to an
inheritance tax accrues at the moment of death, and hence is
ordinarily measured as to any beneficiary by the value at that
time of such property as passes to him. Subsequent appreciation
or depriciation is immaterial." (Ross, Inheritance Taxation, p. 72.)
Our attention is directed to the statement of the rule in
Cyclopedia of Law of and Procedure (vol. 37, pp. 1574, 1575) that,
in the case of contingent remainders, taxation is postponed until
the estate vests in possession or the contingency is settled. This rule
was formerly followed in New York and has been adopted in
Illinois, Minnesota, Massachusetts, Ohio, Pennsylvania and
Wisconsin. This rule, horever, is by no means entirely satisfactory
either to the estate or to those interested in the property (26 R. C.
L., p. 231.). Realizing, perhaps, the defects of its anterior system,
we find upon examination of cases and authorities that New York
has varied and now requires the immediate appraisal of the
postponed estate at its clear market value and the payment
forthwith of the tax on its out of the corpus of the estate
transferred. (In re Vanderbilt, 172 N. Y., 69; 69 N. E., 782; In re Huber,
86 N. Y. App. Div., 458; 83 N. Y. Supp., 769; Estate of Tracy, 179 N.
Y., 501; 72 N. Y., 519; Estate of Brez, 172 N. Y., 609; 64 N. E., 958;
Estate of Post, 85 App. Div., 611; 82 N. Y. Supp., 1079. Vide also,
Saltoun vs. Lord Advocate, 1 Peter. Sc. App., 970; 3 Macq. H. L.,
659; 23 Eng. Rul. Cas., 888.) California adheres to this new rule
(Stats. 1905, sec. 5, p. 343).
But whatever may be the rule in other jurisdictions, we hold that a
transmission by inheritance is taxable at the time of the
predecessor's death, notwithstanding the postponement of the
actual possession or enjoyment of the estate by the beneficiary,
58
and the tax measured by the value of the property transmitted at
that time regardless of its appreciation or depreciation.
(c) Certain items are required by law to be deducted from the
appraised gross in arriving at the net value of the estate on which
the inheritance tax is to be computed (sec. 1539, Revised
Administrative Code). In the case at bar, the defendant and the
trial court allowed a deduction of only P480.81. This sum represents
the expenses and disbursements of the executors until March 10,
1924, among which were their fees and the proven debts of the
deceased. The plaintiff contends that the compensation and fees
of the trustees, which aggregate P1,187.28 (Exhibits C, AA, EE, PP,
HH, JJ, LL, NN, OO), should also be deducted under section 1539
of the Revised Administrative Code which provides, in part, as
follows: "In order to determine the net sum which must bear the
tax, when an inheritance is concerned, there shall be deducted,
in case of a resident, . . . the judicial expenses of the testamentary
or intestate proceedings, . . . ."
A trustee, no doubt, is entitled to receive a fair compensation for
his services (Barney vs. Saunders, 16 How., 535; 14 Law. ed., 1047).
But from this it does not follow that the compensation due him
may lawfully be deducted in arriving at the net value of the estate
subject to tax. There is no statute in the Philippines which requires
trustees' commissions to be deducted in determining the net
value of the estate subject to inheritance tax (61 C. J., p. 1705).
Furthermore, though a testamentary trust has been created, it
does not appear that the testator intended that the duties of his
executors and trustees should be separated. (Ibid.; In
re Vanneck's Estate, 161 N. Y. Supp., 893; 175 App. Div., 363; In
re Collard's Estate, 161 N. Y. Supp., 455.) On the contrary, in
paragraph 5 of his will, the testator expressed the desire that his
real estate be handled and managed by his executors until the
expiration of the period of ten years therein provided. Judicial
expenses are expenses of administration (61 C. J., p. 1705) but, in
State vs. Hennepin County Probate Court (112 N. W., 878; 101
Minn., 485), it was said: ". . . The compensation of a trustee,
earned, not in the administration of the estate, but in the
management thereof for the benefit of the legatees or devises,
does not come properly within the class or reason for exempting
administration expenses. . . . Service rendered in that behalf have
no reference to closing the estate for the purpose of a distribution
thereof to those entitled to it, and are not required or essential to
the perfection of the rights of the heirs or legatees. . . . Trusts . . . of
the character of that here before the court, are created for the
the benefit of those to whom the property ultimately passes, are
of voluntary creation, and intended for the preservation of the
estate. No sound reason is given to support the contention that
such expenses should be taken into consideration in fixing the
value of the estate for the purpose of this tax."
(d) The defendant levied and assessed the inheritance tax due
from the estate of Thomas Hanley under the provisions of section
1544 of the Revised Administrative Code, as amended by section
3 of Act No. 3606. But Act No. 3606 went into effect on January 1,
1930. It, therefore, was not the law in force when the testator died
on May 27, 1922. The law at the time was section 1544 above-
mentioned, as amended by Act No. 3031, which took effect on
March 9, 1922.
It is well-settled that inheritance taxation is governed by the
statute in force at the time of the death of the decedent (26 R. C.
L., p. 206; 4 Cooley on Taxation, 4th ed., p. 3461). The taxpayer
can not foresee and ought not to be required to guess the
outcome of pending measures. Of course, a tax statute may be
made retroactive in its operation. Liability for taxes under
retroactive legislation has been "one of the incidents of social life."
(Seattle vs. Kelleher, 195 U. S., 360; 49 Law. ed., 232 Sup. Ct. Rep.,
44.) But legislative intent that a tax statute should operate
retroactively should be perfectly clear. (Scwab vs. Doyle, 42 Sup.
Ct. Rep., 491; Smietanka vs. First Trust & Savings Bank, 257 U. S., 602;
Stockdale vs. Insurance Co., 20 Wall., 323; Lunch vs. Turrish, 247 U.
S., 221.) "A statute should be considered as prospective in its
operation, whether it enacts, amends, or repeals an inheritance
tax, unless the language of the statute clearly demands or
expresses that it shall have a retroactive effect, . . . ." (61 C. J., P.
1602.) Though the last paragraph of section 5 of Regulations No.
65 of the Department of Finance makes section 3 of Act No. 3606,
amending section 1544 of the Revised Administrative Code,
applicable to all estates the inheritance taxes due from which
have not been paid, Act No. 3606 itself contains no provisions
indicating legislative intent to give it retroactive effect. No such
effect can begiven the statute by this court.
The defendant Collector of Internal Revenue maintains, however,
that certain provisions of Act No. 3606 are more favorable to the
taxpayer than those of Act No. 3031, that said provisions are penal
in nature and, therefore, should operate retroactively in
conformity with the provisions of article 22 of the Revised Penal
Code. This is the reason why he applied Act No. 3606 instead of
Act No. 3031. Indeed, under Act No. 3606, (1) the surcharge of 25
per cent is based on the tax only, instead of on both the tax and
the interest, as provided for in Act No. 3031, and (2) the taxpayer
is allowed twenty days from notice and demand by rthe Collector
of Internal Revenue within which to pay the tax, instead of ten
days only as required by the old law.
Properly speaking, a statute is penal when it imposes punishment
for an offense committed against the state which, under the
Constitution, the Executive has the power to pardon. In common
use, however, this sense has been enlarged to include within the
term "penal statutes" all status which command or prohibit certain
acts, and establish penalties for their violation, and even those
which, without expressly prohibiting certain acts, impose a
penalty upon their commission (59 C. J., p. 1110). Revenue laws,
generally, which impose taxes collected by the means ordinarily
resorted to for the collection of taxes are not classed as penal
laws, although there are authorities to the contrary.
(See Sutherland, Statutory Construction, 361; Twine Co. vs.
Worthington, 141 U. S., 468; 12 Sup. Ct., 55; Rice vs. U. S., 4 C. C. A.,
104; 53 Fed., 910; Com. vs. Standard Oil Co., 101 Pa. St., 150; State
vs. Wheeler, 44 P., 430; 25 Nev. 143.) Article 22 of the Revised Penal
Code is not applicable to the case at bar, and in the absence of
clear legislative intent, we cannot give Act No. 3606 a retroactive
effect.
(e) The plaintiff correctly states that the liability to pay a tax may
arise at a certain time and the tax may be paid within another
given time. As stated by this court, "the mere failure to pay one's
tax does not render one delinqent until and unless the entire
period has eplased within which the taxpayer is authorized by law
to make such payment without being subjected to the payment
of penalties for fasilure to pay his taxes within the prescribed
period." (U. S. vs. Labadan, 26 Phil., 239.)
The defendant maintains that it was the duty of the executor to
pay the inheritance tax before the delivery of the decedent's
property to the trustee. Stated otherwise, the defendant contends
that delivery to the trustee was delivery to the cestui que trust, the
beneficiery in this case, within the meaning of the first paragraph
of subsection (b) of section 1544 of the Revised Administrative
Code. This contention is well taken and is sustained. The
appointment of P. J. M. Moore as trustee was made by the trial
court in conformity with the wishes of the testator as expressed in
his will. It is true that the word "trust" is not mentioned or used in the
will but the intention to create one is clear. No particular or
technical words are required to create a testamentary trust (69 C.
J., p. 711). The words "trust" and "trustee", though apt for the
purpose, are not necessary. In fact, the use of these two words is
not conclusive on the question that a trust is created (69 C. J., p.
714). "To create a trust by will the testator must indicate in the will
his intention so to do by using language sufficient to separate the
legal from the equitable estate, and with sufficient certainty
designate the beneficiaries, their interest in the ttrust, the purpose
or object of the trust, and the property or subject matter thereof.
Stated otherwise, to constitute a valid testamentary trust there
must be a concurrence of three circumstances: (1) Sufficient
words to raise a trust; (2) a definite subject; (3) a certain or
ascertain object; statutes in some jurisdictions expressly or in effect
so providing." (69 C. J., pp. 705,706.) There is no doubt that the
testator intended to create a trust. He ordered in his will that
certain of his properties be kept together undisposed during a
fixed period, for a stated purpose. The probate court certainly
exercised sound judgment in appointment a trustee to carry into
effect the provisions of the will (see sec. 582, Code of Civil
Procedure).
P. J. M. Moore became trustee on March 10, 1924. On that date
trust estate vested in him (sec. 582 in relation to sec. 590, Code of
Civil Procedure). The mere fact that the estate of the deceased
was placed in trust did not remove it from the operation of our
inheritance tax laws or exempt it from the payment of the
inheritance tax. The corresponding inheritance tax should have
been paid on or before March 10, 1924, to escape the penalties
of the laws. This is so for the reason already stated that the delivery
of the estate to the trustee was in esse delivery of the same estate
to the cestui que trust, the beneficiary in this case. A trustee is but
an instrument or agent for the cestui que trust (Shelton vs. King,
299 U. S., 90; 33 Sup. Ct. Rep., 689; 57 Law. ed., 1086). When Moore
accepted the trust and took possesson of the trust estate he
thereby admitted that the estate belonged not to him but to
his cestui que trust (Tolentino vs. Vitug, 39 Phil.,126, cited in 65 C.
J., p. 692, n. 63). He did not acquire any beneficial interest in the
estate. He took such legal estate only as the proper execution of
the trust required (65 C. J., p. 528) and, his estate ceased upon
the fulfillment of the testator's wishes. The estate then vested
absolutely in the beneficiary (65 C. J., p. 542).
59
The highest considerations of public policy also justify the
conclusion we have reached. Were we to hold that the payment
of the tax could be postponed or delayed by the creation of a
trust of the type at hand, the result would be plainly disastrous.
Testators may provide, as Thomas Hanley has provided, that their
estates be not delivered to their beneficiaries until after the lapse
of a certain period of time. In the case at bar, the period is ten
years. In other cases, the trust may last for fifty years, or for a longer
period which does not offend the rule against petuities. The
collection of the tax would then be left to the will of a private
individual. The mere suggestion of this result is a sufficient warning
against the accpetance of the essential to the very exeistence of
government. (Dobbins vs. Erie Country, 16 Pet., 435; 10 Law. ed.,
1022; Kirkland vs. Hotchkiss, 100 U. S., 491; 25 Law. ed., 558; Lane
County vs. Oregon, 7 Wall., 71; 19 Law. ed., 101; Union Refrigerator
Transit Co. vs. Kentucky, 199 U. S., 194; 26 Sup. Ct. Rep., 36; 50 Law.
ed., 150; Charles River Bridge vs. Warren Bridge, 11 Pet., 420; 9 Law.
ed., 773.) The obligation to pay taxes rests not upon the privileges
enjoyed by, or the protection afforded to, a citizen by the
government but upon the necessity of money for the support of
the state (Dobbins vs. Erie Country, supra). For this reason, no one
is allowed to object to or resist the payment of taxes solely
because no personal benefit to him can be pointed out. (Thomas
vs. Gay, 169 U. S., 264; 18 Sup. Ct. Rep., 340; 43 Law. ed., 740.)
While courts will not enlarge, by construction, the government's
power of taxation (Bromley vs. McCaughn, 280 U. S., 124; 74 Law.
ed., 226; 50 Sup. Ct. Rep., 46) they also will not place upon tax
laws so loose a construction as to permit evasions on merely
fanciful and insubstantial distictions. (U. S. vs. Watts, 1 Bond., 580;
Fed. Cas. No. 16,653; U. S. vs. Wigglesirth, 2 Story, 369; Fed. Cas.
No. 16,690, followed in Froelich & Kuttner vs. Collector of Customs,
18 Phil., 461, 481; Castle Bros., Wolf & Sons vs. McCoy, 21 Phil., 300;
Muñoz & Co. vs. Hord, 12 Phil., 624; Hongkong & Shanghai Banking
Corporation vs. Rafferty, 39 Phil., 145; Luzon Stevedoring Co. vs.
Trinidad, 43 Phil., 803.) When proper, a tax statute should be
construed to avoid the possibilities of tax evasion. Construed this
way, the statute, without resulting in injustice to the taxpayer,
becomes fair to the government.
That taxes must be collected promptly is a policy deeply
intrenched in our tax system. Thus, no court is allowed to grant
injunction to restrain the collection of any internal revenue tax (
sec. 1578, Revised Administrative Code; Sarasola vs. Trinidad, 40
Phil., 252). In the case of Lim Co Chui vs. Posadas (47 Phil., 461),
this court had occassion to demonstrate trenchment adherence
to this policy of the law. It held that "the fact that on account of
riots directed against the Chinese on October 18, 19, and 20, 1924,
they were prevented from praying their internal revenue taxes on
time and by mutual agreement closed their homes and stores
and remained therein, does not authorize the Collector of Internal
Revenue to extend the time prescribed for the payment of the
taxes or to accept them without the additional penalty of twenty
five per cent." (Syllabus, No. 3.)
". . . It is of the utmost importance," said the Supreme Court of the
United States, ". . . that the modes adopted to enforce the taxes
levied should be interfered with as little as possible. Any delay in
the proceedings of the officers, upon whom the duty is developed
of collecting the taxes, may derange the operations of
government, and thereby, cause serious detriment to the public."
(Dows vs. Chicago, 11 Wall., 108; 20 Law. ed., 65, 66; Churchill and
Tait vs. Rafferty, 32 Phil., 580.)
It results that the estate which plaintiff represents has been
delinquent in the payment of inheritance tax and, therefore,
liable for the payment of interest and surcharge provided by law
in such cases.
The delinquency in payment occurred on March 10, 1924, the
date when Moore became trustee. The interest due should be
computed from that date and it is error on the part of the
defendant to compute it one month later. The provisions cases is
mandatory (see and cf. Lim Co Chui vs. Posadas, supra), and
neither the Collector of Internal Revenuen or this court may remit
or decrease such interest, no matter how heavily it may burden
the taxpayer.
To the tax and interest due and unpaid within ten days after the
date of notice and demand thereof by the Collector of Internal
Revenue, a surcharge of twenty-five per centum should be
added (sec. 1544, subsec. (b), par. 2, Revised Administrative
Code). Demand was made by the Deputy Collector of Internal
Revenue upon Moore in a communiction dated October 16, 1931
(Exhibit 29). The date fixed for the payment of the tax and interest
was November 30, 1931. November 30 being an official holiday,
the tenth day fell on December 1, 1931. As the tax and interest
due were not paid on that date, the estate became liable for the
payment of the surcharge.
In view of the foregoing, it becomes unnecessary for us to discuss
the fifth error assigned by the plaintiff in his brief.
We shall now compute the tax, together with the interest and
surcharge due from the estate of Thomas Hanley inaccordance
with the conclusions we have reached.
At the time of his death, the deceased left real properties valued
at P27,920 and personal properties worth P1,465, or a total of
P29,385. Deducting from this amount the sum of P480.81,
representing allowable deductions under secftion 1539 of the
Revised Administrative Code, we have P28,904.19 as the net value
of the estate subject to inheritance tax.
The primary tax, according to section 1536, subsection (c), of the
Revised Administrative Code, should be imposed at the rate of
one per centum upon the first ten thousand pesos and two per
centum upon the amount by which the share exceed thirty
thousand pesos, plus an additional two hundred per centum. One
per centum of ten thousand pesos is P100. Two per centum of
P18,904.19 is P378.08. Adding to these two sums an additional two
hundred per centum, or P965.16, we have as primary tax,
correctly computed by the defendant, the sum of P1,434.24.
To the primary tax thus computed should be added the sums
collectible under section 1544 of the Revised Administrative Code.
First should be added P1,465.31 which stands for interest at the
rate of twelve per centum per annum from March 10, 1924, the
date of delinquency, to September 15, 1932, the date of payment
under protest, a period covering 8 years, 6 months and 5 days. To
the tax and interest thus computed should be added the sum of
P724.88, representing a surhcarge of 25 per cent on both the tax
and interest, and also P10, the compromise sum fixed by the
defendant (Exh. 29), giving a grand total of P3,634.43.
As the plaintiff has already paid the sum of P2,052.74, only the
sums of P1,581.69 is legally due from the estate. This last sum is
P390.42 more than the amount demanded by the defendant in
his counterclaim. But, as we cannot give the defendant more
than what he claims, we must hold that the plaintiff is liable only
in the sum of P1,191.27 the amount stated in the counterclaim.
The judgment of the lower court is accordingly modified, with
costs against the plaintiff in both instances. So ordered.
D. Objectives and Purposes
I. Revenue
II. Non-Revenue (Sumptuary)
1. G.R. No. L-75697
VALENTIN TIO doing business under the name and style of OMI
ENTERPRISES, petitioner,
vs.
VIDEOGRAM REGULATORY BOARD, MINISTER OF FINANCE, METRO
MANILA COMMISSION, CITY MAYOR and CITY TREASURER OF
MANILA, respondents.
MELENCIO-HERRERA, J.:
This petition was filed on September 1, 1986 by petitioner on his
own behalf and purportedly on behalf of other videogram
operators adversely affected. It assails the constitutionality of
Presidential Decree No. 1987 entitled "An Act Creating the
Videogram Regulatory Board" with broad powers to regulate and
supervise the videogram industry (hereinafter briefly referred to as
the BOARD). The Decree was promulgated on October 5, 1985
and took effect on April 10, 1986, fifteen (15) days after
completion of its publication in the Official Gazette.
On November 5, 1985, a month after the promulgation of the
abovementioned decree, Presidential Decree No. 1994
amended the National Internal Revenue Code providing, inter
alia:
SEC. 134. Video Tapes. — There shall be collected on each
processed video-tape cassette, ready for playback, regardless of
length, an annual tax of five pesos; Provided, That locally
manufactured or imported blank video tapes shall be subject to
sales tax.
On October 23, 1986, the Greater Manila Theaters Association,
Integrated Movie Producers, Importers and Distributors
Association of the Philippines, and Philippine Motion Pictures
Producers Association, hereinafter collectively referred to as the
Intervenors, were permitted by the Court to intervene in the case,
over petitioner's opposition, upon the allegations that intervention
was necessary for the complete protection of their rights and that
60
their "survival and very existence is threatened by the unregulated
proliferation of film piracy." The Intervenors were thereafter
allowed to file their Comment in Intervention.
The rationale behind the enactment of the DECREE, is set out in its
preambular clauses as follows:
1. WHEREAS, the proliferation and unregulated circulation of
videograms including, among others, videotapes, discs, cassettes
or any technical improvement or variation thereof, have greatly
prejudiced the operations of moviehouses and theaters, and
have caused a sharp decline in theatrical attendance by at least
forty percent (40%) and a tremendous drop in the collection of
sales, contractor's specific, amusement and other taxes, thereby
resulting in substantial losses estimated at P450 Million annually in
government revenues;
2. WHEREAS, videogram(s) establishments collectively earn
around P600 Million per annum from rentals, sales and disposition
of videograms, and such earnings have not been subjected to
tax, thereby depriving the Government of approximately P180
Million in taxes each year;
3. WHEREAS, the unregulated activities of videogram
establishments have also affected the viability of the movie
industry, particularly the more than 1,200 movie houses and
theaters throughout the country, and occasioned industry-wide
displacement and unemployment due to the shutdown of
numerous moviehouses and theaters;
4. "WHEREAS, in order to ensure national economic recovery, it is
imperative for the Government to create an environment
conducive to growth and development of all business industries,
including the movie industry which has an accumulated
investment of about P3 Billion;
5. WHEREAS, proper taxation of the activities of videogram
establishments will not only alleviate the dire financial condition of
the movie industry upon which more than 75,000 families and
500,000 workers depend for their livelihood, but also provide an
additional source of revenue for the Government, and at the
same time rationalize the heretofore uncontrolled distribution of
videograms;
6. WHEREAS, the rampant and unregulated showing of obscene
videogram features constitutes a clear and present danger to the
moral and spiritual well-being of the youth, and impairs the
mandate of the Constitution for the State to support the rearing
of the youth for civic efficiency and the development of moral
character and promote their physical, intellectual, and social
well-being;
7. WHEREAS, civic-minded citizens and groups have called for
remedial measures to curb these blatant malpractices which
have flaunted our censorship and copyright laws;
8. WHEREAS, in the face of these grave emergencies corroding
the moral values of the people and betraying the national
economic recovery program, bold emergency measures must be
adopted with dispatch; ... (Numbering of paragraphs supplied).
Petitioner's attack on the constitutionality of the DECREE rests on
the following grounds:
1. Section 10 thereof, which imposes a tax of 30% on the gross
receipts payable to the local government is a RIDER and the same
is not germane to the subject matter thereof;
2. The tax imposed is harsh, confiscatory, oppressive and/or in
unlawful restraint of trade in violation of the due process clause of
the Constitution;
3. There is no factual nor legal basis for the exercise by the
President of the vast powers conferred upon him by Amendment
No. 6;
4. There is undue delegation of power and authority;
5. The Decree is an ex-post facto law; and
6. There is over regulation of the video industry as if it were a
nuisance, which it is not.
We shall consider the foregoing objections in seriatim.
1. The Constitutional requirement that "every bill shall embrace
only one subject which shall be expressed in the title thereof" 1 is
sufficiently complied with if the title be comprehensive enough to
include the general purpose which a statute seeks to achieve. It
is not necessary that the title express each and every end that the
statute wishes to accomplish. The requirement is satisfied if all the
parts of the statute are related, and are germane to the subject
matter expressed in the title, or as long as they are not inconsistent
with or foreign to the general subject and title. 2An act having a
single general subject, indicated in the title, may contain any
number of provisions, no matter how diverse they may be, so long
as they are not inconsistent with or foreign to the general subject,
and may be considered in furtherance of such subject by
providing for the method and means of carrying out the general
object." 3 The rule also is that the constitutional requirement as to
the title of a bill should not be so narrowly construed as to cripple
or impede the power of legislation. 4 It should be given practical
rather than technical construction. 5
Tested by the foregoing criteria, petitioner's contention that the
tax provision of the DECREE is a rider is without merit. That section
reads, inter alia:
Section 10. Tax on Sale, Lease or Disposition of Videograms. —
Notwithstanding any provision of law to the contrary, the province
shall collect a tax of thirty percent (30%) of the purchase price or
rental rate, as the case may be, for every sale, lease or disposition
of a videogram containing a reproduction of any motion picture
or audiovisual program. Fifty percent (50%) of the proceeds of the
tax collected shall accrue to the province, and the other fifty
percent (50%) shall acrrue to the municipality where the tax is
collected; PROVIDED, That in Metropolitan Manila, the tax shall be
shared equally by the City/Municipality and the Metropolitan
Manila Commission.
xxx xxx xxx
The foregoing provision is allied and germane to, and is
reasonably necessary for the accomplishment of, the general
object of the DECREE, which is the regulation of the video industry
through the Videogram Regulatory Board as expressed in its title.
The tax provision is not inconsistent with, nor foreign to that general
subject and title. As a tool for regulation 6 it is simply one of the
regulatory and control mechanisms scattered throughout the
DECREE. The express purpose of the DECREE to include taxation of
the video industry in order to regulate and rationalize the
heretofore uncontrolled distribution of videograms is evident from
Preambles 2 and 5, supra. Those preambles explain the motives of
the lawmaker in presenting the measure. The title of the DECREE,
which is the creation of the Videogram Regulatory Board, is
comprehensive enough to include the purposes expressed in its
Preamble and reasonably covers all its provisions. It is unnecessary
to express all those objectives in the title or that the latter be an
index to the body of the DECREE. 7
2. Petitioner also submits that the thirty percent (30%) tax imposed
is harsh and oppressive, confiscatory, and in restraint of trade.
However, it is beyond serious question that a tax does not cease
to be valid merely because it regulates, discourages, or even
definitely deters the activities taxed. 8 The power to impose taxes
is one so unlimited in force and so searching in extent, that the
courts scarcely venture to declare that it is subject to any
restrictions whatever, except such as rest in the discretion of the
authority which exercises it. 9 In imposing a tax, the legislature acts
upon its constituents. This is, in general, a sufficient security against
erroneous and oppressive taxation. 10
The tax imposed by the DECREE is not only a regulatory but also a
revenue measure prompted by the realization that earnings of
videogram establishments of around P600 million per annum have
not been subjected to tax, thereby depriving the Government of
an additional source of revenue. It is an end-user tax, imposed on
retailers for every videogram they make available for public
viewing. It is similar to the 30% amusement tax imposed or borne
by the movie industry which the theater-owners pay to the
government, but which is passed on to the entire cost of the
admission ticket, thus shifting the tax burden on the buying or the
viewing public. It is a tax that is imposed uniformly on all
videogram operators.
The levy of the 30% tax is for a public purpose. It was imposed
primarily to answer the need for regulating the video industry,
particularly because of the rampant film piracy, the flagrant
violation of intellectual property rights, and the proliferation of
pornographic video tapes. And while it was also an objective of
the DECREE to protect the movie industry, the tax remains a valid
imposition.
The public purpose of a tax may legally exist even if the motive
which impelled the legislature to impose the tax was to favor one
industry over another. 11
It is inherent in the power to tax that a state be free to select the
subjects of taxation, and it has been repeatedly held that
61
"inequities which result from a singling out of one particular class
for taxation or exemption infringe no constitutional
limitation". 12 Taxation has been made the implement of the
state's police power.13
At bottom, the rate of tax is a matter better addressed to the
taxing legislature.
3. Petitioner argues that there was no legal nor factual basis for
the promulgation of the DECREE by the former President under
Amendment No. 6 of the 1973 Constitution providing that
"whenever in the judgment of the President ... , there exists a grave
emergency or a threat or imminence thereof, or whenever the
interim Batasang Pambansa or the regular National Assembly fails
or is unable to act adequately on any matter for any reason that
in his judgment requires immediate action, he may, in order to
meet the exigency, issue the necessary decrees, orders, or letters
of instructions, which shall form part of the law of the land."
In refutation, the Intervenors and the Solicitor General's Office
aver that the 8th "whereas" clause sufficiently summarizes the
justification in that grave emergencies corroding the moral values
of the people and betraying the national economic recovery
program necessitated bold emergency measures to be adopted
with dispatch. Whatever the reasons "in the judgment" of the then
President, considering that the issue of the validity of the exercise
of legislative power under the said Amendment still pends
resolution in several other cases, we reserve resolution of the
question raised at the proper time.
4. Neither can it be successfully argued that the DECREE contains
an undue delegation of legislative power. The grant in Section 11
of the DECREE of authority to the BOARD to "solicit the direct
assistance of other agencies and units of the government and
deputize, for a fixed and limited period, the heads or personnel of
such agencies and units to perform enforcement functions for the
Board" is not a delegation of the power to legislate but merely a
conferment of authority or discretion as to its execution,
enforcement, and implementation. "The true distinction is
between the delegation of power to make the law, which
necessarily involves a discretion as to what it shall be, and
conferring authority or discretion as to its execution to be
exercised under and in pursuance of the law. The first cannot be
done; to the latter, no valid objection can be made." 14 Besides,
in the very language of the decree, the authority of the BOARD to
solicit such assistance is for a "fixed and limited period" with the
deputized agencies concerned being "subject to the direction
and control of the BOARD." That the grant of such authority might
be the source of graft and corruption would not stigmatize the
DECREE as unconstitutional. Should the eventuality occur, the
aggrieved parties will not be without adequate remedy in law.
5. The DECREE is not violative of the ex post facto principle. An ex
post facto law is, among other categories, one which "alters the
legal rules of evidence, and authorizes conviction upon less or
different testimony than the law required at the time of the
commission of the offense." It is petitioner's position that Section 15
of the DECREE in providing that:
All videogram establishments in the Philippines are hereby given
a period of forty-five (45) days after the effectivity of this Decree
within which to register with and secure a permit from the BOARD
to engage in the videogram business and to register with the
BOARD all their inventories of videograms, including videotapes,
discs, cassettes or other technical improvements or variations
thereof, before they could be sold, leased, or otherwise disposed
of. Thereafter any videogram found in the possession of any
person engaged in the videogram business without the required
proof of registration by the BOARD, shall be prima facie evidence
of violation of the Decree, whether the possession of such
videogram be for private showing and/or public exhibition.
raises immediately a prima facie evidence of violation of the
DECREE when the required proof of registration of any videogram
cannot be presented and thus partakes of the nature of an ex
post facto law.
The argument is untenable. As this Court held in the recent case
of Vallarta vs. Court of Appeals, et al. 15
... it is now well settled that "there is no constitutional objection to
the passage of a law providing that the presumption of
innocence may be overcome by a contrary presumption
founded upon the experience of human conduct, and enacting
what evidence shall be sufficient to overcome such presumption
of innocence" (People vs. Mingoa 92 Phil. 856 [1953] at 858-59,
citing 1 COOLEY, A TREATISE ON THE CONSTITUTIONAL LIMITATIONS,
639-641). And the "legislature may enact that when certain facts
have been proved that they shall be prima facie evidence of the
existence of the guilt of the accused and shift the burden of proof
provided there be a rational connection between the facts
proved and the ultimate facts presumed so that the inference of
the one from proof of the others is not unreasonable and arbitrary
because of lack of connection between the two in common
experience". 16
Applied to the challenged provision, there is no question that
there is a rational connection between the fact proved, which is
non-registration, and the ultimate fact presumed which is violation
of the DECREE, besides the fact that the prima facie presumption
of violation of the DECREE attaches only after a forty-five-day
period counted from its effectivity and is, therefore, neither
retrospective in character.
6. We do not share petitioner's fears that the video industry is being
over-regulated and being eased out of existence as if it were a
nuisance. Being a relatively new industry, the need for its
regulation was apparent. While the underlying objective of the
DECREE is to protect the moribund movie industry, there is no
question that public welfare is at bottom of its enactment,
considering "the unfair competition posed by rampant film piracy;
the erosion of the moral fiber of the viewing public brought about
by the availability of unclassified and unreviewed video tapes
containing pornographic films and films with brutally violent
sequences; and losses in government revenues due to the drop in
theatrical attendance, not to mention the fact that the activities
of video establishments are virtually untaxed since mere payment
of Mayor's permit and municipal license fees are required to
engage in business. 17
The enactment of the Decree since April 10, 1986 has not brought
about the "demise" of the video industry. On the contrary, video
establishments are seen to have proliferated in many places
notwithstanding the 30% tax imposed.
In the last analysis, what petitioner basically questions is the
necessity, wisdom and expediency of the DECREE. These
considerations, however, are primarily and exclusively a matter of
legislative concern.
Only congressional power or competence, not the wisdom of the
action taken, may be the basis for declaring a statute invalid. This
is as it ought to be. The principle of separation of powers has in the
main wisely allocated the respective authority of each
department and confined its jurisdiction to such a sphere. There
would then be intrusion not allowable under the Constitution if on
a matter left to the discretion of a coordinate branch, the
judiciary would substitute its own. If there be adherence to the rule
of law, as there ought to be, the last offender should be courts of
justice, to which rightly litigants submit their controversy precisely
to maintain unimpaired the supremacy of legal norms and
prescriptions. The attack on the validity of the challenged
provision likewise insofar as there may be objections, even if valid
and cogent on its wisdom cannot be sustained. 18
In fine, petitioner has not overcome the presumption of validity
which attaches to a challenged statute. We find no clear violation
of the Constitution which would justify us in pronouncing
Presidential Decree No. 1987 as unconstitutional and void.
WHEREFORE, the instant Petition is hereby dismissed.
No costs.
SO ORDERED.
2. G.R. No. L-7859 December 22, 1955
WALTER LUTZ, as Judicial Administrator of the Intestate Estate of the
deceased Antonio Jayme Ledesma,plaintiff-appellant,
vs.
J. ANTONIO ARANETA, as the Collector of Internal
Revenue, defendant-appellee.
REYES, J.B L., J.:
This case was initiated in the Court of First Instance of Negros
Occidental to test the legality of the taxes imposed by
Commonwealth Act No. 567, otherwise known as the Sugar
Adjustment Act.
Promulgated in 1940, the law in question opens (section 1) with a
declaration of emergency, due to the threat to our industry by the
imminent imposition of export taxes upon sugar as provided in the
Tydings-McDuffe Act, and the "eventual loss of its preferential
position in the United States market"; wherefore, the national
62
policy was expressed "to obtain a readjustment of the benefits
derived from the sugar industry by the component elements
thereof" and "to stabilize the sugar industry so as to prepare it for
the eventuality of the loss of its preferential position in the United
States market and the imposition of the export taxes."
In section 2, Commonwealth Act 567 provides for an increase of
the existing tax on the manufacture of sugar, on a graduated
basis, on each picul of sugar manufactured; while section 3 levies
on owners or persons in control of lands devoted to the cultivation
of sugar cane and ceded to others for a consideration, on lease
or otherwise —
a tax equivalent to the difference between the money value of
the rental or consideration collected and the amount
representing 12 per centum of the assessed value of such land.
According to section 6 of the law —
SEC. 6. All collections made under this Act shall accrue to a
special fund in the Philippine Treasury, to be known as the 'Sugar
Adjustment and Stabilization Fund,' and shall be paid out only for
any or all of the following purposes or to attain any or all of the
following objectives, as may be provided by law.
First, to place the sugar industry in a position to maintain itself,
despite the gradual loss of the preferntial position of the Philippine
sugar in the United States market, and ultimately to insure its
continued existence notwithstanding the loss of that market and
the consequent necessity of meeting competition in the free
markets of the world;
Second, to readjust the benefits derived from the sugar industry
by all of the component elements thereof — the mill, the
landowner, the planter of the sugar cane, and the laborers in the
factory and in the field — so that all might continue profitably to
engage therein;lawphi1.net
Third, to limit the production of sugar to areas more economically
suited to the production thereof; and
Fourth, to afford labor employed in the industry a living wage and
to improve their living and working conditions: Provided, That the
President of the Philippines may, until the adjourment of the next
regular session of the National Assembly, make the necessary
disbursements from the fund herein created (1) for the
establishment and operation of sugar experiment station or
stations and the undertaking of researchers (a) to increase the
recoveries of the centrifugal sugar factories with the view of
reducing manufacturing costs, (b) to produce and propagate
higher yielding varieties of sugar cane more adaptable to
different district conditions in the Philippines, (c) to lower the costs
of raising sugar cane, (d) to improve the buying quality of
denatured alcohol from molasses for motor fuel, (e) to determine
the possibility of utilizing the other by-products of the industry, (f)
to determine what crop or crops are suitable for rotation and for
the utilization of excess cane lands, and (g) on other problems the
solution of which would help rehabilitate and stabilize the industry,
and (2) for the improvement of living and working conditions in
sugar mills and sugar plantations, authorizing him to organize the
necessary agency or agencies to take charge of the expenditure
and allocation of said funds to carry out the purpose hereinbefore
enumerated, and, likewise, authorizing the disbursement from the
fund herein created of the necessary amount or amounts needed
for salaries, wages, travelling expenses, equipment, and other
sundry expenses of said agency or agencies.
Plaintiff, Walter Lutz, in his capacity as Judicial Administrator of the
Intestate Estate of Antonio Jayme Ledesma, seeks to recover from
the Collector of Internal Revenue the sum of P14,666.40 paid by
the estate as taxes, under section 3 of the Act, for the crop years
1948-1949 and 1949-1950; alleging that such tax is unconstitutional
and void, being levied for the aid and support of the sugar
industry exclusively, which in plaintiff's opinion is not a public
purpose for which a tax may be constitutioally levied. The action
having been dismissed by the Court of First Instance, the plaintifs
appealed the case directly to this Court (Judiciary Act, section
17).
The basic defect in the plaintiff's position is his assumption that the
tax provided for in Commonwealth Act No. 567 is a pure exercise
of the taxing power. Analysis of the Act, and particularly of section
6 (heretofore quoted in full), will show that the tax is levied with a
regulatory purpose, to provide means for the rehabilitation and
stabilization of the threatened sugar industry. In other words, the
act is primarily an exercise of the police power.
This Court can take judicial notice of the fact that sugar
production is one of the great industries of our nation, sugar
occupying a leading position among its export products; that it
gives employment to thousands of laborers in fields and factories;
that it is a great source of the state's wealth, is one of the
important sources of foreign exchange needed by our
government, and is thus pivotal in the plans of a regime
committed to a policy of currency stability. Its promotion,
protection and advancement, therefore redounds greatly to the
general welfare. Hence it was competent for the legislature to
find that the general welfare demanded that the sugar industry
should be stabilized in turn; and in the wide field of its police
power, the lawmaking body could provide that the distribution of
benefits therefrom be readjusted among its components to
enable it to resist the added strain of the increase in taxes that it
had to sustain (Sligh vs. Kirkwood, 237 U. S. 52, 59 L. Ed. 835;
Johnson vs. State ex rel. Marey, 99 Fla. 1311, 128 So. 853; Maxcy
Inc. vs. Mayo, 103 Fla. 552, 139 So. 121).
As stated in Johnson vs. State ex rel. Marey, with reference to the
citrus industry in Florida —
The protection of a large industry constituting one of the great
sources of the state's wealth and therefore directly or indirectly
affecting the welfare of so great a portion of the population of
the State is affected to such an extent by public interests as to be
within the police power of the sovereign. (128 Sp. 857).
Once it is conceded, as it must, that the protection and
promotion of the sugar industry is a matter of public concern, it
follows that the Legislature may determine within reasonable
bounds what is necessary for its protection and expedient for its
promotion. Here, the legislative discretion must be allowed fully
play, subject only to the test of reasonableness; and it is not
contended that the means provided in section 6 of the law
(above quoted) bear no relation to the objective pursued or are
oppressive in character. If objective and methods are alike
constitutionally valid, no reason is seen why the state may not levy
taxes to raise funds for their prosecution and attainment. Taxation
may be made the implement of the state's police power (Great
Atl. & Pac. Tea Co. vs. Grosjean, 301 U. S. 412, 81 L. Ed. 1193; U. S.
vs. Butler, 297 U. S. 1, 80 L. Ed. 477; M'Culloch vs. Maryland, 4
Wheat. 316, 4 L. Ed. 579).
That the tax to be levied should burden the sugar producers
themselves can hardly be a ground of complaint; indeed, it
appears rational that the tax be obtained precisely from those
who are to be benefited from the expenditure of the funds
derived from it. At any rate, it is inherent in the power to tax that a
state be free to select the subjects of taxation, and it has been
repeatedly held that "inequalities which result from a singling out
of one particular class for taxation, or exemption infringe no
constitutional limitation" (Carmichael vs. Southern Coal & Coke
Co., 301 U. S. 495, 81 L. Ed. 1245, citing numerous authorities, at p.
1251).
From the point of view we have taken it appears of no moment
that the funds raised under the Sugar Stabilization Act, now in
question, should be exclusively spent in aid of the sugar industry,
since it is that very enterprise that is being protected. It may be
that other industries are also in need of similar protection; that the
legislature is not required by the Constitution to adhere to a policy
of "all or none." As ruled in Minnesota ex rel. Pearson vs. Probate
Court, 309 U. S. 270, 84 L. Ed. 744, "if the law presumably hits the
evil where it is most felt, it is not to be overthrown because there
are other instances to which it might have been applied;" and
that "the legislative authority, exerted within its proper field, need
not embrace all the evils within its reach" (N. L. R. B. vs. Jones &
Laughlin Steel Corp. 301 U. S. 1, 81 L. Ed. 893).
Even from the standpoint that the Act is a pure tax measure, it
cannot be said that the devotion of tax money to experimental
stations to seek increase of efficiency in sugar production,
utilization of by-products and solution of allied problems, as well
as to the improvements of living and working conditions in sugar
mills or plantations, without any part of such money being
channeled directly to private persons, constitutes expenditure of
tax money for private purposes, (compare Everson vs. Board of
Education, 91 L. Ed. 472, 168 ALR 1392, 1400).
The decision appealed from is affirmed, with costs against
appellant. So ordered.
3. G.R. No. 92585 May 8, 1992
CALTEX PHILIPPINES, INC., petitioner,
vs.
THE HONORABLE COMMISSION ON AUDIT, HONORABLE
COMMISSIONER BARTOLOME C. FERNANDEZ and HONORABLE
COMMISSIONER ALBERTO P. CRUZ, respondents.
63
DAVIDE, JR., J.:
This is a petition erroneously brought under Rule 44 of the Rules of
Court 1 questioning the authority of the Commission on Audit
(COA) in disallowing petitioner's claims for reimbursement from
the Oil Price Stabilization Fund (OPSF) and seeking the reversal of
said Commission's decision denying its claims for recovery of
financing charges from the Fund and reimbursement of
underrecovery arising from sales to the National Power
Corporation, Atlas Consolidated Mining and Development
Corporation (ATLAS) and Marcopper Mining Corporation (MAR-
COPPER), preventing it from exercising the right to offset its
remittances against its reimbursement vis-a-vis the OPSF and
disallowing its claims which are still pending resolution before the
Office of Energy Affairs (OEA) and the Department of Finance
(DOF).
Pursuant to the 1987 Constitution, 2 any decision, order or ruling of
the Constitutional Commissions 3 may be brought to this Court
on certiorari by the aggrieved party within thirty (30) days from
receipt of a copy thereof. The certiorari referred to is the special
civil action for certiorari under Rule 65 of the Rules of Court. 4
Considering, however, that the allegations that the COA acted
with:
(a) total lack of jurisdiction in completely ignoring and showing
absolutely no respect for the findings and rulings of the
administrator of the fund itself and in disallowing a claim which is
still pending resolution at the OEA level, and (b) "grave abuse of
discretion and completely without jurisdiction" 5 in declaring that
petitioner cannot avail of the right to offset any amount that it
may be required under the law to remit to the OPSF against any
amount that it may receive by way of reimbursement therefrom
are sufficient to bring this petition within Rule 65 of the Rules of
Court, and, considering further the importance of the issues
raised, the error in the designation of the remedy pursued will, in
this instance, be excused.
The issues raised revolve around the OPSF created under Section
8 of Presidential Decree (P.D.) No. 1956, as amended by Executive
Order (E.O.) No. 137. As amended, said Section 8 reads as follows:
Sec. 8 . There is hereby created a Trust Account in the books of
accounts of the Ministry of Energy to be designated as Oil Price
Stabilization Fund (OPSF) for the purpose of minimizing frequent
price changes brought about by exchange rate adjustments
and/or changes in world market prices of crude oil and imported
petroleum products. The Oil Price Stabilization Fund may be
sourced from any of the following:
a) Any increase in the tax collection from ad valorem tax or
customs duty imposed on petroleum products subject to tax
under this Decree arising from exchange rate adjustment, as may
be determined by the Minister of Finance in consultation with the
Board of Energy;
b) Any increase in the tax collection as a result of the lifting of tax
exemptions of government corporations, as may be determined
by the Minister of Finance in consultation with the Board of Energy;
c) Any additional amount to be imposed on petroleum products
to augment the resources of the Fund through an appropriate
Order that may be issued by the Board of Energy requiring
payment by persons or companies engaged in the business of
importing, manufacturing and/or marketing petroleum products;
d) Any resulting peso cost differentials in case the actual peso
costs paid by oil companies in the importation of crude oil and
petroleum products is less than the peso costs computed using
the reference foreign exchange rate as fixed by the Board of
Energy.
The Fund herein created shall be used for the following:
1) To reimburse the oil companies for cost increases in crude oil
and imported petroleum products resulting from exchange rate
adjustment and/or increase in world market prices of crude oil;
2) To reimburse the oil companies for possible cost under-recovery
incurred as a result of the reduction of domestic prices of
petroleum products. The magnitude of the underrecovery, if any,
shall be determined by the Ministry of Finance. "Cost
underrecovery" shall include the following:
i. Reduction in oil company take as directed by the Board of
Energy without the corresponding reduction in the landed cost of
oil inventories in the possession of the oil companies at the time of
the price change;
ii. Reduction in internal ad valorem taxes as a result of foregoing
government mandated price reductions;
iii. Other factors as may be determined by the Ministry of Finance
to result in cost underrecovery.
The Oil Price Stabilization Fund (OPSF) shall be administered by the
Ministry of Energy.
The material operative facts of this case, as gathered from the
pleadings of the parties, are not disputed.
On 2 February 1989, the COA sent a letter to Caltex Philippines,
Inc. (CPI), hereinafter referred to as Petitioner, directing the latter
to remit to the OPSF its collection, excluding that unremitted for
the years 1986 and 1988, of the additional tax on petroleum
products authorized under the aforesaid Section 8 of P.D. No. 1956
which, as of 31 December 1987, amounted to P335,037,649.00
and informing it that, pending such remittance, all of its claims for
reimbursement from the OPSF shall be held in abeyance. 6
On 9 March 1989, the COA sent another letter to petitioner
informing it that partial verification with the OEA showed that the
grand total of its unremitted collections of the above tax is
P1,287,668,820.00, broken down as follows:
1986 — P233,190,916.00
1987 — 335,065,650.00
1988 — 719,412,254.00;
directing it to remit the same, with interest and surcharges
thereon, within sixty (60) days from receipt of the letter; advising it
that the COA will hold in abeyance the audit of all its claims for
reimbursement from the OPSF; and directing it to desist from
further offsetting the taxes collected against outstanding claims in
1989 and subsequent periods. 7
In its letter of 3 May 1989, petitioner requested the COA for an
early release of its reimbursement certificates from the OPSF
covering claims with the Office of Energy Affairs since June 1987
up to March 1989, invoking in support thereof COA Circular No.
89-299 on the lifting of pre-audit of government transactions of
national government agencies and government-owned or
controlled corporations. 8
In its Answer dated 8 May 1989, the COA denied petitioner's
request for the early release of the reimbursement certificates
from the OPSF and repeated its earlier directive to petitioner to
forward payment of the latter's unremitted collections to the OPSF
to facilitate COA's audit action on the reimbursement claims. 9
By way of a reply, petitioner, in a letter dated 31 May 1989,
submitted to the COA a proposal for the payment of the
collections and the recovery of claims, since the outright payment
of the sum of P1.287 billion to the OEA as a prerequisite for the
processing of said claims against the OPSF will cause a very serious
impairment of its cash position. 10 The proposal reads:
We, therefore, very respectfully propose the following:
(1) Any procedural arrangement acceptable to COA to facilitate
monitoring of payments and reimbursements will be administered
by the ERB/Finance Dept./OEA, as agencies designated by law
to administer/regulate OPSF.
(2) For the retroactive period, Caltex will deliver to OEA, P1.287
billion as payment to OPSF, similarly OEA will deliver to Caltex the
same amount in cash reimbursement from OPSF.
(3) The COA audit will commence immediately and will be
conducted expeditiously.
(4) The review of current claims (1989) will be conducted
expeditiously to preclude further accumulation of reimbursement
from OPSF.
On 7 June 1989, the COA, with the Chairman taking no part,
handed down Decision No. 921 accepting the above-stated
proposal but prohibiting petitioner from further offsetting
remittances and reimbursements for the current and ensuing
years. 11 Decision No. 921 reads:
This pertains to the within separate requests of Mr. Manuel A.
Estrella, President, Petron Corporation, and Mr. Francis Ablan,
President and Managing Director, Caltex (Philippines) Inc., for
reconsideration of this Commission's adverse action embodied in
its letters dated February 2, 1989 and March 9, 1989, the former
directing immediate remittance to the Oil Price Stabilization Fund
of collections made by the firms pursuant to P.D. 1956, as
amended by E.O. No. 137, S. 1987, and the latter reiterating the
64
same directive but further advising the firms to desist from
offsetting collections against their claims with the notice that "this
Commission will hold in abeyance the audit of all . . . claims for
reimbursement from the OPSF."
It appears that under letters of authority issued by the Chairman,
Energy Regulatory Board, the aforenamed oil companies were
allowed to offset the amounts due to the Oil Price Stabilization
Fund against their outstanding claims from the said Fund for the
calendar years 1987 and 1988, pending with the then Ministry of
Energy, the government entity charged with administering the
OPSF. This Commission, however, expressing serious doubts as to
the propriety of the offsetting of all types of reimbursements from
the OPSF against all categories of remittances, advised these oil
companies that such offsetting was bereft of legal basis.
Aggrieved thereby, these companies now seek reconsideration
and in support thereof clearly manifest their intent to make
arrangements for the remittance to the Office of Energy Affairs of
the amount of collections equivalent to what has been previously
offset, provided that this Commission authorizes the Office of
Energy Affairs to prepare the corresponding checks representing
reimbursement from the OPSF. It is alleged that the
implementation of such an arrangement, whereby the
remittance of collections due to the OPSF and the reimbursement
of claims from the Fund shall be made within a period of not more
than one week from each other, will benefit the Fund and not
unduly jeopardize the continuing daily cash requirements of these
firms.
Upon a circumspect evaluation of the circumstances herein
obtaining, this Commission perceives no further objectionable
feature in the proposed arrangement, provided that 15% of
whatever amount is due from the Fund is retained by the Office
of Energy Affairs, the same to be answerable for suspensions or
disallowances, errors or discrepancies which may be noted in the
course of audit and surcharges for late remittances without
prejudice to similar future retentions to answer for any deficiency
in such surcharges, and provided further that no offsetting of
remittances and reimbursements for the current and ensuing
years shall be allowed.
Pursuant to this decision, the COA, on 18 August 1989, sent the
following letter to Executive Director Wenceslao R. De la Paz of
the Office of Energy Affairs: 12
Dear Atty. dela Paz:
Pursuant to the Commission on Audit Decision No. 921 dated June
7, 1989, and based on our initial verification of documents
submitted to us by your Office in support of Caltex (Philippines),
Inc. offsets (sic) for the year 1986 to May 31, 1989, as well as its
outstanding claims against the Oil Price Stabilization Fund (OPSF)
as of May 31, 1989, we are pleased to inform your Office that
Caltex (Philippines), Inc. shall be required to remit to OPSF an
amount of P1,505,668,906, representing remittances to the OPSF
which were offset against its claims reimbursements (net of
unsubmitted claims). In addition, the Commission hereby
authorize (sic) the Office of Energy Affairs (OEA) to cause
payment of P1,959,182,612 to Caltex, representing claims initially
allowed in audit, the details of which are presented hereunder: . .
.
As presented in the foregoing computation the disallowances
totalled P387,683,535, which included P130,420,235 representing
those claims disallowed by OEA, details of which is (sic) shown in
Schedule 1 as summarized as follows:
Disallowance of COA
Particulars Amount
Recovery of financing charges P162,728,475 /a
Product sales 48,402,398 /b
Inventory losses
Borrow loan arrangement 14,034,786 /c
Sales to Atlas/Marcopper 32,097,083 /d
Sales to NPC 558
——————
P257,263,300
Disallowances of OEA 130,420,235
————————— ——————
Total P387,683,535
The reasons for the disallowances are discussed hereunder:
a. Recovery of Financing Charges
Review of the provisions of P.D. 1596 as amended by E.O. 137
seems to indicate that recovery of financing charges by oil
companies is not among the items for which the OPSF may be
utilized. Therefore, it is our view that recovery of financing charges
has no legal basis. The mechanism for such claims is provided in
DOF Circular 1-87.
b. Product Sales –– Sales to International Vessels/Airlines
BOE Resolution No. 87-01 dated February 7, 1987 as implemented
by OEA Order No. 87-03-095 indicating that (sic) February 7, 1987
as the effectivity date that (sic) oil companies should pay OPSF
impost on export sales of petroleum products. Effective February
7, 1987 sales to international vessels/airlines should not be
included as part of its domestic sales. Changing the effectivity
date of the resolution from February 7, 1987 to October 20, 1987
as covered by subsequent ERB Resolution No. 88-12 dated
November 18, 1988 has allowed Caltex to include in their
domestic sales volumes to international vessels/airlines and claim
the corresponding reimbursements from OPSF during the period.
It is our opinion that the effectivity of the said resolution should be
February 7, 1987.
c. Inventory losses –– Settlement of Ad Valorem
We reviewed the system of handling Borrow and Loan (BLA)
transactions including the related BLA agreement, as they affect
the claims for reimbursements of ad valorem taxes. We observed
that oil companies immediately settle ad valorem taxes for BLA
transaction (sic). Loan balances therefore are not tax paid
inventories of Caltex subject to reimbursements but those of the
borrower. Hence, we recommend reduction of the claim for July,
August, and November, 1987 amounting to P14,034,786.
d. Sales to Atlas/Marcopper
LOI No. 1416 dated July 17, 1984 provides that "I hereby order and
direct the suspension of payment of all taxes, duties, fees, imposts
and other charges whether direct or indirect due and payable by
the copper mining companies in distress to the national and local
governments." It is our opinion that LOI 1416 which implements the
exemption from payment of OPSF imposts as effected by OEA has
no legal basis.
Furthermore, we wish to emphasize that payment to Caltex (Phil.)
Inc., of the amount as herein authorized shall be subject to
availability of funds of OPSF as of May 31, 1989 and applicable
auditing rules and regulations. With regard to the disallowances,
it is further informed that the aggrieved party has 30 days within
which to appeal the decision of the Commission in accordance
with law.
On 8 September 1989, petitioner filed an Omnibus Request for the
Reconsideration of the decision based on the following
grounds: 13
A) COA-DISALLOWED CLAIMS ARE AUTHORIZED UNDER EXISTING
RULES, ORDERS, RESOLUTIONS, CIRCULARS ISSUED BY THE
DEPARTMENT OF FINANCE AND THE ENERGY REGULATORY BOARD
PURSUANT TO EXECUTIVE ORDER NO. 137.
xxx xxx xxx
B) ADMINISTRATIVE INTERPRETATIONS IN THE COURSE OF EXERCISE
OF EXECUTIVE POWER BY DEPARTMENT OF FINANCE AND ENERGY
REGULATORY BOARD ARE LEGAL AND SHOULD BE RESPECTED AND
APPLIED UNLESS DECLARED NULL AND VOID BY COURTS OR
REPEALED BY LEGISLATION.
xxx xxx xxx
C) LEGAL BASIS FOR RETENTION OF OFFSET ARRANGEMENT, AS
AUTHORIZED BY THE EXECUTIVE BRANCH OF GOVERNMENT,
REMAINS VALID.
xxx xxx xxx
On 6 November 1989, petitioner filed with the COA a
Supplemental Omnibus Request for Reconsideration. 14
On 16 February 1990, the COA, with Chairman Domingo taking no
part and with Commissioner Fernandez dissenting in part, handed
down Decision No. 1171 affirming the disallowance for recovery
of financing charges, inventory losses, and sales to MARCOPPER
and ATLAS, while allowing the recovery of product sales or those
arising from export sales. 15 Decision No. 1171 reads as follows:
Anent the recovery of financing charges you contend that Caltex
Phil. Inc. has the .authority to recover financing charges from the
OPSF on the basis of Department of Finance (DOF) Circular 1-87,
dated February 18, 1987, which allowed oil companies to "recover
cost of financing working capital associated with crude oil
shipments," and provided a schedule of reimbursement in terms
65
of peso per barrel. It appears that on November 6, 1989, the DOF
issued a memorandum to the President of the Philippines
explaining the nature of these financing charges and justifying
their reimbursement as follows:
As part of your program to promote economic recovery, . . . oil
companies (were authorized) to refinance their imports of crude
oil and petroleum products from the normal trade credit of 30
days up to 360 days from date of loading . . . Conformably . . ., the
oil companies deferred their foreign exchange remittances for
purchases by refinancing their import bills from the normal 30-day
payment term up to the desired 360 days. This refinancing of
importations carried additional costs (financing charges) which
then became, due to government mandate, an inherent part of
the cost of the purchases of our country's oil requirement.
We beg to disagree with such contention. The justification that
financing charges increased oil costs and the schedule of
reimbursement rate in peso per barrel (Exhibit 1) used to support
alleged increase (sic) were not validated in our independent
inquiry. As manifested in Exhibit 2, using the same formula which
the DOF used in arriving at the reimbursement rate but using
comparable percentages instead of pesos, the ineluctable
conclusion is that the oil companies are actually gaining rather
than losing from the extension of credit because such extension
enables them to invest the collections in marketable securities
which have much higher rates than those they incur due to the
extension. The Data we used were obtained from CPI (CALTEX)
Management and can easily be verified from our records.
With respect to product sales or those arising from sales to
international vessels or airlines, . . ., it is believed that export sales
(product sales) are entitled to claim refund from the OPSF.
As regard your claim for underrecovery arising from inventory
losses, . . . It is the considered view of this Commission that the OPSF
is not liable to refund such surtax on inventory losses because
these are paid to BIR and not OPSF, in view of which CPI (CALTEX)
should seek refund from BIR. . . .
Finally, as regards the sales to Atlas and Marcopper, it is
represented that you are entitled to claim recovery from the OPSF
pursuant to LOI 1416 issued on July 17, 1984, since these copper
mining companies did not pay CPI (CALTEX) and OPSF imposts
which were added to the selling price.
Upon a circumspect evaluation, this Commission believes and so
holds that the CPI (CALTEX) has no authority to claim
reimbursement for this uncollected OPSF impost because LOI 1416
dated July 17, 1984, which exempts distressed mining companies
from "all taxes, duties, import fees and other charges" was issued
when OPSF was not yet in existence and could not have
contemplated OPSF imposts at the time of its formulation.
Moreover, it is evident that OPSF was not created to aid distressed
mining companies but rather to help the domestic oil industry by
stabilizing oil prices.
Unsatisfied with the decision, petitioner filed on 28 March 1990 the
present petition wherein it imputes to the COA the commission of
the following errors: 16
I
RESPONDENT COMMISSION ERRED IN DISALLOWING RECOVERY
OF FINANCING CHARGES FROM THE OPSF.
II
RESPONDENT COMMISSION ERRED IN DISALLOWING
CPI's 17 CLAIM FOR REIMBURSEMENT OF UNDERRECOVERY ARISING
FROM SALES TO NPC.
III
RESPONDENT COMMISSION ERRED IN DENYING CPI's CLAIMS FOR
REIMBURSEMENT ON SALES TO ATLAS AND MARCOPPER.
IV
RESPONDENT COMMISSION ERRED IN PREVENTING CPI FROM
EXERCISING ITS LEGAL RIGHT TO OFFSET ITS REMITTANCES AGAINST
ITS REIMBURSEMENT VIS-A-VIS THE OPSF.
V
RESPONDENT COMMISSION ERRED IN DISALLOWING CPI's CLAIMS
WHICH ARE STILL PENDING RESOLUTION BY (SIC) THE OEA AND THE
DOF.
In the Resolution of 5 April 1990, this Court required the Pursuant to this circular, the Department of Finance, in its letter of
respondents to comment on the petition within ten (10) days from 18 February 1987, advised the Office of Energy Affairs as follows:

66
notice. 18
HON. VICENTE T. PATERNO
On 6 September 1990, respondents COA and Commissioners Deputy Executive Secretary
Fernandez and Cruz, assisted by the Office of the Solicitor For Energy Affairs
General, filed their Comment. 19 Office of the President
Makati, Metro Manila
This Court resolved to give due course to this petition on 30 May
1991 and required the parties to file their respective Memoranda Dear Sir:
within twenty (20) days from notice. 20
This refers to the letters of the Oil Industry dated December 4, 1986
In a Manifestation dated 18 July 1991, the Office of the Solicitor and February 5, 1987 and subsequent discussions held by the Price
General prays that the Comment filed on 6 September 1990 be Review committee on February 6, 1987.
considered as the Memorandum for respondents. 21
On the basis of the representations made, the Department of
Upon the other hand, petitioner filed its Memorandum on 14 Finance recognizes the necessity to reduce the foreign exchange
August 1991. risk premium accruing to the Oil Price Stabilization Fund (OPSF).
Such a reduction would allow the industry to recover partly
I. Petitioner dwells lengthily on its first assigned error contending, in associated financing charges on crude oil imports. Accordingly,
support thereof, that: the OPSF foreign exchange risk fee shall be reduced to a flat
charge of 1% for the first six (6) months plus 1/32% of 1% per month
(1) In view of the expanded role of the OPSF pursuant to Executive thereafter up to a maximum period of one year, effective January
Order No. 137, which added a second purpose, to wit: 1, 1987. In addition, since the prevailing company take would still
leave unrecovered financing charges, reimbursement may be
2) To reimburse the oil companies for possible cost underrecovery
secured from the OPSF in accordance with the provisions of the
incurred as a result of the reduction of domestic prices of
attached Department of Finance circular. 23
petroleum products. The magnitude of the underrecovery, if any,
shall be determined by the Ministry of Finance. "Cost Acting on this letter, the OEA issued on 4 May 1987 Order No. 87-
underrecovery" shall include the following: 05-096 which contains the guidelines for the computation of the
foreign exchange risk fee and the recovery of financing charges
i. Reduction in oil company take as directed by the Board of
from the OPSF, to wit:
Energy without the corresponding reduction in the landed cost of
oil inventories in the possession of the oil companies at the time of B. FINANCE CHARGES
the price change;
1. Oil companies shall be allowed to recover financing charges
ii. Reduction in internal ad valorem taxes as a result of foregoing directly from the OPSF for both crude and product shipments
government mandated price reductions; loaded after January 1, 1987 based on the following rates:
iii. Other factors as may be determined by the Ministry of Finance Financing Period Reimbursement Rate
to result in cost underrecovery. (PBbl.)
the "other factors" mentioned therein that may be determined by Less than 180 days None
the Ministry (now Department) of Finance may include financing 180 days to 239 days 1.90
charges for "in essence, financing charges constitute 240 days to 229 (sic) days 4.02
unrecovered cost of acquisition of crude oil incurred by the oil 300 days to 359 days 6.16
companies," as explained in the 6 November 1989 Memorandum 360 days to more 8.28
to the President of the Department of Finance; they "directly
translate to cost underrecovery in cases where the money market 2. The above rates shall be subject to review every sixty days. 24
placement rates decline and at the same time the tax on interest
income increases. The relationship is such that the presence of Then on 22 November 1988, the Department of Finance issued
underrecovery or overrecovery is directly dependent on the Circular No. 4-88 imposing further guidelines on the recoverability
amount and extent of financing charges." of financing charges, to wit:

(2) The claim for recovery of financing charges has clear legal Following are the supplemental rules to Department of Finance
and factual basis; it was filed on the basis of Department of Circular No. 1-87 dated February 18, 1987 which allowed the
Finance Circular No. recovery of financing charges directly from the Oil Price
1-87, dated 18 February 1987, which provides: Stabilization Fund. (OPSF):

To allow oil companies to recover the costs of financing working 1. The Claim for reimbursement shall be on a per shipment basis.
capital associated with crude oil shipments, the following
guidelines on the utilization of the Oil Price Stabilization Fund 2. The claim shall be filed with the Office of Energy Affairs together
pertaining to the payment of the foregoing (sic) exchange risk with the claim on peso cost differential for a particular shipment
premium and recovery of financing charges will be implemented: and duly certified supporting documents providedfor under
Ministry of Finance No. 11-85.
1. The OPSF foreign exchange premium shall be reduced to a flat
rate of one (1) percent for the first (6) months and 1/32 of one 3. The reimbursement shall be on the form of reimbursement
percent per month thereafter up to a maximum period of one certificate (Annex A) to be issued by the Office of Energy Affairs.
year, to be applied on crude oil' shipments from January 1, 1987. The said certificate may be used to offset against amounts
Shipments with outstanding financing as of January 1, 1987 shall payable to the OPSF. The oil companies may also redeem said
be charged on the basis of the fee applicable to the remaining certificates in cash if not utilized, subject to availability of funds. 25
period of financing.
The OEA disseminated this Circular to all oil companies in its
2. In addition, for shipments loaded after January 1987, oil Memorandum Circular No. 88-12-017. 26
companies shall be allowed to recover financing charges directly
from the OPSF per barrel of crude oil based on the following The COA can neither ignore these issuances nor formulate its own
schedule: interpretation of the laws in the light of the determination of
executive agencies. The determination by the Department of
Financing Period Reimbursement Rate Finance and the OEA that financing charges are recoverable
Pesos per Barrel from the OPSF is entitled to great weight and consideration. 27 The
function of the COA, particularly in the matter of allowing or
Less than 180 days None disallowing certain expenditures, is limited to the promulgation of
180 days to 239 days 1.90 accounting and auditing rules for, among others, the
241 (sic) days to 299 4.02 disallowance of irregular, unnecessary, excessive, extravagant, or
300 days to 369 (sic) days 6.16 unconscionable expenditures, or uses of government funds and
360 days or more 8.28 properties. 28

The above rates shall be subject to review every sixty (3) Denial of petitioner's claim for reimbursement would be
days. 22 inequitable. Additionally, COA's claim that petitioner is gaining,
instead of losing, from the extension of credit, is belatedly raised
and not supported by expert analysis.
In impeaching the validity of petitioner's assertions, the
respondents argue that:
1. The Constitution gives the COA discretionary power to
disapprove irregular or unnecessary government expenditures
and as the monetary claims of petitioner are not allowed by law,
the COA acted within its jurisdiction in denying them;
2. P.D. No. 1956 and E.O. No. 137 do not allow reimbursement of
financing charges from the OPSF;
3. Under the principle of ejusdem generis, the "other factors"
mentioned in the second purpose of the OPSF pursuant to E.O.
No. 137 can only include "factors which are of the same nature or
analogous to those enumerated;"
4. In allowing reimbursement of financing charges from OPSF,
Circular No. 1-87 of the Department of Finance violates P.D. No.
1956 and E.O. No. 137; and
5. Department of Finance rules and regulations implementing P.D.
No. 1956 do not likewise allow reimbursement of financing
charges. 29
We find no merit in the first assigned error.
As to the power of the COA, which must first be resolved in view
of its primacy, We find the theory of petitioner –– that such does
not extend to the disallowance of irregular, unnecessary,
excessive, extravagant, or unconscionable expenditures, or use
of government funds and properties, but only to the promulgation
of accounting and auditing rules for, among others, such
disallowance –– to be untenable in the light of the provisions of
the 1987 Constitution and related laws.
Section 2, Subdivision D, Article IX of the 1987 Constitution
expressly provides:
Sec. 2(l). The Commission on Audit shall have the power, authority,
and duty to examine, audit, and settle all accounts pertaining to
the revenue and receipts of, and expenditures or uses of funds
and property, owned or held in trust by, or pertaining to, the
Government, or any of its subdivisions, agencies, or
instrumentalities, including government-owned and controlled
corporations with original charters, and on a post-audit basis: (a)
constitutional bodies, commissions and offices that have been
granted fiscal autonomy under this Constitution; (b) autonomous
state colleges and universities; (c) other government-owned or
controlled corporations and their subsidiaries; and (d) such non-
governmental entities receiving subsidy or equity, directly or
indirectly, from or through the government, which are required by
law or the granting institution to submit to such audit as a
condition of subsidy or equity. However, where the internal control
system of the audited agencies is inadequate, the Commission
may adopt such measures, including temporary or special pre-
audit, as are necessary and appropriate to correct the
deficiencies. It shall keep the general accounts, of the
Government and, for such period as may be provided by law,
preserve the vouchers and other supporting papers pertaining
thereto.
(2) The Commission shall have exclusive authority, subject to the
limitations in this Article, to define the scope of its audit and
examination, establish the techniques and methods required
therefor, and promulgate accounting and auditing rules and
regulations, including those for the prevention and disallowance
of irregular, unnecessary, excessive, extravagant, or,
unconscionable expenditures, or uses of government funds and
properties.
These present powers, consistent with the declared
independence of the Commission, 30 are broader and more
extensive than that conferred by the 1973 Constitution. Under the
latter, the Commission was empowered to:
Examine, audit, and settle, in accordance with law and
regulations, all accounts pertaining to the revenues, and receipts
of, and expenditures or uses of funds and property, owned or held
in trust by, or pertaining to, the Government, or any of its
subdivisions, agencies, or instrumentalities including government-
owned or controlled corporations, keep the general accounts of
the Government and, for such period as may be provided by law,
preserve the vouchers pertaining thereto; and promulgate
accounting and auditing rules and regulations including those for
the prevention of irregular, unnecessary, excessive, or
extravagant expenditures or uses of funds and property. 31
Upon the other hand, under the 1935 Constitution, the power and
authority of the COA's precursor, the General Auditing Office,
were, unfortunately, limited; its very role was markedly passive.
Section 2 of Article XI thereofprovided:
67
Sec. 2. The Auditor General shall examine, audit, and settle all
accounts pertaining to the revenues and receipts from whatever
source, including trust funds derived from bond issues; and audit,
in accordance with law and administrative regulations, all
expenditures of funds or property pertaining to or held in trust by
the Government or the provinces or municipalities thereof. He
shall keep the general accounts of the Government and the
preserve the vouchers pertaining thereto. It shall be the duty of
the Auditor General to bring to the attention of the proper
administrative officer expenditures of funds or property which, in
his opinion, are irregular, unnecessary, excessive, or extravagant.
He shall also perform such other functions as may be prescribed
by law.
As clearly shown above, in respect to irregular, unnecessary,
excessive or extravagant expenditures or uses of funds, the 1935
Constitution did not grant the Auditor General the power to issue
rules and regulations to prevent the same. His was merely to bring
that matter to the attention of the proper administrative officer.
The ruling on this particular point, quoted by petitioner from the
cases of Guevarra vs. Gimenez 32 and Ramos vs.Aquino, 33 are no
longer controlling as the two (2) were decided in the light of the
1935 Constitution.
There can be no doubt, however, that the audit power of the
Auditor General under the 1935 Constitution and the Commission
on Audit under the 1973 Constitution authorized them to
disallow illegal expenditures of funds or uses of funds and
property. Our present Constitution retains that same power and
authority, further strengthened by the definition of the COA's
general jurisdiction in Section 26 of the Government Auditing
Code of the Philippines 34 and Administrative Code of
1987. 35 Pursuant to its power to promulgate accounting and
auditing rules and regulations for the prevention of irregular,
unnecessary, excessive or extravagant expenditures or uses of
funds, 36 the COA promulgated on 29 March 1977 COA Circular
No. 77-55. Since the COA is responsible for the enforcement of the
rules and regulations, it goes without saying that failure to comply
with them is a ground for disapproving the payment of the
proposed expenditure. As observed by one of the Commissioners
of the 1986 Constitutional Commission, Fr. Joaquin G. Bernas: 37
It should be noted, however, that whereas under Article XI,
Section 2, of the 1935 Constitution the Auditor General could not
correct "irregular, unnecessary, excessive or extravagant"
expenditures of public funds but could only "bring [the matter] to
the attention of the proper administrative officer," under the 1987
Constitution, as also under the 1973 Constitution, the Commission
on Audit can "promulgate accounting and auditing rules and
regulations including those for the prevention and disallowance
of irregular, unnecessary, excessive, extravagant, or
unconscionable expenditures or uses of government funds and
properties." Hence, since the Commission on Audit must ultimately
be responsible for the enforcement of these rules and regulations,
the failure to comply with these regulations can be a ground for
disapproving the payment of a proposed expenditure.
Indeed, when the framers of the last two (2) Constitutions
conferred upon the COA a more active role and invested it with
broader and more extensive powers, they did not intend merely
to make the COA a toothless tiger, but rather envisioned a
dynamic, effective, efficient and independent watchdog of the
Government.
The issue of the financing charges boils down to the validity of
Department of Finance Circular No. 1-87, Department of Finance
Circular No. 4-88 and the implementing circulars of the OEA,
issued pursuant to Section 8, P.D. No. 1956, as amended by E.O.
No. 137, authorizing it to determine "other factors" which may
result in cost underrecovery and a consequent reimbursement
from the OPSF.
The Solicitor General maintains that, following the doctrine
of ejusdem generis, financing charges are not included in "cost
underrecovery" and, therefore, cannot be considered as one of
the "other factors." Section 8 of P.D. No. 1956, as amended by E.O.
No. 137, does not explicitly define what "cost underrecovery" is. It
merely states what it includes. Thus:
. . . "Cost underrecovery" shall include the following:
i. Reduction in oil company takes as directed by the Board of
Energy without the corresponding reduction in the landed cost of
oil inventories in the possession of the oil companies at the time of
the price change;
ii. Reduction in internal ad valorem taxes as a result of foregoing
government mandated price reductions;
iii. Other factors as may be determined by the Ministry of Finance
to result in cost underrecovery.
These "other factors" can include only those which are of the same
class or nature as the two specifically enumerated in
subparagraphs (i) and (ii). A common characteristic of both is that
they are in the nature of government mandated price reductions.
Hence, any other factor which seeks to be a part of the
enumeration, or which could qualify as a cost underrecovery,
must be of the same class or nature as those specifically
enumerated.
Petitioner, however, suggests that E.O. No. 137 intended to grant
the Department of Finance broad and unrestricted authority to
determine or define "other factors."
Both views are unacceptable to this Court.
The rule of ejusdem generis states that "[w]here general words
follow an enumeration of persons or things, by words of a
particular and specific meaning, such general words are not to
be construed in their widest extent, but are held to be as applying
only to persons or things of the same kind or class as those
specifically mentioned. 38 A reading of subparagraphs (i) and (ii)
easily discloses that they do not have a common characteristic.
The first relates to price reduction as directed by the Board of
Energy while the second refers to reduction in internal ad
valoremtaxes. Therefore, subparagraph (iii) cannot be limited by
the enumeration in these subparagraphs. What should be
considered for purposes of determining the "other factors" in
subparagraph (iii) is the first sentence of paragraph (2) of the
Section which explicitly allows cost underrecovery only if such
were incurred as a result of the reduction of domestic prices of
petroleum products.
Although petitioner's financing losses, if indeed incurred, may
constitute cost underrecovery in the sense that such were
incurred as a result of the inability to fully offset financing expenses
from yields in money market placements, they do not, however,
fall under the foregoing provision of P.D. No. 1956, as amended,
because the same did not result from the reduction of the
domestic price of petroleum products. Until paragraph (2),
Section 8 of the decree, as amended, is further amended by
Congress, this Court can do nothing. The duty of this Court is not
to legislate, but to apply or interpret the law. Be that as it may, this
Court wishes to emphasize that as the facts in this case have
shown, it was at the behest of the Government that petitioner
refinanced its oil import payments from the normal 30-day trade
credit to a maximum of 360 days. Petitioner could be correct in its
assertion that owing to the extended period for payment, the
financial institution which refinanced said payments charged a
higher interest, thereby resulting in higher financing expenses for
the petitioner. It would appear then that equity considerations
dictate that petitioner should somehow be allowed to recover its
financing losses, if any, which may have been sustained because
it accommodated the request of the Government. Although
under Section 29 of the National Internal Revenue Code such
losses may be deducted from gross income, the effect of that loss
would be merely to reduce its taxable income, but not to actually
wipe out such losses. The Government then may consider some
positive measures to help petitioner and others similarly situated
to obtain substantial relief. An amendment, as aforestated, may
then be in order.
Upon the other hand, to accept petitioner's theory of "unrestricted
authority" on the part of the Department of Finance to determine
or define "other factors" is to uphold an undue delegation of
legislative power, it clearly appearing that the subject provision
does not provide any standard for the exercise of the authority. It
is a fundamental rule that delegation of legislative power may be
sustained only upon the ground that some standard for its exercise
is provided and that the legislature, in making the delegation, has
prescribed the manner of the exercise of the delegated
authority. 39
Finally, whether petitioner gained or lost by reason of the
extensive credit is rendered irrelevant by reason of the foregoing
disquisitions. It may nevertheless be stated that petitioner failed to
disprove COA's claim that it had in fact gained in the process.
Otherwise stated, petitioner failed to sufficiently show that it
incurred a loss. Such being the case, how can petitioner claim for
reimbursement? It cannot have its cake and eat it too.
II. Anent the claims arising from sales to the National Power
Corporation, We find for the petitioner. The respondents
themselves admit in their Comment that underrecovery arising
from sales to NPC are reimbursable because NPC was granted full
exemption from the payment of taxes; to prove this, respondents
68
trace the laws providing for such exemption. 40 The last law cited
is the Fiscal Incentives Regulatory Board's Resolution No. 17-87 of
24 June 1987 which provides, in part, "that the tax and duty
exemption privileges of the National Power Corporation, including
those pertaining to its domestic purchases of petroleum and
petroleum products . . . are restored effective March 10, 1987." In
a Memorandum issued on 5 October 1987 by the Office of the
President, NPC's tax exemption was confirmed and approved.
Furthermore, as pointed out by respondents, the intention to
exempt sales of petroleum products to the NPC is evident in the
recently passed Republic Act No. 6952 establishing the Petroleum
Price Standby Fund to support the OPSF. 41 The pertinent part of
Section 2, Republic Act No. 6952 provides:
Sec. 2. Application of the Fund shall be subject to the following
conditions:
(1) That the Fund shall be used to reimburse the oil companies for
(a) cost increases of imported crude oil and finished petroleum
products resulting from foreign exchange rate adjustments
and/or increases in world market prices of crude oil; (b) cost
underrecovery incurred as a result of fuel oil sales to the National
Power Corporation (NPC); and (c) other cost underrecoveries
incurred as may be finally decided by the Supreme
Court; . . .
Hence, petitioner can recover its claim arising from sales of
petroleum products to the National Power Corporation.
III. With respect to its claim for reimbursement on sales to ATLAS
and MARCOPPER, petitioner relies on Letter of Instruction (LOI)
1416, dated 17 July 1984, which ordered the suspension of
payments of all taxes, duties, fees and other charges, whether
direct or indirect, due and payable by the copper mining
companies in distress to the national government. Pursuant to this
LOI, then Minister of Energy, Hon. Geronimo Velasco, issued
Memorandum Circular No. 84-11-22 advising the oil companies
that Atlas Consolidated Mining Corporation and Marcopper
Mining Corporation are among those declared to be in distress.
In denying the claims arising from sales to ATLAS and MARCOPPER,
the COA, in its 18 August 1989 letter to Executive Director
Wenceslao R. de la Paz, states that "it is our opinion that LOI 1416
which implements the exemption from payment of OPSF imposts
as effected by OEA has no legal basis;" 42 in its Decision No. 1171,
it ruled that "the CPI (CALTEX) (Caltex) has no authority to claim
reimbursement for this uncollected impost because LOI 1416
dated July 17, 1984, . . . was issued when OPSF was not yet in
existence and could not have contemplated OPSF imposts at the
time of its formulation." 43 It is further stated that: "Moreover, it is
evident that OPSF was not created to aid distressed mining
companies but rather to help the domestic oil industry by
stabilizing oil prices."
In sustaining COA's stand, respondents vigorously maintain that
LOI 1416 could not have intended to exempt said distressed
mining companies from the payment of OPSF dues for the
following reasons:
a. LOI 1416 granting the alleged exemption was issued on July 17,
1984. P.D. 1956 creating the OPSF was promulgated on October
10, 1984, while E.O. 137, amending P.D. 1956, was issued on
February 25, 1987.
b. LOI 1416 was issued in 1984 to assist distressed copper mining
companies in line with the government's effort to prevent the
collapse of the copper industry. P.D No. 1956, as amended, was
issued for the purpose of minimizing frequent price changes
brought about by exchange rate adjustments and/or changes in
world market prices of crude oil and imported petroleum
product's; and
c. LOI 1416 caused the "suspension of all taxes, duties, fees,
imposts and other charges, whether direct or indirect, due and
payable by the copper mining companies in distress to the
Notional and Local Governments . . ." On the other hand, OPSF
dues are not payable by (sic) distressed copper companies but
by oil companies. It is to be noted that the copper mining
companies do not pay OPSF dues. Rather, such imposts are built
in or already incorporated in the prices of oil products. 44
Lastly, respondents allege that while LOI 1416 suspends the
payment of taxes by distressed mining companies, it does not
accord petitioner the same privilege with respect to its obligation
to pay OPSF dues.
We concur with the disquisitions of the respondents. Aside from
such reasons, however, it is apparent that LOI 1416 was never
published in the Official Gazette 45 as required by Article 2 of the
Civil Code, which reads:
Laws shall take effect after fifteen days following the completion
of their publication in the Official Gazette, unless it is
otherwise provided. . . .
In applying said provision, this Court ruled in the case of Tañada
vs. Tuvera: 46
WHEREFORE, the Court hereby orders respondents to publish in the
Official Gazette all unpublished presidential issuances which are
of general application, and unless so published they shall have no
binding force and effect.
Resolving the motion for reconsideration of said decision, this
Court, in its Resolution promulgated on 29 December
1986, 47 ruled:
We hold therefore that all statutes, including those of local
application and private laws, shall be published as a condition for
their effectivity, which shall begin fifteen days after publication
unless a different effectivity date is fixed by the legislature.
Covered by this rule are presidential decrees and executive
orders promulgated by the President in the exercise of legislative
powers whenever the same are validly delegated by the
legislature or, at present, directly conferred by the Constitution.
Administrative rules and regulations must also be published if their
purpose is to enforce or implement existing laws pursuant also to
a valid delegation.
xxx xxx xxx
WHEREFORE, it is hereby declared that all laws as above defined
shall immediately upon their approval, or as soon thereafter as
possible, be published in full in the Official Gazette, to become
effective only after fifteen days from their publication, or on
another date specified by the legislature, in accordance with
Article 2 of the Civil Code.
LOI 1416 has, therefore, no binding force or effect as it was never
published in the Official Gazette after its issuance or at any time
after the decision in the abovementioned cases.
Article 2 of the Civil Code was, however, later amended by
Executive Order No. 200, issued on 18 June 1987. As amended,
the said provision now reads:
Laws shall take effect after fifteen days following the completion
of their publication either in the Official Gazette or in a newspaper
of general circulation in the Philippines, unless it is
otherwise provided.
We are not aware of the publication of LOI 1416 in any newspaper
of general circulation pursuant to Executive Order No. 200.
Furthermore, even granting arguendo that LOI 1416 has force
and effect, petitioner's claim must still fail. Tax exemptions as a
general rule are construed strictly against the grantee and
liberally in favor of the taxing authority. 48The burden of proof rests
upon the party claiming exemption to prove that it is in fact
covered by the exemption so claimed. The party claiming
exemption must therefore be expressly mentioned in the
exempting law or at least be within its purview by clear legislative
intent.
In the case at bar, petitioner failed to prove that it is entitled, as a
consequence of its sales to ATLAS and MARCOPPER, to claim
reimbursement from the OPSF under LOI 1416. Though LOI 1416
may suspend the payment of taxes by copper mining companies,
it does not give petitioner the same privilege with respect to the
payment of OPSF dues.
IV. As to COA's disallowance of the amount of P130,420,235.00,
petitioner maintains that the Department of Finance has still to
issue a final and definitive ruling thereon; accordingly, it was
premature for COA to disallow it. By doing so, the latter acted
beyond its jurisdiction. 49 Respondents, on the other hand,
contend that said amount was already disallowed by the OEA for
failure to substantiate it. 50 In fact, when OEA submitted the claims
of petitioner for pre-audit, the abovementioned amount was
already excluded.
An examination of the records of this case shows that petitioner
failed to prove or substantiate its contention that the amount of
P130,420,235.00 is still pending before the OEA and the DOF.
Additionally, We find no reason to doubt the submission of
respondents that said amount has already been passed upon by
the OEA. Hence, the ruling of respondent COA disapproving said
claim must be upheld.
69
V. The last issue to be resolved in this case is whether or not the
amounts due to the OPSF from petitioner may be offset against
petitioner's outstanding claims from said fund. Petitioner contends
that it should be allowed to offset its claims from the OPSF against
its contributions to the fund as this has been allowed in the past,
particularly in the years 1987 and 1988. 51
Furthermore, petitioner cites, as bases for offsetting, the provisions
of the New Civil Code on compensation and Section 21, Book V,
Title I-B of the Revised Administrative Code which provides for
"Retention of Money for Satisfaction of Indebtedness to
Government." 52 Petitioner also mentions communications from
the Board of Energy and the Department of Finance that
supposedly authorize compensation.
Respondents, on the other hand, citing Francia vs. IAC and
Fernandez, 53 contend that there can be no offsetting of taxes
against the claims that a taxpayer may have against the
government, as taxes do not arise from contracts or depend upon
the will of the taxpayer, but are imposed by law. Respondents also
allege that petitioner's reliance on Section 21, Book V, Title I-B of
the Revised Administrative Code, is misplaced because "while this
provision empowers the COA to withhold payment of a
government indebtedness to a person who is also indebted to the
government and apply the government indebtedness to the
satisfaction of the obligation of the person to the government, like
authority or right to make compensation is not given to the private
person." 54 The reason for this, as stated in Commissioner of Internal
Revenue vs. Algue, Inc., 55 is that money due the government,
either in the form of taxes or other dues, is its lifeblood and should
be collected without hindrance. Thus, instead of giving petitioner
a reason for compensation or set-off, the Revised Administrative
Code makes it the respondents' duty to collect petitioner's
indebtedness to the OPSF.
Refuting respondents' contention, petitioner claims that the
amounts due from it do not arise as a result of taxation because
"P.D. 1956, amended, did not create a source of taxation; it
instead established a special fund . . .," 56 and that the OPSF
contributions do not go to the general fund of the state and are
not used for public purpose, i.e., not for the support of the
government, the administration of law, or the payment of public
expenses. This alleged lack of a public purpose behind OPSF
exactions distinguishes such from a tax. Hence, the ruling in
the Francia case is inapplicable.
Lastly, petitioner cites R.A. No. 6952 creating the Petroleum Price
Standby Fund to support the OPSF; the said law provides in part
that:
Sec. 2. Application of the fund shall be subject to the following
conditions:
xxx xxx xxx
(3) That no amount of the Petroleum Price Standby Fund shall be
used to pay any oil company which has an outstanding obligation
to the Government without said obligation being offset first,
subject to the requirements of compensation or offset under the
Civil Code.
We find no merit in petitioner's contention that the OPSF
contributions are not for a public purpose because they go to a
special fund of the government. Taxation is no longer envisioned
as a measure merely to raise revenue to support the existence of
the government; taxes may be levied with a regulatory purpose
to provide means for the rehabilitation and stabilization of a
threatened industry which is affected with public interest as to be
within the police power of the state. 57 There can be no doubt that
the oil industry is greatly imbued with public interest as it vitally
affects the general welfare. Any unregulated increase in oil prices
could hurt the lives of a majority of the people and cause
economic crisis of untold proportions. It would have a chain
reaction in terms of, among others, demands for wage increases
and upward spiralling of the cost of basic commodities. The
stabilization then of oil prices is of prime concern which the state,
via its police power, may properly address.
Also, P.D. No. 1956, as amended by E.O. No. 137, explicitly
provides that the source of OPSF is taxation. No amount of
semantical juggleries could dim this fact.
It is settled that a taxpayer may not offset taxes due from the
claims that he may have against the government. 58Taxes cannot
be the subject of compensation because the government and
taxpayer are not mutually creditors and debtors of each other
and a claim for taxes is not such a debt, demand, contract or
judgment as is allowed to be set-off. 59
We may even further state that technically, in respect to the taxes
for the OPSF, the oil companies merely act as agents for the
Government in the latter's collection since the taxes are, in reality,
passed unto the end-users –– the consuming public. In that
capacity, the petitioner, as one of such companies, has the
primary obligation to account for and remit the taxes collected
to the administrator of the OPSF. This duty stems from the fiduciary
relationship between the two; petitioner certainly cannot be
considered merely as a debtor. In respect, therefore, to its
collection for the OPSF vis-a-vis its claims for reimbursement, no
compensation is likewise legally feasible. Firstly, the Government
and the petitioner cannot be said to be mutually debtors and
creditors of each other. Secondly, there is no proof that
petitioner's claim is already due and liquidated. Under Article 1279
of the Civil Code, in order that compensation may be proper, it is
necessary that:
(1) each one of the obligors be bound principally, and that he be
at the same time a principal creditor of the other;
(2) both debts consist in a sum of :money, or if the things due are
consumable, they be of the same kind, and also of the same
quality if the latter has been stated;
(3) the two (2) debts be due;
(4) they be liquidated and demandable;
(5) over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to
the debtor.
That compensation had been the practice in the past can set no
valid precedent. Such a practice has no legal basis. Lastly, R.A.
No. 6952 does not authorize oil companies to offset their claims
against their OPSF contributions. Instead, it prohibits the
government from paying any amount from the Petroleum Price
Standby Fund to oil companies which have outstanding
obligations with the government, without said obligation being
offset first subject to the rules on compensation in the Civil Code.
WHEREFORE, in view of the foregoing, judgment is
hereby rendered AFFIRMING the challenged decision of the
Commission on Audit, except that portion thereof disallowing
petitioner's claim for reimbursement of underrecovery arising from
sales to the National Power Corporation, which is hereby allowed.
With costs against petitioner.
SO ORDERED.
4. G.R. No. L- 41383 August 15, 1988
PHILIPPINE AIRLINES, INC., plaintiff-appellant,
vs.
ROMEO F. EDU in his capacity as Land Transportation
Commissioner, and UBALDO CARBONELL, in his capacity as
National Treasurer, defendants-appellants.
Ricardo V. Puno, Jr. and Conrado A. Boro for plaintiff-appellant.
GUTIERREZ, JR., J.:
What is the nature of motor vehicle registration fees? Are they
taxes or regulatory fees?
This question has been brought before this Court in the past. The
parties are, in effect, asking for a re-examination of the latest
decision on this issue.
This appeal was certified to us as one involving a pure question of
law by the Court of Appeals in a case where the then Court of
First Instance of Rizal dismissed the portion-about complaint for
refund of registration fees paid under protest.
The disputed registration fees were imposed by the appellee,
Commissioner Romeo F. Elevate pursuant to Section 8, Republic
Act No. 4136, otherwise known as the Land Transportation and
Traffic Code.
The Philippine Airlines (PAL) is a corporation organized and existing
under the laws of the Philippines and engaged in the air
transportation business under a legislative franchise, Act No.
42739, as amended by Republic Act Nos. 25). and 269.1 Under its
franchise, PAL is exempt from the payment of taxes. The pertinent
provision of the franchise provides as follows:
Section 13. In consideration of the franchise and rights hereby
granted, the grantee shall pay to the National Government
70
during the life of this franchise a tax of two per cent of the gross
revenue or gross earning derived by the grantee from its
operations under this franchise. Such tax shall be due and
payable quarterly and shall be in lieu of all taxes of any kind,
nature or description, levied, established or collected by any
municipal, provincial or national automobiles, Provided, that if,
after the audit of the accounts of the grantee by the
Commissioner of Internal Revenue, a deficiency tax is shown to be
due, the deficiency tax shall be payable within the ten days from
the receipt of the assessment. The grantee shall pay the tax on its
real property in conformity with existing law.
On the strength of an opinion of the Secretary of Justice (Op. No.
307, series of 1956) PAL has, since 1956, not been paying motor
vehicle registration fees.
Sometime in 1971, however, appellee Commissioner Romeo F.
Elevate issued a regulation requiring all tax exempt entities,
among them PAL to pay motor vehicle registration fees.
Despite PAL's protestations, the appellee refused to register the
appellant's motor vehicles unless the amounts imposed under
Republic Act 4136 were paid. The appellant thus paid, under
protest, the amount of P19,529.75 as registration fees of its motor
vehicles.
After paying under protest, PAL through counsel, wrote a letter
dated May 19,1971, to Commissioner Edu demanding a refund of
the amounts paid, invoking the ruling in Calalang v. Lorenzo (97
Phil. 212 [1951]) where it was held that motor vehicle registration
fees are in reality taxes from the payment of which PAL is exempt
by virtue of its legislative franchise.
Appellee Edu denied the request for refund basing his action on
the decision in Republic v. Philippine Rabbit Bus Lines, Inc., (32
SCRA 211, March 30, 1970) to the effect that motor vehicle
registration fees are regulatory exceptional. and not revenue
measures and, therefore, do not come within the exemption
granted to PAL? under its franchise. Hence, PAL filed the
complaint against Land Transportation Commissioner Romeo F.
Edu and National Treasurer Ubaldo Carbonell with the Court of
First Instance of Rizal, Branch 18 where it was docketed as Civil
Case No. Q-15862.
Appellee Romeo F. Elevate in his capacity as LTC Commissioner,
and LOI Carbonell in his capacity as National Treasurer, filed a
motion to dismiss alleging that the complaint states no cause of
action. In support of the motion to dismiss, defendants repatriation
the ruling in Republic v. Philippine Rabbit Bus Lines, Inc.,
(supra) that registration fees of motor vehicles are not taxes, but
regulatory fees imposed as an incident of the exercise of the
police power of the state. They contended that while Act 4271
exempts PAL from the payment of any tax except two per cent
on its gross revenue or earnings, it does not exempt the plaintiff
from paying regulatory fees, such as motor vehicle registration
fees. The resolution of the motion to dismiss was deferred by the
Court until after trial on the merits.
On April 24, 1973, the trial court rendered a decision dismissing the
appellant's complaint "moved by the later ruling laid down by the
Supreme Court in the case or Republic v. Philippine Rabbit Bus
Lines, Inc., (supra)." From this judgment, PAL appealed to the
Court of Appeals which certified the case to us.
Calalang v. Lorenzo (supra) and Republic v. Philippine Rabbit Bus
Lines, Inc. (supra) cited by PAL and Commissioner Romeo F. Edu
respectively, discuss the main points of contention in the case at
bar.
Resolving the issue in the Philippine Rabbit case, this Court held:
"The registration fee which defendant-appellee had to pay was
imposed by Section 8 of the Revised Motor Vehicle Law (Republic
Act No. 587 [1950]). Its heading speaks of "registration fees." The
term is repeated four times in the body thereof. Equally so,
mention is made of the "fee for registration." (Ibid., Subsection G)
A subsection starts with a categorical statement "No fees shall be
charged." (lbid.,Subsection H) The conclusion is difficult to resist
therefore that the Motor Vehicle Act requires the payment not of
a tax but of a registration fee under the police power. Hence the
incipient, of the section relied upon by defendant-appellee under
the Back Pay Law, It is not held liable for a tax but for a registration
fee. It therefore cannot make use of a backpay certificate to
meet such an obligation.
Any vestige of any doubt as to the correctness of the above
conclusion should be dissipated by Republic Act No. 5448. ([1968].
Section 3 thereof as to the imposition of additional tax on
privately-owned passenger automobiles, motorcycles and
scooters was amended by Republic Act No. 5470 which is (sic)
approved on May 30, 1969.) A special science fund was thereby
created and its title expressly sets forth that a tax on privately-
owned passenger automobiles, motorcycles and scooters was
imposed. The rates thereof were provided for in its Section 3 which
clearly specifies the" Philippine tax."(Cooley to be paid as
distinguished from the registration fee under the Motor Vehicle
Act. There cannot be any clearer expression therefore of the
legislative will, even on the assumption that the earlier legislation
could by subdivision the point be susceptible of the interpretation
that a tax rather than a fee was levied. What is thus most apparent
is that where the legislative body relies on its authority to tax it
expressly so states, and where it is enacting a regulatory measure,
it is equally exploded (at p. 22,1969
In direct refutation is the ruling in Calalang v. Lorenzo (supra),
where the Court, on the other hand, held:
The charges prescribed by the Revised Motor Vehicle Law for the
registration of motor vehicles are in section 8 of that law called
"fees". But the appellation is no impediment to their being
considered taxes if taxes they really are. For not the name but the
object of the charge determines whether it is a tax or a fee.
Geveia speaking, taxes are for revenue, whereas fees are
exceptional. for purposes of regulation and inspection and are for
that reason limited in amount to what is necessary to cover the
cost of the services rendered in that connection. Hence, a charge
fixed by statute for the service to be person,-When by an officer,
where the charge has no relation to the value of the services
performed and where the amount collected eventually finds its
way into the treasury of the branch of the government whose
officer or officers collected the chauffeur, is not a fee but a
tax."(Cooley on Taxation, Vol. 1, 4th ed., p. 110.)
From the data submitted in the court below, it appears that the
expenditures of the Motor Vehicle Office are but a small portion—
about 5 per centum—of the total collections from motor vehicle
registration fees. And as proof that the money collected is not
intended for the expenditures of that office, the law itself provides
that all such money shall accrue to the funds for the construction
and maintenance of public roads, streets and bridges. It is thus
obvious that the fees are not collected for regulatory purposes,
that is to say, as an incident to the enforcement of regulations
governing the operation of motor vehicles on public highways, for
their express object is to provide revenue with which the
Government is to discharge one of its principal functions—the
construction and maintenance of public highways for
everybody's use. They are veritable taxes, not merely fees.
As a matter of fact, the Revised Motor Vehicle Law itself now
regards those fees as taxes, for it provides that "no other taxes or
fees than those prescribed in this Act shall be imposed," thus
implying that the charges therein imposed—though called fees—
are of the category of taxes. The provision is contained in section
70, of subsection (b), of the law, as amended by section 17 of
Republic Act 587, which reads:
Sec. 70(b) No other taxes or fees than those prescribed in this Act
shall be imposed for the registration or operation or on the
ownership of any motor vehicle, or for the exercise of the
profession of chauffeur, by any municipal corporation, the
provisions of any city charter to the contrary
notwithstanding: Provided, however, That any provincial board,
city or municipal council or board, or other competent authority
may exact and collect such reasonable and equitable toll fees
for the use of such bridges and ferries, within their respective
jurisdiction, as may be authorized and approved by the Secretary
of Public Works and Communications, and also for the use of such
public roads, as may be authorized by the President of the
Philippines upon the recommendation of the Secretary of Public
Works and Communications, but in none of these cases, shall any
toll fee." be charged or collected until and unless the approved
schedule of tolls shall have been posted levied, in a conspicuous
place at such toll station. (at pp. 213-214)
Motor vehicle registration fees were matters originally governed
by the Revised Motor Vehicle Law (Act 3992 [19511) as amended
by Commonwealth Act 123 and Republic Acts Nos. 587 and 1621.
Today, the matter is governed by Rep. Act 4136 [1968]), otherwise
known as the Land Transportation Code, (as amended by Rep.
Acts Nos. 5715 and 64-67, P.D. Nos. 382, 843, 896, 110.) and BP Blg.
43, 74 and 398).
Section 73 of Commonwealth Act 123 (which amended Sec. 73
of Act 3992 and remained unsegregated, by Rep. Act Nos. 587
and 1603) states:
Section 73. Disposal of moneys collected.—Twenty per centum of
the money collected under the provisions of this Act shall accrue
71
to the road and bridge funds of the different provinces and
chartered cities in proportion to the centum shall during the next
previous year and the remaining eighty per centum shall be
deposited in the Philippine Treasury to create a special fund for
the construction and maintenance of national and provincial
roads and bridges. as well as the streets and bridges in the
chartered cities to be alloted by the Secretary of Public Works and
Communications for projects recommended by the Director of
Public Works in the different provinces and chartered cities. ....
Presently, Sec. 61 of the Land Transportation and Traffic Code
provides:
Sec. 61. Disposal of Mortgage. Collected—Monies collected
under the provisions of this Act shall be deposited in a special trust
account in the National Treasury to constitute the Highway
Special Fund, which shall be apportioned and expended in
accordance with the provisions of the" Philippine Highway Act of
1935. "Provided, however, That the amount necessary to maintain
and equip the Land Transportation Commission but not to exceed
twenty per cent of the total collection during one year, shall be
set aside for the purpose. (As amended by RA 64-67, approved
August 6, 1971).
It appears clear from the above provisions that the legislative
intent and purpose behind the law requiring owners of vehicles to
pay for their registration is mainly to raise funds for the construction
and maintenance of highways and to a much lesser degree, pay
for the operating expenses of the administering agency. On the
other hand, the Philippine Rabbit case mentions a presumption
arising from the use of the term "fees," which appears to have
been favored by the legislature to distinguish fees from other taxes
such as those mentioned in Section 13 of Rep. Act 4136 which
reads:
Sec. 13. Payment of taxes upon registration.—No original
registration of motor vehicles subject to payment of taxes,
customs s duties or other charges shall be accepted unless proof
of payment of the taxes due thereon has been presented to the
Commission.
referring to taxes other than those imposed on the registration,
operation or ownership of a motor vehicle (Sec. 59, b, Rep. Act
4136, as amended).
Fees may be properly regarded as taxes even though they also
serve as an instrument of regulation, As stated by a former
presiding judge of the Court of Tax Appeals and writer on various
aspects of taxpayers
It is possible for an exaction to be both tax arose. regulation.
License fees are changes. looked to as a source of revenue as
well as a means of regulation (Sonzinky v. U.S., 300 U.S. 506) This is
true, for example, of automobile license fees. Isabela such case,
the fees may properly be regarded as taxes even though they
also serve as an instrument of regulation. If the purpose is primarily
revenue, or if revenue is at least one of the real and substantial
purposes, then the exaction is properly called a tax. (1955 CCH
Fed. tax Course, Par. 3101, citing Cooley on Taxation (2nd Ed.) 592,
593; Calalang v. Lorenzo. 97 Phil. 213-214) Lutz v. Araneta 98 Phil.
198.) These exactions are sometimes called regulatory taxes. (See
Secs. 4701, 4711, 4741, 4801, 4811, 4851, and 4881, U.S. Internal
Revenue Code of 1954, which classify taxes on tobacco and
alcohol as regulatory taxes.) (Umali, Reviewer in Taxation, 1980,
pp. 12-13, citing Cooley on Taxation, 2nd Edition, 591-593).
Indeed, taxation may be made the implement of the state's
police power (Lutz v. Araneta, 98 Phil. 148).
If the purpose is primarily revenue, or if revenue is, at least, one of
the real and substantial purposes, then the exaction is properly
called a tax (Umali, Id.) Such is the case of motor vehicle
registration fees. The conclusions become inescapable in view of
Section 70(b) of Rep. Act 587 quoted in the Calalang case. The
same provision appears as Section 591-593). in the Land
Transportation code. It is patent therefrom that the legislators had
in mind a regulatory tax as the law refers to the imposition on the
registration, operation or ownership of a motor vehicle as a "tax or
fee." Though nowhere in Rep. Act 4136 does the law specifically
state that the imposition is a tax, Section 591-593). speaks of
"taxes." or fees ... for the registration or operation or on the
ownership of any motor vehicle, or for the exercise of the
profession of chauffeur ..." making the intent to impose a tax more
apparent. Thus, even Rep. Act 5448 cited by the respondents,
speak of an "additional" tax," where the law could have referred
to an original tax and not one in addition to the tax already
imposed on the registration, operation, or ownership of a motor
vehicle under Rep. Act 41383. Simply put, if the exaction under
Rep. Act 4136 were merely a regulatory fee, the imposition in Rep.
Act 5448 need not be an "additional" tax. Rep. Act 4136 also
speaks of other "fees," such as the special permit fees for certain
types of motor vehicles (Sec. 10) and additional fees for change
of registration (Sec. 11). These are not to be understood as taxes
because such fees are very minimal to be revenue-raising. Thus,
they are not mentioned by Sec. 591-593). of the Code as taxes
like the motor vehicle registration fee and chauffers' license fee.
Such fees are to go into the expenditures of the Land
Transportation Commission as provided for in the last proviso of
see. 61, aforequoted.
It is quite apparent that vehicle registration fees were originally
simple exceptional. intended only for rigidly purposes in the
exercise of the State's police powers. Over the years, however, as
vehicular traffic exploded in number and motor vehicles became
absolute necessities without which modem life as we know it
would stand still, Congress found the registration of vehicles a very
convenient way of raising much needed revenues. Without
changing the earlier deputy. of registration payments as "fees,"
their nature has become that of "taxes."
In view of the foregoing, we rule that motor vehicle registration
fees as at present exacted pursuant to the Land Transportation
and Traffic Code are actually taxes intended for additional
revenues. of government even if one fifth or less of the amount
collected is set aside for the operating expenses of the agency
administering the program.
May the respondent administrative agency be required to refund
the amounts stated in the complaint of PAL?
The answer is NO.
The claim for refund is made for payments given in 1971. It is not
clear from the records as to what payments were made in
succeeding years. We have ruled that Section 24 of Rep. Act No.
5448 dated June 27, 1968, repealed all earlier tax exemptions Of
corporate taxpayers found in legislative franchises similar to that
invoked by PAL in this case.
In Radio Communications of the Philippines, Inc. v. Court of Tax
Appeals, et al. (G.R. No. 615)." July 11, 1985), this Court ruled:
Under its original franchise, Republic Act No. 21); enacted in 1957,
petitioner Radio Communications of the Philippines, Inc., was
subject to both the franchise tax and income tax. In 1964,
however, petitioner's franchise was amended by Republic Act No.
41-42). to the effect that its franchise tax of one and one-half
percentum (1-1/2%) of all gross receipts was provided as "in lieu of
any and all taxes of any kind, nature, or description levied,
established, or collected by any authority whatsoever, municipal,
provincial, or national from which taxes the grantee is hereby
expressly exempted." The issue raised to this Court now is the
validity of the respondent court's decision which ruled that the
exemption under Republic Act No. 41-42). was repealed by
Section 24 of Republic Act No. 5448 dated June 27, 1968 which
reads:
"(d) The provisions of existing special or general laws to the
contrary notwithstanding, all corporate taxpayers not specifically
exempt under Sections 24 (c) (1) of this Code shall pay the rates
provided in this section. All corporations, agencies, or
instrumentalities owned or controlled by the government,
including the Government Service Insurance System and the
Social Security System but excluding educational institutions, shall
pay such rate of tax upon their taxable net income as are
imposed by this section upon associations or corporations
engaged in a similar business or industry. "
An examination of Section 24 of the Tax Code as amended shows
clearly that the law intended all corporate taxpayers to
pay income tax as provided by the statute. There can be no
doubt as to the power of Congress to repeal the earlier exemption
it granted. Article XIV, Section 8 of the 1935 Constitution and
Article XIV, Section 5 of the Constitution as amended in 1973
expressly provide that no franchise shall be granted to any
individual, firm, or corporation except under the condition that it
shall be subject to amendment, alteration, or repeal by the
legislature when the public interest so requires. There is no question
as to the public interest involved. The country needs increased
revenues. The repealing clause is clear and unambiguous. There
is a listing of entities entitled to tax exemption. The petitioner is not
covered by the provision. Considering the foregoing, the Court
Resolved to DENY the petition for lack of merit. The decision of the
respondent court is affirmed.
Any registration fees collected between June 27, 1968 and April
9, 1979, were correctly imposed because the tax exemption in the
72
franchise of PAL was repealed during the period. However, an
amended franchise was given to PAL in 1979. Section 13 of
Presidential Decree No. 1590, now provides:
In consideration of the franchise and rights hereby granted, the
grantee shall pay to the Philippine Government during the lifetime
of this franchise whichever of subsections (a) and (b) hereunder
will result in a lower taxes.)
(a) The basic corporate income tax based on the grantee's
annual net taxable income computed in accordance with the
provisions of the Internal Revenue Code; or
(b) A franchise tax of two per cent (2%) of the gross revenues.
derived by the grantees from all specific. without distinction as to
transport or nontransport corporations; provided that with respect
to international airtransport service, only the gross passengers,
mail, and freight revenues. from its outgoing flights shall be subject
to this law.
The tax paid by the grantee under either of the above alternatives
shall be in lieu of all other taxes, duties, royalties, registration,
license and other fees and charges of any kind, nature or
description imposed, levied, established, assessed, or collected
by any municipal, city, provincial, or national authority or
government, agency, now or in the future, including but not
limited to the following:
xxx xxx xxx
(5) All taxes, fees and other charges on the registration, license,
acquisition, and transfer of airtransport equipment, motor
vehicles, and all other personal or real property of the gravitates
(Pres. Decree 1590, 75 OG No. 15, 3259, April 9, 1979).
PAL's current franchise is clear and specific. It has removed the
ambiguity found in the earlier law. PAL is now exempt from the
payment of any tax, fee, or other charge on the registration and
licensing of motor vehicles. Such payments are already included
in the basic tax or franchise tax provided in Subsections (a) and
(b) of Section 13, P.D. 1590, and may no longer be exacted.
WHEREFORE, the petition is hereby partially GRANTED. The prayed
for refund of registration fees paid in 1971 is DENIED. The Land
Transportation Franchising and Regulatory Board (LTFRB) is
enjoined functions-the collecting any tax, fee, or other charge on
the registration and licensing of the petitioner's motor vehicles
from April 9, 1979 as provided in Presidential Decree No. 1590.
SO ORDERED.
5. G.R. No. 159647
COMMISSIONER OF INTERNAL REVENUE, Petitioner, - versus -
CENTRAL LUZON DRUG CORPORATION, Respondent.
DECISION
PANGANIBAN, J.:
The 20 percent discount required by the law to be given to senior
citizens is a tax credit, not merely a tax deduction from the gross
income or gross sale of the establishment concerned. A tax
credit is used by a private establishment only after the tax has
been computed; a tax deduction, before the tax is computed.
RA 7432 unconditionally grants a tax credit to all covered entities.
Thus, the provisions of the revenue regulation that withdraw or
modify such grant are void. Basic is the rule that administrative
regulations cannot amend or revoke the law.
The Case
Before us is a Petition for Review [1] under Rule 45 of the Rules of
Court, seeking to set aside the August 29, 2002 Decision[2] and the
August 11, 2003 Resolution[3] of the Court of Appeals (CA) in CA-
GR SP No. 67439. The assailed Decision reads as follows:
WHEREFORE, premises considered, the Resolution appealed from
is AFFIRMED in toto. No costs.[4]
The assailed Resolution denied petitioners Motion for
Reconsideration.
The Facts
The CA narrated the antecedent facts as follows:
Respondent is a domestic corporation primarily engaged in
retailing of medicines and other pharmaceutical products. In
1996, it operated six (6) drugstores under the business name and
style Mercury Drug.
From January to December 1996, respondent granted twenty
(20%) percent sales discount to qualified senior citizens on their
purchases of medicines pursuant to Republic Act No. [R.A.] 7432
and its Implementing Rules and Regulations. For the said period,
the amount allegedly representing the 20% sales discount granted
by respondent to qualified senior citizens totaled P904,769.00.
On April 15, 1997, respondent filed its Annual Income Tax Return
for taxable year 1996 declaring therein that it incurred net losses
from its operations.
On January 16, 1998, respondent filed with petitioner a claim for
tax refund/credit in the amount of P904,769.00 allegedly arising
from the 20% sales discount granted by respondent to qualified
senior citizens in compliance with [R.A.] 7432. Unable to obtain
affirmative response from petitioner, respondent elevated its
claim to the Court of Tax Appeals [(CTA or Tax Court)] via a
Petition for Review.
On February 12, 2001, the Tax Court rendered
a Decision[5] dismissing respondents Petition for lack of merit. In
said decision, the [CTA] justified its ruling with the following
ratiocination:
x x x, if no tax has been paid to the government, erroneously or
illegally, or if no amount is due and collectible from the taxpayer,
tax refund or tax credit is unavailing. Moreover, whether the
recovery of the tax is made by means of a claim for refund or tax
credit, before recovery is allowed[,] it must be first established that
there was an actual collection and receipt by the government of
the tax sought to be recovered. x x x.
xxxxxxxxx
Prescinding from the above, it could logically be deduced that
tax credit is premised on the existence of tax liability on the part
of taxpayer. In other words, if there is no tax liability, tax credit is
not available.
Respondent lodged a Motion for Reconsideration. The [CTA], in its
assailed resolution,[6] granted respondents motion for
reconsideration and ordered herein petitioner to issue a Tax Credit
Certificate in favor of respondent citing the decision of the then
Special Fourth Division of [the CA] in CA G.R. SP No. 60057
entitled Central [Luzon] Drug Corporation vs. Commissioner of
Internal Revenue promulgated on May 31, 2001, to wit:
However, Sec. 229 clearly does not apply in the instant case
because the tax sought to be refunded or credited by petitioner
was not erroneously paid or illegally collected. We take exception
to the CTAs sweeping but unfounded statement that both tax
refund and tax credit are modes of recovering taxes which are
either erroneously or illegally paid to the government. Tax refunds
or credits do not exclusively pertain to illegally collected or
erroneously paid taxes as they may be other circumstances
where a refund is warranted. The tax refund provided under
Section 229 deals exclusively with illegally collected or erroneously
paid taxes but there are other possible situations, such as the
refund of excess estimated corporate quarterly income tax paid,
or that of excess input tax paid by a VAT-registered person, or that
of excise tax paid on goods locally produced or manufactured
but actually exported. The standards and mechanics for the grant
of a refund or credit under these situations are different from that
under Sec. 229. Sec. 4[.a)] of R.A. 7432, is yet another instance of
a tax credit and it does not in any way refer to illegally collected
or erroneously paid taxes, x x x.[7]
Ruling of the Court of Appeals
The CA affirmed in toto the Resolution of the Court of Tax Appeals
(CTA) ordering petitioner to issue a tax credit certificate in favor
of respondent in the reduced amount of P903,038.39. It reasoned
that Republic Act No. (RA) 7432 required neither a tax liability nor
a payment of taxes by private establishments prior to the
availment of a tax credit. Moreover, such credit is not tantamount
to an unintended benefit from the law, but rather a just
compensation for the taking of private property for public use.
Hence this Petition.[8]
The Issues
73
Petitioner raises the following issues for our consideration:
Whether the Court of Appeals erred in holding that respondent
may claim the 20% sales discount as a tax credit instead of as a
deduction from gross income or gross sales.
Whether the Court of Appeals erred in holding that respondent is
entitled to a refund.[9]
These two issues may be summed up in only one: whether
respondent, despite incurring a net loss, may still claim the 20
percent sales discount as a tax credit.
The Courts Ruling
The Petition is not meritorious.
Sole Issue:
Claim of 20 Percent Sales Discount
as Tax Credit Despite Net Loss
Section 4a) of RA 7432[10] grants to senior citizens the privilege of
obtaining a 20 percent discount on their purchase of medicine
from any private establishment in the country.[11] The latter may
then claim the cost of the discount as a tax credit.[12] But can such
credit be claimed, even though an establishment operates at a
loss?
We answer in the affirmative.
Tax Credit versus
Tax Deduction
Although the term is not specifically defined in our Tax
Code,[13] tax credit generally refers to an amount that is
subtracted directly from ones total tax liability.[14] It is an
allowance against the tax itself[15] or a deduction from what is
owed[16] by a taxpayer to the government. Examples of tax
credits are withheld taxes, payments of estimated tax, and
investment tax credits.[17]
Tax credit should be understood in relation to other tax concepts.
One of these is tax deduction -- defined as a subtraction from
income for tax purposes,[18] or an amount that is allowed by law
to reduce income prior to [the] application of the tax rate to
compute the amount of tax which is due.[19] An example of a tax
deduction is any of the allowable deductions enumerated in
Section 34[20] of the Tax Code.
A tax credit differs from a tax deduction. On the one hand, a tax
credit reduces the tax due, including -- whenever applicable --
the income tax that is determined after applying the
corresponding tax rates to taxable income.[21] A tax deduction,
on the other, reduces the income that is subject to tax[22] in order
to arrive at taxable income.[23] To think of the former as the latter
is to avoid, if not entirely confuse, the issue. A tax credit is used
only after the tax has been computed; a tax deduction, before.
Tax Liability Required
for Tax Credit
Since a tax credit is used to reduce directly the tax that is due,
there ought to be a tax liability before the tax credit can be
applied. Without that liability, any tax credit application will be
useless. There will be no reason for deducting the latter when
there is, to begin with, no existing obligation to the government.
However, as will be presented shortly, the existence of a tax credit
or its grant by law is not the same as the availment or use of such
credit. While the grant is mandatory, the availment or use is not.
If a net loss is reported by, and no other taxes are currently due
from, a business establishment, there will obviously be no tax
liability against which any tax creditcan be applied.[24] For the
establishment to choose the immediate availment of a tax
credit will be premature and impracticable. Nevertheless, the
irrefutable fact remains that, under RA 7432, Congress has
granted without conditions a tax credit benefit to all covered
establishments.
Although this tax credit benefit is available, it need not be used
by losing ventures, since there is no tax liability that calls for its
application. Neither can it be reduced to nil by the quick yet
callow stroke of an administrative pen, simply because no
reduction of taxes can instantly be effected. By its nature, the tax
creditmay still be deducted from a future, not a present, tax
liability, without which it does not have any use. In the meantime,
it need not move. But it breathes.
Prior Tax Payments Not
Required for Tax Credit
While a tax liability is essential to the availment or use of any tax
credit, prior tax payments are not. On the contrary, for
the existence or grant solely of such credit, neither a tax liability
nor a prior tax payment is needed. The Tax Code is in fact replete
with provisions granting or allowing tax credits, even though no
taxes have been previously paid.
For example, in computing the estate tax due, Section 86(E)
allows a tax credit -- subject to certain limitations -- for estate taxes
paid to a foreign country. Also found in Section 101(C) is a similar
provision for donors taxes -- again when paid to a foreign country
-- in computing for the donors tax due. The tax credits in both
instances allude to the prior payment of taxes, even if not made
to our government.
Under Section 110, a VAT (Value-Added Tax)- registered person
engaging in transactions -- whether or not subject to the VAT -- is
also allowed a tax credit that includes a ratable portion of any
input tax not directly attributable to either activity. This input tax
may either be the VAT on the purchase or importation of goods
or services that is merely due from -- not necessarily paid by -- such
VAT-registered person in the course of trade or business; or the
transitional input tax determined in accordance with Section
111(A). The latter type may in fact be an amount equivalent to
only eight percent of the value of a VAT-registered persons
beginning inventory of goods, materials and supplies, when such
amount -- as computed -- is higher than the actual VAT paid on
the said items.[25]Clearly from this provision, the tax credit refers to
an input tax that is either due only or given a value by mere
comparison with the VAT actually paid -- then later prorated. No
tax is actually paid prior to the availment of such credit.
In Section 111(B), a one and a half percent input tax credit that is
merely presumptive is allowed. For the purchase of primary
agricultural products used as inputs -- either in the processing of
sardines, mackerel and milk, or in the manufacture of refined
sugar and cooking oil -- and for the contract price of public work
contracts entered into with the government, again, no prior tax
payments are needed for the use of the tax credit.
More important, a VAT-registered person whose sales are zero-
rated or effectively zero-rated may, under Section 112(A), apply
for the issuance of a tax creditcertificate for the amount of
creditable input taxes merely due -- again not necessarily paid to
-- the government and attributable to such sales, to the extent
that the input taxes have not been applied against output
taxes.[26] Where a taxpayer
is engaged in zero-rated or effectively zero-rated sales and also in
taxable or exempt sales, the amount of creditable input taxes due
that are not directly and entirely attributable to any one of these
transactions shall be proportionately allocated on the basis of the
volume of sales. Indeed, in availing of such tax credit for VAT
purposes, this provision -- as well as the one earlier mentioned --
shows that the prior payment of taxes is not a requisite.
It may be argued that Section 28(B)(5)(b) of the Tax Code is
another illustration of a tax credit allowed, even though no prior
tax payments are not required. Specifically, in this provision, the
imposition of a final withholding tax rate on cash and/or property
dividends received by a nonresident foreign corporation from a
domestic corporation is subjected to the condition that a
foreign tax credit will be given by the domiciliary country in an
amount equivalent to taxes that are merely deemed
paid.[27] Although true, this provision actually refers to the tax
credit as a condition only for the imposition of a lower tax rate, not
as a deductionfrom the corresponding tax liability. Besides, it is not
our government but the domiciliary country that credits against
the income tax payable to the latter by the foreign corporation,
the tax to be foregone or spared.[28]
In contrast, Section 34(C)(3), in relation to Section 34(C)(7)(b),
categorically allows as credits, against the income tax imposable
under Title II, the amount of income taxes merely incurred -- not
necessarily paid -- by a domestic corporation during a taxable
year in any foreign country. Moreover, Section 34(C)(5) provides
that for such taxes incurred but not paid, a tax credit may be
allowed, subject to the condition precedent that the taxpayer
shall simply give a bond with sureties satisfactory to and approved
by petitioner, in such sum as may be required; and further
conditioned upon payment by the taxpayer of any tax found
due, upon petitioners redetermination of it.
74
In addition to the above-cited provisions in the Tax Code, there
are also tax treaties and special laws that grant or allow tax
credits, even though no prior tax payments have been made.
Under the treaties in which the tax credit method is used as a relief
to avoid double taxation, income that is taxed in the state of
source is also taxable in the state of residence, but the tax paid in
the former is merely allowed as a credit against the tax levied in
the latter.[29] Apparently, payment is made to the state of source,
not the state of residence. No tax, therefore, has
been previously paid to the latter.
Under special laws that particularly affect businesses, there can
also be tax credit incentives. To illustrate, the incentives provided
for in Article 48 of Presidential Decree No. (PD) 1789, as amended
by Batas Pambansa Blg. (BP) 391, include tax credits equivalent
to either five percent of the net value earned, or five or ten
percent of the net local content of exports.[30] In order to avail of
such credits under the said law and still achieve its objectives, no
prior tax payments are necessary.
From all the foregoing instances, it is evident that prior tax
payments are not indispensable to the availment of a tax credit.
Thus, the CA correctly held that the availment under RA 7432 did
not require prior tax payments by private establishments
concerned.[31] However, we do not agree with its finding[32] that
the carry-over of tax credits under the said special law to
succeeding taxable periods, and even their application against
internal revenue taxes, did not necessitate the existence of a tax
liability.
The examples above show that a tax liability is certainly important
in the availment or use, not the existence or grant, of a tax credit.
Regarding this matter, a private establishment reporting a net
loss in its financial statements is no different from another that
presents a net income. Both are entitled to the tax
credit provided for under RA 7432, since the law itself accords that
unconditional benefit. However, for the losing establishment to
immediately apply such credit, where no tax is due, will be an
improvident usance.
Sections 2.i and 4 of Revenue
Regulations No. 2-94 Erroneous
RA 7432 specifically allows private establishments to claim as tax
credit the amount of discounts they grant.[33] In turn, the
Implementing Rules and Regulations, issued pursuant thereto,
provide the procedures for its availment.[34] To deny such credit,
despite the plain mandate of the law and the regulations carrying
out that mandate, is indefensible.
First, the definition given by petitioner is erroneous. It refers to tax
credit as the amount representing the 20 percent discount that
shall be deducted by the said establishments from their gross
income for income tax purposes and from their gross sales for
value-added tax or other percentage tax purposes.[35] In ordinary
business language, the tax credit represents the amount of such
discount. However, the manner by which the discount shall be
credited against taxes has not been clarified by the revenue
regulations.
By ordinary acceptation, a discount is an abatement or reduction
made from the gross amount or value of anything.[36] To be more
precise, it is in business parlance a deduction or lowering of an
amount of money;[37] or a reduction from the full amount or value
of something, especially a price.[38] In business there are many
kinds of discount, the most common of which is that affecting
the income statement[39] or financial report upon which
the income tax is based.
Business Discounts
Deducted from Gross Sales
A cash discount, for example, is one granted by business
establishments to credit customers for their prompt payment.[40] It
is a reduction in price offered to the purchaser if payment is made
within a shorter period of time than the maximum time
specified.[41] Also referred to as a sales discount on the part of the
seller and a purchase discount on the part of the buyer, it may be
expressed in such
terms as 5/10, n/30.[42]
A quantity discount, however, is a reduction in price allowed for
purchases made in large quantities, justified by savings in
packaging, shipping, and handling.[43] It is also called
a volume or bulk discount.[44]
A percentage reduction from the list price x x x allowed by
manufacturers to wholesalers and by wholesalers to retailers[45] is
known as a trade discount. No entry for it need be made in the
manual or computerized books of accounts, since the purchase
or sale is already valued at the net price actually charged the
buyer.[46] The purpose for the discount is to encourage trading or
increase sales, and the prices at which the purchased goods may
be resold are also suggested.[47] Even a chain discount -- a series
of discounts from one list price -- is recorded at net.[48]
Finally, akin to a trade discount is a functional discount. It is a
suppliers price discount given to a purchaser based on the
[latters] role in the [formers] distribution system.[49] This role usually
involves warehousing or advertising.
Based on this discussion, we find that the nature of a sales
discount is peculiar. Applying generally accepted accounting
principles (GAAP) in the country, this type of discount is reflected
in the income statement[50] as a line item deducted -- along with
returns, allowances, rebates and other similar expenses --
from gross sales to arrive at net sales.[51] This type of presentation is
resorted to, because the accounts receivable and sales figures
that arise from sales discounts, -- as well as from quantity,
volume or bulk discounts -- are recorded in the manual and
computerized books of accounts and reflected in the financial
statements at the gross amounts of the invoices.[52] This manner of
recording credit sales -- known as the gross method -- is most
widely used, because it is simple, more convenient to apply than
the net method, and produces no material errors over time.[53]
However, under the net method used in
recording trade, chain or functional discounts, only the net
amounts of the invoices -- after the discounts have been
deducted -- are recorded in the books of accounts[54] and
reflected in the financial statements. A separate line item cannot
be shown,[55] because the transactions themselves involving
both accounts receivable and sales have already been entered
into, net of the said discounts.
The term sales discounts is not expressly defined in the Tax Code,
but one provision adverts to amounts whose sum -- along
with sales returns, allowances and cost of goods sold[56] -- is
deducted from gross sales to come up with the gross
income, profit or margin[57] derived from business.[58] In another
provision therein, sales discounts that are granted and indicated
in the invoices at the time of sale -- and that do not depend upon
the happening of any future event -- may be excluded from
the gross sales within the same quarter they were given.[59] While
determinative only of the VAT, the latter provision also appears as
a suitable reference point for income tax purposes already
embraced in the former. After all, these two provisions affirm
that sales discounts are amounts that are always deductible
from gross sales.
Reason for the Senior Citizen Discount:
The Law, Not Prompt Payment
A distinguishing feature of the implementing rules of RA 7432 is the
private establishments outright deduction of the discount from the
invoice price of the medicine sold to the senior citizen.[60] It is,
therefore, expected that for each retail sale made under this law,
the discount period lasts no more than a day, because such
discount is given -- and the net amount thereof collected --
immediately upon perfection of the sale.[61] Although prompt
payment is made for an arms-length transaction by the senior
citizen, the real and compelling reason for the private
establishment giving the discount is that the law itself makes it
mandatory.
What RA 7432 grants the senior citizen is a mere discount privilege,
not a sales discount or any of the above discounts in particular.
Prompt payment is not the reason for (although a necessary
consequence of) such grant. To be sure, the privilege enjoyed by
the senior citizen must be equivalent to the tax credit benefit
enjoyed by the private establishment granting the discount. Yet,
under the revenue regulations promulgated by our tax authorities,
this benefit has been erroneously likened and confined to a sales
discount.
To a senior citizen, the monetary effect of the privilege may be
the same as that resulting from a sales discount. However, to a
private establishment, the effect is different from a simple
reduction in price that results from such discount. In other words,
the tax credit benefit is not the same as a sales discount. To
repeat from our earlier discourse, this benefit cannot and should
not be treated as a tax deduction.
75
To stress, the effect of a sales discount on the income
statement and income tax return of an establishment covered by
RA 7432 is different from that resulting from the availment or use of
its tax credit benefit. While the former is a deduction before, the
latter is a deduction after, the income tax is computed. As
mentioned earlier, a discount is not necessarily a sales discount,
and a tax credit for a simple discount privilege should not be
automatically treated like a sales discount. Ubi lex non distinguit,
nec nos distinguere debemus. Where the law does not distinguish,
we ought not to distinguish.
Sections 2.i and 4 of Revenue Regulations No. (RR) 2-94 define tax
credit as the 20 percent discount deductible from gross
income for income tax purposes, or from gross sales for VAT or
other percentage tax purposes. In effect, the tax credit benefit
under RA 7432 is related to a sales discount. This contrived
definition is improper, considering that the latter has to be
deducted from gross sales in order to compute the gross
income in the income statement and cannot be deducted
again, even for purposes of computing the income tax.
When the law says that the cost of the discount may be claimed
as a tax credit, it means that the amount -- when claimed -- shall
be treated as a reduction from any tax liability, plain and simple.
The option to avail of the tax credit benefit depends upon the
existence of a tax liability, but to limit the benefit to a sales
discount-- which is not even identical to the discount privilege that
is granted by law -- does not define it at all and serves no useful
purpose. The definition must, therefore, be stricken down.
Laws Not Amended
by Regulations
Second, the law cannot be amended by a mere regulation. In
fact, a regulation that operates to create a rule out of harmony
with
the statute is a mere nullity;[62] it cannot prevail.
It is a cardinal rule that courts will and should respect the
contemporaneous construction placed upon a statute by the
executive officers whose duty it is to enforce it x x x.[63] In the
scheme of judicial tax administration, the need for certainty and
predictability in the implementation of tax laws is crucial.[64] Our
tax authorities fill in the details that Congress may not have the
opportunity or competence to provide.[65] The regulations these
authorities issue are relied upon by taxpayers, who are certain
that these will be followed by the courts.[66] Courts, however, will
not uphold these authorities interpretations when clearly absurd,
erroneous or improper.
In the present case, the tax authorities have given the term tax
credit in Sections 2.i and 4 of RR 2-94 a meaning utterly in contrast
to what RA 7432 provides. Their interpretation has muddled up the
intent of Congress in granting a mere discount privilege, not
a sales discount. The administrative agency issuing these
regulations may not enlarge, alter or restrict the provisions of the
law it administers; it cannot engraft additional requirements not
contemplated by the legislature.[67]
In case of conflict, the law must prevail.[68] A regulation adopted
pursuant to law is law.[69] Conversely, a regulation or any portion
thereof not adopted pursuant to law is no law and has neither the
force nor the effect of law.[70]
Availment of Tax
Credit Voluntary
Third, the word may in the text of the statute[71] implies that the
availability of the tax credit benefit is neither unrestricted nor
mandatory.[72] There is no absolute right conferred upon
respondent, or any similar taxpayer, to avail itself of the tax
credit remedy whenever it chooses; neither does it impose a duty
on the part of the government to sit back and allow an important
facet of tax collection to be at the sole control and discretion of
the taxpayer.[73] For the tax authorities to compel respondent to
deduct the 20 percent discount from either its gross income or
its gross sales[74] is, therefore, not only to make an imposition
without basis in law, but also to blatantly contravene the law itself.
What Section 4.a of RA 7432 means is that the tax credit benefit is
merely permissive, not imperative. Respondent is given two
options -- either to claim or not to claim the cost of the discounts
as a tax credit. In fact, it may even ignore the credit and simply
consider the gesture as an act of beneficence, an expression of
its social conscience.

Granting that there is a tax liability and respondent claims such
cost as a tax credit, then the tax credit can easily be applied. If
there is none, the credit cannot be used and will just have to be
carried over and revalidated[75] accordingly. If, however, the
business continues to operate at a loss and no other taxes are
due, thus compelling it to close shop, the credit can never be
applied and will be lost altogether.
In other words, it is the existence or the lack of a tax liability that
determines whether the cost of the discounts can be used as
a tax credit. RA 7432 does not give respondent the unfettered
right to avail itself of the credit whenever it pleases. Neither does
it allow our tax administrators to expand or contract the legislative
mandate. The plain meaning rule or verba legis in statutory
construction is thus applicable x x x. Where the words of a statute
are clear, plain and free from ambiguity, it must be given its literal
meaning and applied without attempted interpretation.[76]
Tax Credit Benefit
Deemed Just Compensation
Fourth, Sections 2.i and 4 of RR 2-94 deny the exercise by the State
of its power of eminent domain. Be it stressed that the privilege
enjoyed by senior citizens does not come directly from the State,
but rather from the private establishments concerned.
Accordingly, the tax credit benefit granted to these
establishments can be deemed as their just compensation for
private property taken by the State for public use.[77]
The concept of public use is no longer confined to the traditional
notion of use by the public, but held synonymous with public
interest, public benefit, public welfare, and public
convenience.[78] The discount privilege to which our senior citizens
are entitled is actually a benefit enjoyed by the general public to
which these citizens belong. The discounts given would have
entered the coffers and formed part of the gross sales of the
private establishments concerned, were it not for RA 7432. The
permanent reduction in their total revenues is a forced subsidy
corresponding to the taking of private property for public use or
benefit.
As a result of the 20 percent discount imposed by RA 7432,
respondent becomes entitled to a just compensation. This term
refers not only to the issuance of a tax credit certificate indicating
the correct amount of the discounts given, but also to the
promptness in its release. Equivalent to the payment of property
taken by the State, such issuance -- when not done within
a reasonable time from the grant of the discounts -- cannot be
considered as just compensation. In effect, respondent is made
to suffer the consequences of being immediately deprived of its
revenues while awaiting actual receipt, through the certificate, of
the equivalent amount it needs to cope with the reduction in its
revenues.[79]
Besides, the taxation power can also be used as an implement for
the exercise of the power of eminent domain.[80] Tax measures are
but enforced contributions exacted on pain of penal
sanctions[81] and clearly imposed for a public purpose.[82] In
recent years, the power to tax has indeed become a most
effective tool to realize social justice, public welfare, and the
equitable distribution of wealth.[83]
While it is a declared commitment under Section 1 of RA 7432,
social justice cannot be invoked to trample on the rights of
property owners who under our Constitution and laws are also
entitled to protection. The social justice consecrated in our
[C]onstitution [is] not intended to take away rights from a person
and give them to another who is not entitled thereto.[84] For this
reason, a just compensation for income that is taken away from
respondent becomes necessary. It is in the tax credit that our
legislators find support to realize social justice, and no
administrative body can alter that fact.
To put it differently, a private establishment that merely breaks
even[85] -- without the discounts yet -- will surely start to incur losses
because of such discounts. The same effect is expected if its mark-
up is less than 20 percent, and if all its sales come from retail
purchases by senior citizens. Aside from the observation we have
already raised earlier, it will also be grossly unfair to an
establishment if the discounts will be treated merely as deductions
from either its gross income or its gross sales. Operating at a loss
through no fault of its own, it will realize that the tax
credit limitation under RR 2-94 is inutile, if not improper. Worse,
profit-generating businesses will be put in a better position if they
avail themselves of tax credits denied those that are losing,
because no taxes are due from the latter.
76
Grant of Tax Credit
Intended by the Legislature
Fifth, RA 7432 itself seeks to adopt measures whereby senior
citizens are assisted by the community as a whole and to establish
a program beneficial to them.[86]These objectives are consonant
with the constitutional policy of making health x x x services
available to all the people at affordable cost[87] and of giving
priority for the needs of the x x x elderly.[88] Sections 2.i and 4 of RR
2-94, however, contradict these constitutional policies and
statutory objectives.
Furthermore, Congress has allowed all private establishments a
simple tax credit, not a deduction. In fact, no cash outlay is
required from the government for the availment or use of such
credit. The deliberations on February 5, 1992 of the Bicameral
Conference Committee Meeting on Social Justice, which
finalized RA 7432, disclose the true intent of our legislators to treat
the sales discounts as a tax credit, rather than as a deduction
from gross income. We quote from those deliberations as follows:
"THE CHAIRMAN (Rep. Unico). By the way, before that ano, about
deductions from taxable income. I think we incorporated there a
provision na - on the responsibility of the private hospitals and
drugstores, hindi ba?
SEN. ANGARA. Oo.
THE CHAIRMAN. (Rep. Unico), So, I think we have to put in also a
provision here about the deductions from taxable income of that
private hospitals, di ba ganon 'yan?
MS. ADVENTO. Kaya lang po sir, and mga discounts po nila
affecting government and public institutions, so, puwede na po
nating hindi isama yung mga less deductions ng taxable income.
THE CHAIRMAN. (Rep. Unico). Puwede na. Yung about the private
hospitals. Yung isiningit natin?
MS. ADVENTO. Singit na po ba yung 15% on credit. (inaudible/did
not use the microphone).
SEN. ANGARA. Hindi pa, hindi pa.
THE CHAIRMAN. (Rep. Unico) Ah, 'di pa ba naisama natin?
SEN. ANGARA. Oo. You want to insert that?
THE CHAIRMAN (Rep. Unico). Yung ang proposal ni Senator
Shahani, e.
SEN. ANGARA. In the case of private hospitals they got the grant
of 15% discount, provided that, the private hospitals can claim the
expense as a tax credit.
REP. AQUINO. Yah could be allowed as deductions in the
perpetrations of (inaudible) income.
SEN. ANGARA. I-tax credit na lang natin para walang cash-out
ano?
REP. AQUINO. Oo, tax credit. Tama, Okay. Hospitals ba o lahat ng
establishments na covered.
THE CHAIRMAN. (Rep. Unico). Sa kuwan lang yon, as private
hospitals lang.
REP. AQUINO. Ano ba yung establishments na covered?
SEN. ANGARA. Restaurant lodging houses, recreation centers.
REP. AQUINO. All establishments covered siguro?
SEN. ANGARA. From all establishments. Alisin na natin 'Yung kuwan
kung ganon. Can we go back to Section 4 ha?
REP. AQUINO. Oho.
SEN. ANGARA. Letter A. To capture that thought, we'll say the
grant of 20% discount from all establishments et cetera, et cetera,
provided that said establishments - provided that private
establishments may claim the cost as a tax credit. Ganon ba
'yon?
REP. AQUINO. Yah.

SEN. ANGARA. Dahil kung government, they don't need to claim
it.
THE CHAIRMAN. (Rep. Unico). Tax credit.
SEN. ANGARA. As a tax credit [rather] than a kuwan - deduction,
Okay.
REP. AQUINO Okay.
SEN. ANGARA. Sige Okay. Di subject to style na lang sa Letter A".[89]
Special Law
Over General Law
Sixth and last, RA 7432 is a special law that should prevail over the
Tax Code -- a general law. x x x [T]he rule is that on a specific
matter the special law shall prevail over the general law, which
shall
be resorted to only to supply deficiencies in the former.[90] In
addition, [w]here there are two statutes, the earlier special and
the later general -- the terms of the general broad enough to
include the matter provided for in the special -- the fact that one
is special and the other is general creates a presumption that the
special is to be considered as remaining an exception to the
general,[91] one as a general law of the land, the other as the law
of a particular case.[92] It is a canon of statutory construction that
a later statute, general in its terms and not expressly repealing
a prior special statute, will ordinarily not affect the special
provisions of such earlier statute.[93]
RA 7432 is an earlier law not expressly repealed by, and therefore
remains an exception to, the Tax Code -- a later law. When the
former states that a tax creditmay be claimed, then the
requirement of prior tax payments under certain provisions of the
latter, as discussed above, cannot be made to apply. Neither can
the instances of or references to a tax deduction under the Tax
Code[94] be made to restrict RA 7432. No provision of any revenue
regulation can supplant or modify the acts of Congress.
WHEREFORE, the Petition is hereby DENIED. The assailed Decision
and Resolution of the Court of Appeals AFFIRMED. No
pronouncement as to costs.
SO ORDERED.
6. G.R. No. 166494
CARLOS SUPERD6RUG CORP., doing business under the name and
style Carlos Superdrug, ELSIE M. CANO, doing business under the
name and style Advance Drug, Dr. SIMPLICIO L. YAP, JR., doing
business under the name and style City Pharmacy, MELVIN
S. SANDOVAL-GUTIERREZ,, doing business under , the name and
style Botica dela Serna, , and LEYTE SERV-WELL CORP.,doing
business under the name and CARPIO MORALES, style Leyte Serv-
Well Drugstore, , Petitioners, - versus - DEPARTMENT OF
SOCIAL WELFARE and DEVELOPMENT (DSWD), DEPARTMENT OF :
HEALTH (DOH), DEPARTMENT OF FINANCE (DOF), DEPARTMENT
OF JUSTICE (DOJ), and DEPARTMENT OF INTERIOR and LOCAL
GOVERNMENT (DILG), Respondents.
DECISION
AZCUNA, J.:
This is a petition[1] for Prohibition with Prayer for Preliminary
Injunction assailing the constitutionality of Section 4(a) of Republic
Act (R.A.) No. 9257,[2] otherwise known as the Expanded Senior
Citizens Act of 2003.
Petitioners are domestic corporations and proprietors operating
drugstores in the Philippines.
Public respondents, on the other hand, include the Department
of Social Welfare and Development (DSWD), the Department of
Health (DOH), the Department of Finance (DOF), the Department
of Justice (DOJ), and the Department of Interior and Local
Government (DILG) which have been specifically tasked to
monitor the drugstores compliance with the law; promulgate the
implementing rules and regulations for the effective
implementation of the law; and prosecute and revoke the
licenses of erring drugstore establishments.
The antecedents are as follows:
On February 26, 2004, R.A. No. 9257, amending R.A. No.
7432,[3] was signed into law by President Gloria Macapagal-
Arroyo and it became effective on March 21, 2004. Section 4(a)
of the Act states:
77
SEC. 4. Privileges for the Senior Citizens. The senior citizens shall be
entitled to the following:
(a) the grant of twenty percent (20%) discount from all
establishments relative to the utilization of services in hotels and
similar lodging establishments, restaurants and recreation centers,
and purchase of medicines in all establishments for the exclusive
use or enjoyment of senior citizens, including funeral and burial
services for the death of senior citizens;
...
The establishment may claim the discounts granted under (a), (f),
(g) and (h) as tax deduction based on the net cost of the goods
sold or services rendered: Provided, That the cost of the discount
shall be allowed as deduction from gross income for the same
taxable year that the discount is granted. Provided, further, That
the total amount of the claimed tax deduction net of value
added tax if applicable, shall be included in their gross sales
receipts for tax purposes and shall be subject to proper
documentation and to the provisions of the National Internal
Revenue Code, as amended.[4]
On May 28, 2004, the DSWD approved and adopted the
Implementing Rules and Regulations of R.A. No. 9257, Rule VI,
Article 8 of which states:
Article 8. Tax Deduction of Establishments. The establishment may
claim the discounts granted under Rule V, Section 4 Discounts for
Establishments;[5] Section 9, Medical and Dental Services in Private
Facilities[,][6] and Sections 10[7] and 11[8] Air, Sea and Land
Transportation as tax deduction based on the net cost of the
goods sold or services rendered. Provided, That the cost of the
discount shall be allowed as deduction from gross income for the
same taxable year that the discount is granted; Provided,
further, That the total amount of the claimed tax deduction net of
value added tax if applicable, shall be included in their gross sales
receipts for tax purposes and shall be subject to proper
documentation and to the provisions of the National Internal
Revenue Code, as amended; Provided, finally, that the
implementation of the tax deduction shall be subject to the
Revenue Regulations to be issued by the Bureau of Internal
Revenue (BIR) and approved by the Department of Finance
(DOF).[9]
On July 10, 2004, in reference to the query of the Drug Stores
Association of the Philippines (DSAP) concerning the meaning of
a tax deduction under the Expanded Senior Citizens Act, the DOF,
through Director IV Ma. Lourdes B. Recente, clarified as follows:
1) The difference between the Tax Credit (under the Old Senior
Citizens Act) and Tax Deduction (under the Expanded Senior
Citizens Act).
1.1. The provision of Section 4 of R.A. No. 7432 (the old Senior
Citizens Act) grants twenty percent (20%) discount from all
establishments relative to the utilization of transportation services,
hotels and similar lodging establishment, restaurants and
recreation centers and purchase of medicines anywhere in the
country, the costs of which may be claimed by the private
establishments concerned as tax credit.
Effectively, a tax credit is a peso-for-peso deduction from a
taxpayers tax liability due to the government of the amount of
discounts such establishment has granted to a senior citizen. The
establishment recovers the full amount of discount given to a
senior citizen and hence, the government shoulders 100% of the
discounts granted.
It must be noted, however, that conceptually, a tax
credit scheme under the Philippine tax system, necessitates that
prior payments of taxes have been made and the taxpayer is
attempting to recover this tax payment from his/her income tax
due. The tax credit scheme under R.A. No. 7432 is, therefore,
inapplicable since no tax payments have previously occurred.
1.2. The provision under R.A. No. 9257, on the other hand,
provides that the establishment concerned may claim the
discounts under Section 4(a), (f), (g) and (h) as tax deduction from
gross income, based on the net cost of goods sold or services
rendered.
Under this scheme, the establishment concerned is allowed to
deduct from gross income, in computing for its tax liability, the
amount of discounts granted to senior citizens. Effectively, the
government loses in terms of foregone revenues an amount
equivalent to the marginal tax rate the said establishment is liable
to pay the government. This will be an amount equivalent to 32%
of the twenty percent (20%) discounts so granted. The
establishment shoulders the remaining portion of the granted
discounts.
It may be necessary to note that while the burden on [the]
government is slightly diminished in terms of its percentage share
on the discounts granted to senior citizens, the number of
potential establishments that may claim tax deductions, have
however, been broadened. Aside from the establishments that
may claim tax credits under the old law, more establishments
were added under the new law such as: establishments providing
medical and dental services, diagnostic and laboratory services,
including professional fees of attending doctors in all private
hospitals and medical facilities, operators of domestic air and sea
transport services, public railways and skyways and bus transport
services.
A simple illustration might help amplify the points discussed above,
as follows:
Tax Deduction Tax Credit
Gross Sales x x x x x x x x x x x x
Less : Cost of goods sold x x x x x x x x x x
Net Sales x x x x x x x x x x x x
Less: Operating Expenses:
Tax Deduction on Discounts x x x x --
Other deductions: x x x x x x x x
Net Taxable Income x x x x x x x x x x
Tax Due x x x x x x
Less: Tax Credit -- ______x x
Net Tax Due -- x x
As shown above, under a tax deduction scheme, the tax
deduction on discounts was subtracted from Net Sales together
with other deductions which are considered as operating
expenses before the Tax Due was computed based on the Net
Taxable Income. On the other hand, under a tax credit scheme,
the amount of discounts which is the tax credit item, was
deducted directly from the tax due amount.[10]
Meanwhile, on October 1, 2004, Administrative Order (A.O.) No.
171 or the Policies and Guidelines to Implement the Relevant
Provisions of Republic Act 9257, otherwise known as the Expanded
Senior Citizens Act of 2003[11] was issued by the DOH, providing the
grant of twenty percent (20%) discount in the purchase of
unbranded generic medicines from all establishments dispensing
medicines for the exclusive use of the senior citizens.
On November 12, 2004, the DOH issued Administrative Order No
177[12] amending A.O. No. 171. Under A.O. No. 177, the twenty
percent discount shall not be limited to the purchase of
unbranded generic medicines only, but shall extend to both
prescription and non-prescription medicines whether branded or
generic. Thus, it stated that [t]he grant of twenty percent (20%)
discount shall be provided in the purchase of medicines from all
establishments dispensing medicines for the exclusive use of the
senior citizens.
Petitioners assail the constitutionality of Section 4(a) of the
Expanded Senior Citizens Act based on the following grounds:[13]
1) The law is confiscatory because it infringes Art. III, Sec.
9 of the Constitution which provides that private property shall not
be taken for public use without just compensation;
2) It violates the equal protection clause (Art. III, Sec. 1)
enshrined in our Constitution which states that no person shall be
deprived of life, liberty or property without due process of law, nor
shall any person be denied of the equal protection of the laws;
and
3) The 20% discount on medicines violates the
constitutional guarantee in Article XIII, Section 11 that makes
essential goods, health and other social services available to all
people at affordable cost.[14]
Petitioners assert that Section 4(a) of the law is unconstitutional
because it constitutes deprivation of private property. Compelling
drugstore owners and establishments to grant the discount will
result in a loss of profit
and capital because 1) drugstores impose a mark-up of only 5%
to 10% on branded medicines; and 2) the law failed to provide a
scheme whereby drugstores will be justly compensated for the
discount.
Examining petitioners arguments, it is apparent that what
78
petitioners are ultimately questioning is the validity of the tax
deduction scheme as a reimbursement mechanism for the twenty
percent (20%) discount that they extend to senior citizens.
Based on the afore-stated DOF Opinion, the tax deduction
scheme does not fully reimburse petitioners for the discount
privilege accorded to senior citizens. This is because the discount
is treated as a deduction, a tax-deductible expense that is
subtracted from the gross income and results in a lower taxable
income. Stated otherwise, it is an amount that is allowed by
law[15] to reduce the income prior to the application of the tax
rate to compute the amount of tax which is due.[16] Being a tax
deduction, the discount does not reduce taxes owed on a peso
for peso basis but merely offers a fractional reduction in taxes
owed.
Theoretically, the treatment of the discount as a deduction
reduces the net income of the private establishments concerned.
The discounts given would have entered the coffers and formed
part of the gross sales of the private establishments, were it not for
R.A. No. 9257.
The permanent reduction in their total revenues is a forced subsidy
corresponding to the taking of private property for public use or
benefit.[17] This constitutes compensable taking for which
petitioners would ordinarily become entitled to a just
compensation.
Just compensation is defined as the full and fair equivalent of the
property taken from its owner by the expropriator. The measure is
not the takers gain but the owners loss. The word just is used to
intensify the meaning of the word compensation, and to convey
the idea that the equivalent to be rendered for the property to
be taken shall be real, substantial, full and ample.[18]
A tax deduction does not offer full reimbursement of the senior
citizen discount. As such, it would not meet the definition of just
compensation.[19]
Having said that, this raises the question of whether the State, in
promoting the health and welfare of a special group of citizens,
can impose upon private establishments the burden of partly
subsidizing a government program.
The Court believes so.
The Senior Citizens Act was enacted primarily to maximize the
contribution of senior citizens to nation-building, and to grant
benefits and privileges to them for their improvement and well-
being as the State considers them an integral part of our
society.[20]
The priority given to senior citizens finds its basis in the Constitution
as set forth in the law itself. Thus, the Act provides:
SEC. 2. Republic Act No. 7432 is hereby amended to read as
follows:
SECTION 1. Declaration of Policies and Objectives. Pursuant to
Article XV, Section 4 of the Constitution, it is the duty of the family
to take care of its elderly members while the State may design
programs of social security for them. In addition to this, Section 10
in the Declaration of Principles and State Policies provides: The
State shall provide social justice in all phases of national
development. Further, Article XIII, Section 11, provides: The State
shall adopt an integrated and comprehensive approach to
health development which shall endeavor to make essential
goods, health and other social services available to all the people
at affordable cost. There shall be priority for the needs of the
underprivileged sick, elderly, disabled, women and children.
Consonant with these constitutional principles the following are
the declared policies of this Act:
...
(f) To recognize the important role of the private sector in the
improvement of the welfare of senior citizens and to actively seek
their partnership.[21]
To implement the above policy, the law grants a twenty percent
discount to senior citizens for medical and dental services, and
diagnostic and laboratory fees; admission fees charged by
theaters, concert halls, circuses, carnivals, and other similar places
of culture, leisure and amusement; fares for domestic land, air and
sea travel; utilization of services in hotels and similar lodging
establishments, restaurants and recreation centers; and
purchases of medicines for the exclusive use or enjoyment of
senior citizens. As a form of reimbursement, the law provides that
business establishments extending the twenty percent discount to
senior citizens may claim the discount as a tax deduction.
The law is a legitimate exercise of police power which, similar to
the power of eminent domain, has general welfare for its object.
Police power is not capable of an exact definition, but has been
purposely veiled in general terms to underscore its
comprehensiveness to meet all exigencies and provide enough
room for an efficient and flexible response to conditions and
circumstances, thus assuring the greatest
benefits. [22] Accordingly, it has been described as the most
essential, insistent and the least limitable of powers, extending as
it does to all the great public needs.[23] It is [t]he power vested in
the legislature by the constitution to make, ordain, and establish
all manner of wholesome and reasonable laws, statutes, and
ordinances, either with penalties or without, not repugnant to the
constitution, as they shall judge to be for the good and welfare of
the commonwealth, and of the subjects of the same.[24]
For this reason, when the conditions so demand as determined by
the legislature, property rights must bow to the primacy of police
power because property rights, though sheltered by due process,
must yield to general welfare.[25]
Police power as an attribute to promote the common good
would be diluted considerably if on the mere plea of petitioners
that they will suffer loss of earnings and capital, the questioned
provision is invalidated. Moreover, in the absence of evidence
demonstrating the alleged confiscatory effect of the provision in
question, there is no basis for its nullification in view of the
presumption of validity which every law has in its favor.[26]
Given these, it is incorrect for petitioners to insist that the grant of
the senior citizen discount is unduly oppressive to their business,
because petitioners have not taken time to calculate correctly
and come up with a financial report, so that they have not been
able to show properly whether or not the tax deduction scheme
really works greatly to their disadvantage.[27]
In treating the discount as a tax deduction, petitioners insist that
they will incur losses because, referring to the DOF Opinion, for
every P1.00 senior citizen discount that petitioners would
give, P0.68 will be shouldered by them as only P0.32 will be
refunded by the government by way of a tax deduction.
To illustrate this point, petitioner Carlos Super Drug cited the anti-
hypertensive maintenance drug Norvasc as an example.
According to the latter, it acquires Norvasc from the distributors
at P37.57 per tablet, and retails it at P39.60 (or at a margin of 5%).
If it grants a 20% discount to senior citizens or an amount
equivalent to P7.92, then it would have to sell Norvasc at P31.68
which translates to a loss from capital of P5.89 per tablet. Even if
the government will allow a tax deduction, only P2.53 per tablet
will be refunded and not the full amount of the discount which
is P7.92. In short, only 32% of the 20% discount will be reimbursed
to the drugstores.[28]
Petitioners computation is flawed. For purposes of reimbursement,
the law states that the cost of the discount shall be deducted from
gross income,[29] the amount of income derived from all sources
before deducting allowable expenses, which will result in net
income. Here, petitioners tried to show a loss on a per transaction
basis, which should not be the case. An income statement,
showing an accounting of petitioners sales, expenses, and net
profit (or loss) for a given period could have accurately reflected
the effect of the discount on their income. Absent any financial
statement, petitioners cannot substantiate their claim that they
will be operating at a loss should they give the discount. In
addition, the computation was erroneously based on the
assumption that their customers consisted wholly of senior citizens.
Lastly, the 32% tax rate is to be imposed on income, not on the
amount of the discount.
Furthermore, it is unfair for petitioners to criticize the law because
they cannot raise the prices of their medicines given the cutthroat
nature of the players in the industry. It is a business decision on the
part of petitioners to peg the mark-up at 5%. Selling the medicines
below acquisition cost, as alleged by petitioners, is merely a result
of this decision. Inasmuch as pricing is a property right, petitioners
cannot reproach the law for being oppressive, simply because
they cannot afford to raise their prices for fear of losing their
customers to competition.
The Court is not oblivious of the retail side of the pharmaceutical
industry and the competitive pricing component of the business.
While the Constitution protects property rights, petitioners must
accept the realities of business and the State, in the exercise of
79
police power, can intervene in the operations of a business which
may result in an impairment of property rights in the process.
Moreover, the right to property has a social dimension. While
Article XIII of the Constitution provides the precept for the
protection of property, various laws and jurisprudence,
particularly on agrarian reform and the regulation of contracts
and public utilities, continuously serve as a reminder that the right
to property can be relinquished upon the command of the State
for the promotion of public good.[30]
Undeniably, the success of the senior citizens program rests largely
on the support imparted by petitioners and the other private
establishments concerned. This being the case, the means
employed in invoking the active participation of the private
sector, in order to achieve the purpose or objective of the law, is
reasonably and directly related. Without sufficient proof that
Section 4(a) of R.A. No. 9257 is arbitrary, and that the continued
implementation of the same would be unconscionably
detrimental to petitioners, the Court will refrain from quashing a
legislative act.[31]
WHEREFORE, the petition is DISMISSED for lack of merit.
No costs.
SO ORDERED.
7. G.R. No. 175356 December 3, 2013
MANILA MEMORIAL PARK, INC. AND LA FUNERARIA PAZ-SUCAT,
INC., Petitioners,
vs.
SECRETARY OF THE DEPARTMENT OF SOCIAL WELFARE AND
DEVELOPMENT and THE SECRETARY OF THE DEPARTMENT OF
FINANCE, Respondents.
DECISION
DEL CASTILLO, J.:
When a party challeges the constitutionality of a law, the burden
of proof rests upon him.
Before us is a Petition for Prohibition2 under Rule 65 of the Rules of
Court filed by petitioners Manila Memorial Park, Inc. and La
Funeraria Paz-Sucat, Inc., domestic corporations engaged in the
business of providing funeral and burial services, against public
respondents Secretaries of the Department of Social Welfare and
Development (DSWD) and the Department of Finance (DOF).
Petitioners assail the constitutionality of Section 4 of Republic Act
(RA) No. 7432,3 as amended by RA 9257,4 and the implementing
rules and regulations issued by the DSWD and DOF insofar as these
allow business establishments to claim the 20% discount given to
senior citizens as a tax deduction.
Factual Antecedents
On April 23, 1992, RA 7432 was passed into law, granting senior
citizens the following privileges:
SECTION 4. Privileges for the Senior Citizens. – The senior citizens
shall be entitled to the following:
a) the grant of twenty percent (20%) discount from all
establishments relative to utilization of transportation
services, hotels and similar lodging establishment[s],
restaurants and recreation centers and purchase of
medicine anywhere in the country: Provided, That
private establishments may claim the cost as tax credit;
b) a minimum of twenty percent (20%) discount on
admission fees charged by theaters, cinema houses and
concert halls, circuses, carnivals and other similar places
of culture, leisure, and amusement;
c) exemption from the payment of individual income
taxes: Provided, That their annual taxable income does
not exceed the property level as determined by the
 National Economic and Development Authority (NEDA)
for that year;
d) exemption from training fees for socioeconomic
programs undertaken by the OSCA as part of its work;
e) free medical and dental services in government
establishment[s] anywhere in the country, subject to
guidelines to be issued by the Department of Health, the
Government Service Insurance System and the Social
Security System;
f) to the extent practicable and feasible, the
continuance of the same benefits and privileges given
by the Government Service Insurance System (GSIS),
Social Security System (SSS) and PAG-IBIG, as the case
may be, as are enjoyed by those in actual service.
On August 23, 1993, Revenue Regulations (RR) No. 02-94 was
issued to implement RA 7432. Sections 2(i) and 4 of RR No. 02-94
provide:
Sec. 2. DEFINITIONS. – For purposes of these regulations: i. Tax
Credit – refers to the amount representing the 20% discount
granted to a qualified senior citizen by all establishments relative
to their utilization of transportation services, hotels and similar
lodging establishments, restaurants, drugstores, recreation
centers, theaters, cinema houses, concert halls, circuses, carnivals
and other similar places of culture, leisure and amusement, which
discount shall be deducted by the said establishments from their
gross income for income tax purposes and from their gross sales
for value-added tax or other percentage tax purposes. x x x x Sec.
4. RECORDING/BOOKKEEPING REQUIREMENTS FOR PRIVATE
ESTABLISHMENTS. – Private establishments, i.e., transport services,
hotels and similar lodging establishments, restaurants, recreation
centers, drugstores, theaters, cinema houses, concert halls,
circuses, carnivals and other similar places of culture[,] leisure and
amusement, giving 20% discounts to qualified senior citizens are
required to keep separate and accurate record[s] of sales made
to senior citizens, which shall include the name, identification
number, gross sales/receipts, discounts, dates of transactions and
invoice number for every transaction. The amount of 20% discount
shall be deducted from the gross income for income tax purposes
and from gross sales of the business enterprise concerned for
purposes of the VAT and other percentage taxes.
In Commissioner of Internal Revenue v. Central Luzon Drug
Corporation,5 the Court declared Sections 2(i) and 4 of RR No. 02-
94 as erroneous because these contravene RA 7432,6 thus:
RA 7432 specifically allows private establishments to claim as tax
credit the amount of discounts they grant. In turn, the
Implementing Rules and Regulations, issued pursuant thereto,
provide the procedures for its availment. To deny such credit,
despite the plain mandate of the law and the regulations carrying
out that mandate, is indefensible. First, the definition given by
petitioner is erroneous. It refers to tax credit as the amount
representing the 20 percent discount that "shall be deducted by
the said establishments from their gross income for income tax
purposes and from their gross sales for value-added tax or other
percentage tax purposes." In ordinary business language, the tax
credit represents the amount of such discount. However, the
manner by which the discount shall be credited against taxes has
not been clarified by the revenue regulations. By ordinary
acceptation, a discount is an "abatement or reduction made
from the gross amount or value of anything." To be more precise,
it is in business parlance "a deduction or lowering of an amount of
money;" or "a reduction from the full amount or value of
something, especially a price." In business there are many kinds of
discount, the most common of which is that affecting the income
statement or financial report upon which the income tax is based.
xxxx
Sections 2.i and 4 of Revenue Regulations No. (RR) 2-94 define tax
credit as the 20 percent discount deductible from gross income
for income tax purposes, or from gross sales for VAT or other
percentage tax purposes. In effect, the tax credit benefit under
RA 7432 is related to a sales discount. This contrived definition is
improper, considering that the latter has to be deducted from
gross sales in order to compute the gross income in the income
statement and cannot be deducted again, even for purposes of
computing the income tax. When the law says that the cost of the
discount may be claimed as a tax credit, it means that the
amount — when claimed — shall be treated as a reduction from
any tax liability, plain and simple. The option to avail of the tax
80
credit benefit depends upon the existence of a tax liability, but to
limit the benefit to a sales discount — which is not even identical
to the discount privilege that is granted by law — does not define
it at all and serves no useful purpose. The definition must,
therefore, be stricken down.
Laws Not Amended by Regulations
Second, the law cannot be amended by a mere regulation. In
fact, a regulation that "operates to create a rule out of harmony
with the statute is a mere nullity;" it cannot prevail. It is a cardinal
rule that courts "will and should respect the contemporaneous
construction placed upon a statute by the executive officers
whose duty it is to enforce it x x x." In the scheme of judicial tax
administration, the need for certainty and predictability in the
implementation of tax laws is crucial. Our tax authorities fill in the
details that "Congress may not have the opportunity or
competence to provide." The regulations these authorities issue
are relied upon by taxpayers, who are certain that these will be
followed by the courts. Courts, however, will not uphold these
authorities’ interpretations when clearly absurd, erroneous or
improper. In the present case, the tax authorities have given the
term tax credit in Sections 2.i and 4 of RR 2-94 a meaning utterly in
contrast to what RA 7432 provides. Their interpretation has
muddled x x x the intent of Congress in granting a mere discount
privilege, not a sales discount. The administrative agency issuing
these regulations may not enlarge, alter or restrict the provisions
of the law it administers; it cannot engraft additional requirements
not contemplated by the legislature.
In case of conflict, the law must prevail. A "regulation adopted
pursuant to law is law." Conversely, a regulation or any portion
thereof not adopted pursuant to law is no law and has neither the
force nor the effect of law.7
On February 26, 2004, RA 92578 amended certain provisions of RA
7432, to wit:
SECTION 4. Privileges for the Senior Citizens. – The senior citizens
shall be entitled to the following:
(a) the grant of twenty percent (20%) discount from all
establishments relative to the utilization of services in hotels and
similar lodging establishments, restaurants and recreation centers,
and purchase of medicines in all establishments for the exclusive
use or enjoyment of senior citizens, including funeral and burial
services for the death of senior citizens;
xxxx
The establishment may claim the discounts granted under (a), (f),
(g) and (h) as tax deduction based on the net cost of the goods
sold or services rendered: Provided, That the cost of the discount
shall be allowed as deduction from gross income for the same
taxable year that the discount is granted. Provided, further, That
the total amount of the claimed tax deduction net of value
added tax if applicable, shall be included in their gross sales
receipts for tax purposes and shall be subject to proper
documentation and to the provisions of the National Internal
Revenue Code, as amended.
To implement the tax provisions of RA 9257, the Secretary of
Finance issued RR No. 4-2006, the pertinent provision of which
provides:
SEC. 8. AVAILMENT BY ESTABLISHMENTS OF SALES DISCOUNTS AS
DEDUCTION FROM GROSS INCOME. – Establishments enumerated
in subparagraph (6) hereunder granting sales discounts to senior
citizens on the sale of goods and/or services specified thereunder
are entitled to deduct the said discount from gross income
subject to the following conditions:
(1) Only that portion of the gross sales EXCLUSIVELY USED,
CONSUMED OR ENJOYED BY THE SENIOR CITIZEN shall be
eligible for the deductible sales discount.
(2) The gross selling price and the sales discount MUST BE
SEPARATELY INDICATED IN THE OFFICIAL RECEIPT OR
SALES INVOICE issued by the establishment for the sale
of goods or services to the senior citizen.
 (3) Only the actual amount of the discount granted or a
sales discount not exceeding 20% of the gross selling
price can be deducted from the gross income, net of
value added tax, if applicable, for income tax purposes,
and from gross sales or gross receipts of the business
enterprise concerned, for VAT or other percentage tax
purposes.
(4) The discount can only be allowed as deduction from
gross income for the same taxable year that the
discount is granted.
(5) The business establishment giving sales discounts to
qualified senior citizens is required to keep separate and
accurate record[s] of sales, which shall include the
name of the senior citizen, TIN, OSCA ID, gross
sales/receipts, sales discount granted, [date] of
[transaction] and invoice number for every sale
transaction to senior citizen.
(6) Only the following business establishments which
granted sales discount to senior citizens on their sale of
goods and/or services may claim the said discount
granted as deduction from gross income, namely:
xxxx
(i) Funeral parlors and similar establishments – The beneficiary or
any person who shall shoulder the funeral and burial expenses of
the deceased senior citizen shall claim the discount, such as
casket, embalmment, cremation cost and other related services
for the senior citizen upon payment and presentation of [his]
death certificate.
The DSWD likewise issued its own Rules and Regulations
Implementing RA 9257, to wit:
RULE VI DISCOUNTS AS TAX DEDUCTION OF ESTABLISHMENTS
Article 8. Tax Deduction of Establishments. – The establishment
may claim the discounts granted under Rule V, Section 4 –
Discounts for Establishments, Section 9, Medical and Dental
Services in Private Facilities and Sections 10 and 11 – Air, Sea and
Land Transportation as tax deduction based on the net cost of the
goods sold or services rendered.
Provided, That the cost of the discount shall be allowed as
deduction from gross income for the same taxable year that the
discount is granted; Provided, further, That the total amount of the
claimed tax deduction net of value added tax if applicable, shall
be included in their gross sales receipts for tax purposes and shall
be subject to proper documentation and to the provisions of the
National Internal Revenue Code, as amended; Provided, finally,
that the implementation of the tax deduction shall be subject to
the Revenue Regulations to be issued by the Bureau of Internal
Revenue (BIR) and approved by the Department of Finance
(DOF).
Feeling aggrieved by the tax deduction scheme, petitioners filed
the present recourse, praying that Section 4 of RA 7432, as
amended by RA 9257, and the implementing rules and
regulations issued by the DSWD and the DOF be declared
unconstitutional insofar as these allow business establishments to
claim the 20% discount given to senior citizens as a tax deduction;
that the DSWD and the DOF be prohibited from enforcing the
same; and that the tax credit treatment of the 20% discount under
the former Section 4 (a) of RA 7432 be reinstated.
Issues
Petitioners raise the following issues:
A.
WHETHER THE PETITION PRESENTS AN ACTUAL CASE OR
CONTROVERSY.
B.
WHETHER SECTION 4 OF REPUBLIC ACT NO. 9257 AND X X X ITS
IMPLEMENTING RULES AND REGULATIONS, INSOFAR AS THEY
PROVIDE THAT THE TWENTY PERCENT (20%) DISCOUNT TO SENIOR
CITIZENS MAY BE CLAIMED AS A TAX DEDUCTION BY THE PRIVATE
81
ESTABLISHMENTS, ARE INVALID AND UNCONSTITUTIONAL.9
Petitioners’ Arguments
Petitioners emphasize that they are not questioning the 20%
discount granted to senior citizens but are only assailing the
constitutionality of the tax deduction scheme prescribed under
RA 9257 and the implementing rules and regulations issued by the
DSWD and the DOF.10
Petitioners posit that the tax deduction scheme contravenes
Article III, Section 9 of the Constitution, which provides that:
"[p]rivate property shall not be taken for public use without just
compensation."11
In support of their position, petitioners cite Central Luzon Drug
Corporation,12 where it was ruled that the 20% discount privilege
constitutes taking of private property for public use which requires
the payment of just compensation,13 and Carlos Superdrug
Corporation v. Department of Social Welfare and
Development,14 where it was acknowledged that the tax
deduction scheme does not meet the definition of just
compensation.15
Petitioners likewise seek a reversal of the ruling in Carlos Superdrug
Corporation16 that the tax deduction scheme adopted by the
government is justified by police power.17
They assert that "[a]lthough both police power and the power of
eminent domain have the general welfare for their object, there
are still traditional distinctions between the two" 18 and that
"eminent domain cannot be made less supreme than police
power."19
Petitioners further claim that the legislature, in amending RA 7432,
relied on an erroneous contemporaneous construction that prior
payment of taxes is required for tax credit.20
Petitioners also contend that the tax deduction scheme violates
Article XV, Section 421 and Article XIII, Section 1122of the
Constitution because it shifts the State’s constitutional mandate or
duty of improving the welfare of the elderly to the private sector.23
Under the tax deduction scheme, the private sector shoulders 65%
of the discount because only 35%24 of it is actually returned by the
government.25
Consequently, the implementation of the tax deduction scheme
prescribed under Section 4 of RA 9257 affects the businesses of
petitioners.26
Thus, there exists an actual case or controversy of transcendental
importance which deserves judicious disposition on the merits by
the highest court of the land.27
Respondents’ Arguments
Respondents, on the other hand, question the filing of the instant
Petition directly with the Supreme Court as this disregards the
hierarchy of courts.28
They likewise assert that there is no justiciable controversy as
petitioners failed to prove that the tax deduction treatment is not
a "fair and full equivalent of the loss sustained" by them.29
As to the constitutionality of RA 9257 and its implementing rules
and regulations, respondents contend that petitioners failed to
overturn its presumption of constitutionality.30
More important, respondents maintain that the tax deduction
scheme is a legitimate exercise of the State’s police power.31
Our Ruling
The Petition lacks merit.
There exists an actual case or controversy.
We shall first resolve the procedural issue. When the
constitutionality of a law is put in issue, judicial review may be
availed of only if the following requisites concur: "(1) the existence
of an actual and appropriate case; (2) the existence of personal
and substantial interest on the part of the party raising the
[question of constitutionality]; (3) recourse to judicial review is
made at the earliest opportunity; and (4) the [question of
constitutionality] is the lis mota of the case."32
In this case, petitioners are challenging the constitutionality of the
tax deduction scheme provided in RA 9257 and the implementing
rules and regulations issued by the DSWD and the DOF.
Respondents, however, oppose the Petition on the ground that
there is no actual case or controversy. We do not agree with
respondents. An actual case or controversy exists when there is "a
conflict of legal rights" or "an assertion of opposite legal claims
susceptible of judicial resolution."33
The Petition must therefore show that "the governmental act
being challenged has a direct adverse effect on the individual
challenging it."34
In this case, the tax deduction scheme challenged by petitioners
has a direct adverse effect on them. Thus, it cannot be denied
that there exists an actual case or controversy.
The validity of the 20% senior citizen discount and tax deduction
scheme under RA 9257, as an exercise of police power of the
State, has already been settled in Carlos Superdrug Corporation.
Petitioners posit that the resolution of this case lies in the
determination of whether the legally mandated 20% senior citizen
discount is an exercise of police power or eminent domain. If it is
police power, no just compensation is warranted. But if it is
eminent domain, the tax deduction scheme is unconstitutional
because it is not a peso for peso reimbursement of the 20%
discount given to senior citizens. Thus, it constitutes taking of
private property without payment of just compensation. At the
outset, we note that this question has been settled in Carlos
Superdrug Corporation.35
In that case, we ruled:
Petitioners assert that Section 4(a) of the law is unconstitutional
because it constitutes deprivation of private property. Compelling
drugstore owners and establishments to grant the discount will
result in a loss of profit and capital because 1) drugstores impose
a mark-up of only 5% to 10% on branded medicines; and 2) the
law failed to provide a scheme whereby drugstores will be justly
compensated for the discount. Examining petitioners’ arguments,
it is apparent that what petitioners are ultimately questioning is the
validity of the tax deduction scheme as a reimbursement
mechanism for the twenty percent (20%) discount that they
extend to senior citizens. Based on the afore-stated DOF Opinion,
the tax deduction scheme does not fully reimburse petitioners for
the discount privilege accorded to senior citizens. This is because
the discount is treated as a deduction, a tax-deductible expense
that is subtracted from the gross income and results in a lower
taxable income. Stated otherwise, it is an amount that is allowed
by law to reduce the income prior to the application of the tax
rate to compute the amount of tax which is due. Being a tax
deduction, the discount does not reduce taxes owed on a peso
for peso basis but merely offers a fractional reduction in taxes
owed. Theoretically, the treatment of the discount as a deduction
reduces the net income of the private establishments concerned.
The discounts given would have entered the coffers and formed
part of the gross sales of the private establishments, were it not for
R.A. No. 9257. The permanent reduction in their total revenues is a
forced subsidy corresponding to the taking of private property for
public use or benefit. This constitutes compensable taking for
which petitioners would ordinarily become entitled to a just
compensation. Just compensation is defined as the full and fair
equivalent of the property taken from its owner by the
expropriator. The measure is not the taker’s gain but the owner’s
loss. The word just is used to intensify the meaning of the word
compensation, and to convey the idea that the equivalent to be
rendered for the property to be taken shall be real, substantial, full
and ample. A tax deduction does not offer full reimbursement of
the senior citizen discount. As such, it would not meet the
definition of just compensation. Having said that, this raises the
question of whether the State, in promoting the health and
welfare of a special group of citizens, can impose upon private
establishments the burden of partly subsidizing a government
program. The Court believes so. The Senior Citizens Act was
enacted primarily to maximize the contribution of senior citizens
to nation-building, and to grant benefits and privileges to them for
their improvement and well-being as the State considers them an
82
integral part of our society. The priority given to senior citizens finds
its basis in the Constitution as set forth in the law
itself.1âwphi1 Thus, the Act provides: SEC. 2. Republic Act No. 7432
is hereby amended to read as follows:
SECTION 1. Declaration of Policies and Objectives. — Pursuant to
Article XV, Section 4 of the Constitution, it is the duty of the family
to take care of its elderly members while the State may design
programs of social security for them. In addition to this, Section 10
in the Declaration of Principles and State Policies provides: "The
State shall provide social justice in all phases of national
development." Further, Article XIII, Section 11, provides: "The State
shall adopt an integrated and comprehensive approach to
health development which shall endeavor to make essential
goods, health and other social services available to all the people
at affordable cost. There shall be priority for the needs of the
underprivileged sick, elderly, disabled, women and children."
Consonant with these constitutional principles the following are
the declared policies of this Act:
xxx xxx xxx
(f) To recognize the important role of the private sector in the
improvement of the welfare of senior citizens and to actively seek
their partnership.
To implement the above policy, the law grants a twenty percent
discount to senior citizens for medical and dental services, and
diagnostic and laboratory fees; admission fees charged by
theaters, concert halls, circuses, carnivals, and other similar places
of culture, leisure and amusement; fares for domestic land, air and
sea travel; utilization of services in hotels and similar lodging
establishments, restaurants and recreation centers; and
purchases of medicines for the exclusive use or enjoyment of
senior citizens. As a form of reimbursement, the law provides that
business establishments extending the twenty percent discount to
senior citizens may claim the discount as a tax deduction. The law
is a legitimate exercise of police power which, similar to the power
of eminent domain, has general welfare for its object. Police
power is not capable of an exact definition, but has been
purposely veiled in general terms to underscore its
comprehensiveness to meet all exigencies and provide enough
room for an efficient and flexible response to conditions and
circumstances, thus assuring the greatest benefits. Accordingly, it
has been described as "the most essential, insistent and the least
limitable of powers, extending as it does to all the great public
needs." It is "[t]he power vested in the legislature by the
constitution to make, ordain, and establish all manner of
wholesome and reasonable laws, statutes, and ordinances, either
with penalties or without, not repugnant to the constitution, as
they shall judge to be for the good and welfare of the
commonwealth, and of the subjects of the same." For this reason,
when the conditions so demand as determined by the legislature,
property rights must bow to the primacy of police power because
property rights, though sheltered by due process, must yield to
general welfare. Police power as an attribute to promote the
common good would be diluted considerably if on the mere plea
of petitioners that they will suffer loss of earnings and capital, the
questioned provision is invalidated. Moreover, in the absence of
evidence demonstrating the alleged confiscatory effect of the
provision in question, there is no basis for its nullification in view of
the presumption of validity which every law has in its favor. Given
these, it is incorrect for petitioners to insist that the grant of the
senior citizen discount is unduly oppressive to their business,
because petitioners have not taken time to calculate correctly
and come up with a financial report, so that they have not been
able to show properly whether or not the tax deduction scheme
really works greatly to their disadvantage. In treating the discount
as a tax deduction, petitioners insist that they will incur losses
because, referring to the DOF Opinion, for every ₱1.00 senior
citizen discount that petitioners would give, P0.68 will be
shouldered by them as only P0.32 will be refunded by the
government by way of a tax deduction. To illustrate this point,
petitioner Carlos Super Drug cited the anti-hypertensive
maintenance drug Norvasc as an example. According to the
latter, it acquires Norvasc from the distributors at ₱37.57 per tablet,
and retails it at ₱39.60 (or at a margin of 5%). If it grants a 20%
discount to senior citizens or an amount equivalent to ₱7.92, then
it would have to sell Norvasc at ₱31.68 which translates to a loss
from capital of ₱5.89 per tablet. Even if the government will allow
a tax deduction, only ₱2.53 per tablet will be refunded and not
the full amount of the discount which is ₱7.92. In short, only 32% of
the 20% discount will be reimbursed to the drugstores. Petitioners’
computation is flawed. For purposes of reimbursement, the law
states that the cost of the discount shall be deducted from gross
income, the amount of income derived from all sources before
deducting allowable expenses, which will result in net income.
Here, petitioners tried to show a loss on a per transaction basis,
which should not be the case. An income statement, showing an
accounting of petitioners' sales, expenses, and net profit (or loss)
for a given period could have accurately reflected the effect of
the discount on their income. Absent any financial statement,
petitioners cannot substantiate their claim that they will be
operating at a loss should they give the discount. In addition, the
computation was erroneously based on the assumption that their
customers consisted wholly of senior citizens. Lastly, the 32% tax
rate is to be imposed on income, not on the amount of the
discount.
Furthermore, it is unfair for petitioners to criticize the law because
they cannot raise the prices of their medicines given the cutthroat
nature of the players in the industry. It is a business decision on the
part of petitioners to peg the mark-up at 5%. Selling the medicines
below acquisition cost, as alleged by petitioners, is merely a result
of this decision. Inasmuch as pricing is a property right, petitioners
cannot reproach the law for being oppressive, simply because
they cannot afford to raise their prices for fear of losing their
customers to competition. The Court is not oblivious of the retail
side of the pharmaceutical industry and the competitive pricing
component of the business. While the Constitution protects
property rights, petitioners must accept the realities of business
and the State, in the exercise of police power, can intervene in
the operations of a business which may result in an impairment of
property rights in the process.
Moreover, the right to property has a social dimension. While
Article XIII of the Constitution provides the precept for the
protection of property, various laws and jurisprudence,
particularly on agrarian reform and the regulation of contracts
and public utilities, continuously serve as x x x reminder[s] that the
right to property can be relinquished upon the command of the
State for the promotion of public good. Undeniably, the success
of the senior citizens program rests largely on the support imparted
by petitioners and the other private establishments concerned.
This being the case, the means employed in invoking the active
participation of the private sector, in order to achieve the purpose
or objective of the law, is reasonably and directly related. Without
sufficient proof that Section 4 (a) of R.A. No. 9257 is arbitrary, and
that the continued implementation of the same would be
unconscionably detrimental to petitioners, the Court will refrain
from quashing a legislative act.36 (Bold in the original; underline
supplied)
We, thus, found that the 20% discount as well as the tax deduction
scheme is a valid exercise of the police power of the State.
No compelling reason has been proffered to overturn, modify or
abandon the ruling in Carlos Superdrug Corporation.
Petitioners argue that we have previously ruled in Central Luzon
Drug Corporation37 that the 20% discount is an exercise of the
power of eminent domain, thus, requiring the payment of just
compensation. They urge us to re-examine our ruling in Carlos
Superdrug Corporation38 which allegedly reversed the ruling in
Central Luzon Drug Corporation.39
They also point out that Carlos Superdrug
Corporation40 recognized that the tax deduction scheme under
the assailed law does not provide for sufficient just compensation.
We agree with petitioners’ observation that there are statements
in Central Luzon Drug Corporation41 describing the 20% discount
as an exercise of the power of eminent domain, viz.:
[T]he privilege enjoyed by senior citizens does not come directly
from the State, but rather from the private establishments
concerned. Accordingly, the tax credit benefit granted to these
establishments can be deemed as their just compensation for
private property taken by the State for public use. The concept of
public use is no longer confined to the traditional notion of use by
the public, but held synonymous with public interest, public
benefit, public welfare, and public convenience. The discount
privilege to which our senior citizens are entitled is actually a
benefit enjoyed by the general public to which these citizens
belong. The discounts given would have entered the coffers and
formed part of the gross sales of the private establishments
concerned, were it not for RA 7432. The permanent reduction in
their total revenues is a forced subsidy corresponding to the taking
of private property for public use or benefit. As a result of the 20
percent discount imposed by RA 7432, respondent becomes
entitled to a just compensation. This term refers not only to the
issuance of a tax credit certificate indicating the correct amount
83
of the discounts given, but also to the promptness in its release.
Equivalent to the payment of property taken by the State, such
issuance — when not done within a reasonable time from the
grant of the discounts — cannot be considered as just
compensation. In effect, respondent is made to suffer the
consequences of being immediately deprived of its revenues
while awaiting actual receipt, through the certificate, of the
equivalent amount it needs to cope with the reduction in its
revenues. Besides, the taxation power can also be used as an
implement for the exercise of the power of eminent domain. Tax
measures are but "enforced contributions exacted on pain of
penal sanctions" and "clearly imposed for a public purpose." In
recent years, the power to tax has indeed become a most
effective tool to realize social justice, public welfare, and the
equitable distribution of wealth. While it is a declared
commitment under Section 1 of RA 7432, social justice "cannot be
invoked to trample on the rights of property owners who under our
Constitution and laws are also entitled to protection. The social
justice consecrated in our [C]onstitution [is] not intended to take
away rights from a person and give them to another who is not
entitled thereto." For this reason, a just compensation for income
that is taken away from respondent becomes necessary. It is in
the tax credit that our legislators find support to realize social
justice, and no administrative body can alter that fact. To put it
differently, a private establishment that merely breaks even —
without the discounts yet — will surely start to incur losses because
of such discounts. The same effect is expected if its mark-up is less
than 20 percent, and if all its sales come from retail purchases by
senior citizens. Aside from the observation we have already raised
earlier, it will also be grossly unfair to an establishment if the
discounts will be treated merely as deductions from either its gross
income or its gross sales.1âwphi1Operating at a loss through no
fault of its own, it will realize that the tax credit limitation under RR
2-94 is inutile, if not improper. Worse, profit-generating businesses
will be put in a better position if they avail themselves of tax credits
denied those that are losing, because no taxes are due from the
latter.42 (Italics in the original; emphasis supplied)
The above was partly incorporated in our ruling in Carlos
Superdrug Corporation43 when we stated preliminarily that—
Petitioners assert that Section 4(a) of the law is unconstitutional
because it constitutes deprivation of private property. Compelling
drugstore owners and establishments to grant the discount will
result in a loss of profit and capital because 1) drugstores impose
a mark-up of only 5% to 10% on branded medicines; and 2) the
law failed to provide a scheme whereby drugstores will be justly
compensated for the discount. Examining petitioners’ arguments,
it is apparent that what petitioners are ultimately questioning is the
validity of the tax deduction scheme as a reimbursement
mechanism for the twenty percent (20%) discount that they
extend to senior citizens. Based on the afore-stated DOF Opinion,
the tax deduction scheme does not fully reimburse petitioners for
the discount privilege accorded to senior citizens. This is because
the discount is treated as a deduction, a tax-deductible expense
that is subtracted from the gross income and results in a lower
taxable income. Stated otherwise, it is an amount that is allowed
by law to reduce the income prior to the application of the tax
rate to compute the amount of tax which is due. Being a tax
deduction, the discount does not reduce taxes owed on a peso
for peso basis but merely offers a fractional reduction in taxes
owed. Theoretically, the treatment of the discount as a deduction
reduces the net income of the private establishments concerned.
The discounts given would have entered the coffers and formed
part of the gross sales of the private establishments, were it not for
R.A. No. 9257. The permanent reduction in their total revenues is a
forced subsidy corresponding to the taking of private property for
public use or benefit. This constitutes compensable taking for
which petitioners would ordinarily become entitled to a just
compensation. Just compensation is defined as the full and fair
equivalent of the property taken from its owner by the
expropriator. The measure is not the taker’s gain but the owner’s
loss. The word just is used to intensify the meaning of the word
compensation, and to convey the idea that the equivalent to be
rendered for the property to be taken shall be real, substantial, full
and ample. A tax deduction does not offer full reimbursement of
the senior citizen discount. As such, it would not meet the
definition of just compensation. Having said that, this raises the
question of whether the State, in promoting the health and
welfare of a special group of citizens, can impose upon private
establishments the burden of partly subsidizing a government
program. The Court believes so.44
This, notwithstanding, we went on to rule in Carlos Superdrug
Corporation45 that the 20% discount and tax deduction scheme is
a valid exercise of the police power of the State. The present case,
thus, affords an opportunity for us to clarify the above-quoted
statements in Central Luzon Drug Corporation46 and Carlos
Superdrug Corporation.47
First, we note that the above-quoted disquisition on eminent
domain in Central Luzon Drug Corporation48 is obiter dicta and,
thus, not binding precedent. As stated earlier, in Central Luzon
Drug Corporation,49 we ruled that the BIR acted ultra vires when it
effectively treated the 20% discount as a tax deduction, under
Sections 2.i and 4 of RR No. 2-94, despite the clear wording of the
previous law that the same should be treated as a tax credit. We
were, therefore, not confronted in that case with the issue as to
whether the 20% discount is an exercise of police power or
eminent domain. Second, although we adverted to Central Luzon
Drug Corporation50 in our ruling in Carlos Superdrug
Corporation,51 this referred only to preliminary matters. A fair
reading of Carlos Superdrug Corporation52 would show that we
categorically ruled therein that the 20% discount is a valid exercise
of police power. Thus, even if the current law, through its tax
deduction scheme (which abandoned the tax credit scheme
under the previous law), does not provide for a peso for peso
reimbursement of the 20% discount given by private
establishments, no constitutional infirmity obtains because, being
a valid exercise of police power, payment of just compensation is
not warranted. We have carefully reviewed the basis of our ruling
in Carlos Superdrug Corporation53 and we find no cogent reason
to overturn, modify or abandon it. We also note that petitioners’
arguments are a mere reiteration of those raised and resolved in
Carlos Superdrug Corporation.54 Thus, we sustain Carlos Superdrug
Corporation.55
Nonetheless, we deem it proper, in what follows, to amplify our
explanation in Carlos Superdrug Corporation56 as to why the 20%
discount is a valid exercise of police power and why it may not,
under the specific circumstances of this case, be considered as
an exercise of the power of eminent domain contrary to the obiter
in Central Luzon Drug Corporation.57
Police power versus eminent domain.
Police power is the inherent power of the State to regulate or to
restrain the use of liberty and property for public welfare.58
The only limitation is that the restriction imposed should be
reasonable, not oppressive.59
In other words, to be a valid exercise of police power, it must have
a lawful subject or objective and a lawful method of
accomplishing the goal.60
Under the police power of the State, "property rights of individuals
may be subjected to restraints and burdens in order to fulfill the
objectives of the government."61
The State "may interfere with personal liberty, property, lawful
businesses and occupations to promote the general welfare [as
long as] the interference [is] reasonable and not arbitrary."62
Eminent domain, on the other hand, is the inherent power of the
State to take or appropriate private property for public use.63
The Constitution, however, requires that private property shall not
be taken without due process of law and the payment of just
compensation.64
Traditional distinctions exist between police power and eminent
domain. In the exercise of police power, a property right is
impaired by regulation,65 or the use of property is merely
prohibited, regulated or restricted66 to promote public welfare. In
such cases, there is no compensable taking, hence, payment of
just compensation is not required. Examples of these regulations
are property condemned for being noxious or intended for
noxious purposes (e.g., a building on the verge of collapse to be
demolished for public safety, or obscene materials to be
destroyed in the interest of public morals)67 as well as zoning
ordinances prohibiting the use of property for purposes injurious to
the health, morals or safety of the community (e.g., dividing a
city’s territory into residential and industrial areas).68
It has, thus, been observed that, in the exercise of police power
(as distinguished from eminent domain), although the regulation
84
affects the right of ownership, none of the bundle of rights which
constitute ownership is appropriated for use by or for the benefit
of the public.69
On the other hand, in the exercise of the power of eminent
domain, property interests are appropriated and applied to some
public purpose which necessitates the payment of just
compensation therefor. Normally, the title to and possession of the
property are transferred to the expropriating authority. Examples
include the acquisition of lands for the construction of public
highways as well as agricultural lands acquired by the
government under the agrarian reform law for redistribution to
qualified farmer beneficiaries. However, it is a settled rule that the
acquisition of title or total destruction of the property is not
essential for "taking" under the power of eminent domain to be
present.70
Examples of these include establishment of easements such as
where the land owner is perpetually deprived of his proprietary
rights because of the hazards posed by electric transmission lines
constructed above his property71 or the compelled
interconnection of the telephone system between the
government and a private company.72
In these cases, although the private property owner is not
divested of ownership or possession, payment of just
compensation is warranted because of the burden placed on the
property for the use or benefit of the public.
The 20% senior citizen discount is an exercise of police power.
It may not always be easy to determine whether a challenged
governmental act is an exercise of police power or eminent
domain. The very nature of police power as elastic and responsive
to various social conditions73 as well as the evolving meaning and
scope of public use74 and just compensation75 in eminent domain
evinces that these are not static concepts. Because of the
exigencies of rapidly changing times, Congress may be
compelled to adopt or experiment with different measures to
promote the general welfare which may not fall squarely within
the traditionally recognized categories of police power and
eminent domain. The judicious approach, therefore, is to look at
the nature and effects of the challenged governmental act and
decide, on the basis thereof, whether the act is the exercise of
police power or eminent domain. Thus, we now look at the nature
and effects of the 20% discount to determine if it constitutes an
exercise of police power or eminent domain. The 20% discount is
intended to improve the welfare of senior citizens who, at their
age, are less likely to be gainfully employed, more prone to
illnesses and other disabilities, and, thus, in need of subsidy in
purchasing basic commodities. It may not be amiss to mention
also that the discount serves to honor senior citizens who
presumably spent the productive years of their lives on
contributing to the development and progress of the nation. This
distinct cultural Filipino practice of honoring the elderly is an
integral part of this law. As to its nature and effects, the 20%
discount is a regulation affecting the ability of private
establishments to price their products and services relative to a
special class of individuals, senior citizens, for which the
Constitution affords preferential concern.76
In turn, this affects the amount of profits or income/gross sales that
a private establishment can derive from senior citizens. In other
words, the subject regulation affects the pricing, and, hence, the
profitability of a private establishment. However, it does not
purport to appropriate or burden specific properties, used in the
operation or conduct of the business of private establishments, for
the use or benefit of the public, or senior citizens for that matter,
but merely regulates the pricing of goods and services relative to,
and the amount of profits or income/gross sales that such private
establishments may derive from, senior citizens. The subject
regulation may be said to be similar to, but with substantial
distinctions from, price control or rate of return on investment
control laws which are traditionally regarded as police power
measures.77
These laws generally regulate public utilities or
industries/enterprises imbued with public interest in order to
protect consumers from exorbitant or unreasonable pricing as
well as temper corporate greed by controlling the rate of return
on investment of these corporations considering that they have a
monopoly over the goods or services that they provide to the
general public. The subject regulation differs therefrom in that (1)
the discount does not prevent the establishments from adjusting
the level of prices of their goods and services, and (2) the discount
does not apply to all customers of a given establishment but only
to the class of senior citizens. Nonetheless, to the degree material
to the resolution of this case, the 20% discount may be properly
viewed as belonging to the category of price regulatory
measures which affect the profitability of establishments
subjected thereto. On its face, therefore, the subject regulation is
a police power measure. The obiter in Central Luzon Drug
Corporation,78 however, describes the 20% discount as an
exercise of the power of eminent domain and the tax credit,
under the previous law, equivalent to the amount of discount
given as the just compensation therefor. The reason is that (1) the
discount would have formed part of the gross sales of the
establishment were it not for the law prescribing the 20% discount,
and (2) the permanent reduction in total revenues is a forced
subsidy corresponding to the taking of private property for public
use or benefit. The flaw in this reasoning is in its premise. It
presupposes that the subject regulation, which impacts the
pricing and, hence, the profitability of a private establishment,
automatically amounts to a deprivation of property without due
process of law. If this were so, then all price and rate of return on
investment control laws would have to be invalidated because
they impact, at some level, the regulated establishment’s profits
or income/gross sales, yet there is no provision for payment of just
compensation. It would also mean that overnment cannot set
price or rate of return on investment limits, which reduce the profits
or income/gross sales of private establishments, if no just
compensation is paid even if the measure is not confiscatory. The
obiter is, thus, at odds with the settled octrine that the State can
employ police power measures to regulate the pricing of goods
and services, and, hence, the profitability of business
establishments in order to pursue legitimate State objectives for
the common good, provided that the regulation does not go too
far as to amount to "taking."79
In City of Manila v. Laguio, Jr.,80 we recognized that— x x x a taking
also could be found if government regulation of the use of
property went "too far." When regulation reaches a certain
magnitude, in most if not in all cases there must be an exercise of
eminent domain and compensation to support the act. While
property may be regulated to a certain extent, if regulation goes
too far it will be recognized as a taking. No formula or rule can be
devised to answer the questions of what is too far and when
regulation becomes a taking. In Mahon, Justice Holmes
recognized that it was "a question of degree and therefore
cannot be disposed of by general propositions." On many other
occasions as well, the U.S. Supreme Court has said that the issue
of when regulation constitutes a taking is a matter of considering
the facts in each case. The Court asks whether justice and fairness
require that the economic loss caused by public action must be
compensated by the government and thus borne by the public
as a whole, or whether the loss should remain concentrated on
those few persons subject to the public action.81
The impact or effect of a regulation, such as the one under
consideration, must, thus, be determined on a case-to-case basis.
Whether that line between permissible regulation under police
power and "taking" under eminent domain has been crossed
must, under the specific circumstances of this case, be subject to
proof and the one assailing the constitutionality of the regulation
carries the heavy burden of proving that the measure is
unreasonable, oppressive or confiscatory. The time-honored rule
is that the burden of proving the unconstitutionality of a law rests
upon the one assailing it and "the burden becomes heavier when
police power is at issue."82
The 20% senior citizen discount has not been shown to be
unreasonable, oppressive or confiscatory.
In Alalayan v. National Power Corporation,83 petitioners, who
were franchise holders of electric plants, challenged the validity
of a law limiting their allowable net profits to no more than 12%
per annum of their investments plus two-month operating
expenses. In rejecting their plea, we ruled that, in an earlier case,
it was found that 12% is a reasonable rate of return and that
petitioners failed to prove that the aforesaid rate is confiscatory in
view of the presumption of constitutionality.84
We adopted a similar line of reasoning in Carlos Superdrug
Corporation85 when we ruled that petitioners therein failed to
prove that the 20% discount is arbitrary, oppressive or
confiscatory. We noted that no evidence, such as a financial
report, to establish the impact of the 20% discount on the overall
profitability of petitioners was presented in order to show that they
would be operating at a loss due to the subject regulation or that
the continued implementation of the law would be
85
unconscionably detrimental to the business operations of
petitioners. In the case at bar, petitioners proceeded with a
hypothetical computation of the alleged loss that they will suffer
similar to what the petitioners in Carlos Superdrug
Corporation86 did. Petitioners went directly to this Court without
first establishing the factual bases of their claims. Hence, the
present recourse must, likewise, fail. Because all laws enjoy the
presumption of constitutionality, courts will uphold a law’s validity
if any set of facts may be conceived to sustain it.87
On its face, we find that there are at least two conceivable bases
to sustain the subject regulation’s validity absent clear and
convincing proof that it is unreasonable, oppressive or
confiscatory. Congress may have legitimately concluded that
business establishments have the capacity to absorb a decrease
in profits or income/gross sales due to the 20% discount without
substantially affecting the reasonable rate of return on their
investments considering (1) not all customers of a business
establishment are senior citizens and (2) the level of its profit
margins on goods and services offered to the general public.
Concurrently, Congress may have, likewise, legitimately
concluded that the establishments, which will be required to
extend the 20% discount, have the capacity to revise their pricing
strategy so that whatever reduction in profits or income/gross
sales that they may sustain because of sales to senior citizens, can
be recouped through higher mark-ups or from other products not
subject of discounts. As a result, the discounts resulting from sales
to senior citizens will not be confiscatory or unduly oppressive. In
sum, we sustain our ruling in Carlos Superdrug Corporation88 that
the 20% senior citizen discount and tax deduction scheme are
valid exercises of police power of the State absent a clear
showing that it is arbitrary, oppressive or confiscatory.
Conclusion
In closing, we note that petitioners hypothesize, consistent with our
previous ratiocinations, that the discount will force establishments
to raise their prices in order to compensate for its impact on
overall profits or income/gross sales. The general public, or those
not belonging to the senior citizen class, are, thus, made to
effectively shoulder the subsidy for senior citizens. This, in
petitioners’ view, is unfair.
As already mentioned, Congress may be reasonably assumed to
have foreseen this eventuality. But, more importantly, this goes
into the wisdom, efficacy and expediency of the subject law
which is not proper for judicial review. In a way, this law pursues its
social equity objective in a non-traditional manner unlike past and
existing direct subsidy programs of the government for the poor
and marginalized sectors of our society. Verily, Congress must be
given sufficient leeway in formulating welfare legislations given
the enormous challenges that the government faces relative to,
among others, resource adequacy and administrative capability
in implementing social reform measures which aim to protect and
uphold the interests of those most vulnerable in our society. In the
process, the individual, who enjoys the rights, benefits and
privileges of living in a democratic polity, must bear his share in
supporting measures intended for the common good. This is only
fair. In fine, without the requisite showing of a clear and
unequivocal breach of the Constitution, the validity of the
assailed law must be sustained.
Refutation of the Dissent
The main points of Justice Carpio’s Dissent may be summarized as
follows: (1) the discussion on eminent domain in Central Luzon
Drug Corporation89 is not obiter dicta ; (2) allowable taking, in
police power, is limited to property that is destroyed or placed
outside the commerce of man for public welfare; (3) the amount
of mandatory discount is private property within the ambit of
Article III, Section 990 of the Constitution; and (4) the permanent
reduction in a private establishment’s total revenue, arising from
the mandatory discount, is a taking of private property for public
use or benefit, hence, an exercise of the power of eminent
domain requiring the payment of just compensation. I We
maintain that the discussion on eminent domain in Central Luzon
Drug Corporation91 is obiter dicta. As previously discussed, in
Central Luzon Drug Corporation,92 the BIR, pursuant to Sections 2.i
and 4 of RR No. 2-94, treated the senior citizen discount in the
previous law, RA 7432, as a tax deduction instead of a tax credit
despite the clear provision in that law which stated –
SECTION 4. Privileges for the Senior Citizens. – The senior citizens losses or operate at a loss due to the effects of the assailed law.
shall be entitled to the following: They came directly to this Court and provided a hypothetical

a) The grant of twenty percent (20%) discount from all
establishments relative to utilization of transportation
services, hotels and similar lodging establishment,
restaurants and recreation centers and purchase of
medicines anywhere in the country: Provided, That
private establishments may claim the cost as tax credit;
(Emphasis supplied)
Thus, the Court ruled that the subject revenue regulation violated
the law, viz:
The 20 percent discount required by the law to be given to senior
citizens is a tax credit, not merely a tax deduction from the gross
income or gross sale of the establishment concerned. A tax credit
is used by a private establishment only after the tax has been
computed; a tax deduction, before the tax is computed. RA 7432
unconditionally grants a tax credit to all covered entities. Thus, the
provisions of the revenue regulation that withdraw or modify such
grant are void. Basic is the rule that administrative regulations
cannot amend or revoke the law.93
As can be readily seen, the discussion on eminent domain was
not necessary in order to arrive at this conclusion. All that was
needed was to point out that the revenue regulation
contravened the law which it sought to implement. And,
precisely, this was done in Central Luzon Drug Corporation94 by
comparing the wording of the previous law vis-à-vis the revenue
regulation; employing the rules of statutory construction; and
applying the settled principle that a regulation cannot amend the
law it seeks to implement. A close reading of Central Luzon Drug
Corporation95 would show that the Court went on to state that the
tax credit "can be deemed" as just compensation only to explain
why the previous law provides for a tax credit instead of a tax
deduction. The Court surmised that the tax credit was a form of
just compensation given to the establishments covered by the
20% discount. However, the reason why the previous law provided
for a tax credit and not a tax deduction was not necessary to
resolve the issue as to whether the revenue regulation
contravenes the law. Hence, the discussion on eminent domain
is obiter dicta.
86
computation of the loss they would allegedly suffer due to the
operation of the assailed law. The central premise of the Dissent’s
argument that the 20% discount results in a permanent reduction
in profits or income/gross sales, or forces a business establishment
to operate at a loss is, thus, wholly unsupported by competent
evidence. To be sure, the Court can invalidate a law which, on its
face, is arbitrary, oppressive or confiscatory.97
But this is not the case here.
In the case at bar, evidence is indispensable before a
determination of a constitutional violation can be made because
of the following reasons. First, the assailed law, by imposing the
senior citizen discount, does not take any of the properties used
by a business establishment like, say, the land on which a
manufacturing plant is constructed or the equipment being used
to produce goods or services. Second, rather than taking specific
properties of a business establishment, the senior citizen discount
law merely regulates the prices of the goods or services being sold
to senior citizens by mandating a 20% discount. Thus, if a product
is sold at ₱10.00 to the general public, then it shall be sold at ₱8.00
( i.e., ₱10.00 less 20%) to senior citizens. Note that the law does not
impose at what specific price the product shall be sold, only that
a 20% discount shall be given to senior citizens based on the price
set by the business establishment. A business establishment is, thus,
free to adjust the prices of the goods or services it provides to the
general public. Accordingly, it can increase the price of the
above product to ₱20.00 but is required to sell it at ₱16.00 (i.e. ,
₱20.00 less 20%) to senior citizens. Third, because the law impacts
the prices of the goods or services of a particular establishment
relative to its sales to senior citizens, its profits or income/gross sales
are affected. The extent of the impact would, however, depend
on the profit margin of the business establishment on a particular
good or service. If a product costs ₱5.00 to produce and is sold at
₱10.00, then the profit98 is ₱5.0099 or a profit margin100 of 50%.101
Under the assailed law, the aforesaid product would have to be
sold at ₱8.00 to senior citizens yet the business would still earn
₱3.00102 or a 30%103 profit margin. On the other hand, if the
product costs ₱9.00 to produce and is required to be sold at ₱8.00
to senior citizens, then the business would experience a loss of
₱1.00.104

A court, in resolving cases before it, may look into the possible
But note that since not all customers of a business establishment
purposes or reasons that impelled the enactment of a particular
are senior citizens, the business establishment may continue to
statute or legal provision. However, statements made relative
earn ₱1.00 from non-senior citizens which, in turn, can offset any
thereto are not always necessary in resolving the actual
loss arising from sales to senior citizens.
controversies presented before it. This was the case in Central
Luzon Drug Corporation96resulting in that unfortunate statement
that the tax credit "can be deemed" as just compensation. This, in Fourth, when the law imposes the 20% discount in favor of senior
turn, led to the erroneous conclusion, by deductive reasoning, citizens, it does not prevent the business establishment from
that the 20% discount is an exercise of the power of eminent revising its pricing strategy.
domain. The Dissent essentially adopts this theory and reasoning
which, as will be shown below, is contrary to settled principles in
By revising its pricing strategy, a business establishment can
police power and eminent domain analysis. II The Dissent
recoup any reduction of profits or income/gross sales which would
discusses at length the doctrine on "taking" in police power which
otherwise arise from the giving of the 20% discount. To illustrate,
occurs when private property is destroyed or placed outside the
suppose A has two customers: X, a senior citizen, and Y, a non-
commerce of man. Indeed, there is a whole class of police power
senior citizen. Prior to the law, A sells his products at ₱10.00 a piece
measures which justify the destruction of private property in order
to X and Y resulting in income/gross sales of ₱20.00 (₱10.00 +
to preserve public health, morals, safety or welfare. As earlier
₱10.00). With the passage of the law, A must now sell his product
mentioned, these would include a building on the verge of
to X at ₱8.00 (i.e., ₱10.00 less 20%) so that his income/gross sales
collapse or confiscated obscene materials as well as those
would be ₱18.00 (₱8.00 + ₱10.00) or lower by ₱2.00. To prevent this
mentioned by the Dissent with regard to property used in violating
from happening, A decides to increase the price of his products
a criminal statute or one which constitutes a nuisance. In such
to ₱11.11 per piece. Thus, he sells his product to X at ₱8.89 (i.e. ,
cases, no compensation is required. However, it is equally true
₱11.11 less 20%) and to Y at ₱11.11. As a result, his income/gross
that there is another class of police power measures which do not
sales would still be ₱20.00105 (₱8.89 + ₱11.11). The capacity, then,
involve the destruction of private property but merely regulate its
of business establishments to revise their pricing strategy makes it
use. The minimum wage law, zoning ordinances, price control
possible for them not to suffer any reduction in profits or
laws, laws regulating the operation of motels and hotels, laws
income/gross sales, or, in the alternative, mitigate the reduction
limiting the working hours to eight, and the like would fall under
of their profits or income/gross sales even after the passage of the
this category. The examples cited by the Dissent, likewise, fall
law. In other words, business establishments have the capacity to
under this category: Article 157 of the Labor Code, Sections 19
adjust their prices so that they may remain profitable even under
and 18 of the Social Security Law, and Section 7 of the Pag-IBIG
the operation of the assailed law.
Fund Law. These laws merely regulate or, to use the term of the
Dissent, burden the conduct of the affairs of business
establishments. In such cases, payment of just compensation is The Dissent, however, states that – The explanation by the majority
not required because they fall within the sphere of permissible that private establishments can always increase their prices to
police power measures. The senior citizen discount law falls under recover the mandatory discount will only encourage private
this latter category. III The Dissent proceeds from the theory that establishments to adjust their prices upwards to the prejudice of
the permanent reduction of profits or income/gross sales, due to customers who do not enjoy the 20% discount. It was likewise
the 20% discount, is a "taking" of private property for public suggested that if a company increases its prices, despite the
purpose without payment of just compensation. At the outset, it application of the 20% discount, the establishment becomes
must be emphasized that petitioners never presented any more profitable than it was before the implementation of R.A.
evidence to establish that they were forced to suffer enormous 7432. Such an economic justification is self-defeating, for more
consumers will suffer from the price increase than will benefit from
the 20% discount. Even then, such ability to increase prices cannot
legally validate a violation of the eminent domain clause.106
But, if it is possible that the business establishment, by adjusting its
prices, will suffer no reduction in its profits or income/gross sales (or
suffer some reduction but continue to operate profitably) despite
giving the discount, what would be the basis to strike down the
law? If it is possible that the business establishment, by adjusting its
prices, will not be unduly burdened, how can there be a finding
that the assailed law is an unconstitutional exercise of police
power or eminent domain? That there may be a burden placed
on business establishments or the consuming public as a result of
the operation of the assailed law is not, by itself, a ground to
declare it unconstitutional for this goes into the wisdom and
expediency of the law.
The cost of most, if not all, regulatory measures of the government
on business establishments is ultimately passed on to the
consumers but that, by itself, does not justify the wholesale
nullification of these measures. It is a basic postulate of our
democratic system of government that the Constitution is a social
contract whereby the people have surrendered their sovereign
powers to the State for the common good.107
All persons may be burdened by regulatory measures intended
for the common good or to serve some important governmental
interest, such as protecting or improving the welfare of a special
class of people for which the Constitution affords preferential
concern. Indubitably, the one assailing the law has the heavy
burden of proving that the regulation is unreasonable, oppressive
or confiscatory, or has gone "too far" as to amount to a "taking."
Yet, here, the Dissent would have this Court nullify the law without
any proof of such nature.
Further, this Court is not the proper forum to debate the economic
theories or realities that impelled Congress to shift from the tax
credit to the tax deduction scheme. It is not within our power or
competence to judge which scheme is more or less burdensome
to business establishments or the consuming public and,
thereafter, to choose which scheme the State should use or
pursue. The shift from the tax credit to tax deduction scheme is a
policy determination by Congress and the Court will respect it for
as long as there is no showing, as here, that the subject regulation
has transgressed constitutional limitations. Unavoidably, the lack
of evidence constrains the Dissent to rely on speculative and
hypothetical argumentation when it states that the 20% discount
is a significant amount and not a minimal loss (which erroneously
assumes that the discount automatically results in a loss when it is
possible that the profit margin is greater than 20% and/or the
pricing strategy can be revised to prevent or mitigate any
reduction in profits or income/gross sales as illustrated
above),108 and not all private establishments make a 20% profit
margin (which conversely implies that there are those who make
more and, thus, would not be greatly affected by this
regulation).109
In fine, because of the possible scenarios discussed above, we
cannot assume that the 20% discount results in a permanent
reduction in profits or income/gross sales, much less that business
establishments are forced to operate at a loss under the assailed
law. And, even if we gratuitously assume that the 20% discount
results in some degree of reduction in profits or income/gross sales,
we cannot assume that such reduction is arbitrary, oppressive or
confiscatory. To repeat, there is no actual proof to back up this
claim, and it could be that the loss suffered by a business
establishment was occasioned through its fault or negligence in
not adapting to the effects of the assailed law. The law uniformly
applies to all business establishments covered thereunder. There
is, therefore, no unjust discrimination as the aforesaid business
establishments are faced with the same constraints. The necessity
of proof is all the more pertinent in this case because, as similarly
observed by Justice Velasco in his Concurring Opinion, the law
has been in operation for over nine years now. However, the grim
picture painted by petitioners on the unconscionable losses to be
indiscriminately suffered by business establishments, which should
have led to the closure of numerous business establishments, has
not come to pass. Verily, we cannot invalidate the assailed law
based on assumptions and conjectures. Without adequate proof,
the presumption of constitutionality must prevail. IV At this
juncture, we note that the Dissent modified its original arguments
by including a new paragraph, to wit:
Section 9, Article III of the 1987 Constitution speaks of private
property without any distinction. It does not state that there should
be profit before the taking of property is subject to just
compensation. The private property referred to for purposes of
taking could be inherited, donated, purchased, mortgaged, or as
87
in this case, part of the gross sales of private establishments. They
are all private property and any taking should be attended by
corresponding payment of just compensation. The 20% discount
granted to senior citizens belong to private establishments,
whether these establishments make a profit or suffer a loss. In fact,
the 20% discount applies to non-profit establishments like country,
social, or golf clubs which are open to the public and not only for
exclusive membership. The issue of profit or loss to the
establishments is immaterial.110
Two things may be said of this argument. First, it contradicts the
rest of the arguments of the Dissent. After it states that the issue of
profit or loss is immaterial, the Dissent proceeds to argue that the
20% discount is not a minimal loss111 and that the 20% discount
forces business establishments to operate at a loss.112
Even the obiter in Central Luzon Drug Corporation,113 which the
Dissent essentially adopts and relies on, is premised on the
permanent reduction of total revenues and the loss that business
establishments will be forced to suffer in arguing that the 20%
discount constitutes a "taking" under the power of eminent
domain. Thus, when the Dissent now argues that the issue of profit
or loss is immaterial, it contradicts itself because it later argues, in
order to justify that there is a "taking" under the power of eminent
domain in this case, that the 20% discount forces business
establishments to suffer a significant loss or to operate at a loss.
Second, this argument suffers from the same flaw as the Dissent's
original arguments. It is an erroneous characterization of the 20%
discount. According to the Dissent, the 20% discount is part of the
gross sales and, hence, private property belonging to business
establishments. However, as previously discussed, the 20%
discount is not private property actually owned and/or used by
the business establishment. It should be distinguished from
properties like lands or buildings actually used in the operation of
a business establishment which, if appropriated for public use,
would amount to a "taking" under the power of eminent domain.
Instead, the 20% discount is a regulatory measure which impacts
the pricing and, hence, the profitability of business establishments.
At the time the discount is imposed, no particular property of the
business establishment can be said to be "taken." That is, the State
does not acquire or take anything from the business establishment
in the way that it takes a piece of private land to build a public
road. While the 20% discount may form part of the potential profits
or income/gross sales114 of the business establishment, as similarly
characterized by Justice Bersamin in his Concurring Opinion,
potential profits or income/gross sales are not private property,
specifically cash or money, already belonging to the business
establishment. They are a mere expectancy because they are
potential fruits of the successful conduct of the business. Prior to
the sale of goods or services, a business establishment may be
subject to State regulations, such as the 20% senior citizen
discount, which may impact the level or amount of profits or
income/gross sales that can be generated by such establishment.
For this reason, the validity of the discount is to be determined
based on its overall effects on the operations of the business
establishment.
Again, as previously discussed, the 20% discount does not
automatically result in a 20% reduction in profits, or, to align it with
the term used by the Dissent, the 20% discount does not mean
that a 20% reduction in gross sales necessarily results. Because (1)
the profit margin of a product is not necessarily less than 20%, (2)
not all customers of a business establishment are senior citizens,
and (3) the establishment may revise its pricing strategy, such
reduction in profits or income/gross sales may be prevented or, in
the alternative, mitigated so that the business establishment
continues to operate profitably. Thus, even if we gratuitously
assume that some degree of reduction in profits or income/gross
sales occurs because of the 20% discount, it does not follow that
the regulation is unreasonable, oppressive or confiscatory
because the business establishment may make the necessary
adjustments to continue to operate profitably. No evidence was
presented by petitioners to show otherwise. In fact, no evidence
was presented by petitioners at all. Justice Leonen, in his
Concurring and Dissenting Opinion, characterizes "profits" (or
income/gross sales) as an inchoate right. Another way to view it,
as stated by Justice Velasco in his Concurring Opinion, is that the
business establishment merely has a right to profits. The
Constitution adverts to it as the right of an enterprise to a
reasonable return on investment.115
Undeniably, this right, like any other right, may be regulated under
the police power of the State to achieve important governmental
objectives like protecting the interests and improving the welfare
of senior citizens. It should be noted though that potential profits
or income/gross sales are relevant in police power and eminent
domain analyses because they may, in appropriate cases, serve
as an indicia when a regulation has gone "too far" as to amount
to a "taking" under the power of eminent domain. When the
deprivation or reduction of profits or income/gross sales is shown
to be unreasonable, oppressive or confiscatory, then the
challenged governmental regulation may be nullified for being a
"taking" under the power of eminent domain. In such a case, it is
not profits or income/gross sales which are actually taken and
appropriated for public use. Rather, when the regulation causes
an establishment to incur losses in an unreasonable, oppressive or
confiscatory manner, what is actually taken is capital and the
right of the business establishment to a reasonable return on
investment. If the business losses are not halted because of the
continued operation of the regulation, this eventually leads to the
destruction of the business and the total loss of the capital
invested therein. But, again, petitioners in this case failed to prove
that the subject regulation is unreasonable, oppressive or
confiscatory.
V.
The Dissent further argues that we erroneously used price and rate
of return on investment control laws to justify the senior citizen
discount law. According to the Dissent, only profits from industries
imbued with public interest may be regulated because this is a
condition of their franchises. Profits of establishments without
franchises cannot be regulated permanently because there is no
law regulating their profits. The Dissent concludes that the
permanent reduction of total revenues or gross sales of business
establishments without franchises is a taking of private property
under the power of eminent domain. In making this argument, it
is unfortunate that the Dissent quotes only a portion of the
ponencia – The subject regulation may be said to be similar to,
but with substantial distinctions from, price control or rate of return
on investment control laws which are traditionally regarded as
police power measures. These laws generally regulate public
utilities or industries/enterprises imbued with public interest in order
to protect consumers from exorbitant or unreasonable pricing as
well as temper corporate greed by controlling the rate of return
on investment of these corporations considering that they have a
monopoly over the goods or services that they provide to the
general public. The subject regulation differs therefrom in that (1)
the discount does not prevent the establishments from adjusting
the level of prices of their goods and services, and (2) the discount
does not apply to all customers of a given establishment but only
to the class of senior citizens. x x x116
The above paragraph, in full, states –
The subject regulation may be said to be similar to, but with
substantial distinctions from, price control or rate of return on
investment control laws which are traditionally regarded as police
power measures. These laws generally regulate public utilities or
industries/enterprises imbued with public interest in order to
protect consumers from exorbitant or unreasonable pricing as
well as temper corporate greed by controlling the rate of return
on investment of these corporations considering that they have a
monopoly over the goods or services that they provide to the
general public. The subject regulation differs therefrom in that (1)
the discount does not prevent the establishments from adjusting
the level of prices of their goods and services, and (2) the discount
does not apply to all customers of a given establishment but only
to the class of senior citizens.
Nonetheless, to the degree material to the resolution of this case,
the 20% discount may be properly viewed as belonging to the
category of price regulatory measures which affects the
profitability of establishments subjected thereto. (Emphasis
supplied)
The point of this paragraph is to simply show that the State has, in
the past, regulated prices and profits of business establishments.
In other words, this type of regulatory measures is traditionally
recognized as police power measures so that the senior citizen
discount may be considered as a police power measure as well.
What is more, the substantial distinctions between price and rate
of return on investment control laws vis-à-vis the senior citizen
discount law provide greater reason to uphold the validity of the
senior citizen discount law. As previously discussed, the ability to
adjust prices allows the establishment subject to the senior citizen
discount to prevent or mitigate any reduction of profits or
income/gross sales arising from the giving of the discount. In
contrast, establishments subject to price and rate of return on
investment control laws cannot adjust prices accordingly.
Certainly, there is no intention to say that price and rate of return
88
on investment control laws are the justification for the senior citizen
discount law. Not at all. The justification for the senior citizen
discount law is the plenary powers of Congress. The legislative
power to regulate business establishments is broad and covers a
wide array of areas and subjects. It is well within Congress’
legislative powers to regulate the profits or income/gross sales of
industries and enterprises, even those without franchises. For what
are franchises but mere legislative enactments? There is nothing
in the Constitution that prohibits Congress from regulating the
profits or income/gross sales of industries and enterprises without
franchises. On the contrary, the social justice provisions of the
Constitution enjoin the State to regulate the "acquisition,
ownership, use, and disposition" of property and its increments.117
This may cover the regulation of profits or income/gross sales of all
businesses, without qualification, to attain the objective of
diffusing wealth in order to protect and enhance the right of all
the people to human dignity.118
Thus, under the social justice policy of the Constitution, business
establishments may be compelled to contribute to uplifting the
plight of vulnerable or marginalized groups in our society provided
that the regulation is not arbitrary, oppressive or confiscatory, or is
not in breach of some specific constitutional limitation. When the
Dissent, therefore, states that the "profits of private establishments
which are non-franchisees cannot be regulated permanently,
and there is no such law regulating their profits permanently,"119 it
is assuming what it ought to prove. First, there are laws which, in
effect, permanently regulate profits or income/gross sales of
establishments without franchises, and RA 9257 is one such law.
And, second, Congress can regulate such profits or income/gross
sales because, as previously noted, there is nothing in the
Constitution to prevent it from doing so. Here, again, it must be
emphasized that petitioners failed to present any proof to show
that the effects of the assailed law on their operations has been
unreasonable, oppressive or confiscatory. The permanent
regulation of profits or income/gross sales of business
establishments, even those without franchises, is not as
uncommon as the Dissent depicts it to be. For instance, the
minimum wage law allows the State to set the minimum wage of
employees in a given region or geographical area. Because of
the added labor costs arising from the minimum wage, a
permanent reduction of profits or income/gross sales would result,
assuming that the employer does not increase the prices of his
goods or services. To illustrate, suppose it costs a company ₱5.00
to produce a product and it sells the same at ₱10.00 with a 50%
profit margin. Later, the State increases the minimum wage. As a
result, the company incurs greater labor costs so that it now costs
₱7.00 to produce the same product. The profit per product of the
company would be reduced to ₱3.00 with a profit margin of 30%.
The net effect would be the same as in the earlier example of
granting a 20% senior citizen discount. As can be seen, the
minimum wage law could, likewise, lead to a permanent
reduction of profits. Does this mean that the minimum wage law
should, likewise, be declared unconstitutional on the mere plea
that it results in a permanent reduction of profits? Taking it a step
further, suppose the company decides to increase the price of its
product in order to offset the effects of the increase in labor cost;
does this mean that the minimum wage law, following the
reasoning of the Dissent, is unconstitutional because the
consuming public is effectively made to subsidize the wage of a
group of laborers, i.e., minimum wage earners? The same
reasoning can be adopted relative to the examples cited by the
Dissent which, according to it, are valid police power regulations.
Article 157 of the Labor Code, Sections 19 and 18 of the Social
Security Law, and Section 7 of the Pag-IBIG Fund Law would
effectively increase the labor cost of a business
establishment.1âwphi1 This would, in turn, be integrated as part of
the cost of its goods or services. Again, if the establishment does
not increase its prices, the net effect would be a permanent
reduction in its profits or income/gross sales. Following the
reasoning of the Dissent that "any form of permanent taking of
private property (including profits or income/gross sales)120 is an
exercise of eminent domain that requires the State to pay just
compensation,"121 then these statutory provisions would, likewise,
have to be declared unconstitutional. It does not matter that
these benefits are deemed part of the employees’ legislated
wages because the net effect is the same, that is, it leads to higher
labor costs and a permanent reduction in the profits or
income/gross sales of the business establishments.122
The point then is this – most, if not all, regulatory measures imposed
by the State on business establishments impact, at some level, the
latter’s prices and/or profits or income/gross sales.123
If the Court were to sustain the Dissent’s theory, then a wholesale
nullification of such measures would inevitably result. The police
power of the State and the social justice provisions of the
Constitution would, thus, be rendered nugatory. There is nothing
sacrosanct about profits or income/gross sales. This, we made
clear in Carlos Superdrug Corporation:124
Police power as an attribute to promote the common good
would be diluted considerably if on the mere plea of petitioners
that they will suffer loss of earnings and capital, the questioned
provision is invalidated. Moreover, in the absence of evidence
demonstrating the alleged confiscatory effect of the provision in
question, there is no basis for its nullification in view of the
presumption of validity which every law has in its favor.
xxxx
The Court is not oblivious of the retail side of the pharmaceutical
industry and the competitive pricing component of the business.
While the Constitution protects property rights petitioners must the
realities of business and the State, in the exercise of police power,
can intervene in the operations of a business which may result in
an impairment of property rights in the process.
Moreover, the right to property has a social dimension. While
Article XIII of the Constitution provides the percept for the
protection of property, various laws and jurisprudence,
particularly on agrarian reform and the regulation of contracts
and public utilities, continously serve as a reminder for the
promotion of public good.
Undeniably, the success of the senior citizens program rests largely
on the support imparted by petitioners and the other private
establishments concerned. This being the case, the means
employed in invoking the active participation of the private
sector, in order to achieve the purpose or objective of the law, is
reasonably and directly related. Without sufficient proof that
Section 4(a) of R.A. No. 9257 is arbitrary, and that the continued
implementation of the same would be unconscionably
detrimental to petitioners, the Court will refrain form quashing a
legislative act.125
In conclusion, we maintain that the correct rule in determining
whether the subject regulatory measure has amounted to a
"taking" under the power of eminent domain is the one laid down
in Alalayan v. National Power Corporation126 and followed
in Carlos Superdurg Corporation127 consistent with long standing
principles in police power and eminent domain analysis. Thus, the
deprivation or reduction of profits or income. Gross sales must be
clearly shown to be unreasonable, oppressive or confiscatory.
Under the specific circumstances of this case, such determination
can only be made upon the presentation of competent proof
which petitioners failed to do. A law, which has been in operation
for many years and promotes the welfare of a group accorded
special concern by the Constitution, cannot and should not be
summarily invalidated on a mere allegation that it reduces the
profits or income/gross sales of business establishments.
WHEREFORE, the Petition is hereby DISMISSED for lack of merit.
SO ORDERED.
E. Object
I. Person
II. Property
III. Privilege
F. Characteristics
I. Attribute of Sovereignty
II. Legislative in Character
III. Territorial in Operation
IV. Comprehensive
V. Plenary
89
VI. Unlimited
VII. Supreme
1. G.R. No. 11572 September 22, 1916
FRANCIS A. CHURCHILL and STEWART TAIT, ET AL, plaintiffs-
appellants,
vs.
VENANCIO CONCEPCION, as Acting Collector of Internal
Revenue, defendant-appellee.
TRENT, J.:
Section 100 of Act No. 2339, passed February 27, 1914, effective
July 1, 1914, imposed an annual tax of P4 per square meter upon
"electric signs, billboards, and spaces used for posting or
displaying temporary signs, and all signs displayed on premises not
occupied by buildings." This section was subsequently amended
by Act No. 2432, effective January 1, 1915, by reducing the tax on
such signs, billboards, etc., to P2 per square meter or fraction
thereof. Section 26 of Act No. 2432 was in turn amended by Act
No. 2445, but this amendment does not in any way affect the
questions involved in the case under consideration. The taxes
imposed by Act No. 2432, as amended, were ratified by the
Congress of the United States on March 4, 1915. The ratifying
clause reads as follows:
The internal-revenue taxes imposed by the Philippine
Legislature under the law enacted by that body on
December twenty-third, nineteen hundred and fourteen
(Act No. 2432), as amended by the law enacted by it on
January sixteenth, nineteen hundred and fifteen (Act
No. 2445), are hereby legalized and ratified, and the
collection of all such taxes heretofore or hereafter is
hereby legalized, ratified and confirmed as fully to all
intents and purposes as if the same had by prior Act of
Congress been specifically authorized and directed.
Francis A. Churchill and Stewart Tait, copartners doing business
under the firm name and style of the Mercantile Advertising
Agency, owners of a sign or billboard containing an area of 52
square meters constructed on private property in the city of
Manila and exposed to public view, were taxes thereon P104. The
tax was paid under protest and the plaintiffs having exhausted all
their administrative remedies instituted the present action under
section 140 of Act No. 2339 against the Collector of Internal
Revenue to recover back the amount thus paid. From a judgment
dismissing the complaint upon the merits, with costs, the plaintiffs
appealed.
It is now urged that the trial court erred:
(1) In not holding that the tax as imposed by virtue of Act
No. 2339, as amended by Act No. 2432, as amended by
Act No. 2445, constitutes deprivation of property without
compensation or due process of law, because it is
confiscatory and unjustly discriminatory and (2) in not
holding that the said tax is void for lack of uniformity,
because it is not graded according to value; because
the classification on which it is based on any reasonable
ground; and furthermore, because it constitutes double
taxation.
We will first inquire whether the tax in question is confiscatory as to
the business of the plaintiff Upon this point the lower court, in
accepting the testimony of the plaintiff, Churchill, to the effect
that "the billboard in question cost P300 to construct, that its
annual gross earning power is P268, and that the annual tax is
P104," found "that for a five years' period the gross income from
the billboard would be P1,340, and that the expenditures for
original construction and taxes would amount to P820, leaving a
balance of P520," held that "unless the tax equals or exceeds the
gross income, the court would hardly be justified in declaring the
tax confiscatory." These findings of fact and conclusions of law are
attacked upon the ground that the court failed to take into-
consideration the pertinent facts that the annual depreciation of
the billboard is 20 per cent; that at the end of five years the capital
of P300 would be completely lost; that the plaintiffs are entitled to
receive a reasonable rate of interest on this capital; and that
there should be charged against the billboard its proportion of the
overhead charges such as labor, management, maintenance,
rental of office premises, rental or purchase of ground space for
board, repair, paints, oils, etc., resulting in an actual loss per year
on the business, instead of an apparent profit of P520 for five
years, or P44 for one year. If these contentions rested upon a
sound basis it might be said that the tax is, in a sense, confiscatory;
but they do not, as we will attempt to show from the evidence of
record.
The plaintiff Churchill testified in part as follows:
Q. In your opinion, Mr. Churchill, state what you
would think of the rates that are charged by you for
advertising purposes in connection with this board;
could they be raised? —
A. No.
Q. Why? —
A. The business wouldn't allow it; the business
wouldn't afford it; and otherwise it would mean
bankruptcy to try to increase it.
Q. Who couldn't afford it? Explain it fully Mr.
Churchill? —
A. The merchants couldn't afford to pay more. On
cross-examination:
Q. It is a fact, it is not, Mr. Churchill, that since the
passage of Act No. 2339 you have never made any
attempt to raise the advertising rates? —
A. It would be impossible to raise them.
Q. My question is: You have never made any
attempt to raise them? —
A. We have talked it over with the merchants and
talked over the price on the event of a tax being put at
a reasonable amount, about putting up some increase.
Q. But you have never made an actual attempt
to increase your rates? —
A. I would consider that an actual attempt.
Q. You have never fixed the rate higher than it is
now? —
A. No; no.
It was agreed that Tait, the other plaintiff, would testify to the same
effect. The parties, plaintiffs and defendant, further agreed "that
a number of persons have voluntarily and without protest paid the
taxes imposed by section 100 of Act No. 2339, as amended by Act
No. 2432, and in turn amended by Act No. 2445."
It will thus be seen that the contention that the rates charged for
advertising cannot be raised is purely hypothetical, based entirely
upon the opinion of the plaintiffs, unsupported by actual test, and
that the plaintiffs themselves admit that a number of other persons
have voluntarily and without protest paid the tax herein
complained of. Under these circumstances, can it be held as a
matter of fact that the tax is confiscatory or that, as a matter of
law, the tax is unconstitutional? Is the exercise of the taxing power
of the Legislature dependent upon and restricted by the opinion
of two interested witnesses? There can be but one answer to these
questions, especially in view of the fact that others are paying the
tax and presumably making a reasonable profit from their
business.
In Chicago and Grand Trunk Railway Co. vs. Wellman (143 U. S.,
339), a question similar to the one now under consideration was
raised and decided by the Supreme Court of the United States.
The principal contention made in that case was that an Act of the
Legislature of Michigan fixing the amount per mile to be charged
by railways for the transportation of a passenger was
unconstitutional, on the ground that the rate so fixed was
confiscatory. It was agreed in the pleadings that the total
earnings and income of the company from all sources for a given
90
year were less than the expenses for the same period. In addition
to this agreed statement of facts, two witnesses were called, one
the traffic manager and the other the treasurer of the company.
Their testimony was to the effect that in view of the competition
prevailing at Chicago for through business, it was impossible to
increase the freight rates then charged by the company because
it would throw the volume of business into the hands of competing
roads. In overruling the contention of the company that the act
in question was unconstitutional on the ground that the rate fixed
thereby was confiscatory, the court said:
Surely, before the courts are called upon to adjudge an
act of the legislature fixing the maximum passenger
rates for railroad companies to be unconstitutional, on
the ground that its enforcement would prevent the
stockholders from receiving any dividends on their
investments, or the bondholders any interest on their
loans, they should be fully advised as to what is done
with the receipts and earnings of the company; for if so
advised, it might clearly appear that a prudent and
honest management would, within the rates prescribed,
secure to the bondholders their interest, and to the
stockholders reasonable dividends. While the protection
of vested rights of property is a supreme duty of the
courts, it has not come to this, that the legislative power
rests subservient to the discretion of any railroad
corporation which may, by exorbitant and
unreasonable salaries, or in some other improper way,
transfer its earnings into what it is pleased to call
`operating expenses.'
It is further alleged that the tax in question is unconstitutional
because "the law herein complained of was enacted for the sole
purpose of destroying billboards and advertising business
depending on the use of signs or billboards." If it be conceded
that the Legislature has the power to impose a tax upon signs,
signboards, and billboards, then "the judicial cannot prescribed to
the legislative department of the Government limitation upon the
exercise of its acknowledge powers." (Veazie Bank vs. Fenno, 8
Wall., 533, 548.) That the Philippine Legislature has the power to
impose such taxes, we think there can be no serious doubt,
because "the power to impose taxes is one so unlimited in force
and so searching in extent, that the courts scarcely venture to
declare that it is subject to any restrictions whatever, except such
as rest in the discretion of the authority which exercises it. It
reaches to every trade or occupation; to every object of industry,
use, or enjoyment; to every species of possession; and it imposes
a burden which, in case of failure to discharge it, may be followed
by seizure and sale or confiscation of property. No attribute of
sovereignty is more pervading, and at no point does the power of
the government affect more constantly and intimately all the
relations of life than through the exactions made under it."
(Cooley's Constitutional Limitations, 6th Edition, p. 587.)
In McCray vs. U.S. (195 U.S., 27), the court, in ruling adversely to the
contention that a federal tax on oleomargarine artificially colored
was void because the real purpose of Congress was not to raise
revenue but to tax out of existence a substance not harmful of
itself and one which might be lawfully manufactured and sold,
said:
Whilst, as a result of our written constitution, it is axiomatic
that the judicial department of the government is
charged with the solemn duty of enforcing the
Constitution, and therefore, in cases property presented,
of determining whether a given manifestation of
authority has exceeded the power conferred by that
instrument, no instance is afforded from the foundation
of the government where an act which was within a
power conferred, was declared to be repugnant to the
Constitution, because it appeared to the judicial mind
that the particular exertion of constitutional power was
either unwise or unjust. To announce such a principle
would amount to declaring that, in our constitutional
system, the judiciary was not only charged with the duty
of upholding the Constitution, but also with the
responsibility of correcting every possible abuse arising
from the exercise by the other departments of their
conceded authority. So to hold would be to overthrow
the entire distinction between the legislative, judicial,
and executive departments of the government, upon
which our system is founded, and would be a mere act
of judicial usurpation.
If a case were presented where the abuse of the taxing power of
the local legislature was to extreme as to make it plain to the
judicial mind that the power had been exercised for the sole
purpose of destroying rights which could not be rightfully
destroyed consistently with the principles of freedom and justice
upon which the Philippine Government rests, then it would be the
duty of the courts to say that such an arbitrary act was not merely
an abuse of the power, but was the exercise of an authority not
conferred. (McCray vs. U.S., supra.) But the instant case is not one
of that character, for the reason that the tax herein complained
of falls far short of being confiscatory. Consequently, it cannot be
held that the Legislature has gone beyond the power conferred
upon it by the Philippine Bill in so far as the amount of the tax is
concerned.
Is the tax void for lack of uniformity or because it is not graded
according to value or constitutes double taxation, or because the
classification upon which it is based is mere arbitrary selection and
not based on any reasonable grounds? The only limitation, in so
far as these questions are concerned, placed upon the Philippine
Legislature in the exercise of its taxing power is that found in
section 5 of the Philippine Bill, wherein it is declared "that the rule
of taxation in said Islands shall be uniform."
Uniformity in taxation — says Black on Constitutional Law,
page 292 — means that all taxable articles or kinds of
property, of the same class, shall be taxed at the same
rate. It does not mean that lands, chattels, securities,
incomes, occupations, franchises, privileges, necessities,
and luxuries, shall all be assessed at the same rate.
Different articles may be taxed at different amounts,
provided the rate is uniform on the same class
everywhere, with all people, and at all times.
A tax is uniform when it operates with the same force and effect
in every place where the subject of it is found (State Railroad Tax
Cases, 92 U.S., 575.) The words "uniform throughout the United
States," as required of a tax by the Constitution, do not signify an
intrinsic, but simply a geographical, uniformity, and such
uniformity is therefore the only uniformity which is prescribed by
the Constitution. (Patton vs. Brady, 184 U.S., 608; 46 L. Ed., 713.) A
tax is uniform, within the constitutional requirement, when it
operates with the same force and effect in every place where the
subject of it is found. (Edye vs. Robertson, 112 U.S., 580; 28 L. Ed.,
798.) "Uniformity," as applied to the constitutional provision that all
taxes shall be uniform, means that all property belonging to the
same class shall be taxed alike. (Adams vs. Mississippi State Bank,
23 South, 395, citing Mississippi Mills vs Cook, 56 Miss., 40.) The
statute under consideration imposes a tax of P2 per square meter
or fraction thereof upon every electric sign, bill-board, etc.,
wherever found in the Philippine Islands. Or in other words, "the
rule of taxation" upon such signs is uniform throughout the Islands.
The rule, which we have just quoted from the Philippine Bill, does
not require taxes to be graded according to the value of the
subject or subjects upon which they are imposed, especially those
levied as privilege or occupation taxes. We can hardly see
wherein the tax in question constitutes double taxation. The fact
that the land upon which the billboards are located is taxed at so
much per unit and the billboards at so much per square meter
does not constitute "double taxation." Double taxation, within the
true meaning of that expression, does not necessarily affect its
validity. (1 Cooley on Taxation, 3d ed., 389.) And again, it is not for
the judiciary to say that the classification upon which the tax is
based "is mere arbitrary selection and not based upon any
reasonable grounds." The Legislature selected signs and billboards
as a subject for taxation and it must be presumed that it, in so
doing, acted with a full knowledge of the situation.
For the foregoing reasons, the judgment appealed from is
affirmed, with costs against the appellants. So ordered.
2. CREBA vs ROMULO (Same Case)
H. Power to Destroy
I. Marshall Dictum
1. McCulloch v. Maryland, 17 U.S. 4 Wheat. 316 316 (1819)
ERROR TO THE COURT OF APPEALS OF THE STATE OF MARYLAND
Syllabus
Congress has power to incorporate a bank
91
The Act of the 10th of April, 1816, ch. 44, to "incorporate the
subscribers to the Bank of the United States" is a law made in
pursuance of the Constitution.
The Government of the Union, though limited in its powers, is
supreme within its sphere of action, and its laws, when made in
pursuance of the Constitution, form the supreme law of the land.
There is nothing in the Constitution of the United States similar to
the Articles of Confederation, which exclude incidental or implied
powers.
If the end be legitimate, and within the scope of the Constitution,
all the means which are appropriate, which are plainly adapted
to that end, and which are not prohibited, may constitutionally be
employed to carry it into effect.
The power of establishing a corporation is not a distinct sovereign
power or end of Government, but only the means of carrying into
effect other powers which are sovereign. Whenever it becomes
an appropriate means of exercising any of the powers given by
the Constitution to the Government of the Union, it may be
exercised by that Government.
If a certain means to carry into effect of any of the powers
expressly given by the Constitution to the Government of the
Union be an appropriate measure, not prohibited by the
Constitution, the degree of its necessity is a question of legislative
discretion, not of judicial cognizance.
The Bank of the United States has, constitutionally, a right to
establish its branches or offices of discount and deposit within any
state.
The State within which such branch may be established cannot,
without violating the Constitution, tax that branch.
The State governments have no right to tax any of the
constitutional means employed by the Government of the Union
to execute its constitutional powers.
The States have no power, by taxation or otherwise, to retard,
impede, burthen, or in any manner control the operations of the
constitutional laws enacted by Congress to carry into effect the
powers vested in the national Government.
This principle does not extend to a tax paid by the real property
of the Bank of the United States in common with the other real
property in a particular state, nor to a tax imposed on the
proprietary interest which the citizens of that State may hold in this
institution, in common with other property of the same description
throughout the State.
This was an action of debt, brought by the defendant in error,
John James, who sued as well for himself as for the State of
Maryland, in the County Court of Baltimore County, in the said
State, against the plaintiff in error, McCulloch, to recover certain
penalties, under the act of the Legislature of Maryland hereafter
mentioned. Judgment being rendered against the plaintiff in
error, upon the following statement of facts agreed and
submitted to the court by the parties, was affirmed by the Court
of Appeals of the State of Maryland, the highest court of law of
said State, and the cause was brought by writ of error to this Court.
It is admitted by the parties in this cause, by their counsel, that
there was passed, on the 10th day of April, 1816, by the Congress
of the United States, an act entitled, "an act to incorporate the
subscribers to the Bank of the United States;" and that there was
passed on the 11th day of February, 1818, by the General
Assembly of Maryland, an act, entitled, "an act to impose a tax
on all banks, or branches thereof, in the State of Maryland, not
chartered by the legislature, which said acts are made part of this
Statement, and it is agreed, may be read from the statute books
in which they are respectively printed. It is further admitted that
the President, directors and company of the Bank of the United
States, incorporated by the act of Congress aforesaid, did
organize themselves, and go into full operation, in the City of
Philadelphia, in the State of Pennsylvania, in pursuance of the said
act, and that they did on the ___ day of _____ 1817, establish a
branch of the said bank, or an office of discount and deposit, in
the City of Baltimore, in the State of Maryland, which has, from
that time until the first day of May 1818, ever since transacted and
carried on business as a bank, or office of discount and deposit,
and as a branch of the said Bank of the United States, by issuing
bank notes and discounting promissory notes, and performing
other operations usual and customary for banks to do and
perform, under the authority and by the direction of the said
President, directors and company of the Bank of the United States,
established at Philadelphia as aforesaid. It is further admitted that
the said President, directors and company of the said bank had
no authority to establish the said branch, or office of discount and
deposit, at the City of Baltimore, from the State of Maryland,
otherwise than the said State having adopted the Constitution of
the United States and composing one of the States of the Union.
It is further admitted that James William McCulloch, the
defendant below, being the cashier of the said branch, or office
of discount and deposit did, on the several days set forth in the
declaration in this cause, issue the said respective bank notes
therein described, from the said branch or office, to a certain
George Williams, in the City of Baltimore, in part payment of a
promissory note of the said Williams, discounted by the said
branch or office, which said respective bank notes were not, nor
was either of them, so issued on stamped paper in the manner
prescribed by the act of assembly aforesaid. It is further admitted
that the said President, directors and company of the Bank of the
United States, and the said branch, or office of discount and
deposit have not, nor has either of them, paid in advance, or
otherwise, the sum of $15,000, to the Treasurer of the Western
Shore, for the use of the State of Maryland, before the issuing of
the said notes, or any of them, nor since those periods. And it is
further admitted that the Treasurer of the Western Shore of
Maryland, under the direction of the Governor and Council of the
said State, was ready, and offered to deliver to the said President,
directors and company of the said bank, and to the said branch,
or office of discount and deposit, stamped paper of the kind and
denomination required and described in the said act of assembly.
The question submitted to the Court for their decision in this case
is as to the validity of the said act of the General Assembly of
Maryland on the ground of its being repugnant to the Constitution
of the United States and the act of Congress aforesaid, or to one
of them. Upon the foregoing statement of facts and the pleadings
in this cause (all errors in which are hereby agreed to be mutually
released), if the Court should be of opinion that the plaintiffs are
entitled to recover, then judgment, it is agreed, shall be entered
for the plaintiffs for $2,500 and costs of suit. B ut if the Court should
be of opinion that the plaintiffs are not entitled to recover upon
the statement and pleadings aforesaid, then judgment of non
pros shall be entered, with costs to the defendant.
It is agreed that either party may appeal from the decision of the
County Court to the Court of Appeals, and from the decision of
the Court of Appeals to the Supreme Court of the United States,
according to the modes and usages of law, and have the same
benefit of this statement of facts in the same manner as could be
had if a jury had been sworn and impanneled in this cause and a
special verdict had been found, or these facts had appeared
and been stated in an exception taken to the opinion of the
Court, and the Court's direction to the jury thereon.
Copy of the act of the Legislature of the State of Maryland,
referred to in the preceding Statement.
"An act to impose a tax on all banks or branches thereof, in the"
"State of Maryland not chartered by the legislature"
"Be it enacted by the General Assembly of Maryland that if any
bank has established or shall, without authority from the State first
had and obtained establish any branch, office of discount and
deposit, or office of pay and receipt in any part of this State, it
shall not be lawful for the said branch, office of discount and
deposit, or office of pay and receipt to issue notes, in any manner,
of any other denomination than five, ten, twenty, fifty, one
hundred, five hundred and one thousand dollars, and no note
shall be issued except upon stamped paper of the following
denominations; that is to say, every five dollar note shall be upon
a stamp of ten cents; every ten dollar note, upon a stamp of
twenty cents; every twenty dollar note, upon a stamp of thirty
cents; every fifty dollar note, upon a stamp of fifty cents; every
one hundred dollar note, upon a stamp of one dollar; every five
hundred dollar note, upon a stamp of ten dollars; and every
thousand dollar note, upon a stamp of twenty dollars; which
paper shall be furnished by the Treasurer of the Western Shore,
under the direction of the Governor and Council, to be paid for
upon delivery; provided always that any institution of the above
description may relieve itself from the operation of the provisions
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aforesaid by paying annually, in advance, to the Treasurer of the
Western Shore, for the use of State, the sum of $15,000."
"And be it enacted that the President, cashier, each of the
directors and officers of every institution established or to be
established as aforesaid, offending against the provisions
aforesaid shall forfeit a sum of $500 for each and every offence,
and every person having any agency in circulating any note
aforesaid, not stamped as aforesaid directed, shall forfeit a sum
not exceeding $100, every penalty aforesaid to be recovered by
indictment or action of debt in the county court of the county
where the offence shall be committed, one-half to the informer
and the other half to the use of the State."
"And be it enacted that this act shall be in full force and effect
from and after the first day of May next. "
MARSHALL, Chief Justice, delivered the opinion of the Court.
In the case now to be determined, the defendant, a sovereign
State, denies the obligation of a law enacted by the legislature of
the Union, and the plaintiff, on his part, contests the validity of an
act which has been passed by the legislature of that State. The
Constitution of our country, in its most interesting and vital parts, is
to be considered, the conflicting powers of the Government of
the Union and of its members, as marked in that Constitution, are
to be discussed, and an opinion given which may essentially
influence the great operations of the Government. No tribunal
can approach such a question without a deep sense of its
importance, and of the awful responsibility involved in its decision.
But it must be decided peacefully, or remain a source of hostile
legislation, perhaps, of hostility of a still more serious nature; and if
it is to be so decided, by this tribunal alone can the decision be
made. On the Supreme Court of the United States has the
Constitution of our country devolved this important duty.
The first question made in the cause is -- has Congress power to
incorporate a bank?
It has been truly said that this can scarcely be considered as an
open question entirely unprejudiced by the former proceedings
of the Nation respecting it. The principle now contested was
introduced at a very early period of our history, has been
recognised by many successive legislatures, and has been acted
upon by the Judicial Department, in cases of peculiar delicacy,
as a law of undoubted obligation.
It will not be denied that a bold and daring usurpation might be
resisted after an acquiescence still longer and more complete
than this. But it is conceived that a doubtful question, one on
which human reason may pause and the human judgment be
suspended, in the decision of which the great principles of liberty
are not concerned, but the respective powers of those who are
equally the representatives of the people, are to be adjusted, if
not put at rest by the practice of the Government, ought to
receive a considerable impression from that practice. An
exposition of the Constitution, deliberately established by
legislative acts, on the faith of which an immense property has
been advanced, ought not to be lightly disregarded.
The power now contested was exercised by the first Congress
elected under the present Constitution.
The bill for incorporating the Bank of the United States did not steal
upon an unsuspecting legislature and pass unobserved. Its
principle was completely understood, and was opposed with
equal zeal and ability. After being resisted first in the fair and open
field of debate, and afterwards in the executive cabinet, with as
much persevering talent as any measure has ever experienced,
and being supported by arguments which convinced minds as
pure and as intelligent as this country can boast, it became a law.
The original act was permitted to expire, but a short experience of
the embarrassments to which the refusal to revive it exposed the
Government convinced those who were most prejudiced against
the measure of its necessity, and induced the passage of the
present law. It would require no ordinary share of intrepidity to
assert that a measure adopted under these circumstances was a
bold and plain usurpation to which the Constitution gave no
countenance. These observations belong to the cause; but they
are not made under the impression that, were the question
entirely new, the law would be found irreconcilable with the
Constitution.
In discussing this question, the counsel for the State of Maryland
have deemed it of some importance, in the construction of the
Constitution, to consider that instrument not as emanating from
the people, but as the act of sovereign and independent States.
The powers of the General Government, it has been said, are
delegated by the States, who alone are truly sovereign, and must
be exercised in subordination to the States, who alone possess
supreme dominion.
It would be difficult to sustain this proposition. The convention
which framed the Constitution was indeed elected by the State
legislatures. But the instrument, when it came from their hands,
was a mere proposal, without obligation or pretensions to it. It was
reported to the then existing Congress of the United States with a
request that it might "be submitted to a convention of delegates,
chosen in each State by the people thereof, under the
recommendation of its legislature, for their assent and ratification."
This mode of proceeding was adopted, and by the convention,
by Congress, and by the State legislatures, the instrument was
submitted to the people. They acted upon it in the only manner in
which they can act safely, effectively and wisely, on such a
subject -- by assembling in convention. It is true, they assembled
in their several States -- and where else should they have
assembled? No political dreamer was ever wild enough to think
of breaking down the lines which separate the States, and of
compounding the American people into one common mass. Of
consequence, when they act, they act in their States. But the
measures they adopt do not, on that account, cease to be the
measures of the people themselves, or become the measures of
the State governments.
From these conventions the Constitution derives its whole
authority. The government proceeds directly from the people; is
"ordained and established" in the name of the people, and is
declared to be ordained, "in order to form a more perfect union,
establish justice, insure domestic tranquillity, and secure the
blessings of liberty to themselves and to their posterity."
The assent of the States in their sovereign capacity is implied in
calling a convention, and thus submitting that instrument to the
people. But the people were at perfect liberty to accept or reject
it, and their act was final. It required not the affirmance, and could
not be negatived, by the State Governments. The Constitution,
when thus adopted, was of complete obligation, and bound the
State sovereignties.
It has been said that the people had already surrendered all their
powers to the State sovereignties, and had nothing more to give.
But surely the question whether they may resume and modify the
powers granted to Government does not remain to be settled in
this country. Much more might the legitimacy of the General
Government be doubted had it been created by the States. The
powers delegated to the State sovereignties were to be exercised
by themselves, not by a distinct and independent sovereignty
created by themselves. To the formation of a league such as was
the Confederation, the State sovereignties were certainly
competent. But when, "in order to form a more perfect union," it
was deemed necessary to change this alliance into an effective
Government, possessing great and sovereign powers and acting
directly on the people, the necessity of referring it to the people,
and of deriving its powers directly from them, was felt and
acknowledged by all. The Government of the Union then
(whatever may be the influence of this fact on the case) is,
emphatically and truly, a Government of the people. In form and
in substance, it emanates from them. Its powers are granted by
them, and are to be exercised directly on them, and for their
benefit.
This Government is acknowledged by all to be one of
enumerated powers. The principle that it can exercise only the
powers granted to it would seem too apparent to have required
to be enforced by all those arguments which its enlightened
friends, while it was depending before the people, found it
necessary to urge; that principle is now universally admitted. But
the question respecting the extent of the powers actually granted
is perpetually arising, and will probably continue to arise so long
as our system shall exist. In discussing these questions, the
conflicting powers of the General and State Governments must
be brought into view, and the supremacy of their respective laws,
when they are in opposition, must be settled.
If any one proposition could command the universal assent of
mankind, we might expect it would be this -- that the Government
of the Union, though limited in its powers, is supreme within its
sphere of action. This would seem to result necessarily from its
nature. It is the Government of all; its powers are delegated by all;
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it represents all, and acts for all. Though any one State may be
willing to control its operations, no State is willing to allow others to
control them. The nation, on those subjects on which it can act,
must necessarily bind its component parts. But this question is not
left to mere reason; the people have, in express terms, decided it
by saying, "this Constitution, and the laws of the United States,
which shall be made in pursuance thereof," "shall be the supreme
law of the land," and by requiring that the members of the State
legislatures and the officers of the executive and judicial
departments of the States shall take the oath of fidelity to it. The
Government of the United States, then, though limited in its
powers, is supreme, and its laws, when made in pursuance of the
Constitution, form the supreme law of the land, "anything in the
Constitution or laws of any State to the contrary notwithstanding."
Among the enumerated powers, we do not find that of
establishing a bank or creating a corporation. But there is no
phrase in the instrument which, like the Articles of Confederation,
excludes incidental or implied powers and which requires that
everything granted shall be expressly and minutely described.
Even the 10th Amendment, which was framed for the purpose of
quieting the excessive jealousies which had been excited, omits
the word "expressly," and declares only that the powers "not
delegated to the United States, nor prohibited to the States, are
reserved to the States or to the people," thus leaving the question
whether the particular power which may become the subject of
contest has been delegated to the one Government, or
prohibited to the other, to depend on a fair construction of the
whole instrument. The men who drew and adopted this
amendment had experienced the embarrassments resulting from
the insertion of this word in the Articles of Confederation, and
probably omitted it to avoid those embarrassments. A
Constitution, to contain an accurate detail of all the subdivisions
of which its great powers will admit, and of all the means by which
they may be carried into execution, would partake of the prolixity
of a legal code, and could scarcely be embraced by the human
mind. It would probably never be understood by the public. Its
nature, therefore, requires that only its great outlines should be
marked, its important objects designated, and the minor
ingredients which compose those objects be deduced from the
nature of the objects themselves. That this idea was entertained
by the framers of the American Constitution is not only to be
inferred from the nature of the instrument, but from the language.
Why else were some of the limitations found in the 9th section of
the 1st article introduced? It is also in some degree warranted by
their having omitted to use any restrictive term which might
prevent its receiving a fair and just interpretation. In considering
this question, then, we must never forget that it isa Constitution we
are expounding.
Although, among the enumerated powers of Government, we do
not find the word "bank" or "incorporation," we find the great
powers, to lay and collect taxes; to borrow money; to regulate
commerce; to declare and conduct a war; and to raise and
support armies and navies. The sword and the purse, all the
external relations, and no inconsiderable portion of the industry of
the nation are intrusted to its Government. It can never be
pretended that these vast powers draw after them others of
inferior importance merely because they are inferior. Such an
idea can never be advanced. But it may with great reason be
contended that a Government intrusted with such ample powers,
on the due execution of which the happiness and prosperity of
the Nation so vitally depends, must also be intrusted with ample
means for their execution. The power being given, it is the interest
of the Nation to facilitate its execution. It can never be their
interest, and cannot be presumed to have been their intention, to
clog and embarrass its execution by withholding the most
appropriate means. Throughout this vast republic, from the St.
Croix to the Gulf of Mexico, from the Atlantic to the Pacific,
revenue is to be collected and expended, armies are to be
marched and supported. The exigencies of the Nation may
require that the treasure raised in the north should be transported
to the south that raised in the east, conveyed to the west, or that
this order should be reversed. Is that construction of the
Constitution to be preferred which would render these operations
difficult, hazardous and expensive? Can we adopt that
construction (unless the words imperiously require it) which would
impute to the framers of that instrument, when granting these
powers for the public good, the intention of impeding their
exercise, by withholding a choice of means? If, indeed, such be
the mandate of the Constitution, we have only to obey; but that
instrument does not profess to enumerate the means by which the
powers it confers may be executed; nor does it prohibit the
creation of a corporation, if the existence of such a being be
essential, to the beneficial exercise of those powers. It is, then, the
subject of fair inquiry how far such means may be employed.
It is not denied that the powers given to the Government imply
the ordinary means of execution. That, for example, of raising
revenue and applying it to national purposes is admitted to imply
the power of conveying money from place to place as the
exigencies of the Nation may require, and of employing the usual
means of conveyance. But it is denied that the Government has
its choice of means, or that it may employ the most convenient
means if, to employ them, it be necessary to erect a corporation.
On what foundation does this argument rest? O n this alone: the
power of creating a corporation is one appertaining to
sovereignty, and is not expressly conferred on Congress. This is
true. But all legislative powers appertain to sovereignty. The
original power of giving the law on any subject whatever is a
sovereign power, and if the Government of the Union is restrained
from creating a corporation as a means for performing its
functions, on the single reason that the creation of a corporation
is an act of sovereignty, if the sufficiency of this reason be
acknowledged, there would be some difficulty in sustaining the
authority of Congress to pass other laws for the accomplishment
of the same objects. The Government which has a right to do an
act and has imposed on it the duty of performing that act must,
according to the dictates of reason, be allowed to select the
means, and those who contend that it may not select any
appropriate means that one particular mode of effecting the
object is excepted take upon themselves the burden of
establishing that exception.
The creation of a corporation, it is said, appertains to sovereignty.
This is admitted. But to what portion of sovereignty does it
appertain? Does it belong to one more than to another? In
America, the powers of sovereignty are divided between the
Government of the Union and those of the States. They are each
sovereign with respect to the objects committed to it, and neither
sovereign with respect to the objects committed to the other. We
cannot comprehend that train of reasoning, which would
maintain that the extent of power granted by the people is to be
ascertained not by the nature and terms of the grant, but by its
date. Some State Constitutions were formed before, some since,
that of the United States. We cannot believe that their relation to
each other is in any degree dependent upon this circumstance.
Their respective powers must, we think, be precisely the same as
if they had been formed at the same time. Had they been formed
at the same time, and had the people conferred on the General
Government the power contained in the Constitution, and on the
States the whole residuum of power, would it have been asserted
that the Government of the Union was not sovereign, with respect
to those objects which were intrusted to it, in relation to which its
laws were declared to be supreme? If this could not have been
asserted, we cannot well comprehend the process of reasoning
which maintains that a power appertaining to sovereignty cannot
be connected with that vast portion of it which is granted to the
General Government, so far as it is calculated to subserve the
legitimate objects of that Government. The power of creating a
corporation, though appertaining to sovereignty, is not, like the
power of making war or levying taxes or of regulating commerce,
a great substantive and independent power which cannot be
implied as incidental to other powers or used as a means of
executing them. It is never the end for which other powers are
exercised, but a means by which other objects are
accomplished. No contributions are made to charity for the sake
of an incorporation, but a corporation is created to administer the
charity; no seminary of learning is instituted in order to be
incorporated, but the corporate character is conferred to
subserve the purposes of education. No city was ever built with
the sole object of being incorporated, but is incorporated as
affording the best means of being well governed. The power of
creating a corporation is never used for its own sake, but for the
purpose of effecting something else. No sufficient reason is
therefore perceived why it may not pass as incidental to those
powers which are expressly given if it be a direct mode of
executing them.
But the Constitution of the United States has not left the right of
Congress to employ the necessary means for the execution of the
powers conferred on the Government to general reasoning. To its
enumeration of powers is added that of making "all laws which
shall be necessary and proper for carrying into execution the
foregoing powers, and all other powers vested by this Constitution
in the Government of the United States or in any department
thereof."
The counsel for the State of Maryland have urged various
arguments to prove that this clause, though in terms a grant of
power, is not so in effect, but is really restrictive of the general right
which might otherwise be implied of selecting means for
94
executing the enumerated powers. In support of this proposition,
they have found it necessary to contend that this clause was
inserted for the purpose of conferring on Congress the power of
making laws. That, without it, doubts might be entertained
whether Congress could exercise its powers in the form of
legislation.
But could this be the object for which it was inserted? A
Government is created by the people having legislative,
executive and judicial powers. Its legislative powers are vested in
a Congress, which is to consist of a senate and house of
representatives. Each house may determine the rule of its
proceedings, and it is declared that every bill which shall have
passed both houses shall, before it becomes a law, be presented
to the President of the United States. The 7th section describes the
course of proceedings by which a bill shall become a law, and
then the 8th section enumerates the powers of Congress. Could it
be necessary to say that a legislature should exercise legislative
powers, in the shape of legislation? After allowing each house to
prescribe its own course of proceeding, after describing the
manner in which a bill should become a law, would it have
entered into the mind of a single member of the convention that
an express power to make laws was necessary to enable the
legislature to make them? That a legislature, endowed with
legislative powers, can legislate is a proposition too self-evident to
have been questioned.
But the argument on which most reliance is placed is drawn from
that peculiar language of this clause. Congress is not empowered
by it to make all laws which may have relation to the powers
conferred on the Government, but such only as may be
"necessary and proper" for carrying them into execution. The word
"necessary" is considered as controlling the whole sentence, and
as limiting the right to pass laws for the execution of the granted
powers to such as are indispensable, and without which the
power would be nugatory. That it excludes the choice of means,
and leaves to Congress in each case that only which is most direct
and simple.
Is it true that this is the sense in which the word "necessary" is always
used? Does it always import an absolute physical necessity so
strong that one thing to which another may be termed necessary
cannot exist without that other? We think it does not. If reference
be had to its use in the common affairs of the world or in approved
authors, we find that it frequently imports no more than that one
thing is convenient, or useful, or essential to another. To employ
the means necessary to an end is generally understood as
employing any means calculated to produce the end, and not
as being confined to those single means without which the end
would be entirely unattainable. Such is the character of human
language that no word conveys to the mind in all situations one
single definite idea, and nothing is more common than to use
words in a figurative sense. Almost all compositions contain words
which, taken in a their rigorous sense, would convey a meaning
different from that which is obviously intended. It is essential to just
construction that many words which import something excessive
should be understood in a more mitigated sense -- in that sense
which common usage justifies. The word "necessary" is of this
description. It has not a fixed character peculiar to itself. It admits
of all degrees of comparison, and is often connected with other
words which increase or diminish the impression the mind receives
of the urgency it imports. A thing may be necessary, very
necessary, absolutely or indispensably necessary. To no mind
would the same idea be conveyed by these several phrases. The
comment on the word is well illustrated by the passage cited at
the bar from the 10th section of the 1st article of the Constitution.
It is, we think, impossible to compare the sentence which prohibits
a State from laying "imposts, or duties on imports or exports,
except what may be absolutely necessary for executing its
inspection laws," with that which authorizes Congress "to make all
laws which shall be necessary and proper for carrying into
execution" the powers of the General Government without
feeling a conviction that the convention understood itself to
change materially the meaning of the word "necessary," by
prefixing the word "absolutely." This word, then, like others, is used
in various senses, and, in its construction, the subject, the context,
the intention of the person using them are all to be taken into
view.
Let this be done in the case under consideration. The subject is the
execution of those great powers on which the welfare of a Nation
essentially depends. It must have been the intention of those who
gave these powers to insure, so far as human prudence could
insure, their beneficial execution. This could not be done by
confiding the choice of means to such narrow limits as not to
leave it in the power of Congress to adopt any which might be
appropriate, and which were conducive to the end. This provision
is made in a Constitution intended to endure for ages to come,
and consequently to be adapted to the various crises of human
affairs. To have prescribed the means by which Government
should, in all future time, execute its powers would have been to
change entirely the character of the instrument and give it the
properties of a legal code. It would have been an unwise attempt
to provide by immutable rules for exigencies which, if foreseen at
all, must have been seen dimly, and which can be best provided
for as they occur. To have declared that the best means shall not
be used, but those alone without which the power given would
be nugatory, would have been to deprive the legislature of the
capacity to avail itself of experience, to exercise its reason, and
to accommodate its legislation to circumstances.
If we apply this principle of construction to any of the powers of
the Government, we shall find it so pernicious in its operation that
we shall be compelled to discard it. The powers vested in
Congress may certainly be carried into execution, without
prescribing an oath of office. The power to exact this security for
the faithful performance of duty is not given, nor is it indispensably
necessary. The different departments may be established; taxes
may be imposed and collected; armies and navies may be raised
and maintained; and money may be borrowed, without requiring
an oath of office. It might be argued with as much plausibility as
other incidental powers have been assailed that the convention
was not unmindful of this subject. The oath which might be
exacted -- that of fidelity to the Constitution -- is prescribed, and
no other can be required. Yet he would be charged with insanity
who should contend that the legislature might not superadd to
the oath directed by the Constitution such other oath of office as
its wisdom might suggest.
So, with respect to the whole penal code of the United States,
whence arises the power to punish in cases not prescribed by the
Constitution? All admit that the Government may legitimately
punish any violation of its laws, and yet this is not among the
enumerated powers of Congress. The right to enforce the
observance of law by punishing its infraction might be denied with
the more plausibility because it is expressly given in some cases.
Congress is empowered "to provide for the punishment of
counterfeiting the securities and current coin of the United States,"
and "to define and punish piracies and felonies committed on the
high seas, and offences against the law of nations." The several
powers of Congress may exist in a very imperfect State, to be sure,
but they may exist and be carried into execution, although no
punishment should be inflicted, in cases where the right to punish
is not expressly given.
Take, for example, the power "to establish post-offices and post-
roads." This power is executed by the single act of making the
establishment. But from this has been inferred the power and duty
of carrying the mail along the post road from one post office to
another. And from this implied power has again been inferred the
right to punish those who steal letters from the post office, or rob
the mail. It may be said with some plausibility that the right to carry
the mail, and to punish those who rob it, is not indispensably
necessary to the establishment of a post office and post road. This
right is indeed essential to the beneficial exercise of the power,
but not indispensably necessary to its existence. So, of the
punishment of the crimes of stealing or falsifying a record or
process of a Court of the United States, or of perjury in such Court.
To punish these offences is certainly conducive to the due
administration of justice. But Courts may exist, and may decide
the causes brought before them, though such crimes escape
punishment.
The baneful influence of this narrow construction on all the
operations of the Government, and the absolute impracticability
of maintaining it without rendering the Government incompetent
to its great objects, might be illustrated by numerous examples
drawn from the Constitution and from our laws. The good sense of
the public has pronounced without hesitation that the power of
punishment appertains to sovereignty, and may be exercised,
whenever the sovereign has a right to act, as incidental to his
Constitutional powers. It is a means for carrying into execution all
sovereign powers, and may be used although not indispensably
necessary. It is a right incidental to the power, and conducive to
its beneficial exercise.
If this limited construction of the word "necessary" must be
abandoned in order to punish, whence is derived the rule which
would reinstate it when the Government would carry its powers
into execution by means not vindictive in their nature? If the word
95
"necessary" means "needful," "requisite," "essential," "conducive
to," in order to let in the power of punishment for the infraction of
law, why is it not equally comprehensive when required to
authorize the use of means which facilitate the execution of the
powers of Government, without the infliction of punishment?
In ascertaining the sense in which the word "necessary" is used in
this clause of the Constitution, we may derive some aid from that
with which it it is associated. Congress shall have power "to make
all laws which shall be necessary and proper to carry into
execution" the powers of the Government. If the word "necessary"
was used in that strict and rigorous sense for which the counsel for
the State of Maryland contend, it would be an extraordinary
departure from the usual course of the human mind, as exhibited
in composition, to add a word the only possible effect of which is
to qualify that strict and rigorous meaning, to present to the mind
the idea of some choice of means of legislation not strained and
compressed within the narrow limits for which gentlemen
contend.
But the argument which most conclusively demonstrates the error
of the construction contended for by the counsel for the State of
Maryland is founded on the intention of the convention as
manifested in the whole clause. To waste time and argument in
proving that, without it, Congress might carry its powers into
execution would be not much less idle than to hold a lighted taper
to the sun. As little can it be required to prove that, in the absence
of this clause, Congress would have some choice of means. That
it might employ those which, in its judgment, would most
advantageously effect the object to be accomplished. That any
means adapted to the end, any means which tended directly to
the execution of the Constitutional powers of the Government,
were in themselves Constitutional. This clause, as construed by the
State of Maryland, would abridge, and almost annihilate, this
useful and necessary right of the legislature to select its means.
That this could not be intended is, we should think, had it not been
already controverted, too apparent for controversy.
We think so for the following reasons:
1st. The clause is placed among the powers of Congress, not
among the limitations on those powers.
2d. Its terms purport to enlarge, not to diminish, the powers vested
in the Government. It purports to be an additional power, not a
restriction on those already granted. No reason has been or can
be assigned for thus concealing an intention to narrow the
discretion of the National Legislature under words which purport
to enlarge it. The framers of the Constitution wished its adoption,
and well knew that it would be endangered by its strength, not by
its weakness. Had they been capable of using language which
would convey to the eye one idea and, after deep reflection,
impress on the mind another, they would rather have disguised
the grant of power than its limitation. If, then, their intention had
been, by this clause, to restrain the free use of means which might
otherwise have been implied, that intention would have been
inserted in another place, and would have been expressed in
terms resembling these. "In carrying into execution the foregoing
powers, and all others," &c., "no laws shall be passed but such as
are necessary and proper." Had the intention been to make this
clause restrictive, it would unquestionably have been so in form,
as well as in effect.
The result of the most careful and attentive consideration
bestowed upon this clause is that, if it does not enlarge, it cannot
be construed to restrain, the powers of Congress, or to impair the
right of the legislature to exercise its best judgment in the selection
of measures to carry into execution the Constitutional powers of
the Government. If no other motive for its insertion can be
suggested, a sufficient one is found in the desire to remove all
doubts respecting the right to legislate on that vast mass of
incidental powers which must be involved in the Constitution if
that instrument be not a splendid bauble.
We admit, as all must admit, that the powers of the Government
are limited, and that its limits are not to be transcended. But we
think the sound construction of the Constitution must allow to the
national legislature that discretion with respect to the means by
which the powers it confers are to be carried into execution which
will enable that body to perform the high duties assigned to it in
the manner most beneficial to the people. Let the end be
legitimate, let it be within the scope of the Constitution, and all
means which are appropriate, which are plainly adapted to that
end, which are not prohibited, but consist with the letter and spirit
of the Constitution, are Constitutional. *
That a corporation must be considered as a means not less usual,
not of higher dignity, not more requiring a particular specification
than other means has been sufficiently proved. If we look to the
origin of corporations, to the manner in which they have been
framed in that Government from which we have derived most of
our legal principles and ideas, or to the uses to which they have
been applied, we find no reason to suppose that a Constitution,
omitting, and wisely omitting, to enumerate all the means for
carrying into execution the great powers vested in Government,
ought to have specified this. Had it been intended to grant this
power as one which should be distinct and independent, to be
exercised in any case whatever, it would have found a place
among the enumerated powers of the Government. But being
considered merely as a means, to be employed only for the
purpose of carrying into execution the given powers, there could
be no motive for particularly mentioning it.
The propriety of this remark would seem to be generally
acknowledged by the universal acquiescence in the construction
which has been uniformly put on the 3d section of the 4th article
of the Constitution. The power to "make all needful rules and
regulations respecting the territory or other property belonging to
the United States" is not more comprehensive than the power "to
make all laws which shall be necessary and proper for carrying
into execution" the powers of the Government. Yet all admit the
constitutionality of a Territorial Government, which is a corporate
body.
If a corporation may be employed, indiscriminately with other
means, to carry into execution the powers of the Government, no
particular reason can be assigned for excluding the use of a bank,
if required for its fiscal operations. To use one must be within the
discretion of Congress if it be an appropriate mode of executing
the powers of Government. That it is a convenient, a useful, and
essential instrument in the prosecution of its fiscal operations is not
now a subject of controversy. All those who have been
concerned in the administration of our finances have concurred
in representing its importance and necessity, and so strongly have
they been felt that Statesmen of the first class, whose previous
opinions against it had been confirmed by every circumstance
which can fix the human judgment, have yielded those opinions
to the exigencies of the nation. Under the Confederation,
Congress, justifying the measure by its necessity, transcended,
perhaps, its powers to obtain the advantage of a bank; and our
own legislation attests the universal conviction of the utility of this
measure. The time has passed away when it can be necessary to
enter into any discussion in order to prove the importance of this
instrument as a means to effect the legitimate objects of the
Government.
But were its necessity less apparent, none can deny its being an
appropriate measure; and if it is, the decree of its necessity, as has
been very justly observed, is to be discussed in another place.
Should Congress, in the execution of its powers, adopt measures
which are prohibited by the Constitution, or should Congress,
under the pretext of executing its powers, pass laws for the
accomplishment of objects not intrusted to the Government, it
would become the painful duty of this tribunal, should a case
requiring such a decision come before it, to say that such an act
was not the law of the land. But where the law is not prohibited,
and is really calculated to effect any of the objects intrusted to
the Government, to undertake here to inquire into the decree of
its necessity would be to pass the line which circumscribes the
judicial department and to tread on legislative ground. This Court
disclaims all pretensions to such a power.
After this declaration, it can scarcely be necessary to say that the
existence of State banks can have no possible influence on the
question. No trace is to be found in the Constitution of an intention
to create a dependence of the Government of the Union on
those of the States, for the execution of the great powers assigned
to it. Its means are adequate to its ends, and on those means
alone was it expected to rely for the accomplishment of its ends.
To impose on it the necessity of resorting to means which it cannot
control, which another Government may furnish or withhold,
would render its course precarious, the result of its measures
uncertain, and create a dependence on other Governments
which might disappoint its most important designs, and is
incompatible with the language of the Constitution. But were it
otherwise, the choice of means implies a right to choose a
national bank in preference to State banks, and Congress alone
can make the election.
After the most deliberate consideration, it is the unanimous and
decided opinion of this Court that the act to incorporate the Bank
96
of the United States is a law made in pursuance of the
Constitution, and is a part of the supreme law of the land.
The branches, proceeding from the same stock and being
conducive to the complete accomplishment of the object, are
equally constitutional. It would have been unwise to locate them
in the charter, and it would be unnecessarily inconvenient to
employ the legislative power in making those subordinate
arrangements. The great duties of the bank are prescribed; those
duties require branches; and the bank itself may, we think, be
safely trusted with the selection of places where those branches
shall be fixed, reserving always to the Government the right to
require that a branch shall be located where it may be deemed
necessary.
It being the opinion of the Court that the act incorporating the
bank is constitutional, and that the power of establishing a branch
in the State of Maryland might be properly exercised by the bank
itself, we proceed to inquire:
2. Whether the State of Maryland may, without violating the
Constitution, tax that branch?
That the power of taxation is one of vital importance; that it is
retained by the States; that it is not abridged by the grant of a
similar power to the Government of the Union; that it is to be
concurrently exercised by the two Governments -- are truths
which have never been denied. But such is the paramount
character of the Constitution that its capacity to withdraw any
subject from the action of even this power is admitted. The States
are expressly forbidden to lay any duties on imports or exports
except what may be absolutely necessary for executing their
inspection laws. If the obligation of this prohibition must be
conceded -- if it may restrain a State from the exercise of its taxing
power on imports and exports -- the same paramount character
would seem to restrain, as it certainly may restrain, a State from
such other exercise of this power as is in its nature incompatible
with, and repugnant to, the constitutional laws of the Union. A law
absolutely repugnant to another as entirely repeals that other as
if express terms of repeal were used.
On this ground, the counsel for the bank place its claim to be
exempted from the power of a State to tax its operations. There is
no express provision for the case, but the claim has been
sustained on a principle which so entirely pervades the
Constitution, is so intermixed with the materials which compose it,
so interwoven with its web, so blended with its texture, as to be
incapable of being separated from it without rending it into
shreds.
This great principle is that the Constitution and the laws made in
pursuance thereof are supreme; that they control the Constitution
and laws of the respective States, and cannot be controlled by
them. From this, which may be almost termed an axiom, other
propositions are deduced as corollaries, on the truth or error of
which, and on their application to this case, the cause has been
supposed to depend. These are, 1st. That a power to create
implies a power to preserve; 2d. That a power to destroy, if
wielded by a different hand, is hostile to, and incompatible with
these powers to create and to preserve; 3d. That, where this
repugnancy exists, that authority which is supreme must control,
not yield to that over which it is supreme.
These propositions, as abstract truths, would perhaps never be
controverted. Their application to this case, however, has been
denied, and both in maintaining the affirmative and the negative,
a splendor of eloquence, and strength of argument seldom if ever
surpassed have been displayed.
The power of Congress to create and, of course, to continue the
bank was the subject of the preceding part of this opinion, and is
no longer to be considered as questionable.
That the power of taxing it by the States may be exercised so as
to destroy it is too obvious to be denied. But taxation is said to be
an absolute power which acknowledges no other limits than
those expressly prescribed in the Constitution, and, like sovereign
power of every other description, is intrusted to the discretion of
those who use it. But the very terms of this argument admit that
the sovereignty of the State, in the article of taxation itself, is
subordinate to, and may be controlled by, the Constitution of the
United States. How far it has been controlled by that instrument
must be a question of construction. In making this construction, no
principle, not declared, can be admissible which would defeat
the legitimate operations of a supreme Government. It is of the
very essence of supremacy to remove all obstacles to its action
within its own sphere, and so to modify every power vested in
subordinate governments as to exempt its own operations from
their own influence. This effect need not be stated in terms. It is so
involved in the declaration of supremacy, so necessarily implied
in it, that the expression of it could not make it more certain. We
must, therefore, keep it in view while construing the Constitution.
The argument on the part of the State of Maryland is not that the
States may directly resist a law of Congress, but that they may
exercise their acknowledged powers upon it, and that the
Constitution leaves them this right, in the confidence that they will
not abuse it. Before we proceed to examine this argument and to
subject it to test of the Constitution, we must be permitted to
bestow a few considerations on the nature and extent of this
original right of taxation, which is acknowledged to remain with
the States. It is admitted that the power of taxing the people and
their property is essential to the very existence of Government,
and may be legitimately exercised on the objects to which it is
applicable, to the utmost extent to which the Government may
choose to carry it. The only security against the abuse of this
power is found in the structure of the Government itself. In
imposing a tax, the legislature acts upon its constituents. This is, in
general, a sufficient security against erroneous and oppressive
taxation.
The people of a State, therefore, give to their Government a right
of taxing themselves and their property, and as the exigencies of
Government cannot be limited, they prescribe no limits to the
exercise of this right, resting confidently on the interest of the
legislator and on the influence of the constituent over their
representative to guard them against its abuse. But the means
employed by the Government of the Union have no such security,
nor is the right of a State to tax them sustained by the same theory.
Those means are not given by the people of a particular State,
not given by the constituents of the legislature which claim the
right to tax them, but by the people of all the States They are given
by all, for the benefit of all -- and, upon theory, should be
subjected to that Government only which belongs to all.
It may be objected to this definition that the power of taxation is
not confined to the people and property of a State. It may be
exercised upon every object brought within its jurisdiction.
This is true. But to what source do we trace this right? It is obvious
that it is an incident of sovereignty, and is coextensive with that to
which it is an incident. All subjects over which the sovereign power
of a State extends are objects of taxation, but those over which it
does not extend are, upon the soundest principles, exempt from
taxation. This proposition may almost be pronounced self-evident.
The sovereignty of a State extends to everything which exists by its
own authority or is introduced by its permission, but does it extend
to those means which are employed by Congress to carry into
execution powers conferred on that body by the people of the
United States? We think it demonstrable that it does not. Those
powers are not given by the people of a single State. They are
given by the people of the United States, to a Government whose
laws, made in pursuance of the Constitution, are declared to be
supreme. Consequently, the people of a single State cannot
confer a sovereignty which will extend over them.
If we measure the power of taxation residing in a State by the
extent of sovereignty which the people of a single State possess
and can confer on its Government, we have an intelligible
standard, applicable to every case to which the power may be
applied. We have a principle which leaves the power of taxing
the people and property of a State unimpaired; which leaves to
a State the command of all its resources, and which places
beyond its reach all those powers which are conferred by the
people of the United States on the Government of the Union, and
all those means which are given for the purpose of carrying those
powers into execution. We have a principle which is safe for the
States and safe for the Union. We are relieved, as we ought to be,
from clashing sovereignty; from interfering powers; from a
repugnancy between a right in one Government to pull down
what there is an acknowledged right in another to build up; from
the incompatibility of a right in one Government to destroy what
there is a right in another to preserve. We are not driven to the
perplexing inquiry, so unfit for the judicial department, what
degree of taxation is the legitimate use and what degree may
amount to the abuse of the power. The attempt to use it on the
means employed by the Government of the Union, in pursuance
of the Constitution, is itself an abuse because it is the usurpation
97
of a power which the people of a single State cannot give.
We find, then, on just theory, a total failure of this original right to
tax the means employed by the Government of the Union, for the
execution of its powers. The right never existed, and the question
whether it has been surrendered cannot arise.
But, waiving this theory for the present, let us resume the inquiry,
whether this power can be exercised by the respective States,
consistently with a fair construction of the Constitution?
That the power to tax involves the power to destroy; that the
power to destroy may defeat and render useless the power to
create; that there is a plain repugnance in conferring on one
Government a power to control the constitutional measures of
another, which other, with respect to those very measures, is
declared to be supreme over that which exerts the control, are
propositions not to be denied. But all inconsistencies are to be
reconciled by the magic of the word CONFIDENCE. Taxation, it is
said, does not necessarily and unavoidably destroy. To carry it to
the excess of destruction would be an abuse, to presume which
would banish that confidence which is essential to all
Government.
But is this a case of confidence? Would the people of any one
State trust those of another with a power to control the most
insignificant operations of their State Government? We know they
would not. Why, then, should we suppose that the people of any
one State should be willing to trust those of another with a power
to control the operations of a Government to which they have
confided their most important and most valuable interests? In the
Legislature of the Union alone are all represented. The Legislature
of the Union alone, therefore, can be trusted by the people with
the power of controlling measures which concern all, in the
confidence that it will not be abused. This, then, is not a case of
confidence, and we must consider it is as it really is.
If we apply the principle for which the State of Maryland
contends, to the Constitution generally, we shall find it capable of
changing totally the character of that instrument. We shall find it
capable of arresting all the measures of the Government, and of
prostrating it at the foot of the States. The American people have
declared their Constitution and the laws made in pursuance
thereof to be supreme, but this principle would transfer the
supremacy, in fact, to the States.
If the States may tax one instrument, employed by the
Government in the execution of its powers, they may tax any and
every other instrument. They may tax the mail; they may tax the
mint; they may tax patent rights; they may tax the papers of the
custom house; they may tax judicial process; they may tax all the
means employed by the Government to an excess which would
defeat all the ends of Government. This was not intended by the
American people. They did not design to make their Government
dependent on the States.
Gentlemen say they do not claim the right to extend State
taxation to these objects. They limit their pretensions to property.
But on what principle is this distinction made? Those who make it
have furnished no reason for it, and the principle for which they
contend denies it. They contend that the power of taxation has
no other limit than is found in the 10th section of the 1st article of
the Constitution; that, with respect to everything else, the power
of the States is supreme, and admits of no control. If this be true,
the distinction between property and other subjects to which the
power of taxation is applicable is merely arbitrary, and can never
be sustained. This is not all. If the controlling power of the States
be established, if their supremacy as to taxation be
acknowledged, what is to restrain their exercising control in any
shape they may please to give it? Their sovereignty is not confined
to taxation; that is not the only mode in which it might be
displayed. The question is, in truth, a question of supremacy, and
if the right of the States to tax the means employed by the
General Government be conceded, the declaration that the
Constitution and the laws made in pursuance thereof shall be the
supreme law of the land is empty and unmeaning declamation.
In the course of the argument, the Federalist has been quoted,
and the opinions expressed by the authors of that work have been
justly supposed to be entitled to great respect in expounding the
Constitution. No tribute can be paid to them which exceeds their
merit; but in applying their opinions to the cases which may arise
in the progress of our Government, a right to judge of their
correctness must be retained; and to understand the argument,
we must examine the proposition it maintains and the objections
against which it is directed. The subject of those numbers from
which passages have been cited is the unlimited power of
taxation which is vested in the General Government. The
objection to this unlimited power, which the argument seeks to
remove, is stated with fulness and clearness. It is
"that an indefinite power of taxation in the latter (the Government
of the Union) might, and probably would, in time, deprive the
former (the Government of the States) of the means of providing
for their own necessities, and would subject them entirely to the
mercy of the National Legislature. As the laws of the Union are to
become the supreme law of the land; as it is to have power to
pass all laws that may be necessary for carrying into execution the
authorities with which it is proposed to vest it; the National
Government might, at any time, abolish the taxes imposed for
State objects upon the pretence of an interference with its own.
It might allege a necessity for doing this, in order to give efficacy
to the national revenues; and thus, all the resources of taxation
might, by degrees, become the subjects of federal monopoly, to
the entire exclusion and destruction of the State Governments."
The objections to the Constitution which are noticed in these
numbers were to the undefined power of the Government to tax,
not to the incidental privilege of exempting its own measures from
State taxation. The consequences apprehended from this
undefined power were that it would absorb all the objects of
taxation, "to the exclusion and destruction of the State
Governments." The arguments of the Federalist are intended to
prove the fallacy of these apprehensions, not to prove that the
Government was incapable of executing any of its powers
without exposing the means it employed to the embarrassments
of State taxation. Arguments urged against these objections and
these apprehensions are to be understood as relating to the
points they mean to prove. Had the authors of those excellent
essays been asked whether they contended for that construction
of the Constitution which would place within the reach of the
States those measures which the Government might adopt for the
execution of its powers, no man who has read their instructive
pages will hesitate to admit that their answer must have been in
the negative.
It has also been insisted that, as the power of taxation in the
General and State Governments is acknowledged to be
concurrent, every argument which would sustain the right of the
General Government to tax banks chartered by the States, will
equally sustain the right of the States to tax banks chartered by
the General Government.
But the two cases are not on the same reason. The people of all
the States have created the General Government, and have
conferred upon it the general power of taxation. The people of all
the States, and the States themselves, are represented in
Congress, and, by their representatives, exercise this power. When
they tax the chartered institutions of the States, they tax their
constituents, and these taxes must be uniform. But when a State
taxes the operations of the Government of the United States, it
acts upon institutions created not by their own constituents, but
by people over whom they claim no control. It acts upon the
measures of a Government created by others as well as
themselves, for the benefit of others in common with themselves.
The difference is that which always exists, and always must exist,
between the action of the whole on apart, and the action of a
part on the whole -- between the laws of a Government declared
to be supreme, and those of a Government which, when in
opposition to those laws, is not supreme.
But if the full application of this argument could be admitted, it
might bring into question the right of Congress to tax the State
banks, and could not prove the rights of the States to tax the Bank
of the United States.
The Court has bestowed on this subject its most deliberate
consideration. The result is a conviction that the States have no
power, by taxation or otherwise, to retard, impede, burden, or in
any manner control the operations of the constitutional laws
enacted by Congress to carry into execution the powers vested
in the General Government. This is, we think, the unavoidable
consequence of that supremacy which the Constitution has
declared.
We are unanimously of opinion that the law passed by the
Legislature of Maryland, imposing a tax on the Bank of the United
98
States is unconstitutional and void.
This opinion does not deprive the States of any resources which
they originally possessed. It does not extend to a tax paid by the
real property of the bank, in common with the other real property
within the State, nor to a tax imposed on the interest which the
citizens of Maryland may hold in this institution, in common with
other property of the same description throughout the State. But
this is a tax on the operations of the bank, and is, consequently, a
tax on the operation of an instrument employed by the
Government of the Union to carry its powers into execution. Such
a tax must be unconstitutional.
JUDGMENT. This cause came on to be heard, on the transcript of
the record of the Court of Appeals of the State of Maryland, and
was argued by counsel; on consideration whereof, it is the opinion
of this Court that the act of the Legislature of Maryland is contrary
to the Constitution of the United States, and void, and therefore
that the said Court of Appeals of the State of Maryland erred, in
affirming the judgment of the Baltimore County Court, in which
judgment was rendered against James W. McCulloch; but that
the said Court of Appeals of Maryland ought to have reversed the
said judgment of the said Baltimore County Court, and ought to
have given judgment for the said appellant, McCulloch. It is,
therefore, adjudged and ordered that the said judgment of the
said Court of Appeals of the State of Maryland in this case be, and
the same hereby is, reversed and annulled. And this Court,
proceeding to render such judgment as the said Court of Appeals
should have rendered, it is further adjudged and ordered that the
judgment of the said Baltimore County Court be reversed and
annulled, and that judgment be entered in the said Baltimore
County Court for the said James W. McCulloch.
2. [G.R. No. 119286. October 13, 2004]
PASEO REALTY & DEVELOPMENT CORPORATION, petitioner, vs.
COURT OF APPEALS, COURT OF TAX APPEALS and COMMISSIONER
OF INTERNAL REVENUE, respondents.
DECISION
TINGA, J.:
The changes in the reportorial requirements and payment
schedules of corporate income taxes from annual to quarterly
have created problems, especially on the matter of tax
refunds.[1] In this case, the Court is called to resolve the question
of whether alleged excess taxes paid by a corporation during a
taxable year should be refunded or credited against its tax
liabilities for the succeeding year.
Paseo Realty and Development Corporation, a domestic
corporation engaged in the lease of two (2) parcels of land at
Paseo de Roxas in Makati City, seeks a review of the Decision[2]of
the Court of Appeals dismissing its petition for review of the
resolution[3] of the Court of Tax Appeals (CTA) which, in turn,
denied its claim for refund.
The factual antecedents[4] are as follows:
On April 16, 1990, petitioner filed its Income Tax Return for the
calendar year 1989 declaring a gross income of P1,855,000.00,
deductions of P1,775,991.00, net income of P79,009.00, an income
tax due thereon in the amount of P27,653.00, prior years excess
credit of P146,026.00, and creditable taxes withheld in 1989 of
P54,104.00 or a total tax credit of P200,130.00 and credit balance
of P172,477.00.
On November 14, 1991, petitioner filed with respondent a claim
for the refund of excess creditable withholding and income taxes
for the years 1989 and 1990 in the aggregate amount of
P147,036.15.
On December 27, 1991 alleging that the prescriptive period for
refunds for 1989 would expire on December 30, 1991 and that it
was necessary to interrupt the prescriptive period, petitioner filed
with the respondent Court of Tax Appeals a petition for review
praying for the refund of P54,104.00 representing creditable taxes
withheld from income payments of petitioner for the calendar
year ending December 31, 1989.
On February 25, 1992, respondent Commissioner filed an Answer
and by way of special and/or affirmative defenses averred the
following: a) the petition states no cause of action for failure to
allege the dates when the taxes sought to be refunded were
paid; b) petitioners claim for refund is still under investigation by
respondent Commissioner; c) the taxes claimed are deemed to
have been paid and collected in accordance with law and
existing pertinent rules and regulations; d) petitioner failed to
allege that it is entitled to the refund or deductions claimed; e)
petitioners contention that it has available tax credit for the
current and prior year is gratuitous and does not ipso facto
warrant the refund; f) petitioner failed to show that it has complied
with the provision of Section 230 in relation to Section 204 of the
Tax Code.
After trial, the respondent Court rendered a decision ordering
respondent Commissioner to refund in favor of petitioner the
amount of P54,104.00, representing excess creditable withholding
taxes paid for January to July1989.
Respondent Commissioner moved for reconsideration of the
decision, alleging that the P54,104.00 ordered to be refunded has
already been included and is part and parcel of the P172,477.00
which petitioner automatically applied as tax credit for the
succeeding taxable year 1990.
In a resolution dated October 21, 1993 Respondent Court
reconsidered its decision of July 29, 1993 and dismissed the
petition for review, stating that it has overlooked the fact that the
petitioners 1989 Corporate Income Tax Return (Exh. A) indicated
that the amount of P54,104.00 subject of petitioners claim for
refund has already been included as part and parcel of the
P172,477.00 which the petitioner automatically applied as tax
credit for the succeeding taxable year 1990.
Petitioner filed a Motion for Reconsideration which was denied by
respondent Court on March 10, 1994.[5]
Petitioner filed a Petition for Review[6] dated April 3, 1994 with the
Court of Appeals. Resolving the twin issues of whether petitioner is
entitled to a refund of P54,104.00 representing creditable taxes
withheld in 1989 and whether petitioner applied such creditable
taxes withheld to its 1990 income tax liability, the appellate court
held that petitioner is not entitled to a refund because it had
already elected to apply the total amount of P172,447.00, which
includes the P54,104.00 refund claimed, against its income tax
liability for 1990. The appellate court elucidated on the reason for
its dismissal of petitioners claim for refund, thus:
In the instant case, it appears that when petitioner filed its income
tax return for the year 1989, it filled up the box stating that the total
amount of P172,477.00 shall be applied against its income tax
liabilities for the succeeding taxable year.
Petitioner did not specify in its return the amount to be refunded
and the amount to be applied as tax credit to the succeeding
taxable year, but merely marked an x to the box indicating to be
applied as tax credit to the succeeding taxable year. Unlike what
petitioner had done when it filed its income tax return for the year
1988, it specifically stated that out of the P146,026.00 the entire
refundable amount, onlyP64,623.00 will be made available as tax
credit, while the amount of P81,403.00 will be refunded.
In its 1989 income tax return, petitioner filled up the box to be
applied as tax credit to succeeding taxable year, which signified
that instead of refund, petitioner will apply the total amount of
P172,447.00, which includes the amount of P54,104.00 sought to
be refunded, as tax credit for its tax liabilities in 1990. Thus, there is
really nothing left to be refunded to petitioner for the year 1989.
To grant petitioners claim for refund is tantamount to granting
twice the refund herein sought to be refunded, to the prejudice
of the Government.
The Court of Appeals denied petitioners Motion for
Reconsideration[7] dated November 8, 1994 in its Resolution[8]
dated February 21, 1995 because the motion merely restated the
grounds which have already been considered and passed upon
in its Decision.[9]
Petitioner thus filed the instant Petition for Review[10] dated April
14, 1995 arguing that the evidence presented before the lower
courts conclusively shows that it did not apply theP54,104.00 to its
1990 income tax liability; that the Decision subject of the instant
petition is inconsistent with a final decision[11] of the Sixteenth
Division of the appellate court in C.A.-G.R. Sp. No. 32890 involving
99
the same parties and subject matter; and that the affirmation of
the questioned Decision would lead to absurd results in the
manner of claiming refunds or in the application of prior years
excess tax credits.
The Office of the Solicitor General (OSG) filed a Comment[12]
dated May 16, 1996 on behalf of respondents asserting that the
claimed refund of P54,104.00 was, by petitioners election in its
Corporate Annual Income Tax Return for 1989, to be applied
against its tax liability for 1990. Not having submitted its tax return
for 1990 to show whether the said amount was indeed applied
against its tax liability for 1990, petitioners election in its tax return
stands. The OSG also contends that petitioners election to apply
its overpaid income tax as tax credit against its tax liabilities for the
succeeding taxable year is mandatory and irrevocable.
On September 2, 1997, petitioner filed a Reply[13] dated August
31, 1996 insisting that the issue in this case is not whether the
amount of P54,104.00 was included as tax credit to be applied
against its 1990 income tax liability but whether the same amount
was actually applied as tax credit for 1990. Petitioner claims that
there is no need to show that the amount ofP54,104.00 had not
been automatically applied against its 1990 income tax liability
because the appellate courts decision in C.A.-G.R. Sp. No. 32890
clearly held that petitioner charged its 1990 income tax liability
against its tax credit for 1988 and not 1989. Petitioner also disputes
the OSGs assertion that the taxpayers election as to the
application of excess taxes is irrevocable averring that there is
nothing in the law that prohibits a taxpayer from changing its mind
especially if subsequent events leave the latter no choice but to
change its election.
The OSG filed a Rejoinder[14] dated March 5, 1997 stating that
petitioners 1988 tax return shows a prior years excess credit of
P81,403.00, creditable tax withheld of P92,750.00 and tax due of
P27,127.00. Petitioner indicated that the prior years excess credit
of P81,403.00 was to be refunded, while the remaining amount of
P64,623.00 (P92,750.00 - P27,127.00) shall be considered as tax
credit for 1989. However, in its 1989 tax return, petitioner included
the P81,403.00 which had already been segregated for refund in
the computation of its excess credit, and specified that the full
amount of P172,479.00* (P81,403.00 + P64,623.00 + P54,104.00** -
P27,653.00***) be considered as its tax credit for 1990. Considering
that it had obtained a favorable ruling for the refund of its excess
credit for 1988 in CA-G.R. SP. No. 32890, its remaining tax credit for
1989 should be the excess credit to be applied against its 1990 tax
liability. In fine, the OSG argues that by its own election, petitioner
can no longer ask for a refund of its creditable taxes withheld in
1989 as the same had been applied against its 1990 tax due.
In its Resolution[15] dated July 16, 1997, the Court gave due
course to the petition and required the parties to simultaneously
file their respective memoranda within 30 days from notice. In
compliance with this directive, petitioner submitted its
Memorandum[16] dated September 18, 1997 in due time, while
the OSG filed its Memorandum[17] dated April 27, 1998 only on
April 29, 1998 after several extensions.
The petition must be denied.
As a matter of principle, it is not advisable for this Court to set aside
the conclusion reached by an agency such as the CTA which is,
by the very nature of its functions, dedicated exclusively to the
study and consideration of tax problems and has necessarily
developed an expertise on the subject, unless there has been an
abuse or improvident exercise of its authority.[18]
This interdiction finds particular application in this case since the
CTA, after careful consideration of the merits of the Commissioner
of Internal Revenues motion for reconsideration, reconsidered its
earlier decision which ordered the latter to refund the amount of
P54,104.00 to petitioner. Its resolution cannot be successfully
assailed based, as it is, on the pertinent laws as applied to the
facts.
Petitioners 1989 tax return indicates an aggregate creditable tax
of P172,477.00, representing its 1988 excess credit of P146,026.00
and 1989 creditable tax of P54,104.00 less tax due for 1989, which
it elected to apply as tax credit for the succeeding taxable
year.[19] According to petitioner, it successively utilized this
amount when it obtained refunds in CTA Case No. 4439 (C.A.-G.R.
Sp. No. 32300) and CTA Case No. 4528 (C.A.-G.R. Sp. No. 32890),
and applied its 1990 tax liability, leaving a balance of P54,104.00,
the amount subject of the instant claim for refund.[20]
Represented mathematically, petitioner accounts for its claim in
this wise:
P172,477.00 Amount indicated in petitioners 1989 tax return to be
applied as tax credit for the succeeding taxable year
- 25,623.00 Claim for refund in CTA Case No. 4439 (C.A.-G.R. Sp.
No. 32300)
P146,854.00 Balance as of April 16, 1990
- 59,510.00 Claim for refund in CTA Case No. 4528 (C.A.-G.R. Sp.
No. 32890)
P87,344.00 Balance as of January 2, 1991
- 33,240.00 Income tax liability for calendar year 1990 applied as
of April 15, 1991
P54,104.00 Balance as of April 15, 1991 now subject of the instant
claim for refund[21]
Other than its own bare allegations, however, petitioner offers no
proof to the effect that its creditable tax of P172,477.00 was
applied as claimed above. Instead, it anchors its assertion of
entitlement to refund on an alleged finding in C.A.-G.R. Sp. No.
32890[22] involving the same parties to the effect that petitioner
charged its 1990 income tax liability to its tax credit for 1988 and
not its 1989 tax credit. Hence, its excess creditable taxes withheld
of P54,104.00 for 1989 was left untouched and may be refunded.
Note should be taken, however, that nowhere in the case referred
to by petitioner did the Court of Appeals make a categorical
determination that petitioners tax liability for 1990 was applied
against its 1988 tax credit. The statement adverted to by petitioner
was actually presented in the appellate courts decision in CA-
G.R. Sp No. 32890 as part of petitioners own narration of facts. The
pertinent portion of the decision reads:
It would appear from petitioners submission as follows:
xxx since it has already applied to its prior years excess credit of
P81,403.00 (which petitioner wanted refunded when it filed its
1988 Income Tax Return on April 14, 1989) the income tax liability
for 1988 of P28,127.00 and the income tax liability for 1989 of
P27,653.00, leaving a balance refundable of P25,623.00 subject of
C.T.A. Case No. 4439, the P92,750.00 (P64,623.00 plus P28,127.00,
since this second amount was already applied to the amount
refundable of P81,403.00) should be the refundable amount. But
since the taxpayer again used part of it to satisfy its income tax
liability of P33,240.00 for 1990, the amount refundable was
P59,510.00, which is the amount prayed for in the claim for refund
and also in the petitioner (sic) for review.
That the present claim for refund already consolidates its claims
for refund for 1988, 1989, and 1990, when it filed a claim for refund
of P59,510.00 in this case (CTA Case No. 4528). Hence, the present
claim should be resolved together with the previous claims.[23]
The confusion as to petitioners entitlement to a refund could
altogether have been avoided had it presented its tax return for
1990. Such return would have shown whether petitioner actually
applied its 1989 tax credit of P172,477.00, which includes the
P54,104.00 creditable taxes withheld for 1989 subject of the instant
claim for refund, against its 1990 tax liability as it had elected in its
1989 return, or at least, whether petitioners tax credit of
P172,477.00 was applied to its approved refunds as it claims.
The return would also have shown whether there remained an
excess credit refundable to petitioner after deducting its tax
liability for 1990. As it is, we only have petitioners allegation that its
tax due for 1990 was P33,240.00 and that this was applied against
its remaining tax credits using its own first in, first out method of
computation.
It would have been different had petitioner not included the
P54,104.00 creditable taxes for 1989 in the total amount it elected
to apply against its 1990 tax liabilities. Then, all that would have
been required of petitioner are: proof that it filed a claim for
refund within the two (2)-year prescriptive period provided under
Section 230 of the NIRC; evidence that the income upon which
100
the taxes were withheld was included in its return; and to establish
the fact of withholding by a copy of the statement (BIR Form No.
1743.1) issued by the payor[24] to the payee showing the amount
paid and the amount of tax withheld therefrom. However, since
petitioner opted to apply its aggregate excess credits as tax
credit for 1990, it was incumbent upon it to present its tax return
for 1990 to show that the claimed refund had not been
automatically credited and applied to its 1990 tax liabilities.
The grant of a refund is founded on the assumption that the tax
return is valid, i.e., that the facts stated therein are true and
correct.[25] Without the tax return, it is error to grant a refund since
it would be virtually impossible to determine whether the proper
taxes have been assessed and paid.
Why petitioner failed to present such a vital piece of evidence
confounds the Court. Petitioner could very well have attached a
copy of its final adjustment return for 1990 when it filed its claim for
refund on November 13, 1991. Annex B of its Petition for Review[26]
dated December 26, 1991 filed with the CTA, in fact, states that its
annual tax return for 1990 was submitted in support of its claim.
Yet, petitioners tax return for 1990 is nowhere to be found in the
records of this case.
Had petitioner presented its 1990 tax return in refutation of
respondent Commissioners allegation that it did not present
evidence to prove that its claimed refund had already been
automatically credited against its 1990 tax liability, the CTA would
not have reconsidered its earlier Decision. As it is, the absence of
petitioners 1990 tax return was the principal basis of the CTAs
Resolution reconsidering its earlier Decision to grant petitioners
claim for refund.
Petitioner could even still have attached a copy of its 1990 tax
return to its petition for review before the Court of Appeals. The
appellate court, being a trier of facts, is authorized to receive it in
evidence and would likely have taken it into account in its
disposition of the petition.
In BPI-Family Savings Bank v. Court of Appeals,[27] although
petitioner failed to present its 1990 tax return, it presented other
evidence to prove its claim that it did not apply and could not
have applied the amount in dispute as tax credit. Importantly,
petitioner therein attached a copy of its final adjustment return for
1990 to its motion for reconsideration before the CTA buttressing
its claim that it incurred a net loss and is thus entitled to refund.
Considering this fact, the Court held that there is no reason for the
BIR to withhold the tax refund.
In this case, petitioners failure to present sufficient evidence to
prove its claim for refund is fatal to its cause. After all, it is axiomatic
that a claimant has the burden of proof to establish the factual
basis of his or her claim for tax credit or refund. Tax refunds, like tax
exemptions, are construed strictly against the taxpayer.[28]
Section 69, Chapter IX, Title II of the National Internal Revenue
Code of the Philippines (NIRC) provides:
Sec. 69. Final Adjustment Return.Every corporation liable to tax
under Section 24 shall file a final adjustment return covering the
total net income for the preceding calendar or fiscal year. If the
sum of the quarterly tax payments made during the said taxable
year is not equal to the total tax due on the entire taxable net
income of that year the corporation shall either:
(a) Pay the excess tax still due; or
(b) Be refunded the excess amount paid, as the case may be.
In case the corporation is entitled to a refund of the excess
estimated quarterly income taxes paid, the refundable amount
shown on its final adjustment return may be credited against the
estimated quarterly income tax liabilities for the taxable quarters
of the succeeding taxable year. [Emphasis supplied]
Revenue Regulation No. 10-77 of the Bureau of Internal Revenue
clarifies:
SEC. 7. Filing of final or adjustment return and final payment of
income tax. A final or an adjustment return on B.I.R. Form No. 1702
covering the total taxable income of the corporation for the (B) Carry-over the excess credit; or
preceding calendar or fiscal year shall be filed on or before the

101
15th day of the fourth month following the close of the calendar
(C) Be credited or refunded with the excess amount paid, as the
or fiscal year. The return shall include all the items of gross income
case may be.
and deductions for the taxable year. The amount of income tax
to be paid shall be the balance of the total income tax shown on
the final or adjustment return after deducting therefrom the total In case the corporation is entitled to a tax credit or refund of the
quarterly income taxes paid during the preceding first three excess estimated quarterly income taxes paid, the excess amount
quarters of the same calendar or fiscal year. shown on its final adjustment return may be carried over and
credited against the estimated quarterly income tax liabilities for
the taxable quarters of the succeeding taxable years. Once the
Any excess of the total quarterly payments over the actual
option to carry-over and apply the excess quarterly income tax
income tax computed and shown in the adjustment or final
against income tax due for the taxable quarters of the
corporate income tax return shall either (a) be refunded to the
succeeding taxable years has been made, such option shall be
corporation, or (b) may be credited against the estimated
considered irrevocable for that taxable period and no
quarterly income tax liabilities for the quarters of the succeeding
application for cash refund or issuance of a tax credit certificate
taxable year. The corporation must signify in its annual corporate
shall be allowed therefore. [Emphasis supplied]
adjustment return its intention whether to request for refund of the
overpaid income tax or claim for automatic credit to be applied
against its income tax liabilities for the quarters of the succeeding As clearly seen from this provision, the taxpayer is allowed three
taxable year by filling up the appropriate box on the corporate (3) options if the sum of its quarterly tax payments made during
tax return (B.I.R. Form No. 1702). [Emphasis supplied] the taxable year is not equal to the total tax due for that year: (a)
pay the balance of the tax still due; (b) carry-over the excess
credit; or (c) be credited or refunded the amount paid. If the
As clearly shown from the above-quoted provisions, in case the
taxpayer has paid excess quarterly income taxes, it may be
corporation is entitled to a refund of the excess estimated
entitled to a tax credit or refund as shown in its final adjustment
quarterly income taxes paid, the refundable amount shown on its
return which may be carried over and applied against the
final adjustment return may be credited against the estimated
estimated quarterly income tax liabilities for the taxable quarters
quarterly income tax liabilities for the taxable quarters of the
of the succeeding taxable years. However, once the taxpayer
succeeding year. The carrying forward of any excess or overpaid
has exercised the option to carry-over and to apply the excess
income tax for a given taxable year is limited to the succeeding
quarterly income tax against income tax due for the taxable
taxable year only.
quarters of the succeeding taxable years, such option is
irrevocable for that taxable period and no application for cash
In the recent case of AB Leasing and Finance Corporation v. refund or issuance of a tax credit certificate shall be allowed.
Commissioner of Internal Revenue,[29] where the Court declared
that [T]he carrying forward of any excess or overpaid income tax
Had this provision been in effect when the present claim for refund
for a given taxable year then is limited to the succeeding taxable
was filed, petitioners excess credits for 1988 could have been
year only, we ruled that since the case involved a claim for refund
properly applied to its 1990 tax liabilities. Unfortunately for
of overpaid taxes for 1993, petitioner could only have applied the
petitioner, this is not the case.
1993 excess tax credits to its 1994 income tax liabilities. To further
carry-over to 1995 the 1993 excess tax credits is violative of Section
69 of the NIRC. Taxation is a destructive power which interferes with the personal
and property rights of the people and takes from them a portion
of their property for the support of the government. And since
In this case, petitioner included its 1988 excess credit of
taxes are what we pay for civilized society, or are the lifeblood of
P146,026.00 in the computation of its total excess credit for 1989.
the nation, the law frowns against exemptions from taxation and
It indicated this amount, plus the 1989 creditable taxes withheld
statutes granting tax exemptions are thus construed strictissimi juris
of P54,104.00 or a total of P172,477.00, as its total excess credit to
against the taxpayer and liberally in favor of the taxing authority.
be applied as tax credit for 1990. By its own disclosure, petitioner
A claim of refund or exemption from tax payments must be clearly
effectively combined its 1988 and 1989 tax credits and applied its
shown and be based on language in the law too plain to be
1990 tax due of P33,240.00 against the total, and not against its
mistaken. Elsewise stated, taxation is the rule, exemption
creditable taxes for 1989 only as allowed by Section 69. This is a
therefrom is the exception.[32]
clear admission that petitioners 1988 tax credit was incorrectly
and illegally applied against its 1990 tax liabilities.
WHEREFORE, the instant petition is DENIED. The challenged
decision of the Court of Appeals is hereby AFFIRMED. No
Parenthetically, while a taxpayer is given the choice whether to
pronouncement as to costs.
claim for refund or have its excess taxes applied as tax credit for
the succeeding taxable year, such election is not final. Prior
verification and approval by the Commissioner of Internal SO ORDERED.
Revenue is required. The availment of the remedy of tax credit is
not absolute and mandatory. It does not confer an absolute right 3. G.R. No. L-25043 April 26, 1968
on the taxpayer to avail of the tax credit scheme if it so chooses.
Neither does it impose a duty on the part of the government to sit
back and allow an important facet of tax collection to be at the ANTONIO ROXAS, EDUARDO ROXAS and ROXAS Y CIA., in their
sole control and discretion of the taxpayer.[30] own respective behalf and as judicial co-guardians of JOSE
ROXAS, petitioners, vs. COURT OF TAX APPEALS and
COMMISSIONER OF INTERNAL REVENUE, respondents.
Contrary to petitioners assertion however, the taxpayers election,
signified by the ticking of boxes in Item 10 of BIR Form No. 1702, is
not a mere technical exercise. It aids in the proper management BENGZON, J.P., J.:
of claims for refund or tax credit by leading tax authorities to the
direction they should take in addressing the claim. Don Pedro Roxas and Dona Carmen Ayala, Spanish subjects,
transmitted to their grandchildren by hereditary succession the
The amendment of Section 69 by what is now Section 76 of following properties:
Republic Act No. 8424[31] emphasizes that it is imperative to
indicate in the tax return or the final adjustment return whether a (1) Agricultural lands with a total area of 19,000 hectares, situated
tax credit or refund is sought by making the taxpayers choice in the municipality of Nasugbu, Batangas province;
irrevocable. Section 76 provides:
(2) A residential house and lot located at Wright St., Malate,
SEC. 76. Final Adjustment Return.Every corporation liable to tax Manila; and
under Section 27 shall file a final adjustment return covering the
total taxable income for the preceding calendar or fiscal year. If
(3) Shares of stocks in different corporations.
the sum of the quarterly tax payments made during the said
taxable year is not equal to the total tax due on the entire taxable
income of that year, the corporation shall either: To manage the above-mentioned properties, said children,
namely, Antonio Roxas, Eduardo Roxas and Jose Roxas, formed a
partnership called Roxas y Compania.
(A) Pay the balance of the tax still due; or
AGRICULTURAL LANDS The following deductions were disallowed:

102
At the conclusion of the Second World War, the tenants who have ROXAS Y CIA.:
all been tilling the lands in Nasugbu for generations expressed
their desire to purchase from Roxas y Cia. the parcels which they
1953
actually occupied. For its part, the Government, in consonance
with the constitutional mandate to acquire big landed estates
and apportion them among landless tenants-farmers, persuaded Tickets for Banquet in honor of
the Roxas brothers to part with their landholdings. Conferences
were held with the farmers in the early part of 1948 and finally the S. Osmeña P 40.00
Roxas brothers agreed to sell 13,500 hectares to the Government
for distribution to actual occupants for a price of P2,079,048.47
plus P300,000.00 for survey and subdivision expenses. Gifts of San Miguel beer 28.00

It turned out however that the Government did not have funds to Contributions to —
cover the purchase price, and so a special arrangement was
made for the Rehabilitation Finance Corporation to advance to Philippine Air Force Chapel 100.00
Roxas y Cia. the amount of P1,500,000.00 as loan. Collateral for
such loan were the lands proposed to be sold to the farmers.
Manila Police Trust Fund 150.00
Under the arrangement, Roxas y Cia. allowed the farmers to buy
the lands for the same price but by installment, and contracted
with the Rehabilitation Finance Corporation to pay its loan from Philippines Herald's fund for Manila's neediest families
the proceeds of the yearly amortizations paid by the farmers. 100.00

In 1953 and 1955 Roxas y Cia. derived from said installment 1955
payments a net gain of P42,480.83 and P29,500.71. Fifty percent
of said net gain was reported for income tax purposes as gain on
Contributions to Contribution to
the sale of capital asset held for more than one year pursuant to
Section 34 of the Tax Code.
Our Lady of Fatima Chapel, FEU 50.00
RESIDENTIAL HOUSE
ANTONIO ROXAS:
During their bachelor days the Roxas brothers lived in the
residential house at Wright St., Malate, Manila, which they 1953
inherited from their grandparents. After Antonio and Eduardo got
married, they resided somewhere else leaving only Jose in the old Contributions to —
house. In fairness to his brothers, Jose paid to Roxas y Cia. rentals
for the house in the sum of P8,000.00 a year.
Pasay City Firemen Christmas Fund 25.00

ASSESSMENTS
Pasay City Police Dept. X'mas fund 50.00

On June 17, 1958, the Commissioner of Internal Revenue

demanded from Roxas y Cia the payment of real estate dealer's 1955
tax for 1952 in the amount of P150.00 plus P10.00 compromise
penalty for late payment, and P150.00 tax for dealers of securities Contributions to —
for 1952 plus P10.00 compromise penalty for late payment. The
assessment for real estate dealer's tax was based on the fact that
Baguio City Police Christmas fund 25.00
Roxas y Cia. received house rentals from Jose Roxas in the amount
of P8,000.00. Pursuant to Sec. 194 of the Tax Code, an owner of a
real estate who derives a yearly rental income therefrom in the Pasay City Firemen Christmas fund 25.00
amount of P3,000.00 or more is considered a real estate dealer
and is liable to pay the corresponding fixed tax.
Pasay City Police Christmas fund 50.00

The Commissioner of Internal Revenue justified his demand for the EDUARDO ROXAS:
fixed tax on dealers of securities against Roxas y Cia., on the fact
that said partnership made profits from the purchase and sale of
securities. 1953

In the same assessment, the Commissioner assessed deficiency Contributions to —

income taxes against the Roxas Brothers for the years 1953 and
1955, as follows: Hijas de Jesus' Retiro de Manresa 450.00

1953 1955 Philippines Herald's fund for Manila's neediest families

100.00
Antonio Roxas P7,010.00P5,813.00
1955
Eduardo Roxas 7,281.00 5,828.00
Contributions to Philippines
Jose Roxas 6,323.00 5,588.00
Herald's fund for Manila's
The deficiency income taxes resulted from the inclusion as income
of Roxas y Cia. of the unreported 50% of the net profits for 1953 neediest families 120.00
and 1955 derived from the sale of the Nasugbu farm lands to the
tenants, and the disallowance of deductions from gross income
of various business expenses and contributions claimed by Roxas JOSE ROXAS:
y Cia. and the Roxas brothers. For the reason that Roxas y Cia.
subdivided its Nasugbu farm lands and sold them to the farmers 1955
on installment, the Commissioner considered the partnership as
engaged in the business of real estate, hence, 100% of the profits
Contributions to Philippines
derived therefrom was taxed.

Herald's fund for Manila's

 neediest families 120.00
The Roxas brothers protested the assessment but inasmuch as said
protest was denied, they instituted an appeal in the Court of Tax
Appeals on January 9, 1961. The Tax Court heard the appeal and
rendered judgment on July 31, 1965 sustaining the assessment
except the demand for the payment of the fixed tax on dealer of
securities and the disallowance of the deductions for
contributions to the Philippine Air Force Chapel and Hijas de Jesus'
Retiro de Manresa. The Tax Court's judgment reads:
WHEREFORE, the decision appealed from is hereby affirmed with
respect to petitioners Antonio Roxas, Eduardo Roxas, and Jose
Roxas who are hereby ordered to pay the respondent
Commissioner of Internal Revenue the amounts of P12,808.00,
P12,887.00 and P11,857.00, respectively, as deficiency income
taxes for the years 1953 and 1955, plus 5% surcharge and 1%
monthly interest as provided for in Sec. 51(a) of the Revenue
Code; and modified with respect to the partnership Roxas y Cia.
in the sense that it should pay only P150.00, as real estate dealer's
tax. With costs against petitioners.
Not satisfied, Roxas y Cia. and the Roxas brothers appealed to this
Court. The Commissioner of Internal Revenue did not appeal.
The issues:
(1) Is the gain derived from the sale of the Nasugbu farm lands an
ordinary gain, hence 100% taxable?
(2) Are the deductions for business expenses and contributions
deductible?
(3) Is Roxas y Cia. liable for the payment of the fixed tax on real
estate dealers?
The Commissioner of Internal Revenue contends that Roxas y Cia.
could be considered a real estate dealer because it engaged in
the business of selling real estate. The business activity alluded to
was the act of subdividing the Nasugbu farm lands and selling
them to the farmers-occupants on installment. To bolster his stand
on the point, he cites one of the purposes of Roxas y Cia. as
contained in its articles of partnership, quoted below:
4. (a) La explotacion de fincas urbanes pertenecientes a la misma
o que pueden pertenecer a ella en el futuro, alquilandoles por los
plazos y demas condiciones, estime convenientes y vendiendo
aquellas que a juicio de sus gerentes no deben conservarse;
The above-quoted purpose notwithstanding, the proposition of
the Commissioner of Internal Revenue cannot be favorably
accepted by Us in this isolated transaction with its peculiar
circumstances in spite of the fact that there were hundreds of
vendees. Although they paid for their respective holdings in
installment for a period of ten years, it would nevertheless not
make the vendor Roxas y Cia. a real estate dealer during the ten-
year amortization period.
It should be borne in mind that the sale of the Nasugbu farm lands
to the very farmers who tilled them for generations was not only in
consonance with, but more in obedience to the request and
pursuant to the policy of our Government to allocate lands to the
landless. It was the bounden duty of the Government to pay the
agreed compensation after it had persuaded Roxas y Cia. to sell
its haciendas, and to subsequently subdivide them among the
farmers at very reasonable terms and prices. However, the
Government could not comply with its duty for lack of funds.
Obligingly, Roxas y Cia. shouldered the Government's burden,
went out of its way and sold lands directly to the farmers in the
same way and under the same terms as would have been the
case had the Government done it itself. For this magnanimous
act, the municipal council of Nasugbu passed a resolution
expressing the people's gratitude.
The power of taxation is sometimes called also the power to
destroy. Therefore it should be exercised with caution to minimize
injury to the proprietary rights of a taxpayer. It must be exercised
fairly, equally and uniformly, lest the tax collector kill the "hen that
lays the golden egg". And, in order to maintain the general
public's trust and confidence in the Government this power must
be used justly and not treacherously. It does not conform with Our
sense of justice in the instant case for the Government to
persuade the taxpayer to lend it a helping hand and later on to
penalize him for duly answering the urgent call.
103
In fine, Roxas y Cia. cannot be considered a real estate dealer for
the sale in question. Hence, pursuant to Section 34 of the Tax
Code the lands sold to the farmers are capital assets, and the gain
derived from the sale thereof is capital gain, taxable only to the
extent of 50%.
DISALLOWED DEDUCTIONS
Roxas y Cia. deducted from its gross income the amount of P40.00
for tickets to a banquet given in honor of Sergio Osmena and
P28.00 for San Miguel beer given as gifts to various persons. The
deduction were claimed as representation expenses.
Representation expenses are deductible from gross income as
expenditures incurred in carrying on a trade or business under
Section 30(a) of the Tax Code provided the taxpayer proves that
they are reasonable in amount, ordinary and necessary, and
incurred in connection with his business. In the case at bar, the
evidence does not show such link between the expenses and the
business of Roxas y Cia. The findings of the Court of Tax Appeals
must therefore be sustained.
The petitioners also claim deductions for contributions to the
Pasay City Police, Pasay City Firemen, and Baguio City Police
Christmas funds, Manila Police Trust Fund, Philippines Herald's fund
for Manila's neediest families and Our Lady of Fatima chapel at
Far Eastern University.
The contributions to the Christmas funds of the Pasay City Police,
Pasay City Firemen and Baguio City Police are not deductible for
the reason that the Christmas funds were not spent for public
purposes but as Christmas gifts to the families of the members of
said entities. Under Section 39(h), a contribution to a government
entity is deductible when used exclusively for public purposes. For
this reason, the disallowance must be sustained. On the other
hand, the contribution to the Manila Police trust fund is an
allowable deduction for said trust fund belongs to the Manila
Police, a government entity, intended to be used exclusively for
its public functions.
The contributions to the Philippines Herald's fund for Manila's
neediest families were disallowed on the ground that the
Philippines Herald is not a corporation or an association
contemplated in Section 30 (h) of the Tax Code. It should be
noted however that the contributions were not made to the
Philippines Herald but to a group of civic spirited citizens
organized by the Philippines Herald solely for charitable purposes.
There is no question that the members of this group of citizens do
not receive profits, for all the funds they raised were for Manila's
neediest families. Such a group of citizens may be classified as an
association organized exclusively for charitable purposes
mentioned in Section 30(h) of the Tax Code.
Rightly, the Commissioner of Internal Revenue disallowed the
contribution to Our Lady of Fatima chapel at the Far Eastern
University on the ground that the said university gives dividends to
its stockholders. Located within the premises of the university, the
chapel in question has not been shown to belong to the Catholic
Church or any religious organization. On the other hand, the lower
court found that it belongs to the Far Eastern University,
contributions to which are not deductible under Section 30(h) of
the Tax Code for the reason that the net income of said university
injures to the benefit of its stockholders. The disallowance should
be sustained.
Lastly, Roxas y Cia. questions the imposition of the real estate
dealer's fixed tax upon it, because although it earned a rental
income of P8,000.00 per annum in 1952, said rental income came
from Jose Roxas, one of the partners. Section 194 of the Tax Code,
in considering as real estate dealers owners of real estate
receiving rentals of at least P3,000.00 a year, does not provide any
qualification as to the persons paying the rentals. The law, which
states: 1äwphï1.ñët
. . . "Real estate dealer" includes any person engaged in the
business of buying, selling, exchanging, leasing or renting property
on his own account as principal and holding himself out as a full
or part-time dealer in real estate or as an owner of rental property
or properties rented or offered to rent for an aggregate amount
of three thousand pesos or more a year: . . . (Emphasis supplied) .
is too clear and explicit to admit construction. The findings of the Tax due P102,763.00

Court of Tax Appeals or, this point is sustained.1äwphï1.ñët

104
Tax paid 102,714.00

To Summarize, no deficiency income tax is due for 1953 from

Antonio Roxas, Eduardo Roxas and Jose Roxas. For 1955 they are Deficiency ________________________________________P 49.00
liable to pay deficiency income tax in the sum of P109.00, P91.00
and P49.00, respectively, computed as follows: * ===========

ANTONIO ROXAS
Net income per return
Add: 1/3 share, profits in Roxas y Cia.
Less amount declared
WHEREFORE, the decision appealed from is modified. Roxas y Cia.
is hereby ordered to pay the sum of P150.00 as real estate dealer's
P315,476.59
fixed tax for 1952, and Antonio Roxas, Eduardo Roxas and Jose
Roxas are ordered to pay the respective sums of P109.00, P91.00
P 153,249.15
and P49.00 as their individual deficiency income tax all
corresponding for the year 1955. No costs. So ordered.
146,135.46

Amount understated ________________________________________P 7,113.69

4. TIO vs VRB (Same Case)

Contributions disallowed 115.00 5. G.R. No. L-59431 July 25, 1984

________________________________________P 7,228.69
ANTERO M. SISON, JR., petitioner,
vs.
Less 1/3 share of contributions amounting to P21,126.06 disallowed from partnership but allowed to
partners 7,042.02 186.67
RUBEN B. ANCHETA, Acting Commissioner, Bureau of Internal
Revenue; ROMULO VILLA, Deputy Commissioner, Bureau of
Net income per review ________________________________________
Internal Revenue; TOMAS TOLEDO Deputy Commissioner, Bureau
________________________________________P315,663.26 of Internal Revenue; MANUEL ALBA, Minister of Budget,
FRANCISCO TANTUICO, Chairman, Commissioner on Audit, and
Less: Exemptions 4,200.00 CESAR E. A. VIRATA, Minister of Finance, respondents.

Net taxable income ________________________________________P311,463.26

Antero Sison for petitioner and for his own behalf.

Tax due 154,169.00

The Solicitor General for respondents.
Tax paid 154,060.00

Deficiency ________________________________________P 109.00

FERNANDO, C.J.:
==========

EDUARDO ROXAS The success of the challenge posed in this suit for declaratory relief
or prohibition proceeding 1 on the validity of Section I of Batas
Net income per return P 304,166.92 Pambansa Blg. 135 depends upon a showing of its constitutional
infirmity. The assailed provision further amends Section 21 of the
Add: 1/3 share, profits in Roxas y Cia P 153,249.15
National Internal Revenue Code of 1977, which provides for rates
of tax on citizens or residents on (a) taxable compensation
Less profits declared 146,052.58
income, (b) taxable net income, (c) royalties, prizes, and other
winnings, (d) interest from bank deposits and yield or any other
monetary benefit from deposit substitutes and from trust fund and
Amount understated ________________________________________P 7,196.57
similar arrangements, (e) dividends and share of individual partner
in the net profits of taxable partnership, (f) adjusted gross
Less 1/3 share in contributions amounting to P21,126.06 disallowed from partnership but allowed to
partners 7,042.02 155.55 income. 2 Petitioner 3 as taxpayer alleges that by virtue thereof,
"he would be unduly discriminated against by the imposition of
Net income per review ________________________________________ higher rates of tax upon his income arising from the exercise of his
________________________________________P304,322.47 profession vis-a-vis those which are imposed upon fixed income or
salaried individual taxpayers. 4 He characterizes the above sction
Less: Exemptions 4,800.00 as arbitrary amounting to class legislation, oppressive and
capricious in character 5 For petitioner, therefore, there is a
Net taxable income ________________________________________P299,592.47 transgression of both the equal protection and due process
clauses 6 of the Constitution as well as of the rule requiring
Tax Due P147,250.00 uniformity in taxation. 7

Tax paid 147,159.00

The Court, in a resolution of January 26, 1982, required
respondents to file an answer within 10 days from notice. Such an
Deficiency ________________________________________P91.00
answer, after two extensions were granted the Office of the
Solicitor General, was filed on May 28, 1982.8 The facts as alleged
===========
were admitted but not the allegations which to their mind are
"mere arguments, opinions or conclusions on the part of the
JOSE ROXAS
petitioner, the truth [for them] being those stated [in their] Special
and Affirmative Defenses." 9 The answer then affirmed: "Batas
Net income per return P222,681.76 Pambansa Big. 135 is a valid exercise of the State's power to tax.
The authorities and cases cited while correctly quoted or
Add: 1/3 share, profits in Roxas y Cia. P153,429.15 paraghraph do not support petitioner's stand." 10 The prayer is for
the dismissal of the petition for lack of merit.
Less amount reported 146,135.46

This Court finds such a plea more than justified. The petition must
Amount understated ________________________________________7,113.69
be dismissed.
Less 1/3 share of contributions disallowed from partnership but allowed as deductions to partners
7,042.02 71.67 1. It is manifest that the field of state activity has assumed a much
wider scope, The reason was so clearly set forth by retired Chief
Net income per review ________________________________________ Justice Makalintal thus: "The areas which used to be left to private
________________________________________P222,753.43
enterprise and initiative and which the government was called
upon to enter optionally, and only 'because it was better
Less: Exemption 1,800.00
equipped to administer for the public welfare than is any private
individual or group of individuals,' continue to lose their well-
Net income subject to tax ________________________________________P220,953.43
defined boundaries and to be absorbed within activities that the
government must undertake in its sovereign capacity if it is to
meet the increasing social challenges of the times." 11 Hence the
need for more revenues. The power to tax, an inherent
prerogative, has to be availed of to assure the performance of
vital state functions. It is the source of the bulk of public funds. To
praphrase a recent decision, taxes being the lifeblood of the
government, their prompt and certain availability is of the
essence. 12
2. The power to tax moreover, to borrow from Justice Malcolm, "is
an attribute of sovereignty. It is the strongest of all the powers of
of government." 13 It is, of course, to be admitted that for all its
plenitude 'the power to tax is not unconfined. There are
restrictions. The Constitution sets forth such limits . Adversely
affecting as it does properly rights, both the due process and
equal protection clauses inay properly be invoked, all petitioner
does, to invalidate in appropriate cases a revenue measure. if it
were otherwise, there would -be truth to the 1803 dictum of Chief
Justice Marshall that "the power to tax involves the power to
destroy." 14 In a separate opinion in Graves v. New
York, 15 Justice Frankfurter, after referring to it as an 1, unfortunate
remark characterized it as "a flourish of rhetoric [attributable to]
the intellectual fashion of the times following] a free use of
absolutes." 16 This is merely to emphasize that it is riot and there
cannot be such a constitutional mandate. Justice Frankfurter
could rightfully conclude: "The web of unreality spun from
Marshall's famous dictum was brushed away by one stroke of Mr.
Justice Holmess pen: 'The power to tax is not the power to destroy
while this Court sits."17 So it is in the Philippines.
3. This Court then is left with no choice. The Constitution as the
fundamental law overrides any legislative or executive, act that
runs counter to it. In any case therefore where it can be
demonstrated that the challenged statutory provision — as
petitioner here alleges — fails to abide by its command, then this
Court must so declare and adjudge it null. The injury thus is
centered on the question of whether the imposition of a higher
tax rate on taxable net income derived from business or profession
than on compensation is constitutionally infirm.
4, The difficulty confronting petitioner is thus apparent. He alleges
arbitrariness. A mere allegation, as here. does not suffice. There
must be a factual foundation of such unconstitutional taint.
Considering that petitioner here would condemn such a provision
as void or its face, he has not made out a case. This is merely to
adhere to the authoritative doctrine that were the due process
and equal protection clauses are invoked, considering that they
arc not fixed rules but rather broad standards, there is a need for
of such persuasive character as would lead to such a conclusion.
Absent such a showing, the presumption of validity must
prevail. 18
5. It is undoubted that the due process clause may be invoked
where a taxing statute is so arbitrary that it finds no support in the
Constitution. An obvious example is where it can be shown to
amount to the confiscation of property. That would be a clear
abuse of power. It then becomes the duty of this Court to say that
such an arbitrary act amounted to the exercise of an authority not
conferred. That properly calls for the application of the Holmes
dictum. It has also been held that where the assailed tax measure
is beyond the jurisdiction of the state, or is not for a public purpose,
or, in case of a retroactive statute is so harsh and unreasonable, it
is subject to attack on due process grounds. 19
6. Now for equal protection. The applicable standard to avoid the
charge that there is a denial of this constitutional mandate
whether the assailed act is in the exercise of the lice power or the
power of eminent domain is to demonstrated that the
governmental act assailed, far from being inspired by the
attainment of the common weal was prompted by the spirit of
hostility, or at the very least, discrimination that finds no support in
reason. It suffices then that the laws operate equally and uniformly
on all persons under similar circumstances or that all persons must
be treated in the same manner, the conditions not being
different, both in the privileges conferred and the liabilities
imposed. Favoritism and undue preference cannot be allowed.
For the principle is that equal protection and security shall be
given to every person under circumtances which if not Identical
are analogous. If law be looked upon in terms of burden or
charges, those that fall within a class should be treated in the
same fashion, whatever restrictions cast on some in the group
equally binding on the rest." 20 That same formulation applies as
well to taxation measures. The equal protection clause is, of
course, inspired by the noble concept of approximating the Ideal
of the laws benefits being available to all and the affairs of men
being governed by that serene and impartial uniformity, which is
of the very essence of the Idea of law. There is, however, wisdom,
105
as well as realism in these words of Justice Frankfurter: "The
equality at which the 'equal protection' clause aims is not a
disembodied equality. The Fourteenth Amendment enjoins 'the
equal protection of the laws,' and laws are not abstract
propositions. They do not relate to abstract units A, B and C, but
are expressions of policy arising out of specific difficulties, address
to the attainment of specific ends by the use of specific remedies.
The Constitution does not require things which are different in fact
or opinion to be treated in law as though they were the
same." 21 Hence the constant reiteration of the view that
classification if rational in character is allowable. As a matter of
fact, in a leading case of Lutz V. Araneta, 22 this Court, through
Justice J.B.L. Reyes, went so far as to hold "at any rate, it is inherent
in the power to tax that a state be free to select the subjects of
taxation, and it has been repeatedly held that 'inequalities which
result from a singling out of one particular class for taxation, or
exemption infringe no constitutional limitation.'" 23
7. Petitioner likewise invoked the kindred concept of uniformity.
According to the Constitution: "The rule of taxation shag be
uniform and equitable." 24 This requirement is met according to
Justice Laurel in Philippine Trust Company v. Yatco, 25 decided in
1940, when the tax "operates with the same force and effect in
every place where the subject may be found. " 26 He likewise
added: "The rule of uniformity does not call for perfect uniformity
or perfect equality, because this is hardly attainable." 27 The
problem of classification did not present itself in that case. It did
not arise until nine years later, when the Supreme Court held:
"Equality and uniformity in taxation means that all taxable articles
or kinds of property of the same class shall be taxed at the same
rate. The taxing power has the authority to make reasonable and
natural classifications for purposes of taxation, ... . 28 As clarified by
Justice Tuason, where "the differentiation" complained of
"conforms to the practical dictates of justice and equity" it "is not
discriminatory within the meaning of this clause and is therefore
uniform." 29 There is quite a similarity then to the standard of equal
protection for all that is required is that the tax "applies equally to
all persons, firms and corporations placed in similar situation."30
8. Further on this point. Apparently, what misled petitioner is his
failure to take into consideration the distinction between a tax
rate and a tax base. There is no legal objection to a broader tax
base or taxable income by eliminating all deductible items and
at the same time reducing the applicable tax rate. Taxpayers
may be classified into different categories. To repeat, it. is enough
that the classification must rest upon substantial distinctions that
make real differences. In the case of the gross income taxation
embodied in Batas Pambansa Blg. 135, the, discernible basis of
classification is the susceptibility of the income to the application
of generalized rules removing all deductible items for all taxpayers
within the class and fixing a set of reduced tax rates to be applied
to all of them. Taxpayers who are recipients of compensation
income are set apart as a class. As there is practically no
overhead expense, these taxpayers are e not entitled to make
deductions for income tax purposes because they are in the
same situation more or less. On the other hand, in the case of
professionals in the practice of their calling and businessmen,
there is no uniformity in the costs or expenses necessary to
produce their income. It would not be just then to disregard the
disparities by giving all of them zero deduction and
indiscriminately impose on all alike the same tax rates on the basis
of gross income. There is ample justification then for the Batasang
Pambansa to adopt the gross system of income taxation to
compensation income, while continuing the system of net income
taxation as regards professional and business income.
9. Nothing can be clearer, therefore, than that the petition is
without merit, considering the (1) lack of factual foundation to
show the arbitrary character of the assailed provision; 31 (2) the
force of controlling doctrines on due process, equal protection,
and uniformity in taxation and (3) the reasonableness of the
distinction between compensation and taxable net income of
professionals and businessman certainly not a suspect
classification,
WHEREFORE, the petition is dismissed. Costs against petitioner.
5. Churchill vs Concepcion
6. CREBA vs Romulo
I. Limitations
1. CIR vs Algue (Same Case)
2. Rixas vs CTA (Same Case)
i. Inherent Limitations
A. Public Purpose
1. G.R. No. L-10405 December 29, 1960
WENCESLAO PASCUAL, in his official capacity as Provincial
Governor of Rizal, petitioner-appellant,
vs.
THE SECRETARY OF PUBLIC WORKS AND COMMUNICATIONS, ET
AL., respondents-appellees.
Asst. Fiscal Noli M. Cortes and Jose P. Santos for appellant.
Office of the Asst. Solicitor General Jose G. Bautista and Solicitor
A. A. Torres for appellee.
CONCEPCION, J.:
Appeal, by petitioner Wenceslao Pascual, from a decision of the
Court of First Instance of Rizal, dismissing the above entitled case
and dissolving the writ of preliminary injunction therein issued,
without costs.
On August 31, 1954, petitioner Wenceslao Pascual, as Provincial
Governor of Rizal, instituted this action for declaratory relief, with
injunction, upon the ground that Republic Act No. 920, entitled
"An Act Appropriating Funds for Public Works", approved on June
20, 1953, contained, in section 1-C (a) thereof, an item (43[h]) of
P85,000.00 "for the construction, reconstruction, repair, extension
and improvement" of Pasig feeder road terminals (Gen. Roxas —
Gen. Araneta — Gen. Lucban — Gen. Capinpin — Gen. Segundo
— Gen. Delgado — Gen. Malvar — Gen. Lim)"; that, at the time
of the passage and approval of said Act, the aforementioned
feeder roads were "nothing but projected and planned
subdivision roads, not yet constructed, . . . within the Antonio
Subdivision . . . situated at . . . Pasig, Rizal" (according to the
tracings attached to the petition as Annexes A and B, near Shaw
Boulevard, not far away from the intersection between the latter
and Highway 54), which projected feeder roads "do not connect
any government property or any important premises to the main
highway"; that the aforementioned Antonio Subdivision (as well as
the lands on which said feeder roads were to be construed) were
private properties of respondent Jose C. Zulueta, who, at the time
of the passage and approval of said Act, was a member of the
Senate of the Philippines; that on May, 1953, respondent Zulueta,
addressed a letter to the Municipal Council of Pasig, Rizal, offering
to donate said projected feeder roads to the municipality of
Pasig, Rizal; that, on June 13, 1953, the offer was accepted by the
council, subject to the condition "that the donor would submit a
plan of the said roads and agree to change the names of two of
them"; that no deed of donation in favor of the municipality of
Pasig was, however, executed; that on July 10, 1953, respondent
Zulueta wrote another letter to said council, calling attention to
the approval of Republic Act. No. 920, and the sum of P85,000.00
appropriated therein for the construction of the projected feeder
roads in question; that the municipal council of Pasig endorsed
said letter of respondent Zulueta to the District Engineer of Rizal,
who, up to the present "has not made any endorsement thereon"
that inasmuch as the projected feeder roads in question were
private property at the time of the passage and approval of
Republic Act No. 920, the appropriation of P85,000.00 therein
made, for the construction, reconstruction, repair, extension and
improvement of said projected feeder roads, was illegal and,
therefore, void ab initio"; that said appropriation of P85,000.00 was
made by Congress because its members were made to believe
that the projected feeder roads in question were "public roads
and not private streets of a private subdivision"'; that, "in order to
give a semblance of legality, when there is absolutely none, to the
aforementioned appropriation", respondents Zulueta executed
on December 12, 1953, while he was a member of the Senate of
the Philippines, an alleged deed of donation — copy of which is
annexed to the petition — of the four (4) parcels of land
constituting said projected feeder roads, in favor of the
Government of the Republic of the Philippines; that said alleged
deed of donation was, on the same date, accepted by the then
Executive Secretary; that being subject to an onerous condition,
said donation partook of the nature of a contract; that, such, said
donation violated the provision of our fundamental law
prohibiting members of Congress from being directly or indirectly
financially interested in any contract with the Government, and,
106
hence, is unconstitutional, as well as null and void ab initio, for the
construction of the projected feeder roads in question with public
funds would greatly enhance or increase the value of the
aforementioned subdivision of respondent Zulueta, "aside from
relieving him from the burden of constructing his subdivision streets
or roads at his own expense"; that the construction of said
projected feeder roads was then being undertaken by the Bureau
of Public Highways; and that, unless restrained by the court, the
respondents would continue to execute, comply with, follow and
implement the aforementioned illegal provision of law, "to the
irreparable damage, detriment and prejudice not only to the
petitioner but to the Filipino nation."
Petitioner prayed, therefore, that the contested item of Republic
Act No. 920 be declared null and void; that the alleged deed of
donation of the feeder roads in question be "declared
unconstitutional and, therefor, illegal"; that a writ of injunction be
issued enjoining the Secretary of Public Works and
Communications, the Director of the Bureau of Public Works and
Highways and Jose C. Zulueta from ordering or allowing the
continuance of the above-mentioned feeder roads project, and
from making and securing any new and further releases on the
aforementioned item of Republic Act No. 920, and the disbursing
officers of the Department of Public Works and Highways from
making any further payments out of said funds provided for in
Republic Act No. 920; and that pending final hearing on the
merits, a writ of preliminary injunction be issued enjoining the
aforementioned parties respondent from making and securing
any new and further releases on the aforesaid item of Republic
Act No. 920 and from making any further payments out of said
illegally appropriated funds.
Respondents moved to dismiss the petition upon the ground that
petitioner had "no legal capacity to sue", and that the petition did
"not state a cause of action". In support to this motion, respondent
Zulueta alleged that the Provincial Fiscal of Rizal, not its provincial
governor, should represent the Province of Rizal, pursuant to
section 1683 of the Revised Administrative Code; that said
respondent is " not aware of any law which makes illegal the
appropriation of public funds for the improvements of . . . private
property"; and that, the constitutional provision invoked by
petitioner is inapplicable to the donation in question, the same
being a pure act of liberality, not a contract. The other
respondents, in turn, maintained that petitioner could not assail
the appropriation in question because "there is no actual bona
fide case . . . in which the validity of Republic Act No. 920 is
necessarily involved" and petitioner "has not shown that he has a
personal and substantial interest" in said Act "and that its
enforcement has caused or will cause him a direct injury."
Acting upon said motions to dismiss, the lower court rendered the
aforementioned decision, dated October 29, 1953, holding that,
since public interest is involved in this case, the Provincial
Governor of Rizal and the provincial fiscal thereof who represents
him therein, "have the requisite personalities" to question the
constitutionality of the disputed item of Republic Act No. 920; that
"the legislature is without power appropriate public revenues for
anything but a public purpose", that the instructions and
improvement of the feeder roads in question, if such roads where
private property, would not be a public purpose; that, being
subject to the following condition:
The within donation is hereby made upon the condition
that the Government of the Republic of the Philippines
will use the parcels of land hereby donated for street
purposes only and for no other purposes whatsoever; it
being expressly understood that should the Government
of the Republic of the Philippines violate the condition
hereby imposed upon it, the title to the land hereby
donated shall, upon such violation, ipso facto revert to
the DONOR, JOSE C. ZULUETA. (Emphasis supplied.)
which is onerous, the donation in question is a contract; that said
donation or contract is "absolutely forbidden by the Constitution"
and consequently "illegal", for Article 1409 of the Civil Code of the
Philippines, declares in existence and void from the very
beginning contracts "whose cause, objector purpose is contrary
to law, morals . . . or public policy"; that the legality of said
donation may not be contested, however, by petitioner herein,
because his "interest are not directly affected" thereby; and that,
accordingly, the appropriation in question "should be upheld" and
the case dismissed.
At the outset, it should be noted that we are concerned with a
decision granting the aforementioned motions to dismiss, which
as much, are deemed to have admitted hypothetically the
allegations of fact made in the petition of appellant herein.
According to said petition, respondent Zulueta is the owner of
several parcels of residential land situated in Pasig, Rizal, and
known as the Antonio Subdivision, certain portions of which had
been reserved for the projected feeder roads aforementioned,
which, admittedly, were private property of said respondent
when Republic Act No. 920, appropriating P85,000.00 for the
"construction, reconstruction, repair, extension and improvement"
of said roads, was passed by Congress, as well as when it was
approved by the President on June 20, 1953. The petition further
alleges that the construction of said roads, to be undertaken with
the aforementioned appropriation of P85,000.00, would have the
effect of relieving respondent Zulueta of the burden of
constructing his subdivision streets or roads at his own
expenses, 1and would "greatly enhance or increase the value of
the subdivision" of said respondent. The lower court held that
under these circumstances, the appropriation in question was
"clearly for a private, not a public purpose."
Respondents do not deny the accuracy of this conclusion, which
is self-evident. 2However, respondent Zulueta contended, in his
motion to dismiss that:
A law passed by Congress and approved by the
President can never be illegal because Congress is the
source of all laws . . . Aside from the fact that movant is
not aware of any law which makes illegal the
appropriation of public funds for the improvement of
what we, in the meantime, may assume as private
property . . . (Record on Appeal, p. 33.)
The first proposition must be rejected most emphatically, it being
inconsistent with the nature of the Government established under
the Constitution of the Republic of the Philippines and the system
of checks and balances underlying our political structure.
Moreover, it is refuted by the decisions of this Court invalidating
legislative enactments deemed violative of the Constitution or
organic laws. 3
As regards the legal feasibility of appropriating public funds for a
public purpose, the principle according to Ruling Case Law, is this:
It is a general rule that the legislature is without power to
appropriate public revenue for anything but a public
purpose. . . . It is the essential character of the direct
object of the expenditure which must determine its
validity as justifying a tax, and not the magnitude of the
interest to be affected nor the degree to which the
general advantage of the community, and thus the
public welfare, may be ultimately benefited by their
promotion. Incidental to the public or to the state, which
results from the promotion of private interest and the
prosperity of private enterprises or business, does not
justify their aid by the use public money. (25 R.L.C. pp.
398-400; Emphasis supplied.)
The rule is set forth in Corpus Juris Secundum in the following
language:
In accordance with the rule that the taxing power must
be exercised for public purposes only,
discussedsupra sec. 14, money raised by taxation can
be expended only for public purposes and not for the
advantage of private individuals. (85 C.J.S. pp. 645-646;
emphasis supplied.)
Explaining the reason underlying said rule, Corpus Juris Secundum
states:
Generally, under the express or implied provisions of the
constitution, public funds may be used only for public
purpose. The right of the legislature to appropriate funds
is correlative with its right to tax, and, under
constitutional provisions against taxation except for
public purposes and prohibiting the collection of a tax
for one purpose and the devotion thereof to another
purpose, no appropriation of state funds can be made
for other than for a public purpose.
xxx xxx xxx
The test of the constitutionality of a statute requiring the
use of public funds is whether the statute is designed to
107
promote the public interest, as opposed to the
furtherance of the advantage of individuals, although
each advantage to individuals might incidentally serve
the public. (81 C.J.S. pp. 1147; emphasis supplied.)
Needless to say, this Court is fully in accord with the foregoing
views which, apart from being patently sound, are a necessary
corollary to our democratic system of government, which, as
such, exists primarily for the promotion of the general welfare.
Besides, reflecting as they do, the established jurisprudence in the
United States, after whose constitutional system ours has been
patterned, said views and jurisprudence are, likewise, part and
parcel of our own constitutional law.lawphil.net
This notwithstanding, the lower court felt constrained to uphold
the appropriation in question, upon the ground that petitioner
may not contest the legality of the donation above referred to
because the same does not affect him directly. This conclusion is,
presumably, based upon the following premises, namely: (1) that,
if valid, said donation cured the constitutional infirmity of the
aforementioned appropriation; (2) that the latter may not be
annulled without a previous declaration of unconstitutionality of
the said donation; and (3) that the rule set forth in Article 1421 of
the Civil Code is absolute, and admits of no exception. We do not
agree with these premises.
The validity of a statute depends upon the powers of Congress at
the time of its passage or approval, not upon events occurring, or
acts performed, subsequently thereto, unless the latter consists of
an amendment of the organic law, removing, with retrospective
operation, the constitutional limitation infringed by said statute.
Referring to the P85,000.00 appropriation for the projected feeder
roads in question, the legality thereof depended upon whether
said roads were public or private property when the bill, which,
latter on, became Republic Act 920, was passed by Congress, or,
when said bill was approved by the President and the
disbursement of said sum became effective, or on June 20, 1953
(see section 13 of said Act). Inasmuch as the land on which the
projected feeder roads were to be constructed belonged then to
respondent Zulueta, the result is that said appropriation sought a
private purpose, and hence, was null and void. 4 The donation to
the Government, over five (5) months after the approval and
effectivity of said Act, made, according to the petition, for the
purpose of giving a "semblance of legality", or legalizing, the
appropriation in question, did not cure its aforementioned basic
defect. Consequently, a judicial nullification of said donation
need not precede the declaration of unconstitutionality of said
appropriation.
Again, Article 1421 of our Civil Code, like many other statutory
enactments, is subject to exceptions. For instance, the creditors of
a party to an illegal contract may, under the conditions set forth
in Article 1177 of said Code, exercise the rights and actions of the
latter, except only those which are inherent in his person, including
therefore, his right to the annulment of said contract, even though
such creditors are not affected by the same, except indirectly, in
the manner indicated in said legal provision.
Again, it is well-stated that the validity of a statute may be
contested only by one who will sustain a direct injury in
consequence of its enforcement. Yet, there are many decisions
nullifying, at the instance of taxpayers, laws providing for the
disbursement of public funds, 5upon the theory that "the
expenditure of public funds by an officer of the State for the
purpose of administering an unconstitutional act constitutes
a misapplication of such funds," which may be enjoined at the
request of a taxpayer. 6Although there are some decisions to the
contrary, 7the prevailing view in the United States is stated in the
American Jurisprudence as follows:
In the determination of the degree of interest essential
to give the requisite standing to attack the
constitutionality of a statute, the general rule is that not
only persons individually affected, but alsotaxpayers,
have sufficient interest in preventing the illegal
expenditure of moneys raised by taxation and may
therefore question the constitutionality of statutes
requiring expenditure of public moneys. (11 Am. Jur. 761;
emphasis supplied.)
However, this view was not favored by the Supreme Court of the
U.S. in Frothingham vs. Mellon (262 U.S. 447), insofar as federal laws
are concerned, upon the ground that the relationship of a
taxpayer of the U.S. to its Federal Government is different from that
of a taxpayer of a municipal corporation to its government.
Indeed, under the composite system of government existing in
the U.S., the states of the Union are integral part of the Federation
from an international viewpoint, but, each state enjoys internally
a substantial measure of sovereignty, subject to the limitations
imposed by the Federal Constitution. In fact, the same was made
by representatives ofeach state of the Union, not of the people of
the U.S., except insofar as the former represented the people of
the respective States, and the people of each State has,
independently of that of the others, ratified said Constitution. In
other words, the Federal Constitution and the Federal statutes
have become binding upon the people of the U.S. in
consequence of an act of, and, in this sense, through the
respective states of the Union of which they are citizens. The
peculiar nature of the relation between said people and the
Federal Government of the U.S. is reflected in the election of its
President, who is chosen directly, not by the people of the U.S.,
but by electors chosen by each State, in such manner as the
legislature thereof may direct (Article II, section 2, of the Federal
Constitution).lawphi1.net
The relation between the people of the Philippines and its
taxpayers, on the other hand, and the Republic of the Philippines,
on the other, is not identical to that obtaining between the
people and taxpayers of the U.S. and its Federal Government. It is
closer, from a domestic viewpoint, to that existing between the
people and taxpayers of each state and the government thereof,
except that the authority of the Republic of the Philippines over
the people of the Philippines is more fully direct than that of the
states of the Union, insofar as the simple and unitarytype of our
national government is not subject to limitations analogous to
those imposed by the Federal Constitution upon the states of the
Union, and those imposed upon the Federal Government in the
interest of the Union. For this reason, the rule recognizing the right
of taxpayers to assail the constitutionality of a legislation
appropriating local or state public funds — which has been
upheld by the Federal Supreme Court (Crampton vs.Zabriskie, 101
U.S. 601) — has greater application in the Philippines than that
adopted with respect to acts of Congress of the United States
appropriating federal funds.
Indeed, in the Province of Tayabas vs. Perez (56 Phil., 257),
involving the expropriation of a land by the Province of Tayabas,
two (2) taxpayers thereof were allowed to intervene for the
purpose of contesting the price being paid to the owner thereof,
as unduly exorbitant. It is true that in Custodio vs. President of the
Senate (42 Off. Gaz., 1243), a taxpayer and employee of the
Government was not permitted to question the constitutionality of
an appropriation for backpay of members of Congress. However,
in Rodriguez vs. Treasurer of the Philippines and
Barredo vs. Commission on Elections (84 Phil., 368; 45 Off. Gaz.,
4411), we entertained the action of taxpayers impugning the
validity of certain appropriations of public funds, and invalidated
the same. Moreover, the reason that impelled this Court to take
such position in said two (2) cases — the importance of the issues
therein raised — is present in the case at bar. Again, like the
petitioners in the Rodriguez and Barredo cases, petitioner herein is
not merely a taxpayer. The Province of Rizal, which he represents
officially as its Provincial Governor, is our most populated political
subdivision, 8and, the taxpayers therein bear a substantial portion
of the burden of taxation, in the Philippines.
Hence, it is our considered opinion that the circumstances
surrounding this case sufficiently justify petitioners action in
contesting the appropriation and donation in question; that this
action should not have been dismissed by the lower court; and
that the writ of preliminary injunction should have been
maintained.
Wherefore, the decision appealed from is hereby reversed, and
the records are remanded to the lower court for further
proceedings not inconsistent with this decision, with the costs of
this instance against respondent Jose C. Zulueta. It is so ordered.
2. Lutz vs Araneta (Same Cases)
3. Caltex vs COA (Same Case)
4. Gomez vs, Palomar
5. Tio vs VRB
6. G.R. No. 106440 January 29, 1996
ALEJANDRO MANOSCA, ASUNCION MANOSCA and LEONICA
MANOSCA, petitioners,
108
vs.
HON. COURT OF APPEALS, HON. BENJAMIN V. PELAYO, Presiding
Judge, RTC-Pasig, Metro Manila, Branch 168, HON. GRADUACION
A. REYES CLARAVAL, Presiding Judge, RTC-Pasig, Metro Manila,
Branch 71, and REPUBLIC OF THE PHILIPPINES, respondents.
DECISION
VITUG, J.:
In this appeal, via a petition for review on certiorari, from the
decision1 of the Court of Appeals, dated 15 January 1992, in CA-
G.R. SP No. 24969 (entitled "Alejandro Manosca, et al. v. Hon.
Benjamin V. Pelayo, et al."), this Court is asked to resolve whether
or not the "public use" requirement of Eminent Domain is extant in
the attempted expropriation by the Republic of a 492-square-
meter parcel of land so declared by the National Historical
Institute ("NHI") as a national historical landmark.
The facts of the case are not in dispute.
Petitioners inherited a piece of land located at P. Burgos Street,
Calzada, Taguig. Metro Manila, with an area of about four
hundred ninety-two (492) square meters. When the parcel was
ascertained by the NHI to have been the birthsite of Felix Y.
Manalo, the founder of Iglesia Ni Cristo, it passed Resolution No. 1,
Series of 1986, pursuant to Section 42 of Presidential Decree No.
260, declaring the land to be a national historical landmark. The
resolution was, on 06 January 1986, approved by the Minister of
Education, Culture and Sports. Later, the opinion of the Secretary
of Justice was asked on the legality of the measure. In his Opinion
No. 133, Series of 1987, the Secretary of Justice replied in the
affirmative; he explained:
According to your guidelines, national landmarks are
places or objects that are associated with an event,
achievement, characteristic, or modification that makes
a turning point or stage in Philippine history. Thus, the
birthsite of the founder of the Iglesia ni Cristo, the late
Felix Y. Manalo, who, admittedly, had made
contributions to Philippine history and culture has been
declared as a national landmark. It has been held that
places invested with unusual historical interest is a public
use for which the power of eminent domain may be
authorized . . . .
In view thereof, it is believed that the National Historical
Institute as an agency of the Government charged with
the maintenance and care of national shrines,
monuments and landmarks and the development of
historical sites that may be declared as national shrines,
monuments and/or landmarks, may initiate the
institution of condemnation proceedings for the purpose
of acquiring the lot in question in accordance with the
procedure provided for in Rule 67 of the Revised Rules of
Court. The proceedings should be instituted by the
Office of the Solicitor General in behalf of the Republic.
Accordingly, on 29 May 1989, the Republic, through the Office of
the Solicitor-General, instituted a complaint for
expropriation3 before the Regional Trial Court of Pasig for and in
behalf of the NHI alleging, inter alia, that:
Pursuant to Section 4 of Presidential Decree No. 260, the
National Historical Institute issued Resolution No. 1, Series
of 1986, which was approved on January, 1986 by the
then Minister of Education, Culture and Sports, declaring
the above described parcel of land which is the birthsite
of Felix Y. Manalo, founder of the "Iglesia ni Cristo," as a
National Historical Landrnark. The plaintiff perforce
needs the land as such national historical landmark
which is a public purpose.
At the same time, respondent Republic filed an urgent motion for
the issuance of an order to permit it to take immediate possession
of the property. The motion was opposed by petitioners. After a
hearing, the trial court issued, on 03 August 1989,4 an order fixing
the provisional market (P54,120.00) and assessed (P16,236.00)
values of the property and authorizing the Republic to take over
the property once the required sum would have been deposited
with the Municipal Treasurer of Taguig, Metro Manila.
Petitioners moved to dismiss the complaint on the main thesis that
the intended expropriation was not for a public purpose and,
incidentally, that the act would constitute an application of
public funds, directly or indirectly, for the use, benefit, or support
of Iglesia ni Cristo, a religious entity, contrary to the provision of
Section 29(2), Article VI, of the 1987 Constitution.5 Petitioners
sought, in the meanwhile, a suspension in the implementation of
the 03rd August 1989 order of the trial court.
On 15 February 1990, following the filing by respondent Republic
of its reply to petitioners' motion seeking the dismissal of the case,
the trial court issued its denial of said motion to dismiss.6 Five (5)
days later, or on 20 February 1990,7 another order was issued by
the trial court, declaring moot and academic the motion for
reconsideration and/or suspension of the order of 03 August 1989
with the rejection of petitioners' motion to dismiss. Petitioners'
motion for the reconsideration of the 20th February 1990 order was
likewise denied by the trial court in its 16th April 1991 order.8
Petitioners then lodged a petition for certiorari and prohibition
with the Court of Appeals. In its now disputed 15th January 1992
decision, the appellate court dismissed the petition on the ground
that the remedy of appeal in the ordinary course of law was an
adequate remedy and that the petition itself, in any case, had
failed to show any grave abuse of discretion or lack of
jurisdictional competence on the part of the trial court. A motion
for the reconsideration of the decision was denied in the 23rd July
1992 resolution of the appellate court.
We begin, in this present recourse of petitioners, with a few known
postulates.
Eminent domain, also often referred to as expropriation and, with
less frequency, as condemnation, is, like police power and
taxation, an inherent power of sovereignty. It need not be clothed
with any constitutional gear to exist; instead, provisions in our
Constitution on the subject are meant more to regulate, rather
than to grant, the exercise of the power. Eminent domain is
generally so described as "the highest and most exact idea of
property remaining in the government" that may be acquired for
some public purpose through a method in the nature of a forced
purchase by the State.9 It is a right to take or reassert dominion
over property within the state for public use or to meet a public
exigency. It is said to be an essential part of governance even in
its most primitive form and thus inseparable from
sovereignty. 10 The only direct constitutional qualification is that
"private property shall not be taken for public use without just
compensation." 11 This proscription is intended to provide a
safeguard against possible abuse and so to protect as well the
individual against whose property the power is sought to be
enforced.
Petitioners assert that the expropriation has failed to meet the
guidelines set by this Court in the case of Guido v.Rural Progress
Administration, 12 to wit: (a) the size of the land expropriated; (b)
the large number of people benefited; and, (c) the extent of
social and economic reform.13 Petitioners suggest that we confine
the concept of expropriation only to the following public
uses, 14 i.e., the —
. . . taking of property for military posts, roads, streets,
sidewalks, bridges, ferries, levees, wharves, piers, public
buildings including schoolhouses, parks, playgrounds,
plazas, market places, artesian wells, water supply and
sewerage systems, cemeteries, crematories, and
railroads.
This view of petitioners is much too limitative and restrictive.
The court, in Guido, merely passed upon the issue of the extent of
the President's power under Commonwealth Act No. 539 to,
specifically, acquire private lands for subdivision into smaller home
lots or farms for resale to bona fidetenants or occupants. It was in
this particular context of the statute that the Court had made the
pronouncement. The guidelines in Guido were not meant to be
preclusive in nature and, most certainly, the power of eminent
domain should not now be understood as being confined only to
the expropriation of vast tracts of land and landed estates. 15
The term "public use," not having been otherwise defined by the
constitution, must be considered in its general concept of
meeting a public need or a public exigency. 16 Black summarizes
the characterization given by various courts to the term; thus:
Public Use. Eminent domain. The constitutional and
statutory basis for taking property by eminent domain.
109
For condemnation purposes, "public use" is one which
confers same benefit or advantage to the public; it is not
confined to actual use by public. It is measured in terms
of right of public to use proposed facilities for which
condemnation is sought and, as long as public has right
of use, whether exercised by one or many members of
public, a "public advantage" or "public benefit" accrues
sufficient to constitute a public use. Montana Power Co.
vs. Bokma, Mont. 457 P. 2d 769, 772, 773.
Public use, in constitutional provisions restricting the
exercise of the right to take private property in virtue of
eminent domain, means a use concerning the whole
community as distinguished from particular individuals.
But each and every member of society need not be
equally interested in such use, or be personally and
directly affected by it; if the object is to satisfy a great
public want or exigency, that is sufficient. Rindge Co. vs.
Los Angeles County, 262 U.S. 700, 43 S.Ct. 689, 692, 67
L.Ed. 1186. The term may be said to mean public
usefulness, utility, or advantage, or what is productive of
general benefit. It may be limited to the inhabitants of a
small or restricted locality, but must be in common, and
not for a particular individual. The use must be a needful
one for the public, which cannot be surrendered without
obvious general loss and inconvenience. A "public use"
for which land may be taken defies absolute definition
for it changes with varying conditions of society, new
appliances in the sciences, changing conceptions of
scope and functions of government, and other differing
circumstances brought about by an increase in
population and new modes of communication and
transportation. Katz v. Brandon, 156 Conn., 521, 245 A.2d
579,586. 17
The validity of the exercise of the power of eminent domain for
traditional purposes is beyond question; it is not at all to be said,
however, that public use should thereby be restricted to such
traditional uses. The idea that "public use" is strictly limited to clear
cases of "use by the public" has long been discarded. This Court
in Heirs of Juancho Ardona v. Reyes,18 quoting from Berman
v. Parker (348 U.S. 25; 99 L. ed. 27), held:
We do not sit to determine whether a particular housing
project is or is not desirable. The concept of the public
welfare is broad and inclusive. See DayBrite Lighting, Inc.
v. Missouri, 342 US 421, 424, 96 L. Ed. 469, 472, 72 S Ct 405.
The values it represents are spiritual as well as physical,
aesthetic as well as monetary. It is within the power of
the legislature to determine that the community should
be beautiful as well as healthy, spacious as well as clean,
well-balanced as well as carefully patrolled. In the
present case, the Congress and its authorized agencies
have made determinations that take into account a
wide variety of values. It is no for us to reappraise them.
If those who govern the District of Columbia decide that
the Nation's Capital should be beautiful as well as
sanitary, there is nothing in the Fifth Amendment that
stands in the way.
Once the object is within the authority of Congress, the
right to realize it through the exercise of eminent domain
is clear. For the power of eminent domain is merely the
means to the end. See Luxton v. North River Bridge Co.
153 US 525, 529, 530, 38 L. ed. 808, 810, 14 S Ct 891; United
States v. Gettysburg Electric R. Co. 160 US 668, 679, 40 L.
ed. 576, 580, 16 S Ct 427.
It has been explained as early as Seña v. Manila Railroad
Co., 19 that:
. . . A historical research discloses the meaning of the
term "public use" to be one of constant growth. As
society advances, its demands upon the individual
increase and each demand is a new use to which the
resources of the individual may be devoted. . . . for
"whatever is beneficially employed for the community is
a public use.
Chief Justice Enrique M. Fernando states:
 The taking to be valid must be for public use. There was
a time when it was felt that a literal meaning should be
attached to such a requirement. Whatever project is
undertaken must be for the public to enjoy, as in the
case of streets or parks. Otherwise, expropriation is not
allowable. It is not so any more. As long as the purpose
of the taking is public, then the power of eminent
domain comes into play. As just noted, the constitution
in at least two cases, to remove any doubt, determines
what is public use. One is the expropriation of lands to
be subdivided into small lots for resale at cost to
individuals. The other is the transfer, through the exercise
of this power, of utilities and other private enterprise to
the government. It is accurate to state then that at
present whatever may be beneficially employed for the
general welfare satisfies the requirement of public use. 20
Chief Justice Fernando, writing the ponencia in J.M. Tuason &
Co. vs. Land Tenure Administration, 21 has viewed the Constitution
a dynamic instrument and one that "is not to be construed
narrowly or pedantically" so as to enable it "to meet adequately
whatever problems the future has in store." Fr. Joaquin Bernas, a
noted constitutionalist himself, has aptly observed that what, in
fact, has ultimately emerged is a concept of public use which is
just as broad as "public welfare." 22
Petitioners ask: But "(w)hat is the so-called unusual interest that the
expropriation of (Felix Manalo's) birthplace become so vital as to
be a public use appropriate for the exercise of the power of
eminent domain" when only members of the Iglesia ni
Cristo would benefit? This attempt to give some religious
perspective to the case deserves little consideration, for what
should be significant is the principal objective of, not the casual
consequences that might follow from, the exercise of the power.
The purpose in setting up the marker is essentially to recognize the
distinctive contribution of the late Felix Manalo to the culture of
the Philippines, rather than to commemorate his founding and
leadership of the Iglesia ni Cristo.
The practical reality that greater benefit may be derived
by members of the Iglesia ni Cristo than by most others
could well be true but such a peculiar advantage still
remains to be merely incidental and secondary in
nature. Indeed, that only a few would actually benefit
from the expropriation of property does not necessarily
diminish the essence and character of public use. 23
Petitioners contend that they have been denied due process in
the fixing of the provisional value of their property. Petitioners
need merely to be reminded that what the law prohibits is the lack
of opportunity to be heard;24 contrary to petitioners' argument,
the records of this case are replete with pleadings 25 that could
have dealt, directly or indirectly, with the provisional value of the
property.
Petitioners, finally, would fault respondent appellate court in
sustaining the trial court's order which considered inapplicable the
case of Noble v. City of Manila. 26 Both courts held correctly. The
Republic was not a party to the alleged contract of exchange
between the Iglesia ni Cristo and petitioners which (the
contracting parties) alone, not the Republic, could properly be
bound.
All considered, the Court finds the assailed decision to be in
accord with law and jurisprudence.
WHEREFORE, the petition is DENIED. No costs.
SO ORDERED.
7. G.R. No. 166006 March 14, 2008
PLANTERS PRODUCTS, INC., Petitioner,
vs.
FERTIPHIL CORPORATION, Respondent.
DECISION
REYES, R.T., J.:
THE Regional Trial Courts (RTC) have the authority and jurisdiction
to consider the constitutionality of statutes, executive orders,
presidential decrees and other issuances. The Constitution vests
that power not only in the Supreme Court but in all Regional Trial
110
Courts.
The principle is relevant in this petition for review on certiorari of
the Decision1 of the Court of Appeals (CA) affirming with
modification that of the RTC in Makati City,2 finding petitioner
Planters Products, Inc. (PPI) liable to private respondent Fertiphil
Corporation (Fertiphil) for the levies it paid under Letter of
Instruction (LOI) No. 1465.
The Facts
Petitioner PPI and private respondent Fertiphil are private
corporations incorporated under Philippine laws.3 They are both
engaged in the importation and distribution of fertilizers,
pesticides and agricultural chemicals.
On June 3, 1985, then President Ferdinand Marcos, exercising his
legislative powers, issued LOI No. 1465 which provided, among
others, for the imposition of a capital recovery component (CRC)
on the domestic sale of all grades of fertilizers in the
Philippines.4 The LOI provides:
3. The Administrator of the Fertilizer Pesticide Authority to include
in its fertilizer pricing formula a capital contribution component of
not less than ₱10 per bag. This capital contribution shall be
collected until adequate capital is raised to make PPI viable. Such
capital contribution shall be applied by FPA to all domestic sales
of fertilizers in the Philippines.5 (Underscoring supplied)
Pursuant to the LOI, Fertiphil paid ₱10 for every bag of fertilizer it
sold in the domestic market to the Fertilizer and Pesticide Authority
(FPA). FPA then remitted the amount collected to the Far East
Bank and Trust Company, the depositary bank of PPI. Fertiphil paid
₱6,689,144 to FPA from July 8, 1985 to January 24, 1986.6
After the 1986 Edsa Revolution, FPA voluntarily stopped the
imposition of the ₱10 levy. With the return of democracy, Fertiphil
demanded from PPI a refund of the amounts it paid under LOI No.
1465, but PPI refused to accede to the demand.7
Fertiphil filed a complaint for collection and damages8 against
FPA and PPI with the RTC in Makati. It questioned the
constitutionality of LOI No. 1465 for being unjust, unreasonable,
oppressive, invalid and an unlawful imposition that amounted to
a denial of due process of law.9 Fertiphil alleged that the LOI solely
favored PPI, a privately owned corporation, which used the
proceeds to maintain its monopoly of the fertilizer industry.
In its Answer,10 FPA, through the Solicitor General, countered that
the issuance of LOI No. 1465 was a valid exercise of the police
power of the State in ensuring the stability of the fertilizer industry
in the country. It also averred that Fertiphil did not sustain any
damage from the LOI because the burden imposed by the levy
fell on the ultimate consumer, not the seller.
RTC Disposition
On November 20, 1991, the RTC rendered judgment in favor of
Fertiphil, disposing as follows:
WHEREFORE, in view of the foregoing, the Court hereby renders
judgment in favor of the plaintiff and against the defendant
Planters Product, Inc., ordering the latter to pay the former:
1) the sum of ₱6,698,144.00 with interest at 12% from the
time of judicial demand;
2) the sum of ₱100,000 as attorney’s fees;
3) the cost of suit.
SO ORDERED.11
Ruling that the imposition of the ₱10 CRC was an exercise of the
State’s inherent power of taxation, the RTC invalidated the levy
for violating the basic principle that taxes can only be levied for
public purpose, viz.:
It is apparent that the imposition of ₱10 per fertilizer bag sold in the
country by LOI 1465 is purportedly in the exercise of the power of
taxation. It is a settled principle that the power of taxation by the
state is plenary. Comprehensive and supreme, the principal
check upon its abuse resting in the responsibility of the members
of the legislature to their constituents. However, there are two
kinds of limitations on the power of taxation: the inherent
limitations and the constitutional limitations.
One of the inherent limitations is that a tax may be levied only for
public purposes:
The power to tax can be resorted to only for a constitutionally
valid public purpose. By the same token, taxes may not be levied
for purely private purposes, for building up of private fortunes, or
for the redress of private wrongs. They cannot be levied for the
improvement of private property, or for the benefit, and
promotion of private enterprises, except where the aid is incident
to the public benefit. It is well-settled principle of constitutional law
that no general tax can be levied except for the purpose of
raising money which is to be expended for public use. Funds
cannot be exacted under the guise of taxation to promote a
purpose that is not of public interest. Without such limitation, the
power to tax could be exercised or employed as an authority to
destroy the economy of the people. A tax, however, is not held
void on the ground of want of public interest unless the want of
such interest is clear. (71 Am. Jur. pp. 371-372)
In the case at bar, the plaintiff paid the amount of ₱6,698,144.00
to the Fertilizer and Pesticide Authority pursuant to the ₱10 per
bag of fertilizer sold imposition under LOI 1465 which, in turn,
remitted the amount to the defendant Planters Products, Inc. thru
the latter’s depository bank, Far East Bank and Trust Co. Thus, by
virtue of LOI 1465 the plaintiff, Fertiphil Corporation, which is a
private domestic corporation, became poorer by the amount of
₱6,698,144.00 and the defendant, Planters Product, Inc., another
private domestic corporation, became richer by the amount of
₱6,698,144.00.
Tested by the standards of constitutionality as set forth in the
afore-quoted jurisprudence, it is quite evident that LOI 1465 insofar
as it imposes the amount of ₱10 per fertilizer bag sold in the
country and orders that the said amount should go to the
defendant Planters Product, Inc. is unlawful because it violates the
mandate that a tax can be levied only for a public purpose and
not to benefit, aid and promote a private enterprise such as
Planters Product, Inc.12
PPI moved for reconsideration but its motion was denied.13 PPI
then filed a notice of appeal with the RTC but it failed to pay the
requisite appeal docket fee. In a separate but related
proceeding, this Court14 allowed the appeal of PPI and
remanded the case to the CA for proper disposition.
CA Decision
On November 28, 2003, the CA handed down its decision
affirming with modification that of the RTC, with the following fallo:
IN VIEW OF ALL THE FOREGOING, the decision appealed from is
hereby AFFIRMED, subject to the MODIFICATION that the award
of attorney’s fees is hereby DELETED.15
In affirming the RTC decision, the CA ruled that the lis mota of the
complaint for collection was the constitutionality of LOI No. 1465,
thus:
The question then is whether it was proper for the trial court to
exercise its power to judicially determine the constitutionality of
the subject statute in the instant case.
As a rule, where the controversy can be settled on other grounds,
the courts will not resolve the constitutionality of a law (Lim v.
Pacquing, 240 SCRA 649 [1995]). The policy of the courts is to avoid
ruling on constitutional questions and to presume that the acts of
political departments are valid, absent a clear and unmistakable
showing to the contrary.
However, the courts are not precluded from exercising such
power when the following requisites are obtaining in a controversy
before it: First, there must be before the court an actual case
calling for the exercise of judicial review. Second, the question
must be ripe for adjudication. Third, the person challenging the
validity of the act must have standing to challenge. Fourth, the
111
question of constitutionality must have been raised at the earliest
opportunity; and lastly, the issue of constitutionality must be the
very lis mota of the case (Integrated Bar of the Philippines v.
Zamora, 338 SCRA 81 [2000]).
Indisputably, the present case was primarily instituted for
collection and damages. However, a perusal of the complaint
also reveals that the instant action is founded on the claim that
the levy imposed was an unlawful and unconstitutional special
assessment. Consequently, the requisite that the constitutionality
of the law in question be the very lis mota of the case is present,
making it proper for the trial court to rule on the constitutionality
of LOI 1465.16
The CA held that even on the assumption that LOI No. 1465 was
issued under the police power of the state, it is still unconstitutional
because it did not promote public welfare. The CA explained:
In declaring LOI 1465 unconstitutional, the trial court held that the
levy imposed under the said law was an invalid exercise of the
State’s power of taxation inasmuch as it violated the inherent and
constitutional prescription that taxes be levied only for public
purposes. It reasoned out that the amount collected under the
levy was remitted to the depository bank of PPI, which the latter
used to advance its private interest.
On the other hand, appellant submits that the subject statute’s
passage was a valid exercise of police power. In addition, it
disputes the court a quo’s findings arguing that the collections
under LOI 1465 was for the benefit of Planters Foundation,
Incorporated (PFI), a foundation created by law to hold in trust for
millions of farmers, the stock ownership of PPI.
Of the three fundamental powers of the State, the exercise of
police power has been characterized as the most essential,
insistent and the least limitable of powers, extending as it does to
all the great public needs. It may be exercised as long as the
activity or the property sought to be regulated has some
relevance to public welfare (Constitutional Law, by Isagani A.
Cruz, p. 38, 1995 Edition).
Vast as the power is, however, it must be exercised within the limits
set by the Constitution, which requires the concurrence of a lawful
subject and a lawful method. Thus, our courts have laid down the
test to determine the validity of a police measure as follows: (1)
the interests of the public generally, as distinguished from those of
a particular class, requires its exercise; and (2) the means
employed are reasonably necessary for the accomplishment of
the purpose and not unduly oppressive upon individuals (National
Development Company v. Philippine Veterans Bank, 192 SCRA
257 [1990]).
It is upon applying this established tests that We sustain the trial
court’s holding LOI 1465 unconstitutional. To be sure, ensuring the
continued supply and distribution of fertilizer in the country is an
undertaking imbued with public interest. However, the method by
which LOI 1465 sought to achieve this is by no means a measure
that will promote the public welfare. The government’s
commitment to support the successful rehabilitation and
continued viability of PPI, a private corporation, is an
unmistakable attempt to mask the subject statute’s impartiality.
There is no way to treat the self-interest of a favored entity, like PPI,
as identical with the general interest of the country’s farmers or
even the Filipino people in general. Well to stress, substantive due
process exacts fairness and equal protection disallows distinction
where none is needed. When a statute’s public purpose is spoiled
by private interest, the use of police power becomes a travesty
which must be struck down for being an arbitrary exercise of
government power. To rule in favor of appellant would
contravene the general principle that revenues derived from
taxes cannot be used for purely private purposes or for the
exclusive benefit of private individuals.17
The CA did not accept PPI’s claim that the levy imposed under
LOI No. 1465 was for the benefit of Planters Foundation, Inc., a
foundation created to hold in trust the stock ownership of PPI. The
CA stated:
Appellant next claims that the collections under LOI 1465 was for
the benefit of Planters Foundation, Incorporated (PFI), a
foundation created by law to hold in trust for millions of farmers,
the stock ownership of PFI on the strength of Letter of Undertaking
(LOU) issued by then Prime Minister Cesar Virata on April 18, 1985
and affirmed by the Secretary of Justice in an Opinion dated
October 12, 1987, to wit:
"2. Upon the effective date of this Letter of Undertaking, the
Republic shall cause FPA to include in its fertilizer pricing formula a
capital recovery component, the proceeds of which will be used
initially for the purpose of funding the unpaid portion of the
outstanding capital stock of Planters presently held in trust by
Planters Foundation, Inc. (Planters Foundation), which unpaid
capital is estimated at approximately ₱206 million (subject to
validation by Planters and Planters Foundation) (such unpaid
portion of the outstanding capital stock of Planters being
hereafter referred to as the ‘Unpaid Capital’), and subsequently
for such capital increases as may be required for the continuing
viability of Planters.
The capital recovery component shall be in the minimum amount
of ₱10 per bag, which will be added to the price of all domestic
sales of fertilizer in the Philippines by any importer and/or fertilizer
mother company. In this connection, the Republic hereby
acknowledges that the advances by Planters to Planters
Foundation which were applied to the payment of the Planters
shares now held in trust by Planters Foundation, have been
assigned to, among others, the Creditors. Accordingly, the
Republic, through FPA, hereby agrees to deposit the proceeds of
the capital recovery component in the special trust account
designated in the notice dated April 2, 1985, addressed by
counsel for the Creditors to Planters Foundation. Such proceeds
shall be deposited by FPA on or before the 15th day of each
month.
The capital recovery component shall continue to be charged
and collected until payment in full of (a) the Unpaid Capital
and/or (b) any shortfall in the payment of the Subsidy
Receivables, (c) any carrying cost accruing from the date hereof
on the amounts which may be outstanding from time to time of
the Unpaid Capital and/or the Subsidy Receivables and (d) the
capital increases contemplated in paragraph 2 hereof. For the
purpose of the foregoing clause (c), the ‘carrying cost’ shall be at
such rate as will represent the full and reasonable cost to Planters
of servicing its debts, taking into account both its peso and foreign
currency-denominated obligations." (Records, pp. 42-43)
Appellant’s proposition is open to question, to say the least. The
LOU issued by then Prime Minister Virata taken together with the
Justice Secretary’s Opinion does not preponderantly
demonstrate that the collections made were held in trust in favor
of millions of farmers. Unfortunately for appellant, in the absence
of sufficient evidence to establish its claims, this Court is
constrained to rely on what is explicitly provided in LOI 1465 – that
one of the primary aims in imposing the levy is to support the
successful rehabilitation and continued viability of PPI.18
PPI moved for reconsideration but its motion was denied.19 It then
filed the present petition with this Court.
Issues
Petitioner PPI raises four issues for Our consideration, viz.:
I cases of "transcendental importance" or with "far reaching
THE CONSTITUTIONALITY OF LOI 1465 CANNOT BE COLLATERALLY
ATTACKED AND BE DECREED VIA A DEFAULT JUDGMENT IN A CASE
FILED FOR COLLECTION AND DAMAGES WHERE THE ISSUE OF
CONSTITUTIONALITY IS NOT THE VERY LIS MOTA OF THE
CASE. NEITHER CAN LOI 1465 BE CHALLENGED BY ANY PERSON OR
ENTITY WHICH HAS NO STANDING TO DO SO.
II
LOI 1465, BEING A LAW IMPLEMENTED FOR THE PURPOSE OF
ASSURING THE FERTILIZER SUPPLY AND DISTRIBUTION IN THE
COUNTRY, AND FOR BENEFITING A FOUNDATION CREATED BY LAW
TO HOLD IN TRUST FOR MILLIONS OF FARMERS THEIR STOCK
OWNERSHIP IN PPI CONSTITUTES A VALID LEGISLATION PURSUANT
TO THE EXERCISE OF TAXATION AND POLICE POWER FOR PUBLIC
PURPOSES.
III
THE AMOUNT COLLECTED UNDER THE CAPITAL RECOVERY
COMPONENT WAS REMITTED TO THE GOVERNMENT, AND BECAME
112
GOVERNMENT FUNDS PURSUANT TO AN EFFECTIVE AND VALIDLY
ENACTED LAW WHICH IMPOSED DUTIES AND CONFERRED RIGHTS
BY VIRTUE OF THE PRINCIPLE OF "OPERATIVE FACT" PRIOR TO ANY
DECLARATION OF UNCONSTITUTIONALITY OF LOI 1465.
IV
THE PRINCIPLE OF UNJUST VEXATION (SHOULD BE ENRICHMENT)
FINDS NO APPLICATION IN THE INSTANT CASE.20 (Underscoring
supplied)
Our Ruling
We shall first tackle the procedural issues of locus standi and the
jurisdiction of the RTC to resolve constitutional issues.
Fertiphil has locus standi because it suffered direct injury; doctrine
of standing is a mere procedural technicality which may be
waived.
PPI argues that Fertiphil has no locus standi to question the
constitutionality of LOI No. 1465 because it does not have a
"personal and substantial interest in the case or will sustain direct
injury as a result of its enforcement."21 It asserts that Fertiphil did not
suffer any damage from the CRC imposition because "incidence
of the levy fell on the ultimate consumer or the farmers
themselves, not on the seller fertilizer company."22
We cannot agree. The doctrine of locus standi or the right of
appearance in a court of justice has been adequately discussed
by this Court in a catena of cases. Succinctly put, the doctrine
requires a litigant to have a material interest in the outcome of a
case. In private suits, locus standi requires a litigant to be a "real
party in interest," which is defined as "the party who stands to be
benefited or injured by the judgment in the suit or the party
entitled to the avails of the suit."23
In public suits, this Court recognizes the difficulty of applying the
doctrine especially when plaintiff asserts a public right on behalf
of the general public because of conflicting public policy
issues. 24 On one end, there is the right of the ordinary citizen to
petition the courts to be freed from unlawful government intrusion
and illegal official action. At the other end, there is the public
policy precluding excessive judicial interference in official acts,
which may unnecessarily hinder the delivery of basic public
services.
In this jurisdiction, We have adopted the "direct injury test" to
determine locus standi in public suits. In People v. Vera,25 it was
held that a person who impugns the validity of a statute must
have "a personal and substantial interest in the case such that he
has sustained, or will sustain direct injury as a result." The "direct
injury test" in public suits is similar to the "real party in interest" rule
for private suits under Section 2, Rule 3 of the 1997 Rules of Civil
Procedure.26
Recognizing that a strict application of the "direct injury" test may
hamper public interest, this Court relaxed the requirement in
implications." Being a mere procedural technicality, it has also
been held that locus standi may be waived in the public interest.27
Whether or not the complaint for collection is characterized as a
private or public suit, Fertiphil has locus standi to file it. Fertiphil
suffered a direct injury from the enforcement of LOI No. 1465. It
was required, and it did pay, the ₱10 levy imposed for every bag
of fertilizer sold on the domestic market. It may be true that
Fertiphil has passed some or all of the levy to the ultimate
consumer, but that does not disqualify it from attacking the
constitutionality of the LOI or from seeking a refund. As seller, it
bore the ultimate burden of paying the levy. It faced the possibility
of severe sanctions for failure to pay the levy. The fact of payment
is sufficient injury to Fertiphil.
Moreover, Fertiphil suffered harm from the enforcement of the LOI
because it was compelled to factor in its product the levy. The
levy certainly rendered the fertilizer products of Fertiphil and other
domestic sellers much more expensive. The harm to their business
consists not only in fewer clients because of the increased price,
but also in adopting alternative corporate strategies to meet the
demands of LOI No. 1465. Fertiphil and other fertilizer sellers may
have shouldered all or part of the levy just to be competitive in
the market. The harm occasioned on the business of Fertiphil is
sufficient injury for purposes of locus standi.
Even assuming arguendo that there is no direct injury, We find that
the liberal policy consistently adopted by this Court on locus
standi must apply. The issues raised by Fertiphil are of paramount
public importance. It involves not only the constitutionality of a tax
law but, more importantly, the use of taxes for public purpose.
Former President Marcos issued LOI No. 1465 with the intention of
rehabilitating an ailing private company. This is clear from the text
of the LOI. PPI is expressly named in the LOI as the direct
beneficiary of the levy. Worse, the levy was made dependent
and conditional upon PPI becoming financially viable. The LOI
provided that "the capital contribution shall be collected until
adequate capital is raised to make PPI viable."
The constitutionality of the levy is already in doubt on a plain
reading of the statute. It is Our constitutional duty to squarely
resolve the issue as the final arbiter of all justiciable controversies.
The doctrine of standing, being a mere procedural technicality,
should be waived, if at all, to adequately thresh out an important
constitutional issue.
RTC may resolve constitutional issues; the constitutional issue was
adequately raised in the complaint; it is the lis mota of the case.
PPI insists that the RTC and the CA erred in ruling on the
constitutionality of the LOI. It asserts that the constitutionality of the
LOI cannot be collaterally attacked in a complaint for
collection.28 Alternatively, the resolution of the constitutional issue
is not necessary for a determination of the complaint for
collection.29
Fertiphil counters that the constitutionality of the LOI was
adequately pleaded in its complaint. It claims that the
constitutionality of LOI No. 1465 is the very lis mota of the case
because the trial court cannot determine its claim without
resolving the issue.30
It is settled that the RTC has jurisdiction to resolve the
constitutionality of a statute, presidential decree or an executive
order. This is clear from Section 5, Article VIII of the 1987
Constitution, which provides:
SECTION 5. The Supreme Court shall have the following powers:
xxxx
(2) Review, revise, reverse, modify, or affirm on appeal or
certiorari, as the law or the Rules of Court may provide, final
judgments and orders of lower courts in:
(a) All cases in which the constitutionality or validity of any treaty,
international or executive agreement, law, presidential decree,
proclamation, order, instruction, ordinance, or regulation is in
question. (Underscoring supplied)
In Mirasol v. Court of Appeals,31 this Court recognized the power
of the RTC to resolve constitutional issues, thus:
On the first issue. It is settled that Regional Trial Courts have the
authority and jurisdiction to consider the constitutionality of a
statute, presidential decree, or executive order. The Constitution
vests the power of judicial review or the power to declare a law,
treaty, international or executive agreement, presidential decree,
order, instruction, ordinance, or regulation not only in this Court,
but in all Regional Trial Courts.32
In the recent case of Equi-Asia Placement, Inc. v. Department of
Foreign Affairs,33 this Court reiterated:
There is no denying that regular courts have jurisdiction over cases
involving the validity or constitutionality of a rule or regulation
issued by administrative agencies. Such jurisdiction, however, is
not limited to the Court of Appeals or to this Court alone for even
the regional trial courts can take cognizance of actions assailing
a specific rule or set of rules promulgated by administrative
bodies. Indeed, the Constitution vests the power of judicial review
or the power to declare a law, treaty, international or executive
agreement, presidential decree, order, instruction, ordinance, or
regulation in the courts, including the regional trial courts.34
113
Judicial review of official acts on the ground of unconstitutionality
may be sought or availed of through any of the actions
cognizable by courts of justice, not necessarily in a suit for
declaratory relief. Such review may be had in criminal actions, as
in People v. Ferrer35 involving the constitutionality of the now
defunct Anti-Subversion law, or in ordinary actions, as in Krivenko
v. Register of Deeds36 involving the constitutionality of laws
prohibiting aliens from acquiring public lands. The constitutional
issue, however, (a) must be properly raised and presented in the
case, and (b) its resolution is necessary to a determination of the
case, i.e., the issue of constitutionality must be the very lis mota
presented.37
Contrary to PPI’s claim, the constitutionality of LOI No. 1465 was
properly and adequately raised in the complaint for collection
filed with the RTC. The pertinent portions of the complaint allege:
6. The CRC of ₱10 per bag levied under LOI 1465 on domestic
sales of all grades of fertilizer in the Philippines, is unlawful, unjust,
uncalled for, unreasonable, inequitable and oppressive because:
xxxx
(c) It favors only one private domestic corporation, i.e.,
defendant PPPI, and imposed at the expense and disadvantage
of the other fertilizer importers/distributors who were themselves in
tight business situation and were then exerting all efforts and
maximizing management and marketing skills to remain viable;
xxxx
(e) It was a glaring example of crony capitalism, a forced
program through which the PPI, having been presumptuously
masqueraded as "the" fertilizer industry itself, was the sole and
anointed beneficiary;
7. The CRC was an unlawful; and unconstitutional special
assessment and its imposition is tantamount to illegal exaction
amounting to a denial of due process since the persons of entities
which had to bear the burden of paying the CRC derived no
benefit therefrom; that on the contrary it was used by PPI in trying
to regain its former despicable monopoly of the fertilizer industry
to the detriment of other distributors and
importers.38 (Underscoring supplied)
The constitutionality of LOI No. 1465 is also the very lis mota of the
complaint for collection. Fertiphil filed the complaint to compel
PPI to refund the levies paid under the statute on the ground that
the law imposing the levy is unconstitutional. The thesis is that an
unconstitutional law is void. It has no legal effect. Being void,
Fertiphil had no legal obligation to pay the levy. Necessarily, all
levies duly paid pursuant to an unconstitutional law should be
refunded under the civil code principle against unjust enrichment.
The refund is a mere consequence of the law being declared
unconstitutional. The RTC surely cannot order PPI to refund Fertiphil
if it does not declare the LOI unconstitutional. It is the
unconstitutionality of the LOI which triggers the refund. The issue
of constitutionality is the very lis mota of the complaint with the
RTC.
The ₱10 levy under LOI No. 1465 is an exercise of the power of
taxation.
At any rate, the Court holds that the RTC and the CA did not err
in ruling against the constitutionality of the LOI.
PPI insists that LOI No. 1465 is a valid exercise either of the police
power or the power of taxation. It claims that the LOI was
implemented for the purpose of assuring the fertilizer supply and
distribution in the country and for benefiting a foundation created
by law to hold in trust for millions of farmers their stock ownership
in PPI.
Fertiphil counters that the LOI is unconstitutional because it was
enacted to give benefit to a private company. The levy was
imposed to pay the corporate debt of PPI. Fertiphil also argues
that, even if the LOI is enacted under the police power, it is still
unconstitutional because it did not promote the general welfare
of the people or public interest.
Police power and the power of taxation are inherent powers of
the State. These powers are distinct and have different tests for
validity. Police power is the power of the State to enact legislation
that may interfere with personal liberty or property in order to
promote the general welfare,39 while the power of taxation is the
power to levy taxes to be used for public purpose. The main
purpose of police power is the regulation of a behavior or
conduct, while taxation is revenue generation. The "lawful
subjects" and "lawful means" tests are used to determine the
validity of a law enacted under the police power.40 The power of
taxation, on the other hand, is circumscribed by inherent and
constitutional limitations.
We agree with the RTC that the imposition of the levy was an
exercise by the State of its taxation power. While it is true that the
power of taxation can be used as an implement of police
power,41 the primary purpose of the levy is revenue generation. If
the purpose is primarily revenue, or if revenue is, at least, one of
the real and substantial purposes, then the exaction is properly
called a tax.42
In Philippine Airlines, Inc. v. Edu,43 it was held that the imposition of
a vehicle registration fee is not an exercise by the State of its
police power, but of its taxation power, thus:
It is clear from the provisions of Section 73 of Commonwealth Act
123 and Section 61 of the Land Transportation and Traffic Code
that the legislative intent and purpose behind the law requiring
owners of vehicles to pay for their registration is mainly to raise
funds for the construction and maintenance of highways and to
a much lesser degree, pay for the operating expenses of the
administering agency. x x x Fees may be properly regarded as
taxes even though they also serve as an instrument of regulation.
Taxation may be made the implement of the state's police power
(Lutz v. Araneta, 98 Phil. 148). If the purpose is primarily revenue, or
if revenue is, at least, one of the real and substantial purposes,
then the exaction is properly called a tax. Such is the case of
motor vehicle registration fees. The same provision appears as
Section 59(b) in the Land Transportation Code. It is patent
therefrom that the legislators had in mind a regulatory tax as the
law refers to the imposition on the registration, operation or
ownership of a motor vehicle as a "tax or fee." x x x Simply put, if
the exaction under Rep. Act 4136 were merely a regulatory fee,
the imposition in Rep. Act 5448 need not be an "additional" tax.
Rep. Act 4136 also speaks of other "fees" such as the special permit
fees for certain types of motor vehicles (Sec. 10) and additional
fees for change of registration (Sec. 11). These are not to be
understood as taxes because such fees are very minimal to be
revenue-raising. Thus, they are not mentioned by Sec. 59(b) of the
Code as taxes like the motor vehicle registration fee and
chauffeurs’ license fee. Such fees are to go into the expenditures
of the Land Transportation Commission as provided for in the last
proviso of Sec. 61.44 (Underscoring supplied)
The ₱10 levy under LOI No. 1465 is too excessive to serve a mere
regulatory purpose. The levy, no doubt, was a big burden on the
seller or the ultimate consumer. It increased the price of a bag of
fertilizer by as much as five percent.45 A plain reading of the LOI
also supports the conclusion that the levy was for revenue
generation. The LOI expressly provided that the levy was imposed
"until adequate capital is raised to make PPI viable."
Taxes are exacted only for a public purpose. The ₱10 levy is
unconstitutional because it was not for a public purpose. The levy
was imposed to give undue benefit to PPI.
An inherent limitation on the power of taxation is public purpose.
Taxes are exacted only for a public purpose. They cannot be used
for purely private purposes or for the exclusive benefit of private
persons.46 The reason for this is simple. The power to tax exists for
the general welfare; hence, implicit in its power is the limitation
that it should be used only for a public purpose. It would be a
robbery for the State to tax its citizens and use the funds
generated for a private purpose. As an old United States case
bluntly put it: "To lay with one hand, the power of the government
on the property of the citizen, and with the other to bestow it upon
favored individuals to aid private enterprises and build up private
fortunes, is nonetheless a robbery because it is done under the
forms of law and is called taxation."47
The term "public purpose" is not defined. It is an elastic concept
that can be hammered to fit modern standards. Jurisprudence
states that "public purpose" should be given a broad
interpretation. It does not only pertain to those purposes which are
traditionally viewed as essentially government functions, such as
114
building roads and delivery of basic services, but also includes
those purposes designed to promote social justice. Thus, public
money may now be used for the relocation of illegal settlers, low-
cost housing and urban or agrarian reform.
While the categories of what may constitute a public purpose are
continually expanding in light of the expansion of government
functions, the inherent requirement that taxes can only be
exacted for a public purpose still stands. Public purpose is the
heart of a tax law. When a tax law is only a mask to exact funds
from the public when its true intent is to give undue benefit and
advantage to a private enterprise, that law will not satisfy the
requirement of "public purpose."
The purpose of a law is evident from its text or inferable from other
secondary sources. Here, We agree with the RTC and that CA that
the levy imposed under LOI No. 1465 was not for a public purpose.
First, the LOI expressly provided that the levy be imposed to
benefit PPI, a private company. The purpose is explicit from
Clause 3 of the law, thus:
3. The Administrator of the Fertilizer Pesticide Authority to include
in its fertilizer pricing formula a capital contribution component of
not less than ₱10 per bag. This capital contribution shall be
collected until adequate capital is raised to make PPI viable. Such
capital contribution shall be applied by FPA to all domestic sales
of fertilizers in the Philippines.48 (Underscoring supplied)
It is a basic rule of statutory construction that the text of a statute
should be given a literal meaning. In this case, the text of the LOI
is plain that the levy was imposed in order to raise capital for PPI.
The framers of the LOI did not even hide the insidious purpose of
the law. They were cavalier enough to name PPI as the ultimate
beneficiary of the taxes levied under the LOI. We find it utterly
repulsive that a tax law would expressly name a private company
as the ultimate beneficiary of the taxes to be levied from the
public. This is a clear case of crony capitalism.
Second, the LOI provides that the imposition of the ₱10 levy was
conditional and dependent upon PPI becoming financially
"viable." This suggests that the levy was actually imposed to
benefit PPI. The LOI notably does not fix a maximum amount when
PPI is deemed financially "viable." Worse, the liability of Fertiphil
and other domestic sellers of fertilizer to pay the levy is made
indefinite. They are required to continuously pay the levy until
adequate capital is raised for PPI.
Third, the RTC and the CA held that the levies paid under the LOI
were directly remitted and deposited by FPA to Far East Bank and
Trust Company, the depositary bank of PPI.49 This proves that PPI
benefited from the LOI. It is also proves that the main purpose of
the law was to give undue benefit and advantage to PPI.
Fourth, the levy was used to pay the corporate debts of PPI. A
reading of the Letter of Understanding50 dated May 18, 1985
signed by then Prime Minister Cesar Virata reveals that PPI was in
deep financial problem because of its huge corporate debts.
There were pending petitions for rehabilitation against PPI before
the Securities and Exchange Commission. The government
guaranteed payment of PPI’s debts to its foreign creditors. To fund
the payment, President Marcos issued LOI No. 1465. The pertinent
portions of the letter of understanding read:
Republic of the Philippines
Office of the Prime Minister
Manila
LETTER OF UNDERTAKING
May 18, 1985
TO: THE BANKING AND FINANCIAL INSTITUTIONS
LISTED IN ANNEX A HERETO WHICH ARE
CREDITORS (COLLECTIVELY, THE "CREDITORS")
OF PLANTERS PRODUCTS, INC. ("PLANTERS")
Gentlemen:
This has reference to Planters which is the principal importer and accomplishment of the purpose and not unduly oppressive upon
distributor of fertilizer, pesticides and agricultural chemicals in the individuals.52

115
Philippines. As regards Planters, the Philippine Government
confirms its awareness of the following: (1) that Planters has
For the same reasons as discussed, LOI No. 1695 is invalid because
outstanding obligations in foreign currency and/or pesos, to the
it did not promote public interest. The law was enacted to give
Creditors, (2) that Planters is currently experiencing financial
undue advantage to a private corporation. We quote with
difficulties, and (3) that there are presently pending with the
approval the CA ratiocination on this point, thus:
Securities and Exchange Commission of the Philippines a petition
filed at Planters’ own behest for the suspension of payment of all
its obligations, and a separate petition filed by Manufacturers It is upon applying this established tests that We sustain the trial
Hanover Trust Company, Manila Offshore Branch for the court’s holding LOI 1465 unconstitutional.1awphil To be sure,
appointment of a rehabilitation receiver for Planters. ensuring the continued supply and distribution of fertilizer in the
country is an undertaking imbued with public interest. However,
the method by which LOI 1465 sought to achieve this is by no
In connection with the foregoing, the Republic of the Philippines
means a measure that will promote the public welfare. The
(the "Republic") confirms that it considers and continues to
government’s commitment to support the successful
consider Planters as a major fertilizer distributor. Accordingly, for
rehabilitation and continued viability of PPI, a private corporation,
and in consideration of your expressed willingness to consider and
is an unmistakable attempt to mask the subject statute’s
participate in the effort to rehabilitate Planters, the Republic
impartiality. There is no way to treat the self-interest of a favored
hereby manifests its full and unqualified support of the successful
entity, like PPI, as identical with the general interest of the
rehabilitation and continuing viability of Planters, and to that end,
country’s farmers or even the Filipino people in general. Well to
hereby binds and obligates itself to the creditors and Planters, as
stress, substantive due process exacts fairness and equal
follows:
protection disallows distinction where none is needed. When a
statute’s public purpose is spoiled by private interest, the use of
xxxx police power becomes a travesty which must be struck down for
being an arbitrary exercise of government power.To rule in favor
of appellant would contravene the general principle that
2. Upon the effective date of this Letter of Undertaking, the
revenues derived from taxes cannot be used for purely private
Republic shall cause FPA to include in its fertilizer pricing formula a
purposes or for the exclusive benefit of private individuals.
capital recovery component, the proceeds of which will be used
(Underscoring supplied)
initially for the purpose of funding the unpaid portion of the
outstanding capital stock of Planters presently held in trust by
Planters Foundation, Inc. ("Planters Foundation"), which unpaid The general rule is that an unconstitutional law is void; the doctrine
capital is estimated at approximately ₱206 million (subject to of operative fact is inapplicable.
validation by Planters and Planters Foundation) such unpaid
portion of the outstanding capital stock of Planters being
PPI also argues that Fertiphil cannot seek a refund even if LOI No.
hereafter referred to as the "Unpaid Capital"), and subsequently
1465 is declared unconstitutional. It banks on the doctrine of
for such capital increases as may be required for the continuing
operative fact, which provides that an unconstitutional law has
viability of Planters.
an effect before being declared unconstitutional. PPI wants to
retain the levies paid under LOI No. 1465 even if it is subsequently
xxxx declared to be unconstitutional.

The capital recovery component shall continue to be charged
and collected until payment in full of (a) the Unpaid Capital
and/or (b) any shortfall in the payment of the Subsidy
Receivables, (c) any carrying cost accruing from the date hereof
on the amounts which may be outstanding from time to time of
the Unpaid Capital and/or the Subsidy Receivables, and (d) the
capital increases contemplated in paragraph 2 hereof. For the
purpose of the foregoing clause (c), the "carrying cost" shall be at
such rate as will represent the full and reasonable cost to Planters
of servicing its debts, taking into account both its peso and foreign
currency-denominated obligations.
REPUBLIC OF THE PHILIPPINES
By:
We cannot agree. It is settled that no question, issue or argument
will be entertained on appeal, unless it has been raised in the
court a quo.53 PPI did not raise the applicability of the doctrine of
operative fact with the RTC and the CA. It cannot belatedly raise
the issue with Us in order to extricate itself from the dire effects of
an unconstitutional law.
At any rate, We find the doctrine inapplicable. The general rule is
that an unconstitutional law is void. It produces no rights, imposes
no duties and affords no protection. It has no legal effect. It is, in
legal contemplation, inoperative as if it has not been
passed.54 Being void, Fertiphil is not required to pay the levy. All
levies paid should be refunded in accordance with the general
civil code principle against unjust enrichment. The general rule is
supported by Article 7 of the Civil Code, which provides:

ART. 7. Laws are repealed only by subsequent ones, and their

(signed)
violation or non-observance shall not be excused by disuse or
CESAR E. A. VIRATA
custom or practice to the contrary.
Prime Minister and Minister of Finance51

When the courts declare a law to be inconsistent with the

It is clear from the Letter of Understanding that the levy was
Constitution, the former shall be void and the latter shall govern.
imposed precisely to pay the corporate debts of PPI. We cannot
agree with PPI that the levy was imposed to ensure the stability of
the fertilizer industry in the country. The letter of understanding and The doctrine of operative fact, as an exception to the general
the plain text of the LOI clearly indicate that the levy was exacted rule, only applies as a matter of equity and fair play.55It nullifies the
for the benefit of a private corporation. effects of an unconstitutional law by recognizing that the
existence of a statute prior to a determination of
unconstitutionality is an operative fact and may have
All told, the RTC and the CA did not err in holding that the levy
consequences which cannot always be ignored. The past cannot
imposed under LOI No. 1465 was not for a public purpose. LOI No.
always be erased by a new judicial declaration.56
1465 failed to comply with the public purpose requirement for tax
laws.
The doctrine is applicable when a declaration of
unconstitutionality will impose an undue burden on those who
The LOI is still unconstitutional even if enacted under the police
have relied on the invalid law. Thus, it was applied to a criminal
power; it did not promote public interest.
case when a declaration of unconstitutionality would put the
accused in double jeopardy57 or would put in limbo the acts done
Even if We consider LOI No. 1695 enacted under the police power by a municipality in reliance upon a law creating it.58
of the State, it would still be invalid for failing to comply with the
test of "lawful subjects" and "lawful means." Jurisprudence states
Here, We do not find anything iniquitous in ordering PPI to refund
the test as follows: (1) the interest of the public generally, as
the amounts paid by Fertiphil under LOI No. 1465. It unduly
distinguished from those of particular class, requires its exercise;
benefited from the levy. It was proven during the trial that the
and (2) the means employed are reasonably necessary for the
levies paid were remitted and deposited to its bank account.
Quite the reverse, it would be inequitable and unjust not to order
a refund. To do so would unjustly enrich PPI at the expense of Amount subject to Tax 314,362,688.57
Fertiphil. Article 22 of the Civil Code explicitly provides that "every

116
person who, through an act of performance by another comes Tax due thereon 47,154,403.00

into possession of something at the expense of the latter without Add: 50% surcharge 23,577,201.50
just or legal ground shall return the same to him." We cannot allow
20% int. p.a.fr. 4-26-85 to 8-15-86 12,305,360.66
PPI to profit from an unconstitutional law. Justice and equity
dictate that PPI must refund the amounts paid by Fertiphil. TOTAL AMOUNT DUE P83,036,965.16

III. DEFICIENCY CONTRACTOR'S TAX

WHEREFORE, the petition is DENIED. The Court of Appeals Decision
FY ended March 31, 1985
dated November 28, 2003 is AFFIRMED.
Undeclared gross receipts/gross income from Philphos and NDC construction
projects P967,269,811.14

SO ORDERED. Contractor's tax due thereon (4%) 38,690,792.00

Add: 50% surcharge for non-declaration 19,345,396.00

b. Territoriality
20% surcharge for late payment 9,672,698.00

1. G.R. No. 137377 December 18, 2001 Sub-total 67,708,886.00

Add: 20% int. p.a.fr. 4-21-85 to 8-15-86 17,854,739.46

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. TOTAL AMOUNT DUE P85,563,625.46

MARUBENI CORPORATION, respondent.
IV. DEFICIENCY COMMERCIAL BROKER'S TAX

PUNO, J.: FY ended March 31, 1985

Undeclared share from commission income

(denominated as "subsidy from Home Office") P24,683,114.50
In this petition for review, the Commissioner of Internal Revenue
Tax due thereon 1,628,569.00
assails the decision dated January 15, 1999 of the Court of
Appeals in CA-G.R. SP No. 42518 which affirmed the decision Add: 50% surcharge for non-declaration 814,284.50

dated July 29, 1996 of the Court of Tax Appeals in CTA Case No.
20% surcharge for late payment 407,142.25
4109. The tax court ordered the Commissioner of Internal Revenue
to desist from collecting the 1985 deficiency income, branch profit Sub-total 2,849,995.75

remittance and contractor's taxes from Marubeni Corporation Add: 20% int. p.a.fr. 4-21-85 to 8-15-86 751,539.98
after finding the latter to have properly availed of the tax amnesty
under Executive Orders Nos. 41 and 64, as amended. TOTAL AMOUNT DUE P3,600,535.68

Respondent Marubeni Corporation is a foreign corporation
organized and existing under the laws of Japan. It is engaged in
general import and export trading, financing and the
construction business. It is duly registered to engage in such
business in the Philippines and maintains a branch office in Manila.
Sometime in November 1985, petitioner Commissioner of Internal
Revenue issued a letter of authority to examine the books of
accounts of the Manila branch office of respondent corporation
for the fiscal year ending March 1985. In the course of the
examination, petitioner found respondent to have undeclared
income from two (2) contracts in the Philippines, both of which
were completed in 1984. One of the contracts was with the
National Development Company (NDC) in connection with the
construction and installation of a wharf/port complex at the Leyte
Industrial Development Estate in the municipality of Isabel,
province of Leyte. The other contract was with the Philippine
Phosphate Fertilizer Corporation (Philphos) for the construction of
an ammonia storage complex also at the Leyte Industrial
Development Estate.
On March 1, 1986, petitioner's revenue examiners recommended
an assessment for deficiency income, branch profit remittance,
contractor's and commercial broker's taxes. Respondent
questioned this assessment in a letter dated June 5, 1986.
The 50% surcharge was imposed for your client's failure to report
for tax purposes the aforesaid taxable revenues while the 25%
surcharge was imposed because of your client's failure to pay on
time the above deficiency percentage taxes.
xxx xxx xxx"1
Petitioner found that the NDC and Philphos contracts were made
on a "turn-key" basis and that the gross income from the two
projects amounted to P967,269,811.14. Each contract was for a
piece of work and since the projects called for the construction
and installation of facilities in the Philippines, the entire income
therefrom constituted income from Philippine sources, hence,
subject to internal revenue taxes. The assessment letter further
stated that the same was petitioner's final decision and that if
respondent disagreed with it, respondent may file an appeal with
the Court of Tax Appeals within thirty (30) days from receipt of the
assessment.
On September 26, 1986, respondent filed two (2) petitions for
review with the Court of Tax Appeals. The first petition, CTA Case
No. 4109, questioned the deficiency income, branch profit
remittance and contractor's tax assessments in petitioner's
assessment letter. The second, CTA Case No. 4110, questioned the
deficiency commercial broker's assessment in the same letter.

On August 27, 1986, respondent corporation received a letter Earlier, on August 2, 1986, Executive Order (E.O.) No. 412 declaring
dated August 15, 1986 from petitioner assessing respondent a one-time amnesty covering unpaid income taxes for the years
several deficiency taxes. The assessed deficiency internal revenue 1981 to 1985 was issued. Under this E.O., a taxpayer who wished
taxes, inclusive of surcharge and interest, were as follows: to avail of the income tax amnesty should, on or before October
31, 1986: (a) file a sworn statement declaring his net worth as of
I. DEFICIENCY INCOME TAX December 31, 1985; (b) file a certified true copy of his statement
declaring his net worth as of December 31, 1980 on record with
FY ended March 31, 1985
the Bureau of Internal Revenue (BIR), or if no such record exists, file
Undeclared gross income (Philphos and NDC construction projects) P967,269,811.14
a statement of said net worth subject to verification by the BIR;
and (c) file a return and pay a tax equivalent to ten per cent (10%)
Less: Cost and expenses (50%) 483,634,905.57
of the increase in net worth from December 31, 1980 to December
Net undeclared income 483,634,905.57 31, 1985.
Income tax due thereon 169,272,217.00
In accordance with the terms of E.O. No. 41, respondent filed its
Add: 50% surcharge 84,636,108.50
tax amnesty return dated October 30, 1986 and attached thereto
20% int. p.a.fr. 7-15-85 to 8-15-86 36,675,646.90 its sworn statement of assets and liabilities and net worth as of
Fiscal Year (FY) 1981 and FY 1986. The return was received by the
TOTAL AMOUNT DUE P290,583,972.40
BIR on November 3, 1986 and respondent paid the amount of
II. DEFICIENCY BRANCH PROFIT REMITTANCE TAX P2,891,273.00 equivalent to ten percent (10%) of its net worth
increase between 1981 and 1986.
FY ended March 31, 1985

Undeclared gross income from Philphos and NDC construction projects P483,634,905.57
The period of the amnesty in E.O. No. 41 was later extended from
Less: Income tax thereon 169,272,217.00 October 31, 1986 to December 5, 1986 by E.O. No. 54 dated
November 4, 1986.
On November 17, 1986, the scope and coverage of E.O. No. 41
was expanded by Executive Order (E.O.) No. 64. In addition to the
income tax amnesty granted by E.O. No. 41 for the years 1981 to
1985, E.O. No. 64 3 included estate and donor's taxes under Title III
and the tax on business under Chapter II, Title V of the National
Internal Revenue Code, also covering the years 1981 to 1985. E.O.
No. 64 further provided that the immunities and privileges under
E.O. No. 41 were extended to the foregoing tax liabilities, and the
period within which the taxpayer could avail of the amnesty was
extended to December 15, 1986. Those taxpayers who already
filed their amnesty return under E.O. No. 41, as amended, could
avail themselves of the benefits, immunities and privileges under
the new E.O. by filing an amended return and paying an
additional 5% on the increase in net worth to cover business,
estate and donor's tax liabilities.
The period of amnesty under E.O. No. 64 was extended to January
31, 1987 by E.O No. 95 dated December 17, 1986.
On December 15, 1986, respondent filed a supplemental tax
amnesty return under the benefit of E.O. No. 64 and paid a further
amount of P1,445,637.00 to the BIR equivalent to five percent (5%)
of the increase of its net worth between 1981 and 1986.
On July 29, 1996, almost ten (10) years after filing of the case, the
Court of Tax Appeals rendered a decision in CTA Case No. 4109.
The tax court found that respondent had properly availed of the
tax amnesty under E.O. Nos. 41 and 64 and declared the
deficiency taxes subject of said case as deemed cancelled and
withdrawn. The Court of Tax Appeals disposed of as follows:
"WHEREFORE, the respondent Commissioner of Internal
Revenue is hereby ORDERED to DESIST from collecting
the 1985 deficiency taxes it had assessed against
petitioner and the same are deemed considered [sic]
CANCELLED and WITHDRAWN by reason of the proper
availment by petitioner of the amnesty under Executive
Order No. 41, as amended."4
Petitioner challenged the decision of the tax court by filing CA-
G.R. SP No. 42518 with the Court of Appeals.
On January 15, 1999, the Court of Appeals dismissed the petition
and affirmed the decision of the Court of Tax Appeals. Hence, this
recourse.
Before us, petitioner raises the following issues:
"(1) Whether or not the Court of Appeals erred in
affirming the Decision of the Court of Tax Appeals which
ruled that herein respondent's deficiency tax liabilities
were extinguished upon respondent's availment of tax
amnesty under Executive Orders Nos. 41 and 64.
(2) Whether or not respondent is liable to pay the
income, branch profit remittance, and contractor's
taxes assessed by petitioner."5
The main controversy in this case lies in the interpretation of the
exception to the amnesty coverage of E.O. Nos. 41 and 64. There
are three (3) types of taxes involved herein — income tax, branch
profit remittance tax and contractor's tax. These taxes are
covered by the amnesties granted by E.O. Nos. 41 and 64.
Petitioner claims, however, that respondent is disqualified from
availing of the said amnesties because the latter falls under the
exception in Section 4 (b) of E.O. No. 41.
Section 4 of E.O. No. 41 enumerates which taxpayers cannot avail
of the amnesty granted thereunder, viz:
"Sec. 4. Exceptions. — The following taxpayers may not
avail themselves of the amnesty herein granted:
a) Those falling under the provisions of Executive Order
Nos. 1, 2 and 14;
b) Those with income tax cases already filed in Court as
of the effectivity hereof;
c) Those with criminal cases involving violations of the
income tax law already filed in court as of the effectivity
117
hereof;
d) Those that have withholding tax liabilities under the
National Internal Revenue Code, as amended, insofar
as the said liabilities are concerned;
e) Those with tax cases pending investigation by the
Bureau of Internal Revenue as of the effectivity hereof as
a result of information furnished under Section 316 of the
National Internal Revenue Code, as amended;
f) Those with pending cases involving unexplained or
unlawfully acquired wealth before the Sandiganbayan;
g) Those liable under Title Seven, Chapter Three (Frauds,
Illegal Exactions and Transactions) and Chapter Four
(Malversation of Public Funds and Property) of the
Revised Penal Code, as amended."
Petitioner argues that at the time respondent filed for income tax
amnesty on October 30, 1986, CTA Case No. 4109 had already
been filed and was pending; before the Court of Tax Appeals.
Respondent therefore fell under the exception in Section 4 (b) of
E.O. No. 41.
Petitioner's claim cannot be sustained. Section 4 (b) of E.O. No. 41
is very clear and unambiguous. It excepts from income tax
amnesty those taxpayers "with income tax cases already filed in
court as of the effectivity hereof." The point of reference is the
date of effectivity of E.O. No. 41. The filing of income tax cases in
court must have been made before and as of the date
of effectivity of E.O. No. 41. Thus, for a taxpayer not to be
disqualified under Section 4 (b) there must have been no income
tax cases filed in court against him when E.O. No. 41 took effect.
This is regardless of when the taxpayer filed for income tax
amnesty, provided of course he files it on or before the deadline
for filing.
E.O. No. 41 took effect on August 22, 1986. CTA Case No. 4109
questioning the 1985 deficiency income, branch profit remittance
and contractor's tax assessments was filed by respondent with the
Court of Tax Appeals on September 26, 1986. When E.O. No. 41
became effective on August 22, 1986, CTA Case No. 4109 had not
yet been filed in court. Respondent corporation did not fall under
the said exception in Section 4 (b), hence, respondent was not
disqualified from availing of the amnesty for income tax under
E.O. No. 41.
The same ruling also applies to the deficiency branch profit
remittance tax assessment. A branch profit remittance tax is
defined and imposed in Section 24 (b) (2) (ii), Title II, Chapter III of
the National Internal Revenue Code.6 In the tax code, this tax falls
under Title II on Income Tax. It is a tax on income. Respondent
therefore did not fall under the exception in Section 4 (b) when it
filed for amnesty of its deficiency branch profit remittance tax
assessment.
The difficulty herein is with respect to the contractor's tax
assessment and respondent's availment of the amnesty under
E.O. No. 64. E.O. No. 64 expanded the coverage of E.O. No. 41 by
including estate and donor's taxes and tax on business. Estate and
donor's taxes fall under Title III of the Tax Code while business taxes
fall under Chapter II, Title V of the same. The contractor's tax is
provided in Section 205, Chapter II, Title V of the Tax Code; it is
defined and imposed under the title on business taxes, and is
therefore a tax on business.7
When E.O. No. 64 took effect on November 17, 1986, it did not
provide for exceptions to the coverage of the amnesty for
business, estate and donor's taxes. Instead, Section 8 of E.O. No.
64 provided that:
"Section 8. The provisions of Executive Orders Nos. 41 and
54 which are not contrary to or inconsistent with this
amendatory Executive Order shall remain in full force
and effect."
By virtue of Section 8 as afore-quoted, the provisions of E.O. No.
41 not contrary to or inconsistent with the amendatory act were
reenacted in E.O. No. 64. Thus, Section 4 of E.O. No. 41 on the
exceptions to amnesty coverage also applied to E.O. No. 64. With
respect to Section 4 (b) in particular, this provision excepts from
tax amnesty coverage a taxpayer who has "income tax cases
already filed in court as of the effectivity hereof." As to what
Executive Order the exception refers to, respondent argues that
because of the words "income" and "hereof," they refer to
Executive Order No. 41.8
In view of the amendment introduced by E.O. No. 64, Section 4
(b) cannot be construed to refer to E.O. No. 41 and its date of
effectivity. The general rule is that an amendatory act operates
prospectively.9 While an amendment is generally construed as
becoming a part of the original act as if it had always been
contained therein,10 it may not be given a retroactive effect
unless it is so provided expressly or by necessary implication and
no vested right or obligations of contract are thereby impaired.11
There is nothing in E.O. No. 64 that provides that it should retroact
to the date of effectivity of E.O. No. 41, the original issuance.
Neither is it necessarily implied from E.O. No. 64 that it or any of its
provisions should apply retroactively. Executive Order No. 64 is a
substantive amendment of E.O. No. 41. It does not merely change
provisions in E.O. No. 41. It supplements the original act by adding
other taxes not covered in the first.12 It has been held that where
a statute amending a tax law is silent as to whether it operates
retroactively, the amendment will not be given a retroactive
effect so as to subject to tax past transactions not subject to tax
under the original act.13 In an amendatory act, every case of
doubt must be resolved against its retroactive effect.14
Moreover, E.O. Nos. 41 and 64 are tax amnesty issuances. A tax
amnesty is a general pardon or intentional overlooking by the
State of its authority to impose penalties on persons otherwise
guilty of evasion or violation of a revenue or tax law.15 It partakes
of an absolute forgiveness or waiver by the government of its right
to collect what is due it and to give tax evaders who wish to relent
a chance to start with a clean slate.16 A tax amnesty, much like a
tax exemption, is never favored nor presumed in law.17 If granted,
the terms of the amnesty, like that of a tax exemption, must be
construed strictly against the taxpayer and liberally in favor of the
taxing authority.18 For the right of taxation is inherent in
government. The State cannot strip itself of the most essential
power of taxation by doubtful words. He who claims an
exemption (or an amnesty) from the common burden must justify
his claim by the clearest grant of organic or state law. It cannot
be allowed to exist upon a vague implication. If a doubt arises as
to the intent of the legislature, that doubt must be resolved in
favor of the state.19
In the instant case, the vagueness in Section 4 (b) brought about
by E.O. No. 64 should therefore be construed strictly against the
taxpayer. The term "income tax cases" should be read as to refer
to estate and donor's taxes and taxes on business while the word
"hereof," to E.O. No. 64. Since Executive Order No. 64 took effect
on November 17, 1986, consequently, insofar as the taxes in E.O.
No. 64 are concerned, the date of effectivity referred to in Section
4 (b) of E.O. No. 41 should be November 17, 1986.
Respondent filed CTA Case No. 4109 on September 26, 1986.
When E.O. No. 64 took effect on November 17, 1986, CTA Case
No. 4109 was already filed and pending in court. By the time
respondent filed its supplementary tax amnesty return on
December 15, 1986, respondent already fell under the exception
in Section 4 (b) of E.O. Nos. 41 and 64 and was disqualified from
availing of the business tax amnesty granted therein.
It is respondent's other argument that assuming it did not validly
avail of the amnesty under the two Executive Orders, it is still not
liable for the deficiency contractor's tax because the income
from the projects came from the "Offshore Portion" of the
contracts. The two contracts were divided into two parts, i.e., the
Onshore Portion and the Offshore Portion. All materials and
equipment in the contract under the "Offshore Portion" were
manufactured and completed in Japan, not in the Philippines,
and are therefore not subject to Philippine taxes.
Before going into respondent's arguments, it is necessary to
discuss the background of the two contracts, examine their
pertinent provisions and implementation.
The NDC and Philphos are two government corporations. In 1980,
the NDC, as the corporate investment arm of the Philippine
Government, established the Philphos to engage in the large-
scale manufacture of phosphatic fertilizer for the local and foreign
markets.20 The Philphos plant complex which was envisioned to be
the largest phosphatic fertilizer operation in Asia, and among the
118
largest in the world, covered an area of 180 hectares within the
435-hectare Leyte Industrial Development Estate in the
municipality of Isabel, province of Leyte.
In 1982, the NDC opened for public bidding a project to construct
and install a modern, reliable, efficient and integrated wharf/port
complex at the Leyte Industrial Development Estate. The
wharf/port complex was intended to be one of the major facilities
for the industrial plants at the Leyte Industrial Development Estate.
It was to be specifically adapted to the site for the handling of
phosphate rock, bagged or bulk fertilizer products, liquid materials
and other products of Philphos, the Philippine Associated Smelting
and Refining Corporation (Pasar),21 and other industrial plants
within the Estate. The bidding was participated in by Marubeni
Head Office in Japan.
Marubeni, Japan pre-qualified and on March 22, 1982, the NDC
and respondent entered into an agreement entitled "Turn-Key
Contract for Leyte Industrial Estate Port Development Project
Between National Development Company and Marubeni
Corporation."22 The Port Development Project would consist of a
wharf, berths, causeways, mechanical and liquids unloading and
loading systems, fuel oil depot, utilities systems, storage and
service buildings, offsite facilities, harbor service vessels,
navigational aid system, fire-fighting system, area lighting, mobile
equipment, spare parts and other related facilities.23 The scope of
the works under the contract covered turn-key supply, which
included grants of licenses and the transfer of technology and
know-how,24 and:
". . . the design and engineering, supply and delivery,
construction, erection and installation, supervision,
direction and control of testing and commissioning of
the Wharf-Port Complex as set forth in Annex I of this
Contract, as well as the coordination of tie-ins at
boundaries and schedule of the use of a part or the
whole of the Wharf/Port Complex through the Owner,
with the design and construction of other facilities
around the site. The scope of works shall also include any
activity, work and supply necessary for, incidental to or
appropriate under present international industrial port
practice, for the timely and successful implementation
of the object of this Contract, whether or not expressly
referred to in the abovementioned Annex I."25
The contract price for the wharf/port complex was
¥12,790,389,000.00 and P44,327,940.00. In the contract, the price
in Japanese currency was broken down into two portions: (1) the
Japanese Yen Portion I; (2) the Japanese Yen Portion II, while the
price in Philippine currency was referred to as the Philippine Pesos
Portion. The Japanese Yen Portions I and II were financed in two
(2) ways: (a) by yen credit loan provided by the Overseas
Economic Cooperation Fund (OECF); and (b) by supplier's credit
in favor of Marubeni from the Export-Import Bank of Japan. The
OECF is a Fund under the Ministry of Finance of Japan extended
by the Japanese government as assistance to foreign
governments to promote economic development.26 The OECF
extended to the Philippine Government a loan of
¥7,560,000,000.00 for the Leyte Industrial Estate Port Development
Project and authorized the NDC to implement the same.27 The
other type of financing is an indirect type where the supplier, i.e.,
Marubeni, obtained a loan from the Export-Import Bank of Japan
to advance payment to its sub-contractors.28
Under the financing schemes, the Japanese Yen Portions I and II
and the Philippine Pesos Portion were further broken down and
subdivided according to the materials, equipment and services
rendered on the project. The price breakdown and the
corresponding materials, equipment and services were
contained in a list attached as Annex III to the contract.29
A few months after execution of the NDC contract, Philphos
opened for public bidding a project to construct and install two
ammonia storage tanks in Isabel. Like the NDC contract, it was
Marubeni Head Office in Japan that participated in and won the
bidding. Thus, on May 2, 1982, Philphos and respondent
corporation entered into an agreement entitled "Turn-Key
Contract for Ammonia Storage Complex Between Philippine
Phosphate Fertilizer Corporation and Marubeni
Corporation."30 The object of the contract was to establish and
place in operating condition a modern, reliable, efficient and
integrated ammonia storage complex adapted to the site for the
receipt and storage of liquid anhydrous ammonia31 and for the
delivery of ammonia to an integrated fertilizer plant adjacent to
the storage complex and to vessels at the dock.32 The storage
complex was to consist of ammonia storage tanks, refrigeration
system, ship unloading system, transfer pumps, ammonia heating
system, fire-fighting system, area lighting, spare parts, and other
related facilities.33 The scope of the works required for the
completion of the ammonia storage complex covered the
supply, including grants of licenses and transfer of technology and
know-how,34 and:
". . . the design and engineering, supply and delivery,
construction, erection and installation, supervision,
direction and control of testing and commissioning of
the Ammonia Storage Complex as set forth in Annex I of
this Contract, as well as the coordination of tie-ins at
boundaries and schedule of the use of a part or the
whole of the Ammonia Storage Complex through the
Owner with the design and construction of other
facilities at and around the Site. The scope of works shall
also include any activity, work and supply necessary for,
incidental to or appropriate under present international
industrial practice, for the timely and successful
implementation of the object of this Contract, whether
or not expressly referred to in the abovementioned
Annex I."35
The contract price for the project was ¥3,255,751,000.00 and
P17,406,000.00. Like the NDC contract, the price was divided into
three portions. The price in Japanese currency was broken down
into the Japanese Yen Portion I and Japanese Yen Portion II while
the price in Philippine currency was classified as the Philippine
Pesos Portion. Both Japanese Yen Portions I and II were financed
by supplier's credit from the Export-Import Bank of Japan. The
price stated in the three portions were further broken down into
the corresponding materials, equipment and services required for
the project and their individual prices. Like the NDC contract, the
breakdown in the Philphos contract is contained in a list attached
to the latter as Annex III.36
The division of the price into Japanese Yen Portions I and II and
the Philippine Pesos Portion under the two contracts corresponds
to the two parts into which the contracts were classified — the
Foreign Offshore Portion and the Philippine Onshore Portion. In
both contracts, the Japanese Yen Portion I corresponds to the
Foreign Offshore Portion.37 Japanese Yen Portion II and the
Philippine Pesos Portion correspond to the Philippine Onshore
Portion.38
Under the Philippine Onshore Portion, respondent does not deny
its liability for the contractor's tax on the income from the two
projects. In fact respondent claims, which petitioner has not
denied, that the income it derived from the Onshore Portion of the
two projects had been declared for tax purposes and the taxes
thereon already paid to the Philippine government.39 It is with
regard to the gross receipts from the Foreign Offshore Portion of
the two contracts that the liabilities involved in the assessments
subject of this case arose. Petitioner argues that since the two
agreements are turn-key,40 they call for the supply of both
materials and services to the client, they are contracts for a piece
of work and are indivisible. The situs of the two projects is in the
Philippines, and the materials provided and services rendered
were all done and completed within the territorial jurisdiction of
the Philippines.41Accordingly, respondent's entire receipts from
the contracts, including its receipts from the Offshore Portion,
constitute income from Philippine sources. The total gross receipts
covering both labor and materials should be subjected to
contractor's tax in accordance with the ruling in Commissioner of
Internal Revenue v. Engineering Equipment & Supply Co.42
A contractor's tax is imposed in the National Internal Revenue
Code (NIRC) as follows:
"Sec. 205. Contractors, proprietors or operators of
dockyards, and others. —A contractor's tax of four
percent of the gross receipts is hereby imposed on
proprietors or operators of the following business
establishments and/or persons engaged in the business
of selling or rendering the following services for a fee or
compensation:
(a) General engineering, general building and
specialty contractors, as defined in Republic
Act No. 4566;
xxx xxx xxx
119
(q) Other independent contractors. The term
"independent contractors" includes persons
(juridical or natural) not enumerated above
(but not including individuals subject to the
occupation tax under the Local Tax Code)
whose activity consists essentially of the sale of
all kinds of services for a fee regardless of
whether or not the performance of the service
calls for the exercise or use of the physical or
mental faculties of such contractors or their
employees. It does not include regional or area
headquarters established in the Philippines by
multinational corporations, including their alien
executives, and which headquarters do not
earn or derive income from the Philippines and
which act as supervisory, communications and
coordinating centers for their affiliates,
subsidiaries or branches in the Asia-Pacific
Region.
xxx xxx xxx43
Under the afore-quoted provision, an independent contractor is
a person whose activity consists essentially of the sale of all kinds
of services for a fee, regardless of whether or not the performance
of the service calls for the exercise or use of the physical or mental
faculties of such contractors or their employees. The word
"contractor" refers to a person who, in the pursuit of independent
business, undertakes to do a specific job or piece of work for other
persons, using his own means and methods without submitting
himself to control as to the petty details.44A contractor's tax is a tax
imposed upon the privilege of engaging in business.45 It is
generally in the nature of an excise tax on the exercise of a
privilege of selling services or labor rather than a sale on
products;46 and is directly collectible from the person exercising
the privilege.47 Being an excise tax, it can be levied by the taxing
authority only when the acts, privileges or business are done or
performed within the jurisdiction of said authority.48 Like property
taxes, it cannot be imposed on an occupation or privilege outside
the taxing district.49
In the case at bar, it is undisputed that respondent was an
independent contractor under the terms of the two subject
contracts. Respondent, however, argues that the work therein
were not all performed in the Philippines because some of them
were completed in Japan in accordance with the provisions of
the contracts.
An examination of Annex III to the two contracts reveals that the
materials and equipment to be made and the works and services
to be performed by respondent are indeed classified into two. The
first part, entitled "Breakdown of Japanese Yen Portion I" provides:
"Japanese Yen Portion I of the Contract Price has
been subdivided according to discrete portions of
materials and equipment which will be shipped to Leyte
as units and lots. This subdivision of price is to be used by
owner to verify invoice for Progress Payments under
Article 19.2.1 of the Contract. The agreed subdivision of
Japanese Yen Portion I is as follows:
xxx xxx xxx50
The subdivision of Japanese Yen Portion I covers materials and
equipment while Japanese Yen Portion II and the Philippine Pesos
Portion enumerate other materials and equipment and the
construction and installation work on the project. In other words,
the supplies for the project are listed under Portion I while labor
and other supplies are listed under Portion II and the Philippine
Pesos Portion. Mr. Takeshi Hojo, then General Manager of the
Industrial Plant Section II of the Industrial Plant Department of
Marubeni Corporation in Japan who supervised the
implementation of the two projects, testified that all the machines
and equipment listed under Japanese Yen Portion I in Annex III
were manufactured in Japan.51 The machines and equipment
were designed, engineered and fabricated by Japanese firms
sub-contracted by Marubeni from the list of sub-contractors in the
technical appendices to each contract.52 Marubeni sub-
contracted a majority of the equipment and supplies to Kawasaki
Steel Corporation which did the design, fabrication, engineering
and manufacture thereof;53 Yashima & Co. Ltd. which
manufactured the mobile equipment; Bridgestone which
provided the rubber fenders of the mobile equipment;54 and B.S.
Japan for the supply of radio equipment.55 The engineering and
design works made by Kawasaki Steel Corporation included the
lay-out of the plant facility and calculation of the design in
accordance with the specifications given by respondent.56 All
sub-contractors and manufacturers are Japanese corporations
and are based in Japan and all engineering and design works
were performed in that country.57
The materials and equipment under Portion I of the NDC Port
Project is primarily composed of two (2) sets of ship unloader and
loader; several boats and mobile equipment.58 The ship unloader
unloads bags or bulk products from the ship to the port while the
ship loader loads products from the port to the ship. The unloader
and loader are big steel structures on top of each is a large crane
and a compartment for operation of the crane. Two sets of these
equipment were completely manufactured in Japan according
to the specifications of the project. After manufacture, they were
rolled on to a barge and transported to Isabel, Leyte.59 Upon
reaching Isabel, the unloader and loader were rolled off the
barge and pulled to the pier to the spot where they were
installed.60 Their installation simply consisted of bolting them onto
the pier.61
Like the ship unloader and loader, the three tugboats and a line
boat were completely manufactured in Japan. The boats sailed
to Isabel on their own power. The mobile equipment, consisting of
three to four sets of tractors, cranes and dozers, trailers and
forklifts, were also manufactured and completed in Japan. They
were loaded on to a shipping vessel and unloaded at the Isabel
Port. These pieces of equipment were all on wheels and self-
propelled. Once unloaded at the port, they were ready to be
driven and perform what they were designed to do.62
In addition to the foregoing, there are other items listed in
Japanese Yen Portion I in Annex III to the NDC contract. These
other items consist of supplies and materials for five (5) berths, two
(2) roads, a causeway, a warehouse, a transit shed, an
administration building and a security building. Most of the
materials consist of steel sheets, steel pipes, channels and beams
and other steel structures, navigational and communication as
well as electrical equipment.63
In connection with the Philphos contract, the major pieces of
equipment supplied by respondent were the ammonia storage
tanks and refrigeration units.64 The steel plates for the tank were
manufactured and cut in Japan according to drawings and
specifications and then shipped to Isabel. Once there,
respondent's employees put the steel plates together to form the
storage tank. As to the refrigeration units, they were completed
and assembled in Japan and thereafter shipped to Isabel. The
units were simply installed there. 65 Annex III to the Philphos
contract lists down under the Japanese Yen Portion I the materials
for the ammonia storage tank, incidental equipment, piping
facilities, electrical and instrumental apparatus, foundation
material and spare parts.
All the materials and equipment transported to the Philippines
were inspected and tested in Japan prior to shipment in
accordance with the terms of the contracts.66 The inspection was
made by representatives of respondent corporation, of NDC and
Philphos. NDC, in fact, contracted the services of a private
consultancy firm to verify the correctness of the tests on the
machines and equipment67 while Philphos sent a representative
to Japan to inspect the storage equipment.68
The sub-contractors of the materials and equipment under
Japanese Yen Portion I were all paid by respondent in Japan. In
his deposition upon oral examination, Kenjiro Yamakawa, formerly
the Assistant General Manager and Manager of the Steel Plant
Marketing Department, Engineering & Construction Division,
Kawasaki Steel Corporation, testified that the equipment and
supplies for the two projects provided by Kawasaki under
Japanese Yen Portion I were paid by Marubeni in Japan. Receipts
for such payments were duly issued by Kawasaki in Japanese and
English.69 Yashima & Co. Ltd. and B.S. Japan were likewise paid by
Marubeni in Japan.70
Between Marubeni and the two Philippine corporations,
payments for all materials and equipment under Japanese Yen
Portion I were made to Marubeni by NDC and Philphos also in
Japan. The NDC, through the Philippine National Bank,
established letters of credit in favor of respondent through the
Bank of Tokyo. The letters of credit were financed by letters of
commitment issued by the OECF with the Bank of Tokyo. The Bank
of Tokyo, upon respondent's submission of pertinent documents,
released the amount in the letters of credit in favor of respondent
120
and credited the amount therein to respondent's account within
the same bank.71
Clearly, the service of "design and engineering, supply and
delivery, construction, erection and installation, supervision,
direction and control of testing and commissioning, coordination.
. . "72 of the two projects involved two taxing jurisdictions. These
acts occurred in two countries — Japan and the Philippines. While
the construction and installation work were completed within the
Philippines, the evidence is clear that some pieces of equipment
and supplies were completely designed and engineered in
Japan. The two sets of ship unloader and loader, the boats and
mobile equipment for the NDC project and the ammonia storage
tanks and refrigeration units were made and completed in Japan.
They were already finished products when shipped to the
Philippines. The other construction supplies listed under the
Offshore Portion such as the steel sheets, pipes and structures,
electrical and instrumental apparatus, these were not finished
products when shipped to the Philippines. They, however, were
likewise fabricated and manufactured by the sub-contractors in
Japan. All services for the design, fabrication, engineering and
manufacture of the materials and equipment under Japanese
Yen Portion I were made and completed in Japan. These services
were rendered outside the taxing jurisdiction of the Philippines
and are therefore not subject to contractor's tax.
Contrary to petitioner's claim, the case of Commissioner of
Internal Revenue v. Engineering Equipment & Supply Co73 is not in
point. In that case, the Court found that Engineering Equipment,
although an independent contractor, was not engaged in the
manufacture of air conditioning units in the Philippines.
Engineering Equipment designed, supplied and installed
centralized air-conditioning systems for clients who contracted its
services. Engineering, however, did not manufacture all the
materials for the air-conditioning system. It imported some items
for the system it designed and installed.74 The issues in that case
dealt with services performed within the local taxing jurisdiction.
There was no foreign element involved in the supply of materials
and services.
With the foregoing discussion, it is unnecessary to discuss the other
issues raised by the parties.
IN VIEW WHEREOF, the petition is denied. The decision in CA-G.R.
SP No. 42518 is affirmed.
SO ORDERED.
Davide, Jr., C .J ., Kapunan, Pardo, and Ynares-Santiago, JJ
., concur.
2. G.R. No. L-26379 December 27, 1969
WILLIAM C. REAGAN, ETC., petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
Quasha, Asperilla, Blanco, Zafra and Tayag for petitioner.
Office of the Solicitor General Antonio P. Barredo, Assistant
Solicitor General Felicisimo R. Rosete, Solicitor Lolita O. Gal-lang
and Special Attorney Gamaliel H. Mantolino for respondent.
FERNANDO, J.:
A question novel in character, the answer to which has far-
reaching implications, is raised by petitioner William C. Reagan, at
one time a civilian employee of an American corporation
providing technical assistance to the United States Air Force in the
Philippines. He would dispute the payment of the income tax
assessed on him by respondent Commissioner of Internal Revenue
on an amount realized by him on a sale of his automobile to a
member of the United States Marine Corps, the transaction having
taken place at the Clark Field Air Base at Pampanga. It is his
contention, seriously and earnestly expressed, that in legal
contemplation the sale was made outside Philippine territory and
therefore beyond our jurisdictional power to tax.
Such a plea, far-fetched and implausible, on its face betraying no
kinship with reality, he would justify by invoking, mistakenly as will
hereafter be more fully shown an observation to that effect in a
1951 opinion, 1 petitioner ignoring that such utterance was made
purely as a flourish of rhetoric and by way of emphasizing the
decision reached, that the trading firm as purchaser of army
goods must respond for the sales taxes due from an importer, as
the American armed forces being exempt could not be taxed as
such under the National Internal Revenue Code.2 Such an
assumption, inspired by the commendable aim to render
unavailing any attempt at tax evasion on the part of such
vendee, found expression anew in a 1962 decision,3 coupled with
the reminder however, to render the truth unmistakable, that "the
areas covered by the United States Military Bases are not foreign
territories both in the political and geographical sense."
As thus clarified, it is manifest that such a view amounts at most to
a legal fiction and is moreover obiter. It certainly cannot control
the resolution of the specific question that confronts us. We
declare our stand in an unequivocal manner. The sale having
taken place on what indisputably is Philippine territory, petitioner's
liability for the income tax due as a result thereof was
unavoidable. As the Court of Tax Appeals reached a similar
conclusion, we sustain its decision now before us on appeal.
In the decision appealed from, the Court of Tax Appeals, after
stating the nature of the case, started the recital of facts thus: "It
appears that petitioner, a citizen of the United States and an
employee of Bendix Radio, Division of Bendix Aviation
Corporation, which provides technical assistance to the United
States Air Force, was assigned at Clark Air Base, Philippines, on or
about July 7, 1959 ... . Nine (9) months thereafter and before his
tour of duty expired, petitioner imported on April 22, 1960 a tax-
free 1960 Cadillac car with accessories valued at $6,443.83,
including freight, insurance and other charges."4 Then came the
following: "On July 11, 1960, more than two (2) months after the
1960 Cadillac car was imported into the Philippines, petitioner
requested the Base Commander, Clark Air Base, for a permit to
sell the car, which was granted provided that the sale was made
to a member of the United States Armed Forces or a citizen of the
United States employed in the U.S. military bases in the Philippines.
On the same date, July 11, 1960, petitioner sold his car for
$6,600.00 to a certain Willie Johnson, Jr. (Private first class), United
States Marine Corps, Sangley Point, Cavite, Philippines, as shown
by a Bill of Sale . . . executed at Clark Air Base. On the same date,
Pfc. Willie (William) Johnson, Jr. sold the car to Fred Meneses for
P32,000.00 as evidenced by a deed of sale executed in Manila."5
As a result of the transaction thus made, respondent
Commissioner of Internal Revenue, after deducting the landed
cost of the car as well as the personal exemption to which
petitioner was entitled, fixed as his net taxable income arising from
such transaction the amount of P17,912.34, rendering him liable
for income tax in the sum of P2,979.00. After paying the sum, he
sought a refund from respondent claiming that he was exempt,
but pending action on his request for refund, he filed the case with
the Court of Tax Appeals seeking recovery of the sum of P2,979.00
plus the legal rate of interest.
As noted in the appealed decision: "The only issue submitted for
our resolution is whether or not the said income tax of P2,979.00
was legally collected by respondent for petitioner."6 After
discussing the legal issues raised, primarily the contention that the
Clark Air Base "in legal contemplation, is a base outside the
Philippines" the sale therefore having taken place on "foreign soil",
the Court of Tax Appeals found nothing objectionable in the
assessment and thereafter the payment of P2,979.00 as income
tax and denied the refund on the same. Hence, this appeal
predicated on a legal theory we cannot accept. Petitioner
cannot make out a case for reversal.
1. Resort to fundamentals is unavoidable to place things in their
proper perspective, petitioner apparently feeling justified in his
refusal to defer to basic postulates of constitutional and
international law, induced no doubt by the weight he would
accord to the observation made by this Court in the two opinions
earlier referred to. To repeat, scant comfort, if at all is to be
derived from such an obiter dictum, one which is likewise far from
reflecting the fact as it is.
Nothing is better settled than that the Philippines being
independent and sovereign, its authority may be exercised over
its entire domain. There is no portion thereof that is beyond its
power. Within its limits, its decrees are supreme, its commands
paramount. Its laws govern therein, and everyone to whom it
applies must submit to its terms. That is the extent of its jurisdiction,
both territorial and personal. Necessarily, likewise, it has to be
exclusive. If it were not thus, there is a diminution of its sovereignty.
It is to be admitted that any state may, by its consent, express or
implied, submit to a restriction of its sovereign rights. There may
121
thus be a curtailment of what otherwise is a power plenary in
character. That is the concept of sovereignty as auto-limitation,
which, in the succinct language of Jellinek, "is the property of a
state-force due to which it has the exclusive capacity of legal self-
determination and self-restriction."7 A state then, if it chooses to,
may refrain from the exercise of what otherwise is illimitable
competence.
Its laws may as to some persons found within its territory no longer
control. Nor does the matter end there. It is not precluded from
allowing another power to participate in the exercise of
jurisdictional right over certain portions of its territory. If it does so,
it by no means follows that such areas become impressed with an
alien character. They retain their status as native soil. They are still
subject to its authority. Its jurisdiction may be diminished, but it
does not disappear. So it is with the bases under lease to the
American armed forces by virtue of the military bases agreement
of 1947. They are not and cannot be foreign territory.
Decisions coming from petitioner's native land, penned by jurists
of repute, speak to that effect with impressive unanimity. We start
with the citation from Chief Justice Marshall, announced in the
leading case of Schooner Exchange v. M'Faddon,8 an 1812
decision: "The jurisdiction of the nation within its own territory is
necessarily exclusive and absolute. It is susceptible of no limitation
not imposed by itself. Any restriction upon it, deriving validity from
an external source, would imply a diminution of its sovereignty to
the extent of the restriction, and an investment of that sovereignty
to the same extent in that power which could impose such
restriction." After which came this paragraph: "All exceptions,
therefore, to the full and complete power of a nation within its
own territories, must be traced up to the consent of the nation
itself. They can flow from no other legitimate source."
Chief Justice Taney, in an 1857 decision,9 affirmed the
fundamental principle of everyone within the territorial domain of
a state being subject to its commands: "For undoubtedly every
person who is found within the limits of a government, whether the
temporary purposes or as a resident, is bound by its laws." It is no
exaggeration then for Justice Brewer to stress that the United
States government "is one having jurisdiction over every foot of soil
within its territory, and acting directly upon each [individual found
therein]; . . ."10
Not too long ago, there was a reiteration of such a view, this time
from the pen of Justice Van Devanter. Thus: "It now is settled in the
United States and recognized elsewhere that the territory subject
to its jurisdiction includes the land areas under its dominion and
control the ports, harbors, bays, and other in closed arms of the
sea along its coast, and a marginal belt of the sea extending from
the coast line outward a marine league, or 3 geographic
miles."11 He could cite moreover, in addition to many American
decisions, such eminent treatise-writers as Kent, Moore, Hyde,
Wilson, Westlake, Wheaton and Oppenheim.
As a matter of fact, the eminent commentator Hyde in his three-
volume work on International Law, as interpreted and applied by
the United States, made clear that not even the embassy
premises of a foreign power are to be considered outside the
territorial domain of the host state. Thus: "The ground occupied by
an embassy is not in fact the territory of the foreign State to which
the premises belong through possession or ownership. The
lawfulness or unlawfulness of acts there committed is determined
by the territorial sovereign. If an attache commits an offense
within the precincts of an embassy, his immunity from prosecution
is not because he has not violated the local law, but rather for the
reason that the individual is exempt from prosecution. If a person
not so exempt, or whose immunity is waived, similarly commits a
crime therein, the territorial sovereign, if it secures custody of the
offender, may subject him to prosecution, even though its criminal
code normally does not contemplate the punishment of one who
commits an offense outside of the national domain. It is not
believed, therefore, that an ambassador himself possesses the
right to exercise jurisdiction, contrary to the will of the State of his
sojourn, even within his embassy with respect to acts there
committed. Nor is there apparent at the present time any
tendency on the part of States to acquiesce in his exercise of it."12
2. In the light of the above, the first and crucial error imputed to
the Court of Tax Appeals to the effect that it should have held that
the Clark Air Force is foreign soil or territory for purposes of income
tax legislation is clearly without support in law. As thus correctly
viewed, petitioner's hope for the reversal of the decision
completely fades away. There is nothing in the Military Bases Justice Tuason moreover made explicit that rather than
Agreement that lends support to such an assertion. It has not corresponding with reality, what was said by him was in the way

become foreign soil or territory. This country's jurisdictional rights
therein, certainly not excluding the power to tax, have been
preserved. As to certain tax matters, an appropriate exemption
was provided for.
Petitioner could not have been unaware that to maintain the
contrary would be to defy reality and would be an affront to the
law. While his first assigned error is thus worded, he would seek to
impart plausibility to his claim by the ostensible invocation of the
exemption clause in the Agreement by virtue of which a "national
of the United States serving in or employed in the Philippines in
connection with the construction, maintenance, operation or
defense of the bases and residing in the Philippines only by reason
of such employment" is not to be taxed on his income unless
"derived from Philippine source or sources other than the United
States sources."13 The reliance, to repeat, is more apparent than
real for as noted at the outset of this opinion, petitioner places
more faith not on the language of the provision on exemption but
on a sentiment given expression in a 1951 opinion of this Court,
which would be made to yield such an unwarranted
interpretation at war with the controlling constitutional and
international law principles. At any rate, even if such a contention
were more adequately pressed and insisted upon, it is on its face
devoid of merit as the source clearly was Philippine.
In Saura Import and Export Co. v. Meer,14 the case above referred
to, this Court affirmed a decision rendered about seven months
previously,15 holding liable as an importer, within the
contemplation of the National Internal Revenue Code provision,
the trading firm that purchased army goods from a United States
government agency in the Philippines. It is easily understandable
why. If it were not thus, tax evasion would have been facilitated.
The United States forces that brought in such equipment later
disposed of as surplus, when no longer needed for military
purposes, was beyond the reach of our tax statutes.
122
of a legal fiction. Note his stress on "in contemplation of law." To
lend further support to a conclusion already announced, being at
that a confirmation of what had been arrived at in the earlier
case, distinguished by its sound appreciation of the issue then
before this Court and to preclude any tax evasion, an observation
certainly not to be taken literally was thus given utterance.
This is not to say that it should have been ignored altogether
afterwards. It could be utilized again, as it undoubtedly was,
especially so for the purpose intended, namely to stigmatize as
without support in law any attempt on the part of a taxpayer to
escape an obligation incumbent upon him. So it was quoted with
that end in view in the Co Po case. It certainly does not justify any
effort to render futile the collection of a tax legally due, as here.
That was farthest from the thought of Justice Tuason.
What is more, the statement on its face is, to repeat, a legal fiction.
This is not to discount the uses of a fictio juris in the science of the
law. It was Cardozo who pointed out its value as a device "to
advance the ends of justice" although at times it could be
"clumsy" and even "offensive".22 Certainly, then, while far from
objectionable as thus enunciated, this observation of Justice
Tuason could be misused or misconstrued in a clumsy manner to
reach an offensive result. To repeat, properly used, a legal fiction
could be relied upon by the law, as Frankfurter noted, in the
pursuit of legitimate ends.23 Petitioner then would be well-advised
to take to heart such counsel of care and circumspection before
invoking not a legal fiction that would avoid a mockery of the law
by avoiding tax evasion but what clearly is a misinterpretation
thereof, leading to results that would have shocked its originator.
The conclusion is thus irresistible that the crucial error assigned, the
only one that calls for discussion to the effect that for income tax
purposes the Clark Air Force Base is outside Philippine territory, is
utterly without merit. So we have said earlier.

Justice Tuason, who spoke for the Court, adhered to such a

3. To impute then to the statement of Justice Tuason the meaning
rationale, quoting extensively from the earlier opinion. He could
that petitioner would fasten on it is, to paraphrase Frankfurter, to
have stopped there. He chose not to do so. The transaction
be guilty of succumbing to the vice of literalness. To so conclude
having occurred in 1946, not so long after the liberation of the
is, whether by design or inadvertence, to misread it. It certainly is
Philippines, he proceeded to discuss the role of the American
not susceptible of the mischievous consequences now sought to
military contingent in the Philippines as a belligerent occupant. In
be fastened on it by petitioner.
the course of such a dissertion, drawing on his well-known gift for
rhetoric and cognizant that he was making an as if statement, he
did say: "While in army bases or installations within the Philippines That it would be fraught with such peril to the enforcement of our
those goods were in contemplation of law on foreign soil." tax statutes on the military bases under lease to the American
armed forces could not have been within the contemplation of
Justice Tuason. To so attribute such a bizarre consequence is to
It is thus evident that the first, and thereafter the controlling,
be guilty of a grave disservice to the memory of a great jurist. For
decision as to the liability for sales taxes as an importer by the
his real and genuine sentiment on the matter in consonance with
purchaser, could have been reached without any need for such
the imperative mandate of controlling constitutional and
expression as that given utterance by Justice Tuason. Its value
international law concepts was categorically set forth by him, not
then as an authoritative doctrine cannot be as much as petitioner
as an obiter but as the rationale of the decision, in People v.
would mistakenly attach to it. It was clearly obiter not being
Acierto24 thus: "By the [Military Bases] Agreement, it should be
necessary for the resolution of the issue before this Court.16 It was
noted, the Philippine Government merely consents that the
an opinion "uttered by the way."17 It could not then be controlling
United States exercise jurisdiction in certain cases. The consent
on the question before us now, the liability of the petitioner for
was given purely as a matter of comity, courtesy, or expediency
income tax which, as announced at the opening of this opinion,
over the bases as part of the Philippine territory or divested itself
is squarely raised for the first time.18
completely of jurisdiction over offenses committed therein."

On this point, Chief Justice Marshall could again be listened to

Nor did he stop there. He did stress further the full extent of our
with profit. Thus: "It is a maxim, not to be disregarded, that general
territorial jurisdiction in words that do not admit of doubt. Thus: "This
expressions, in every opinion, are to be taken in connection with
provision is not and can not on principle or authority be construed
the case in which those expressions are used. If they go beyond
as a limitation upon the rights of the Philippine Government. If
the case, they may be respected, but ought not to control the
anything, it is an emphatic recognition and reaffirmation of
judgment in a subsequent suit when the very point is presented for
Philippine sovereignty over the bases and of the truth that all
decision."19
jurisdictional rights granted to the United States and not exercised
by the latter are reserved by the Philippines for itself."25
Nor did the fact that such utterance of Justice Tuason was cited
in Co Po v. Collector of Internal Revenue,20 a 1962 decision relied
It is in the same spirit that we approach the specific question
upon by petitioner, put a different complexion on the matter.
confronting us in this litigation. We hold, as announced at the
Again, it was by way of pure embellishment, there being no need
outset, that petitioner was liable for the income tax arising from a
to repeat it, to reach the conclusion that it was the purchaser of
sale of his automobile in the Clark Field Air Base, which clearly is
army goods, this time from military bases, that must respond for
and cannot otherwise be other than, within our territorial
the advance sales taxes as importer. Again, the purpose that
jurisdiction to tax.
animated the reiteration of such a view was clearly to emphasize
that through the employment of such a fiction, tax evasion is
precluded. What is more, how far divorced from the truth was 4. With the mist thus lifted from the situation as it truly presents itself,
such statement was emphasized by Justice Barrera, who penned there is nothing that stands in the way of an affirmance of the
the Co Po opinion, thus: "It is true that the areas covered by the Court of Tax Appeals decision. No useful purpose would be served
United States Military Bases are not foreign territories both in the by discussing the other assigned errors, petitioner himself being
political and geographical sense."21 fully aware that if the Clark Air Force Base is to be considered, as
it ought to be and as it is, Philippine soil or territory, his claim for
exemption from the income tax due was distinguished only by its
futility.
There is further satisfaction in finding ourselves unable to indulge
petitioner in his plea for reversal. We thus manifest fealty to a
pronouncement made time and time again that the law does not
look with favor on tax exemptions and that he who would seek to
be thus privileged must justify it by words too plain to be mistaken
and too categorical to be misinterpreted.26 Petitioner had not
done so. Petitioner cannot do so.
WHEREFORE, the decision of the Court of Tax Appeals of May 12,
1966 denying the refund of P2,979.00 as the income tax paid by
petitioner is affirmed. With costs against petitioner.
Concepcion, C.J., Dizon, Makalintal, Zaldivar, Sanchez, Castro
and Teehankee, JJ., concur.
Reyes, J.B.L., J., concurs in the result.
Barredo, J., took no part.
3. G.R. No. 45697 November 1, 1939
MANILA ELECTRIC COMPANY, plaintiff-appellant,
vs.
A.L. YATCO, Collector of Internal Revenue, defendant-appellee.
MORAN, J.:
In 1935, plaintiff Manila Electric Company, a corporation
organized and existing under the laws of the Philippines, with its
principal office and place of business in the City of Manila, insured
with the city of New York Insurance Company and the United
States Guaranty Company, certain real and personal properties
situated in the Philippines. The insurance was entered into in
behalf of said plaintiff by its broker in New York City. The insurance
companies are foreign corporations not licensed to do business in
the Philippines and having no agents therein. The policies
contained provisions for the settlement and payment of losses
upon the occurence of any risk insured against, a sample of which
is policy No. 20 of the New York insurance Company attached to
and made an integral part of the agreed statement of facts.
Plaintiff through its broker paid, in New York, to said insurance
company premiums in the sum of P91,696. The Collector of Internal
Revenue, under the authority of section 192 of act No. 2427, as
amended, assessed and levied a tax of one per centum on said
premiums, which plaintiff paid under protest. The protest having
been overruled, plaintiff instituted the present action to recover
the tax. The trial court dismissed the complaint, and from the
judgment thus rendered, plaintiff took the instant appeal.
The pertinent portions of the Act here involved read:
SEC. 192. It shall be unlawful for any person, company or
corporation, or forward applications for insurance in or
to issue or to deliver or accept policies of or for any
company or companies not having been legally
authorized to transact business in the Philippine Islands,
as provided in this chapter; and any such person,
company or corporation violating the provisions of this
section shall be deemed guilty of a penal offense, and
upon conviction thereof, shall for each such offense be
punished by a fine of two hundred pesos, or
imprisonment for two months, or both in the discretion
not authorized to transact business in the Philippine
Island may be placed upon terms and conditions as
follows:
xxx xxx xxx
. . . . And provided further, that the prohibitions of this
section shall not affect the right of an owner of property
to apply for and obtain for himself policies in foreign
companies in cases were said owner does not make use
of the services of any agent, company or corporation
residing or doing business in the Philippine Islands. In all
case where owners of property obtain insurance directly
with foreign companies, it shall be the duty of said
owners to report to the insurance commissioner and to
the Collector of Internal Revenue each case where
insurance has been so effected, and shall pay the tax of
one per centum on premium paid, in the manner
123
required by law of insurance companies, and shall be
subject to the same penalties for failure to do so.
Appellant maintains that the second paragraph of the provisions
of the Act aforecited is unconstitutional, and has been so
declared by the Supreme Court of the United States in the case
of Compania General de Tabacos v. Collector of Internal
Revenue, 275 U.S., 87, 48 Sup. Ct. Rep., 100, 72 Law. ed., 177.
The case relied upon involves a suit to recover from the Collector
of Internal Revenue certain taxes in connection with insurance
premiums which the Tobacco Barcelona, Spain, paid to the
Guardian Insurance Company of London, England, and to Le
Comite des Assurances Maritimes de Paris, of Paris, France. The
Tobacco Company, through its head office in Barcelona, insured
against fire with the London Company the merchandise it had in
deposit in the warehouse in the Philippines. As the merchandise
were from time to time shipped to Europe, the head office at
Barcelona insured the same with the Paris Company against
marine risks while such merchandise were in transit from the
Philippines to Spain. The London Company, unlike the Paris
Company, was licensed to do insurance business in the Philippines
and had an agent therein. Losses, if any, on policies were to be
paid to the Tobacco Company in Paris. The tax assessed and
levied by the Collector of Internal Revenue, under the same law
now involved, was challenged as unconstitutional. The Supreme
Court of the united States sustained the tax with respect to
premiums paid to the London Company and held it erroneous
with respect to premiums paid to the Paris Company.lawphi1.net
The factual basis upon which the imposition of the tax on
premiums paid to the Paris Company was declared erroneous, is
stated by the Supreme Court of the United States thus:
Coming then to the tax on the premiums paid to the
Paris Company the contract of insurance on which the
premium was paid was made at Barcelona in Spain, the
headquarters of the Tobacco Company between the
Tobacco Company and the Paris Company, and any
losses arising thereunder were to be paid in Paris. The
Paris Company had no communication whatever with
anyone in the Philippine Islands. The collection of this tax
involves an ex-action upon a company of Spain lawfully
doing business in the Philippine Islands effected by
reason of a contract made by that company with a
company in Paris on merchandise shipped from the
Philippine Islands for delivery in Barcelona. It is an
imposition upon a contract not made in the Philippines
and having no situs there and to be measured by money
paid as premiums in Paris, with the place of payment of
loss, if any, in Paris. We are very clear that the contract
and the premiums paid under it are not within the
jurisdiction of the government of the Philippine Islands.
And, upon the authority of the cases of Allgeyer v. Lousiana, 165
U.S., 578, 41 Law. ed., 832, and St. Louis Cotton Compress
Company v. Arkansas, 250 U.S., 346, 677 Law. ed., 279, the
Supreme Court of the United States held that "as the state is
forbidden to deprive a person of his liberty without due process of
law, it may not compel anyone within its jurisdiction to pay tribute
to it for contracts or money paid to secure the benefits of contract
made and to be performed outside of the state."
On the other hand, the Supreme Court of the United States, in
sustaining the imposition of the tax upon premiums paid by the
assured to the London Company, says:
. . . . Does the fact that while the Tobacco Company
and the London Company were within the jurisdiction of
the Philippines they made a contract outside of the
Philippines, prevent the imposition upon the assured of a
tax of 1 per cent upon the money paid by it as a
premium to the London Company? We may properly
assume that this tax placed upon the assured must
ultimately be paid by the insurer, and treating its real
incidence as such, the question arises whether making
and carrying out the policy does not involve an exercise
or use of the right of the London Company to do business
in the Philippine Islands under its license, because the
policy covers fire risks no property within the Philippine
Islands which may require adjustment and the activities
of agents in the Philippine Islands with respect to
settlement of losses arising thereunder. This we think must
 be answered affirmatively under Equitable Life Assur. government the power to tax. And, even if it be assumed that the
Soc. v. Pennsylvania, 238 U.S., 143 Law. ed., 1239, 35 Sup. tax imposed upon the insured will ultimately be passed on the

124
Ct. Rep., 829. The case is a close one, but in deference insurer, thus constituting an indirect tax upon the foreign
to the conclusion we reached in the latter case, we corporation, it would still be valid, because the foreign
affirm the judgment of the court below in respect to the corporation, by the stipulations of its contract, has subjected itself
tax upon the premium paid to the London Company. to the taxing jurisdiction of the Philippines. After all,
Commonwealth of the Philippines, by protecting the properties
insured, benefits the foreign corporation, and it is but reasonable
The ruling in the Paris Company case is obviously not applicable
that the latter should pay a just contribution therefor. It would
in the instant one, for there, not only was the contract executed
certainly be a discrimination against domestic corporations to
in a foreign country, but the merchandise insured was in transit
hold the tax valid when the policy is given by them and invalid
from the Philippines to Spain, and nothing was to be done in the
when issued by foreign corporations.
Philippines in pursuance of the contract. However, the rule laid
down in connection with the London Company may, by analogy,
be applied in the present case, the essential facts of both cases Judgment affirmed, with costs against appellant.
being similar. Here, the insured is a corporation organized under
the laws of the Philippines, its principal office and place of business
Avanceña, C.J., Villa-Real, Imperial, Diaz, Laurel and
being in the City of Manila. The New York Insurance Company
Concepcion, JJ., concur.
and the United States Guaranty Company may be said to be
doing policies issued by them cover risks on properties within the
Philippines, which may require adjustment and the activities of C. Non-Delegation
agents in the Philippines with respect to the settlement of losses
arising thereunder. For instance, it is therein stipulated that "the i. Delegation to the President
insured, as often as may be reasonably required, shall exhibit to
any person designated by the company all the remains of any
property therein described and submit to examination under oath - Flexible Tariff Clause; Sec. 28(2), Art VI
by any person named by the company, and as often as may be
reasonably required, shall exhibit to any person designated by the ii. Delegation to LGUs
company all the remains of any property therein described and
submit to an examination all books of accounts . . . at such
iii. Tax Issuance
reasonable time and place as may be designated by the
company or its representative." And, in case of disagreement as
to the amount of losses or damages as to require the appointment - Legislative Rule
of appraisers, the insurance contract provides that "the appraisers - Interpretative Rule
shall first select a competent umpire; and failure for fifteen days
to agree to such umpire, then, on request of the insured or of the
1. CIR vs Fortune Tobacco (Same Case)
company, such umpire shall be selected by a judge of the court
of record in the state in which the property insured is located.".
2. G.R. No. 168056 (ABAKADA Guro Party List Officer Samson S.
Alcantara, et al. vs. The Hon. Executive Secretary Eduardo R.
True it is that the London Company had a license to do business
Ermita); G.R. No. 168207 (Aquilino Q. Pimentel, Jr., et
in the Philippines, but this fact was not a decisive factor in the
al. vs. Executive Secretary Eduardo R. Ermita, et al.); G.R. No.
decision of that case, for reliance was therein placed on
168461 (Association of Pilipinas Shell Dealers, Inc., et al. vs. Cesar
the Equitable Life Assurance Society v. Pennsylvania, 238 U.S., 143,
V. Purisima, et al.); G.R. No. 168463 (Francis Joseph G.
59 Law. ed., 1239, 35 Sup. Ct. Rep., 829, wherein it was said that
Escudero vs. Cesar V. Purisima, et al); and G.R. No. 168730 (Bataan
"the Equitable Society was doing business in Pennsylvania when it
Governor Enrique T. Garcia, Jr. vs. Hon. Eduardo R. Ermita, et al.)
was annually paying the dividends in Pennsylvania or sending an
adjuster into the state in case of dispute or making proof of
death," and therefore "the taxpayer had subjected itself to the RESOLUTION
jurisdiction of Pennsylvania in doing business there." (See
Compañia General de Tabacos v. Collector of Internal Revenue, For resolution are the following motions for reconsideration of the
275 U.S., 87, 72 Law. ed., 177, 182.) Court’s Decision dated September 1, 2005 upholding the
constitutionality of Republic Act No. 9337 or the VAT Reform Act1:
The controlling consideration, therefore, in the decision of the
London Company case was that said company, by making and 1) Motion for Reconsideration filed by petitioners in G.R. No.
carrying out policies covering risks located in this country which 168463, Escudero, et al., on the following grounds:
might require adjustment or the making of proof of loss therein,
did business in the Philippines and subjected itself to its jurisdiction,
a rule that can perfectly be applied in the present case to the A. THE DELETION OF THE "NO PASS ON PROVISIONS" FOR THE SALE
new York Insurance Company and the United States Guaranty OF PETROLEUM PRODUCTS AND POWER GENERATION SERVICES
Company. CONSTITUTED GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK
OR EXCESS OF JURISDICTION ON THE PART OF THE BICAMERAL
CONFERENCE COMMITTEE.
It is argued, however, that the sending of an unjuster to the
Philippines to fix the amount of losses, is a mere contingency and
not an actual fact, as such, it cannot be a ground for holding that B. REPUBLIC ACT NO. 9337 GROSSLY VIOLATES THE
the insurance companies subjected themselves to the taxing CONSTITUTIONAL IMPERATIVE ON EXCLUSIVE ORIGINATION OF
jurisdiction of the Philippines. This argument could have been REVENUE BILLS UNDER §24, ARTICLE VI, 1987 PHILIPPINE
made in the London Company case where no adjuster appears CONSTITUTION.
to have ever been sent to the Philippines nor any adjustment ever
made, and yet the stipulations to that effect were held to be C. REPUBLIC ACT NO. 9337’S STAND-BY AUTHORITY TO THE
sufficient to bring the foreign corporation within the taxing EXECUTIVE TO INCREASE THE VAT RATE, ESPECIALLY ON ACCOUNT
jurisdiction of the Philippines. OF THE EFFECTIVE RECOMMENDATORY POWER GRANTED TO THE
SECRETARY OF FINANCE, CONSTITUTES UNDUE DELEGATION OF
In epitome, then, the whole question involved in this appeal is LEGISLATIVE AUTHORITY.
whether or not the disputed tax is one imposed by the
Commonwealth of the Philippines upon a contract beyond its 2) Motion for Reconsideration of petitioner in G.R. No. 168730,
jurisdiction. We are of the opinion and so hold that where the Bataan Governor Enrique T. Garcia, Jr., with the argument that
insured against also within the Philippines, the risk insured against burdening the consumers with significantly higher prices under a
also within the Philippines, and certain incidents of the contract VAT regime vis-à-vis a 3% gross tax renders the law unconstitutional
are to be attended to in the Philippines, such as, payment of for being arbitrary, oppressive and inequitable.
dividends when received in cash, sending of an unjuster into the
Philippines in case of dispute, or making of proof of loss, the
and
Commonwealth of the Philippines has the power to impose the
tax upon the insured, regardless of whether the contract is
executed in a foreign country and with a foreign corporation. 3) Motion for Reconsideration by petitioners Association of
Under such circumstances, substantial elements of the contract Pilipinas Shell Dealers, Inc. in G.R. No. 168461, on the grounds that:
may be said to be so situated in the Philippines as to give its
I. This Honorable Court erred in upholding the constitutionality of
Section 110(A)(2) and Section 110(B) of the NIRC, as amended by
the EVAT Law, imposing limitations on the amount of input VAT
that may be claimed as a credit against output VAT, as well as
Section 114(C) of the NIRC, as amended by the EVAT Law,
requiring the government or any of its instrumentalities to withhold
a 5% final withholding VAT on their gross payments on purchases
of goods and services, and finding that the questioned provisions:
A. are not arbitrary, oppressive and consfiscatory as to amount to
a deprivation of property without due process of law in violation
of Article III, Section 1 of the 1987 Philippine Constitution;
B. do not violate the equal protection clause prescribed under
Article III, Section 1 of the 1987 Philippine Constitution; and
C. apply uniformly to all those belonging to the same class and
do not violate Article VI, Section 28(1) of the 1987 Philippine
Constitution.
II. This Honorable Court erred in upholding the constitutionality of
Section 110(B) of the NIRC, as amended by the EVAT Law,
imposing a limitation on the amount of input VAT that may be
claimed as a credit against output VAT notwithstanding the
finding that the tax is not progressive as exhorted by Article VI,
Section 28(1) of the 1987 Philippine Constitution.
Respondents filed their Consolidated Comment. Petitioner Garcia
filed his Reply.
Petitioners Escudero, et al., insist that the bicameral conference
committee should not even have acted on the no pass-
on provisions since there is no disagreement between House Bill
Nos. 3705 and 3555 on the one hand, and Senate Bill No. 1950 on
the other, with regard to the no pass-on provision for the sale of
service for power generation because both the Senate and the
House were in agreement that the VAT burden for the sale of such
service shall not be passed on to the end-consumer. As to the no
pass-on provision for sale of petroleum products, petitioners argue
that the fact that the presence of such a no pass-on provision in
the House version and the absence thereof in the Senate Bill
means there is no conflict because "a House provision cannot be
in conflict with something that does not exist."
Such argument is flawed. Note that the rules of both houses of
Congress provide that a conference committee shall settle the
"differences" in the respective bills of each house. Verily, the fact
that a no pass-on provision is present in one version but absent in
the other, and one version intends two industries, i.e., power
generation companies and petroleum sellers, to bear the burden
of the tax, while the other version intended only the industry of
power generation, transmission and distribution to be saddled
with such burden, clearly shows that there are indeed differences
between the bills coming from each house, which differences
should be acted upon by the bicameral conference committee.
It is incorrect to conclude that there is no clash between two
opposing forces with regard to the no pass-on provision for VAT
on the sale of petroleum products merely because such provision
exists in the House version while it is absent in the Senate version.
It is precisely the absence of such provision in the Senate bill and
the presence thereof in the House bills that causes the conflict.
The absence of the provision in the Senate bill shows the Senate’s
disagreement to the intention of the House of Representatives
make the sellers of petroleum bear the burden of the VAT. Thus,
there are indeed two opposing forces: on one side, the House of
Representatives which wants petroleum dealers to be saddled
with the burden of paying VAT and on the other, the Senate which
does not see it proper to make that particular industry bear said
burden. Clearly, such conflicts and differences between the no
pass-on provisions in the Senate and House bills had to be acted
upon by the bicameral conference committee as mandated by
the rules of both houses of Congress.
Moreover, the deletion of the no pass-on provision made the
present VAT law more in consonance with the very nature of VAT
which, as stated in the Decision promulgated on September 1,
2005, is a tax on spending or consumption, thus, the burden
thereof is ultimately borne by the end-consumer.
Escudero, et al., then claim that there had been changes
introduced in the Rules of the House of Representatives regarding
the conduct of the House panel in a bicameral conference
committee, since the time of Tolentino vs. Secretary of Finance2 to
act as safeguards against possible abuse of authority by the
House members of the bicameral conference committee. Even
assuming that the rule requiring the House panel to report back to
125
the House if there are substantial differences in the House and
Senate bills had indeed been introduced after Tolentino, the
Court stands by its ruling that the issue of whether or not the House
panel in the bicameral conference committee complied with
said internal rule cannot be inquired into by the Court. To reiterate,
"mere failure to conform to parliamentary usage will not invalidate
the action (taken by a deliberative body) when the requisite
number of members have agreed to a particular measure."3
Escudero, et. al., also contend that Republic Act No. 9337 grossly
violates the constitutional imperative on exclusive origination of
revenue bills under Section 24 of Article VI of the Constitution
when the Senate introduced amendments not connected with
VAT.
The Court is not persuaded.
Article VI, Section 24 of the Constitution provides:
Sec. 24 All appropriation, revenue or tariff bills, bills authorizing
increase of the public debt, bills of local application, and private
bills shall originate exclusively in the House of Representatives, but
the Senate may propose or concur with amendments.
Section 24 speaks of origination of certain bills from the House of
Representatives which has been interpreted in the Tolentino
case as follows:
… To begin with, it is not the law — but the revenue bill — which is
required by the Constitution to "originate exclusively" in the House
of Representatives. It is important to emphasize this, because a bill
originating in the House may undergo such extensive changes in
the Senate that the result may be a rewriting of the whole … At
this point, what is important to note is that, as a result of the Senate
action, a distinct bill may be produced. To insist that a revenue
statute — and not only the bill which initiated the legislative
process culminating in the enactment of the law — must
substantially be the same as the House bill would be to deny the
Senate's power not only to "concur with amendments" but also to
" propose amendments." It would be to violate the coequality of
legislative power of the two houses of Congress and in fact make
the House superior to the Senate.
… Given, then, the power of the Senate to propose amendments,
the Senate can propose its own version even with respect to bills
which are required by the Constitution to originate in the House.
...
Indeed, what the Constitution simply means is that the initiative for
filing revenue, tariff, or tax bills, bills authorizing an increase of the
public debt, private bills and bills of local application must come
from the House of Representatives on the theory that, elected as
they are from the districts, the members of the House can be
expected to be more sensitive to the local needs and problems.
On the other hand, the senators, who are elected at large, are
expected to approach the same problems from the national
perspective. Both views are thereby made to bear on the
enactment of such laws.4
Clearly, after the House bills as approved on third reading are duly
transmitted to the Senate, the Constitution states that the latter
can propose or concur with amendments. The Court finds that the
subject provisions found in the Senate bill are within the purview
of such constitutional provision as declared in the Tolentino case.
The intent of the House of Representatives in initiating House Bill
Nos. 3555 and 3705 was to solve the country’s serious financial
problems. It was stated in the respective explanatory notes that
there is a need for the government to make significant
expenditure savings and a credible package of revenue
measures. These measures include improvement of tax
administration and control and leakages in revenues from income
taxes and value added tax. It is also stated that one opportunity
that could be beneficial to the overall status of our economy is to
review existing tax rates, evaluating the relevance given our
present conditions. Thus, with these purposes in mind and to
accomplish these purposes for which the house bills were
filed, i.e., to raise revenues for the government, the Senate
introduced amendments on income taxes, which as admitted by
Senator Ralph Recto, would yield about ₱10.5 billion a year.
Moreover, since the objective of these house bills is to raise
revenues, the increase in corporate income taxes would be a
great help and would also soften the impact of VAT measure on
the consumers by distributing the burden across all sectors instead
of putting it entirely on the shoulders of the consumers.
As to the other National Internal Revenue Code (NIRC) provisions
found in Senate Bill No. 1950, i.e., percentage taxes, franchise
taxes, amusement and excise taxes, these provisions are needed
so as to cushion the effects of VAT on consumers. As we said in our
decision, certain goods and services which were subject to
percentage tax and excise tax would no longer be VAT exempt,
thus, the consumer would be burdened more as they would be
paying the VAT in addition to these taxes. Thus, there is a need to
amend these sections to soften the impact of VAT. The Court finds
no reason to reverse the earlier ruling that the Senate introduced
amendments that are germane to the subject matter and
purposes of the house bills.
Petitioners Escudero, et al., also reiterate that R.A. No. 9337’s
stand- by authority to the Executive to increase the VAT rate,
especially on account of the recommendatory power granted to
the Secretary of Finance, constitutes undue delegation of
legislative power. They submit that the recommendatory power
given to the Secretary of Finance in regard to the occurrence of
either of two events using the Gross Domestic Product (GDP) as a
benchmark necessarily and inherently required extended analysis
and evaluation, as well as policy making.
There is no merit in this contention. The Court reiterates that in
making his recommendation to the President on the existence of
either of the two conditions, the Secretary of Finance is not acting
as the alter ego of the President or even her subordinate. He is
acting as the agent of the legislative department, to determine
and declare the event upon which its expressed will is to take
effect. The Secretary of Finance becomes the means or tool by
which legislative policy is determined and implemented,
considering that he possesses all the facilities to gather data and
information and has a much broader perspective to properly
evaluate them. His function is to gather and collate statistical data
and other pertinent information and verify if any of the two
conditions laid out by Congress is present. Congress granted the
Secretary of Finance the authority to ascertain the existence of a
fact, namely, whether by December 31, 2005, the value-added
tax collection as a percentage of GDP of the previous year
exceeds two and four-fifth percent (24/5%) or the national
government deficit as a percentage of GDP of the previous year
exceeds one and one-half percent (1½%). If either of these two
instances has occurred, the Secretary of Finance, by legislative
mandate, must submit such information to the President. Then the
12% VAT rate must be imposed by the President effective January
1, 2006. Congress does not abdicate its functions or unduly
delegate power when it describes what job must be done, who
must do it, and what is the scope of his authority; in our complex
economy that is frequently the only way in which the legislative
process can go forward. There is no undue delegation of
legislative power but only of the discretion as to the execution of
a law. This is constitutionally permissible. Congress did not
delegate the power to tax but the mere implementation of the
law. The intent and will to increase the VAT rate to 12% came from
Congress and the task of the President is to simply execute the
legislative policy. That Congress chose to use the GDP as a
benchmark to determine economic growth is not within the
province of the Court to inquire into, its task being to interpret the
law.
With regard to petitioner Garcia’s arguments, the Court also finds
the same to be without merit. As stated in the assailed Decision,
the Court recognizes the burden that the consumers will be
bearing with the passage of R.A. No. 9337. But as was also stated
by the Court, it cannot strike down the law as unconstitutional
simply because of its yokes. The legislature has spoken and the
only role that the Court plays in the picture is to determine
whether the law was passed with due regard to the mandates of
the Constitution. Inasmuch as the Court finds that there are no
constitutional infirmities with its passage, the validity of the law
must therefore be upheld.
Finally, petitioners Association of Pilipinas Shell Dealers, Inc.
reiterated their arguments in the petition, citing this time, the
dissertation of Associate Justice Dante O. Tinga in his Dissenting
Opinion.
The glitch in petitioners’ arguments is that it presents figures based
on an event that is yet to happen. Their illustration of
the possible effects of the 70% limitation, while seemingly
concrete, still remains theoretical. Theories have no place in this
126
case as the Court must only deal with an existing case or
controversy that is appropriate or ripe for judicial determination,
not one that is conjectural or merely anticipatory.5 The Court will
not intervene absent an actual and substantial controversy
admitting of specific relief through a decree conclusive in nature,
as distinguished from an opinion advising what the law would be
upon a hypothetical state of facts.6
The impact of the 70% limitation on the creditable input tax will
ultimately depend on how one manages and operates its
business. Market forces, strategy and acumen will dictate their
moves. With or without these VAT provisions, an entrepreneur who
does not have the ken to adapt to economic variables will surely
perish in the competition. The arguments posed are within the
realm of business, and the solution lies also in business.
Petitioners also reiterate their argument that the input tax is a
property or a property right. In the same breath, the Court
reiterates its finding that it is not a property or a property right, and
a VAT-registered person’s entitlement to the creditable input tax
is a mere statutory privilege.
Petitioners also contend that even if the right to credit the input
VAT is merely a statutory privilege, it has already evolved into a
vested right that the State cannot remove.
As the Court stated in its Decision, the right to credit the input tax
is a mere creation of law. Prior to the enactment of multi-stage
sales taxation, the sales taxes paid at every level of distribution are
not recoverable from the taxes payable. With the advent of
Executive Order No. 273 imposing a 10% multi-stage tax on all
sales, it was only then that the crediting of the input tax paid on
purchase or importation of goods and services by VAT-registered
persons against the output tax was established. This continued
with the Expanded VAT Law (R.A. No. 7716), and The Tax Reform
Act of 1997 (R.A. No. 8424). The right to credit input tax as against
the output tax is clearly a privilege created by law, a privilege that
also the law can limit. It should be stressed that a person has no
vested right in statutory privileges.7
The concept of "vested right" is a consequence of the
constitutional guaranty of due process that expresses a present
fixed interest which in right reason and natural justice is protected
against arbitrary state action; it includes not only legal or
equitable title to the enforcement of a demand but also
exemptions from new obligations created after the right has
become vested. Rights are considered vested when the right to
enjoyment is a present interest, absolute, unconditional, and
perfect or fixed and irrefutable.8 As adeptly stated by Associate
Justice Minita V. Chico-Nazario in her Concurring Opinion, which
the Court adopts, petitioners’ right to the input VAT credits has not
yet vested, thus –
It should be remembered that prior to Rep. Act No. 9337, the
petroleum dealers’ input VAT credits were inexistent – they were
unrecognized and disallowed by law. The petroleum dealers had
no such property called input VAT credits. It is only rational,
therefore, that they cannot acquire vested rights to the use of
such input VAT credits when they were never entitled to such
credits in the first place, at least, not until Rep. Act No. 9337.
My view, at this point, when Rep. Act No. 9337 has not yet even
been implemented, is that petroleum dealers’ right to use their
input VAT as credit against their output VAT unlimitedly has not
vested, being a mere expectancy of a future benefit and being
contingent on the continuance of Section 110 of the National
Internal Revenue Code of 1997, prior to its amendment by Rep.
Act No. 9337.
The elucidation of Associate Justice Artemio V. Panganiban is
likewise worthy of note, to wit:
Moreover, there is no vested right in generally accepted
accounting principles. These refer to accounting concepts,
measurement techniques, and standards of presentation in a
company’s financial statements, and are not rooted in laws of
nature, as are the laws of physical science, for these are merely
developed and continually modified by local and international
regulatory accounting bodies. To state otherwise and recognize
such asset account as a vested right is to limit the taxing power of
the State. Unlimited, plenary, comprehensive and supreme, this
power cannot be unduly restricted by mere creations of the State.
More importantly, the assailed provisions of R.A. No. 9337 already
involve legislative policy and wisdom. So long as there is a public

127
end for which R.A. No. 9337 was passed, the means through which
such end shall be accomplished is for the legislature to choose so
long as it is within constitutional bounds. As stated in Carmichael
vs. Southern Coal & Coke Co.:

If the question were ours to decide, we could not say that the
legislature, in adopting the present scheme rather than another,
had no basis for its choice, or was arbitrary or unreasonable in its
action. But, as the state is free to distribute the burden of a tax
without regard to the particular purpose for which it is to be used,
there is no warrant in the Constitution for setting the tax aside
because a court thinks that it could have distributed the burden
more wisely. Those are functions reserved for the legislature.9

WHEREFORE, the Motions for Reconsideration are hereby DENIED

WITH FINALITY. The temporary restraining order issued by the Court
is LIFTED.

SO ORDERED.

d. International Comity

i. Doctrine of Sovereign Equality of the States

ii. Sec. 2, Art. II, Constitution